On August 11, 2008, we issued 5,900,000 shares of our common stock and Warrants to purchase an additional 1,500,000 shares in exchange for the shares of Model Reorg, which merged into our wholly-owned subsidiary, Model Reorg Acquisition
LLC. Due to a number of factors, including that the shares issued to the Model Reorg shareholders amounted to approximately 66% of our shares outstanding after the issuance, the transaction has been accounted for as a "reverse acquisition," and Model Reorg is being treated as the "accounting acquirer" in accordance with US GAAP. Accordingly, our historical financial statements reflect the historical results of Model Reorg prior to the transaction date of August 11, 2008 and those of the combined companies beginning effective August 11, 2008. The Company is continuing to use the same fiscal year end, the Saturday closest to January 31, as E Com used before the Merger. Model Reorg's fiscal year end before the Merger was October 31. The audited consolidated financial statements of Model Reorg as of October 31, 2007 and 2006 and for the years ended October 31, 2007, 2006 and 2005 were previously filed with the SEC. The audited consolidated financial statements of Model Reorg as of and for the thirteen weeks ended February 2, 2008 and the unaudited financial statements of Model Reorg as of July 31, 2008 and for the three months and nine months ended July 31, 2008 and 2007 have been filed with the SEC as well.

Comparison of the Thirteen Weeks Ended August 1, 2009 with the Three Months
Ended July 31, 2008.

Net Sales



                       Thirteen Weeks    Percentage       Three Months     Percentage
                           Ended             of               Ended            of
                       August 1, 2009    Net Sales        July 31, 2008    Net Sales
                                             ($ in thousands)
    Retail            $         72,768         67.8 %    $        17,386         27.3 %
    Wholesale                   34,520         32.2 %             46,399         72.7 %

    Total net sales   $        107,288        100.0 %    $        63,785        100.0 %

Net sales increased 68.2% from $63.8 million in the three months ended July 31, 2008 to $107.3 million in the thirteen weeks ended August 1, 2009. Excluding the sales from Perfumania's retail division which are included in the above sales information for the thirteen week period ended August 1, 2009, net sales decreased by $14.1 million or 22.1%. Excluding Perfumania's results, the decrease in sales was primarily due to a decrease in wholesale sales of $11.9 million.

As discussed above, because the Merger with Model Reorg is treated as a reverse acquisition for accounting purposes, Perfumania's retail sales are included in our condensed consolidated financial statements only for the thirteen weeks ended August 1, 2009. Perfumania's retail sales of $57.6 million for the thirteen weeks ended August 1, 2009 were unchanged compared with the same period in 2008. The average number of stores operated was 367 in the thirteen week period ended August 1, 2009, versus 320 in the prior year's comparable period. Perfumania's comparable store sales decreased by 11.6% during the thirteen weeks ended August 1, 2009 from the same period in 2008. Comparable store sales measure sales from stores that have been open for one year or more. We exclude stores that are closed for renovation from comparable store sales from the month during which renovation commences until the first full month after reopening. The average retail price per unit sold during the thirteen weeks ended August 1, 2009 decreased 1.8% from the prior year's comparable period while the total number of units sold increased by 1.7%. The decrease in the average retail price per unit sold was due to increased promotional activity to drive sales. The increase in the number of units sold was attributable to the increase in the number of stores operated as the continuing softness in the United States economy and resulting weak mall traffic caused a decrease in the number of customers at our comparable stores.

Approximately $7.9 million of the $11.9 million decrease in wholesale sales are represented by affiliate sales to Perfumania in the three months ended July 31, 2008. As a result of the Merger on August 11, 2008, wholesale sales to Perfumania became intercompany transactions, which are eliminated in consolidation. The remaining decrease in wholesale sales of $4.0 million is the result of the tightening of credit resources generally during the past year, which has decreased our customers' ability to purchase, and lower consumer demand for the reasons described above.

We expect the softness in wholesale and retail sales to continue for the foreseeable future until consumer confidence and the United States economy improve.

