<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K/A
                                 AMENDMENT NO. 2

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
                       EXCHANGE ACT OF 1934 (FEE REQUIRED)

                   FOR THE FISCAL YEAR ENDED JANUARY 30, 1999
                                       OR

[ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                     EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                         COMMISSION FILE NUMBER 0-19714

                                PERFUMANIA, INC.

             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

     FLORIDA (State or other jurisdiction of incorporation or organization)

               65-0026340 (I.R.S. Employer Identification Number)

    11701 NW 101 ST. ROAD, MIAMI, FL (Address of principal executive offices)

                                33178 (Zip Code)

       (305) 889-1600 (Registrant's telephone number, including area code)

           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.01 par value
                                (Title of Class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]  No [ ]

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K [ ].

         As of September 17, 1999, the number of shares of the registrant's
Common Stock outstanding was 9,156,434. The aggregate market value of the Common
Stock held by non affiliates of the registrant as of September 17, 1999 was
approximately $21.6 million, based on the closing price of the Common Stock
($3.938) as reported by the Nasdaq National Market on such date. For purposes of
the foregoing computation, all executive officers, directors and 5 percent
beneficial owners of the registrant are deemed to be affiliates. Such
determination should not be deemed to be an admission that such executive
officers, directors or 5 percent beneficial owners are, in fact, affiliates of
the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

         The information called for by Part III is incorporated to the Proxy
Statement for the Annual Meeting of Shareholders of the company, which will be
filed no later than 120 days after the close of the fiscal year end.


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                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
ITEM                                                                                                                   PAGE
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                                                               PART I

<S>      <C>                                                                                                           <C>
1.       Business.........................................................................................................3
2.       Properties.......................................................................................................9
3.       Legal Proceedings................................................................................................9
4.       Submission of Matters to a Vote if Security Holders..............................................................9

                                                              PART II

5.       Market for Registrant's Common Equity and Related Stockholder Matters...........................................11
6.       Selected Financial Data.........................................................................................11
7.       Management's Discussion and Analysis of Financial Condition and Results of Operations...........................13
7A.      Quantitative and Qualitative Disclosures About Market Risks.....................................................22
8.       Financial Statements and Supplementary Data.....................................................................23
9.       Changes in and Disagreements with Accountants in Accounting and Financial Disclosures...........................46

                                                             PART III

10.      Directors and Executive Officers of the Registrant..............................................................47
11.      Executive Compensation..........................................................................................49
12.      Security Ownership of Certain Beneficial Owners and Management..................................................54
13.      Certain Relationships and Related Transactions..................................................................55

                                                              PART IV

14.      Exhibits, Financial Statements, Schedules and Reports on Form 8-K...............................................57
</TABLE>


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                           FORWARD-LOOKING STATEMENTS

         Certain statements within this Form 10-K constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or its industry to be materially different from
any future results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among other things, the
Company's seasonality, lack of long-term agreements with suppliers, dependence
on line of credit, dependence on key personnel, the ability to manage the
Company's growth and potential litigation. See "Risk Factors That May Affect
Future Results" in Item 7.

                                     PART I.

ITEM 1.      BUSINESS

GENERAL

         Perfumania, Inc. ("Perfumania" or the "Company") is a leading specialty
retailer and wholesale distributor of a wide range of brand name and designer
fragrances. As of January 30, 1999, the Company operated a chain of 289 retail
stores specializing in the sale of fragrances at discounted prices up to 60%
below the manufacturer's suggested retail prices. The Company's wholesale
division distributes approximately 1,100 stock keeping units (SKUs) of
fragrances and related products to approximately 44 customers, including
national and regional chains and other wholesale distributors throughout North
America and overseas. The Company's wholesale business is managed and owned by
the parent company, Perfumania, Inc. and the Company's retail business is
managed and owned by Magnifique Parfumes and Cosmetics, Inc., a wholly owned
subsidiary of Perfumania, Inc. The parent and subsidiary are separate and
distinct legal entities, but for ease of reference in this Form 10-K, they are
referred to as segments. See Item 6 for Selected Financial Data by segment.