Gross Profit



                                     Thirteen Weeks     Three Months
                                          Ended             Ended
                                     August 1, 2009     July 31, 2008
                                              (in thousands)
                Retail               $        31,240   $         7,697
                Wholesale                      5,829            10,072

                Total gross profit   $        37,069   $        17,769

Gross Profit Percentages



                                         Thirteen Weeks      Three Months
                                             Ended               Ended
                                         August 1, 2009      July 31, 2008
         Retail                                    42.9 %             44.3 %
         Wholesale                                 16.9 %             21.7 %
         Total gross profit percentage             34.6 %             27.9 %

Gross profit increased 108.6% from $17.8 million in the three months ended July 31, 2008 (27.9% of total net sales) to $37.1 million in the thirteen weeks ended August 1, 2009 (34.6% of total net sales). Excluding the gross profit from Perfumania's retail division which is included in the above gross profit information for the thirteen weeks ended August 1, 2009, gross profit decreased by $5.6 million. Excluding Perfumania's results, the decrease in gross profit was due to a decrease in wholesale sales volume as discussed above offset by an increase in retail gross profit due to sales of a larger ratio of higher margin products.

Perfumania's retail gross profit for the thirteen weeks ended August 1, 2009 decreased by 5.9% to $24.9 million compared with the comparative same period in 2008. For these same periods, Perfumania's retail gross margins were 43.2% and 46.1%, respectively. The decrease in Perfumania's retail gross margins was due to increased promotional activity during the thirteen weeks ended August 1, 2009.

Selling, general and administrative expenses include payroll and related benefits for our distribution centers, sales, store operations, field management, purchasing and other corporate office and administrative personnel; rent, common area maintenance, real estate taxes and utilities for our stores, distribution centers and corporate office; advertising, consignment fees, sales promotion, insurance, supplies, freight out, and other administrative expenses. Selling, general and administrative expenses increased by $25.6 from $13.1 million in the three months ended July 31, 2008 to $38.7 million in the thirteen weeks ended August 1, 2009. Excluding the selling, general and administrative expenses of Perfumania's retail division of $27.3 million, which are included for the thirteen

weeks ended August 1, 2009, selling, general and administrative expenses decreased by $1.7 million or 13.0%. Included in selling, general and administrative expenses are expenses charged by Quality King, which were $0.7 million for the thirteen weeks ended August 1, 2009 and $0.8 million for the three months ended July 31, 2008.

Perfumania's selling, general and administrative expenses for the thirteen weeks ended August 1, 2009, were $27.3 million compared to $27.1 million in the same period of 2008. While store occupancy costs increased due to the opening of 45 net new stores over the past year, the ongoing Company wide cost reduction initiatives have resulted in lower payroll, advertising and other operating expenses. In addition, certain corporate functions, including warehousing and distribution of merchandise were relocated to the Company's principal executive offices and distribution center in Bellport, New York and these costs are not included in Perfumania's selling, general and administrative expenses for the thirteen weeks ended August 1, 2009.

Depreciation and amortization was approximately $3.4 million in the thirteen weeks ended August 1, 2009, compared to $0.5 million for the three months ended July 31, 2008. Approximately $2.5 million of the total increase is attributable to Perfumania's retail division.

Interest expense was approximately $4.6 million for the thirteen weeks ended August 1, 2009 compared with approximately $1.9 million for the three months ended July 31, 2008. The thirteen week period ended August 1, 2009 includes the combined Company whereas the three months ended July 31, 2008 includes Model Reorg only. The interest rates on total variable interest debt increased by approximately 3.3% during the thirteen weeks ended August 1, 2009 as compared to the three months ended July 31, 2008.

Since the Company continues to record a full valuation allowance against all deferred tax assets, no income tax benefit was recorded during the thirteen weeks ended August 1, 2009, compared with an income tax provision of $0.9 million during the three months ended July 31, 2008.

As a result of the foregoing, we realized a net loss of approximately $9.5 million in the thirteen weeks ended August 1, 2009, of which $7.1 million is attributable to Perfumania, compared to net income of $1.3 million in the three months ended July 31, 2008. As discussed above, certain corporate expenses were not allocated to Perfumania in the thirteen weeks ended August 1, 2009.

Comparison of the Twenty-six Weeks Ended August 1, 2009 with the Six Months
Ended July 31, 2008.

Net Sales



                     Twenty-six Weeks    Percentage        Six Months      Percentage
                           Ended             of               Ended            of
                      August 1, 2009     Net Sales        July 31, 2008    Net Sales
                                             ($ in thousands)
   Retail            $         135,888         66.6 %    $        32,685         26.2 %
   Wholesale                    68,060         33.4 %             92,218         73.8 %

   Total net sales   $         203,948        100.0 %    $       124,903        100.0 %

Net sales increased 63.3% from $124.9 million in the six months ended July 31, 2008 to $203.9 million in the twenty-six weeks ended August 1, 2009. Excluding the sales from Perfumania's retail division which are included in the above sales information for the period from February 1, 2009 through August 1, 2009, net sales decreased by $25.2 million or 20.2%. Excluding Perfumania's results, the decrease in sales was primarily due to a decrease in wholesale sales of $24.2 million.

As discussed above, because the Merger with Model is treated as a reverse acquisition for accounting purposes, Perfumania's retail sales are included in our condensed consolidated financial statements only for the twenty-six weeks ended August 1, 2009. Perfumania's retail sales of $104.3 million for the twenty-six weeks ended August 1, 2009 were unchanged compared with the same period in 2008. Perfumania's comparable store sales decreased by 10.5% during the twenty-six weeks ended August 1, 2009. The average retail price per unit sold during the twenty-six weeks ended August 1, 2009 increased 0.6% from the prior year's comparable period and the total number of units sold decreased by 0.6%. The number of units sold was affected by the continuing softness in the United States economy and the resulting weak mall traffic. The average number of stores operated was 363 in the twenty-six week period ended August 1, 2009, versus 314 in the prior year's comparable period.

Approximately $14.5 million of the $24.2 million decrease in wholesale sales are represented by affiliate sales to Perfumania in the six months ended July 31, 2008. As a result of the Merger on August 11, 2008, wholesale sales to Perfumania became intercompany transactions, which are eliminated in consolidation. The remaining decrease in wholesale sales of $9.7 million is the result of the tightening of credit resources generally and weakened consumer demand discussed above.

Gross Profit



                                    Twenty-six Weeks      Six Months
                                         Ended               Ended
                                     August 1, 2009      July 31, 2008
                                              (in thousands)
              Retail               $           59,993   $        13,581
              Wholesale                        12,910            21,108

              Total gross profit   $           72,903   $        34,689

Gross Profit Percentages



                                        Twenty-six Weeks       Six Months
                                             Ended                Ended
                                         August 1, 2009       July 31, 2008
        Retail                                      44.1 %             41.6 %
        Wholesale                                   19.0 %             22.9 %
        Total gross profit percentage               35.7 %             27.8 %

Gross profit increased 110.2% from $34.7 million in the six months ended July 31, 2008 (27.8% of total net sales) to $72.9 million in the twenty-six weeks ended August 1, 2009 (35.7% of total net sales). Excluding the gross profit from Perfumania's retail division which is included in the above gross profit information for the twenty-six weeks ended August 1, 2009, gross profit decreased by $8.7 million. Excluding Perfumania's results, the decrease in gross profit was due to a decrease in wholesale sales volume as discussed above offset by an increase in retail gross profit due to sales of a larger ratio of higher margin products.

Perfumania's retail gross profit for the twenty-six weeks ended August 1, 2009 decreased by 2.9% to $46.9 million compared with the comparative period in 2008. For these same periods, Perfumania's retail gross margins were 45.0% and 46.4%, respectively. The decrease in Perfumania's retail gross margins was due to increased promotional activity, primarily during the latter part of the twenty-six weeks ended August 1, 2009.

Selling, general and administrative expenses increased by 192.9% from $26.4 million in the six months ended July 31, 2008 to $77.4 million in the twenty-six weeks ended August 1, 2009. Excluding the selling, general and administrative expenses of Perfumania's retail division of $54.5 million, which are included for the twenty-six weeks ended August 1, 2009, selling, general and administrative expenses decreased by $3.5 million or 13.3%. Included in selling, general and administrative expenses are expenses charged by Quality King, which were $1.5 million for both the twenty-six weeks ended August 1, 2009 and the six months ended July 31, 2008.

Perfumania's selling, general and administrative expenses for the twenty-six weeks ended August 1, 2009, increased by 5.5% to $54.5 million compared to $51.7 million in the same period of 2008. While store occupancy costs increased due to the opening of 45 net new stores over the past year, the ongoing Company wide cost reduction initiatives have resulted in lower payroll, advertising and other operating expenses. In addition, the costs of corporate functions that were relocated to the Company's principal executive offices and distribution center in Bellport, New York are not included in Perfumania's selling, general and administrative expenses for the twenty-six weeks ended August 1, 2009.

Depreciation and amortization was approximately $5.8 million in the twenty-six weeks ended August 1, 2009, compared to $0.9 million for the six months ended July 31, 2008. Approximately $4.3 million of the total increase is attributable to Perfumania's retail division.