RETAIL SEGMENT

         Marketing and Merchandising. Each of the Company's retail stores offers
approximately 175 different brands of fragrances for women and men at prices up
to 60% below the manufacturer's suggested retail prices. Stores stock brand name
and designer brands such as Estee Lauder(R), Fendi(R), Yves Saint Laurent(R),
Fred Hayman(R), Karl Lagerfeld(R), Gucci(R), Ralph Lauren/Polo(R), Perry
Ellis(R), Liz Claiborne(R), Giorgio(R), Hugo Boss(R), Halston(R), Christian
Dior(R), Chanel(R) and Cartier(R). Historically, the Company has carried a
narrow private line of bath and body and treatment under the name Jerome Privee.
The Company has spent 1998 expanding, repackaging and redesigning its bath and
body line. The new line includes approximately 250 SKU's and was reintroduced
during April 1998. Also during 1998, the Company continued to develop its own
private label Nature's Elements line of cosmetics, treatment and aromatherapy.
The cosmetics line, which stresses quality for value, was introduced in May
1998. The treatment line was launched in the fourth quarter of 1998 and the
aromatherapy line is expected during the fourth quarter of 1999. The Company
believes that the continued expansion of its sales in the bath, body, cosmetic
and treatment categories is very important to its future business. These private
label lines could generate more frequent visits to the Company's stores and
thereby increase sales. The Company also intends to continue to expand its gift
accessories category by offering a wider assortment of vanity trays, perfume
bottles and oil burners.

         The cornerstone of the Company's marketing philosophy is customer
awareness that Perfumania's stores offer an extensive assortment of brand name
and designer fragrances at discount prices. Perfumania posts highly visible
price tags for each item in a store, listing both the manufacturers' suggested
retail price and the Company's discounted prices in order to enable customers to
make price comparisons. In addition, the Company utilizes sales promotions such
as "gift with purchase" and "purchase with purchase" offers. From time to time
the Company test markets in its stores additional specialty gift items.


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        The Company's stores are "full-service" stores. Accordingly, store
personnel are trained to establish a personal rapport with each customer, to
identify customer preferences with respect to both product and price range, and
to successfully conclude a sale. Management believes that attentive personal
service and knowledgeable sales personnel are key factors to the success of the
Company's retail stores. The Company's store personnel are compensated on a
salary plus bonus basis. The Company has several bonus programs that provide
incentives for store personnel to sell merchandise on which the Company has
higher profit margins. In addition, to provide an incentive to reduce expenses,
district and area managers are eligible to receive a bonus if store profit goals
are met. Management believes that a key component of the Company's ability to
increase profitability will be its ability to locate, train and retain store
personnel and regional and district managers. The Company conducts comprehensive
training programs designed to increase customer satisfaction.

         The Company primarily relies on its distinctive store design and window
displays to attract the attention of prospective customers. The Company also
distributes flyers and brochures in its stores and in the malls in which its
stores are located. The Company has refocused a substantial portion of its
advertising from national and local newspapers, television and radio to less
expensive billboards and in-store promotions. The amount of advertising varies
with the seasonality of the business.

         Retail Stores. The Company's standard store design includes signs and
merchandise displays which are designed to enhance customer recognition of
Perfumania's stores. The Company's stores average approximately 1,500 square
feet, although stores located in manufacturer's outlet malls tend to be larger
than the Company's other stores. Each store is managed by one manager and one
assistant manager. The average number of employees in a Perfumania store is
five, including part-time help. District or area managers visit stores on a
regular basis in an effort to ensure knowledgeable and attentive customer
service.

         Information Systems. The Company has a point-of-sale and management
information system which integrates data from every significant phase of the
Company's operations and provides the Company with information for planning,
purchasing, pricing, distribution, financial and human resources decisions. The
system also provides, on a real-time basis, information to manage store and
warehouse inventories efficiently and to closely monitor individual store and
each salesperson's performance. In addition, the system prepares price labels
and pick orders and provides for automatic reordering, minimum and maximum
stocking levels and optimum order quantities based on actual sales. Further, the
system permits analysis of the Company's retail sales data based on product
groups, items and manufacturers, enabling the Company to respond to changes in
sales patterns. The management information system has bar scanners to record
sales, track inventories and conduct physical inventories. The information
system also has automated time and attendance modules to capture payroll
information through the stores' point-of-sale systems, E-Mail systems allowing
daily communication among the stores, district managers and the corporate
office, and automated scheduling for store personnel. During the second quarter
of 1999, the Company will upgrade the merchandising, inventory management and
distribution and finance components of its management information system. During
the third quarter of 1999, the Company intends to upgrade its register software
so that it will be able to perform promotional discounts automatically,
calculate bonuses for employees at store level, perform inventories at store
level and expand its E-Mail and printing capabilities. The costs for
improvements and upgrades to the Company's management information systems and
related point-of-sale software are expected to be approximately $1.5 million in
fiscal 1999. See "Year 2000" discussion under Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations.