Interest expense was approximately $9.1 million for the twenty-six weeks ended August 1, 2009 compared with approximately $4.0 million for the six months ended July 31, 2008. The twenty-six week period ended August 1, 2009 includes the combined Company whereas the six months ended July 31, 2008 includes Model Reorg only. The interest rates on total variable interest debt increased by approximately 2.8% during the twenty-six weeks ended August 1, 2009 as compared to the six months ended July 31, 2008.

Since the Company continues to record a full valuation allowance against all deferred tax assets, no income tax benefit was recorded during the twenty-six weeks ended August 1, 2009, compared with an income tax provision of $1.4 million during the six months ended July 31, 2008.

As a result of the foregoing, we realized a net loss of approximately $19.4 million in the twenty-six weeks ended August 1, 2009, of which $15.9 million is attributable to Perfumania, compared to net income of $2.0 million in the six months ended July 31, 2008. As discussed above, certain corporate expenses were not allocated to Perfumania in the twenty-six weeks ended August 1, 2009.

LIQUIDITY AND CAPITAL RESOURCES

Our principal funding requirements are for inventory purchases, financing extended terms on accounts receivable, paying down accounts payable and debt, opening new stores and renovation of existing stores. Prior to the Merger, Model Reorg also financed extended terms on accounts receivable from E Com. These capital requirements generally have been satisfied through borrowings under the respective revolving credit facilities and notes payable to affiliates.

The Company has a $250 million revolving credit facility with a syndicate of banks for which General Electric Capital Corporation ("GECC") serves as Agent, Collateral Agent and Lender, GE Capital Markets, Inc. serves as Joint Lead Arranger and Book Runner and Wachovia Capital Markets serves as Joint Lead Arranger (the "Senior Credit Facility"). The Senior Credit Facility is used for the Company's general corporate purposes and those of its subsidiaries, including working capital. The Company and certain of its subsidiaries are co-borrowers under the Senior Credit Facility, and the Company's other subsidiaries have guaranteed all of their obligations thereunder.

The Senior Credit Facility is scheduled to expire on August 11, 2011, when all amounts will be due and payable in full. The Senior Credit Facility does not require amortization of principal and may be paid before maturity in whole or in part at the Company's option without penalty or premium; provided that, if the Company permanently reduces the revolving commitment in connection with a prepayment, on or before August 11, 2009, it must pay a prepayment fee equal to 1% of the amount of such reduction, or after such date and on or before August 11, 2010, it must pay a prepayment fee equal to 0.5% of the prepayment.

Revolving loans under the Senior Credit Facility may be drawn, repaid and reborrowed up to the amount available under a borrowing base calculated with reference to a specified percentage of the borrowers' eligible accounts and a specified percentage of the borrowers' eligible inventory from time to time. GECC has the right to impose reserves in its reasonable credit judgment, whether or not there is an Event of Default, which would effectively reduce the borrowing base and thereby the amount that the borrowers may borrow under the Senior Credit Facility. Under an amendment to the Senior Credit Facility executed as of May 26, 2009 ("Waiver and Amendment No.1"), reserves against borrowing availability increasing from $9 million to $15 million at August 4, 2009 and thereafter will automatically apply, in addition to any reserves that may be imposed from time to time in GECC's reasonable credit judgment. The Senior Credit Facility also includes a sub-limit of $25 million for letters of credit and a sub-limit of $12.5 million for swing line loans (that is, same-day loans from the lead or agent bank).

As a result of the covenant defaults described below, effective January 23, 2009, GECC elected to impose the Default Rate of interest on outstanding borrowings, which is 2% higher than the interest rate otherwise applicable. The Company was also required to pay fees equal to 0.375% of the unused amount of the Senior Credit Facility and the outstanding amount of letters of credit under that facility. Under Waiver and Amendment No.1, interest under the Senior Credit Facility for periods after May 26, 2009 will be, at the Company's election unless an event of default exists, either the highest of (A) The Wall Street Journal "prime rate," (B) the federal funds rate plus .50% or (C) the sum of 3-month LIBOR plus 1.00% (the "Index Rate"), in each case plus 3.50% or
(ii) LIBOR (but not less than 2.00%) plus 4.50%. The Company is also now required to pay fees equal to 1.00% of the unused amount of the Senior Credit Facility and 4.50% of the outstanding amount of any letters of credit under that facility.