         Acquisition. During November 1996, the Company acquired substantially
all of the assets of Nature's Elements Holding Corporation (Nature's) which
included the service mark and trade name "Nature's Elements" and the stock of
its subsidiary. Prior to the acquisition, all of Nature's liabilities, both at
the parent and subsidiary level were transferred to a liquidating trust.
Subsequent to the purchase, the stock of the subsidiary was liquidated and the
Company received inventory and store fixtures, and assumed the obligation for 34
leases (including 1 seasonal store). The Company has since closed 11 locations,
renovated 18 locations during 1998 and the remaining locations will either be
renovated or subleased during 1999. The Company continues to use the trade name
Nature's Elements for its in-house developed cosmetic, treatment, aromatherapy
and bath line.



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         Store Location and Expansion. Perfumania's 280 stores are located in 36
states, the District of Columbia and Puerto Rico, including 49 in Florida, 33 in
New York, 22 in California and 20 in Texas. Perfumania's strategy for opening
new stores is to seek locations throughout the United States principally in
regional malls and manufacturers' outlet malls and, selectively, on a
stand-alone basis in suburban shopping centers in metropolitan areas. To achieve
economies of scale with respect to advertising and management costs, the Company
emphasizes opening additional stores in markets where it already has a presence.
The Company also plans to expand into additional markets that it believes have a
population density to support a cluster of stores. Prior to selecting new store
locations, the Company analyzes, among other things, the potential adverse
effect of competition from new stores on the sales of existing stores.

         The number of stores opened by the Company will depend on several
factors such as locating satisfactory sites, obtaining leases on favorable terms
and general economic and business conditions in the localities of the new
stores. Furthermore, although the Company may have executed a lease for a future
location, a store may not open if, for example, a developer decides not to
construct a mall. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources".

         Currently, the Company's average cost for opening a store is
approximately $175,000, including equipment, furniture and fixtures, and other
items (which average approximately $50,000 per store), build-out costs (which
average approximately $120,000 per store), and preopening expenses, such as the
hiring and training of new employees and travel (which average approximately
$5,000 per store). In addition, initial inventory in a new store ranges from
approximately $100,000 during the first fiscal quarter to approximately $140,000
during the Christmas holiday season. To supplement the inventory in its stores,
the Company carries at least four months supply of inventory at its warehouse.

         Through September 17, 1999, the Company had opened 5 stores and closed
14 stores in fiscal year 1999. The Company opened 36 stores in fiscal year 1998,
40 stores in fiscal year 1997 (excluding 18 seasonal locations) and 74 stores in
fiscal year 1996, (including 33 stores acquired from Nature's). The Company
continuously monitors store performance and from time to time has closed
underperforming stores, which typically have been older stores in undesirable
locations. The Company attempts to schedule store closings after the Christmas
holiday season. During fiscal year 1998, 1997 and 1996, the Company closed 32
stores, 17 stores and 6 stores, respectively. For fiscal 1999, the Company will
slow its growth and focus on improving its existing stores profitability. The
Company will open a maximum of 8 stores and will close up to 15 stores during
1999.

WHOLESALE SEGMENT

         The Company is one of the largest wholesale distributors of fragrances
in the United States. The Company distributes fragrances on a wholesale basis to
national and regional retail chains and other wholesale distributors throughout
North America and overseas. During fiscal years 1998 and 1997, the wholesale
division sold to approximately 41 and 44 customers, respectively. One of the
Company's customers accounted for 24.8% and 37.0% of net wholesale sales during
fiscal year 1998 and 1997, respectively. Foreign wholesale sales during fiscal
year 1998 were $2.9 million, compared to $1.7 million during fiscal year 1997.
See Note 14 to the Company's Consolidated Financial Statements included in Item
8 hereof.

         The wholesale division offers its customers approximately 1,100 SKUs.
The wholesale division's strategy for purchasing merchandise is to capitalize on
market opportunities, to purchase those products that are in demand and to
purchase merchandise available due to overstock situations or close-out sales.
In addition, it takes the Company approximately 70 days after purchase to
receive inventory for its wholesale division and an additional 20 days for the
inventory to arrive at the Company's stores. As a result, the wholesale division
generally carries at least four months' supply of inventory. The Company's
warehouse inventory is generally higher than other retailers and wholesalers
since the Company purchases a large amount of its inventories from the
manufacturers and the secondary market and must assure itself of having
consistent supplies of desirable inventories at favorable prices. Some of the
Company's suppliers require monetary advances to purchase the inventory.



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<PAGE>   6

         Jerome Falic, the Company's President, is primarily responsible for
activities of the wholesale division. The Company believes that Mr. Falic has
developed strong, reliable relationships with suppliers and customers in the
United States, Europe, Asia and South America. The Company continuously seeks to
develop new supplier and customer relationships. The wholesale division works
closely with the retail division when determining which merchandise to purchase
on behalf of the Company and the retail division will frequently direct the
wholesale division to locate and purchase particular products. The Company
purchases merchandise on behalf of both the wholesale division and the retail
division which, the Company believes, allows both divisions to benefit from the
Company's supplier relationships and volume discounts thereby obtaining a more
reliable source of inventory at lower prices than many other wholesalers or
retailers of perfume.

         The Company believes that its ability to extend credit has been an
important factor of wholesale sales. Most sales are made on open account terms,
generally net 30 to 60 days following the receipt of goods. Other sales, with
the exception of sales to the Company's largest customer, are made on a basis of
cash on or in advance of delivery or upon receipt of a letter of credit. The
receivable from the Company's largest customer was $0.1 million as of January
30, 1999, compared to $0.9 million as of January 31, 1998. Historically, the
credit terms for this customer have been up to six months. See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.

SOURCES OF SUPPLY

         During fiscal years 1998 and 1997, the Company purchased fragrances
from 155 and 126 different suppliers, respectively, including national and
international manufacturers, distributors, wholesalers, importers and retailers.
The Company generally makes its purchases based on the most favorable available
combination of prices, quantities and merchandise selection and, accordingly,
the extent and nature of the Company's purchases from its various suppliers
change constantly. As is customary in the perfume industry, the Company has no
long-term or exclusive contract with any supplier.

         Merchandise is purchased both directly from manufacturers and secondary
sources such as distributors, wholesalers, importers and retailers. Merchandise
purchased by the Company from secondary sources includes trademarked and
copyrighted products manufactured in foreign countries and trademarked and
copyrighted products manufactured in the United States that may have been sold
to foreign distributors. Substantially all of the Company's merchandise is
covered by trademarks or copyrights owned by others. From time to time, United
States trademark and copyright owners and their licensees and trade associations
have initiated litigation or administrative agency proceedings seeking to halt
the importation into the United States of such foreign manufactured or
previously exported trademarked products or restrict the sale of such goods in
the United States, and Federal legislation for such purposes has been proposed
but not yet adopted.

         In May 1988, the United States Supreme Court in K-MART v. CARTIER
("K-Mart"), upheld United States Customs Service regulations permitting the
importation, without the consent of the United States trademark owner, of
products manufactured overseas having legitimate foreign trademarks identical to
United States trademarks, when the foreign and United States trademarks are
owned by the same entity or entities under "common ownership or control." K-MART
also held that where the foreign trademarked goods are produced by an
unaffiliated entity authorized, but not controlled, by the United States
trademark holder, the United States Customs Service cannot permit the
importation of the goods without the consent of the United States trademark
owner. Certain federal courts have narrowly interpreted the K-MART case as
applying to a particular tariff statute, and the courts remain divided on the
extent to which trademark, copyright or other laws or regulations may restrict
the importation or sale of trademarked or copyrighted merchandise without the
consent of the trademark or copyright owner, even where the entities owning and
applying the trademark or copyright involved are under common ownership or
control. For example, in LEVER BROS. v. UNITED STATES ("LEVER BROS."), a 1993
decision, the District of Columbia Circuit Court of Appeals held that the
"common ownership or control" exception does not apply to foreign goods with an
identical trademark but with physical material differences from the product
produced by the United States trademark holder. Under LEVER BROS., such goods
are barred from importation without the permission of the United States
trademark holder. In addition, on November 23, 1992, the U.S. District Court for
the