All obligations of the Company under the Senior Credit Facility and under any interest rate protection or other hedging arrangements entered into in connection with the Senior Credit Facility are secured by a first priority perfected security interest in all existing and after-acquired personal property and owned real property owned by the Company and its subsidiaries, which are co-borrowers or guarantors, including, without limitation, 100% (or, in the case of excluded foreign subsidiaries, 66%) of the outstanding equity interests in their subsidiaries.

The Senior Credit Facility limits the Company's and its subsidiaries' ability to, among other things: incur additional indebtedness; incur liens or guarantee obligations; pay dividends and make other distributions; make investments and enter into joint ventures; dispose of assets; and engage in transactions with affiliates, except for certain existing arrangements under which the Company leases space and obtains certain business services from affiliated companies and other arrangements in the ordinary course of business. The Senior Credit Facility also provides that short-term advances to suppliers by the Company and its subsidiaries may not exceed $8 million with respect to all suppliers or $3 million with respect to any one supplier (together with its affiliates).

Under the Senior Credit Facility, the Company and its subsidiaries have been required to maintain certain financial ratios, as specified in the agreement. As the Company was not in compliance with certain of these ratios as of November 1, 2008 and January 31, 2009, GECC imposed the Default Rate of interest on outstanding borrowings, as described above. In order to better align the provisions of the Senior Credit Facility with the Company's current business situation, Waiver and Amendment No.1 waived the covenant defaults and certain other defaults under the facility, provided for no testing of the minimum fixed charge coverage ratio, the inventory turnover ratio or the maximum leverage ratio covenants for the fiscal quarter ended May 2, 2009, deleted the inventory turnover ratio covenant and the maximum leverage ratio covenant thereafter, and suspended the minimum fixed charge coverage ratio covenant until the fiscal quarter ending January 30, 2010.

The Senior Credit Facility also includes other customary events of default that, if not waived, would permit the lenders to accelerate the indebtedness and terminate the credit facility. Any future defaults that are not waived could result in our having to refinance the Senior Credit Facility and obtain an alternative source of financing. Due to the current weakness in the credit markets, there is no assurance that such financing would be obtained, or if such refinancing is obtained, that the terms of a new facility would be on terms comparable to the current Senior Credit Facility. If the Company were unable to obtain such financing, its operations and financial condition would be materially adversely affected and it would be forced to seek an alternative source of liquidity, such as by selling additional securities, to continue operations, or to limit its operations.

At the closing of the Merger, six estate planning trusts established by Glenn, Stephen and Arlene Nussdorf (the "Nussdorf Trusts") loaned an aggregate of approximately $55 million to the Company on an unsecured basis. At the same time, we issued an unsecured subordinated promissory note in the principal amount of $35 million to Quality King. All of the subordinated promissory notes issued to the Nussdorf Trusts and Quality King are subordinated to the Senior Credit Facility and, pursuant to amendments as of May 26, 2009, no payments of principal or interest may be made before the maturity of the Senior Credit Facility on August 11, 2011. The maturity date of the subordinated promissory notes payable to the Nussdorf Trusts is February 8, 2012 and that of the note payable to Quality King is June 30, 2012. The Nussdorf Trusts notes bear interest at a rate equal to 2% over the rate in effect from time to time on the revolving loans under the Senior Credit Facility, and the Quality King note bears interest at a rate equal to 1% over the rate in effect from time to time on the revolving loans under the Senior Credit Facility. Quality King and the Nussdorf Trusts have acknowledged that the Company's nonpayment, because of the subordination provisions, of amounts otherwise due under these notes will not constitute a default under the notes.

On December 9, 2004, E Com issued a Subordinated Convertible Note (the "Convertible Note") to Glenn and Stephen Nussdorf in exchange for a $5 million subordinated secured demand loan made in March 2004. The Convertible Note was originally secured by E Com's assets, but, in connection with the August 11, 2008 financing transactions, Glenn and Stephen Nussdorf released and terminated their security interest. The Convertible Note was originally payable in January 2007; however it was modified in January 2006 to extend the due date to January 2009. The Convertible Note is subordinate to all bank related indebtedness and, pursuant to a May 26, 2009 amendment, no payments of principal or interest may be made before the maturity of the Senior Credit Facility on August 11, 2011. As a result, the Convertible Note is currently in default, resulting in an increase of 2% in the nominal interest rate, which is the prime rate plus 1%. The Convertible Note allows Glenn and Stephen Nussdorf to convert any or all of the principal and accrued interest due on the Convertible Note into shares of the Company's common stock. The conversion price was originally $11.25, which . . .