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Central District of California, in an unreported decision in PARFUMS GIVENCHY,
INC. v. DRUG EMPORIUM, INC. ("PARFUMS"), which purports to follow a decision of
the Ninth Circuit Court of Appeals, held that the sale of products manufactured
abroad and imported into the United States, which would be covered by a U.S.
copyright, without the consent of the U.S. copyright holder, is a copyright
violation. This decision was upheld by the 9th Circuit Court of Appeals and on
March 6, 1995, the U.S. Supreme Court denied Certiorari, without giving any
reason. In March 1998, however, the United States Supreme Court in QUALITY KING
DISTRIBUTORS v. L'ANZA RESEARCH INTERNATIONAL ("L'ANZA"), was faced with a
situation in which a United States manufacturer had manufactured and sold
certain goods with copyrighted labels affixed to a foreign purchaser. These
goods somehow found their way from the foreign purchaser back into the United
States without L'anza's permission, and were sold by Quality King to
unauthorized retailers at discounted prices. The L'ANZA Court unanimously held
that there was no copyright violation by Quality King because the "first sale"
doctrine applied to imported copies. Although L'ANZA appears favorable to those
involved in purchasing through secondary sources, it is still too early to tell
how the L'ANZA decision will be applied to future situations.

         As is often the case in the fragrance and cosmetics business, some of
the merchandise purchased by suppliers such as the Company may have been
manufactured by entities, particularly foreign licensees and others, who are not
the owners of the trademarks or copyrights for the merchandise. If the Company
were called upon or challenged by the owner of a particular trademark or
copyright to demonstrate that specific merchandise was produced and sold with
the proper authority and the Company were unable to do so, the Company could,
among other things, be restricted from reselling the particular merchandise or
be subjected to other liabilities, which could have an adverse effect on the
Company's business and results of operations. The Company may not always be able
to know or to demonstrate that the manufacturer of specific merchandise had
proper authority from the trademark or copyright owner to produce the
merchandise or permit it to be resold in the United States.

         During fiscal 1998, less than 30 percent of the Company's merchandise
was purchased from gray market sources. The Company's gray market sources
generally will not disclose the identity of their suppliers, which they consider
to be proprietary trade information. As a result, the Company cannot determine
specifically what portion of its merchandise purchased from gray market sources
could be affected by the potential actions discussed above or actions on other
grounds. See "Item 3. Legal Proceedings" for a description of certain pending
litigation predicated on grounds of patent infringement. There can be no
assurance that future judicial, legislative or administrative agency action,
including possible import, export, tariff or other trade restrictions, will not
limit or eliminate some of the secondary sources of supply used by the Company
or any of the Company's business activities. In addition, there can be no
assurance that the Company's business activities will not become the subject of
legal or administrative actions brought by manufacturers, distributors or
others.

DISTRIBUTION

         The Company's retail and wholesale operations are served by its
warehouse in Miami, Florida. The lease for the facility expires in July 2003.
The warehouse is approximately 139,000 square feet, of which 20,000 square feet
is utilized as office space. The Company's wholesale division also utilizes
space in a third party bonded warehouse.

         The Company delivers merchandise utilizing its own trucks to its South
Florida stores and the Company utilizes independent national trucking companies
to deliver merchandise to stores outside of the South Florida area. Deliveries
generally are made weekly, with more frequent deliveries during the Christmas
holiday season. Such deliveries permit the stores to minimize inventory storage
space, and increase the space available for display and sale of merchandise. The
Company ships merchandise to wholesale customers by truck, ship or plane. In
addition, in order to expedite delivery of merchandise to its customers, the
Company sometimes instructs its suppliers to ship merchandise directly to
wholesale division customers.



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COMPETITION

         The retail and wholesale perfume businesses are highly competitive. The
Company's retail competitors include department stores, regional and national
retail chains, independent drug stores, duty free shops and other specialty
retail stores. The Company is the largest specialty retailer of discounted
fragrances in the United States in terms of number of stores. Some of the
Company's competitors sell fragrances at discount prices, and some are part of
large national or regional chains that have substantially greater resources and
name recognition than the Company. The Company's stores compete on the basis of
selling price, customer service, merchandise variety, store location and
ambiance. The Company believes that its European-style perfumeries concept,
full-service sales staff, discount prices, large and varied selection of brand
name and designer fragrances and attractive shopping environment are important
to its competitive position.

         The Company is one of the largest wholesale distributors of fragrances
in the United States. The wholesale division competes directly with other
perfume wholesalers and perfume manufacturers, some of which have substantially
greater resources or merchandise variety than the Company. The wholesale
division competes principally on the basis of merchandise selection and
availability, selling price and rapid delivery.

EMPLOYEES

         At January 30, 1999, the Company had 1,834 employees, of whom 1,632
were employed in the Company's retail stores, 92 were employed in the Company's
warehouse and distribution operations and the balance were employed in
executive, administrative and other positions. Temporary and part-time employees
are usually added during peak sales periods (principally between Thanksgiving
and Christmas). None of the Company's employees are covered by a collective
bargaining agreement and the Company considers its relationship with its
employees to be good.

TRADE NAME AND SERVICE MARK

         The Company's stores use the trade name and service mark Perfumania(R).
The Company also operates 18 stores under the trade name "Nature's Elements" (as
of January 31, 1998; see "Acquisition"- page 5), 3 stores under the trade name
"Class Perfumes" in malls where the Company also operates a Perfumania(R) store,
and 10 stand-alone stores under the trade name "Perfumania Plus". The Company
has common law rights to its trade names and service mark in those general areas
in which its existing stores are located and has registered the service mark
Perfumania(R) with the U.S. Patent and Trademark Office. The registration
expires in 2009 and may be renewed for 10-year terms thereafter.

RECENT DEVELOPMENTS

         In February 1999, through a wholly-owned subsidiary, perfumania.com,
inc., the Company began operation of an Internet commerce site, perfumania.com.
The Company intends to capitalize on its name recognition and cross marketing
opportunities with its stores to become a top discount retailer of fragrance and
related products on the Internet. All orders placed with the Internet site are
shipped from the Company's existing distribution center in Miami, Florida.

         On August 31, 1999, the Company entered into a stock purchase agreement
with an affiliated Company through common ownership. The agreement calls for the
transfer of 1,512,406 shares of the Company's treasury stock to this affiliated
company in consideration for a partial reduction of the Company's outstanding
trade indebtedness balance of approximately $4.5 million. The transfer price was
based on a per share price of $2.98, which approximates 90% of the closing price
on the Company's common stock for the previous 20 business days. Pursuant to
this agreement the parties entered into a registration rights agreement dated
August 31, 1999, which grants the affiliated company demand registration rights.

         On September 28, 1999, perfumania.com, inc., a wholly-owned subsidiary
of the Company, made an initial public offering of its common stock representing
approximately 47% of the common stock outstanding following the offering.
perfumania.com, inc. offered 3,500,000 shares of its common stock, which
included 1,000,000 shares held by the Company. The offering raised approximately
$24.5 million. The net proceeds of the offering will be used for repayment of
outstanding indebtedness to the Company and for working capital and other
general corporate purposes as well as reduction of the outstanding balance in
the Company's bank line of credit.



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ITEM 2.      PROPERTIES

         The Company's executive offices and warehouse are leased for a ten (10)
year period pursuant to a lease which currently provides for monthly rent of
approximately $70,000 and specified annual increases thereafter.

         All of the Company's retail stores are located in leased premises. Most
of the Company's store leases provide for the payment of a fixed amount of base
rent plus a percentage of sales, ranging from 3% to 10%, over certain minimum
sales levels. Store leases typically require the Company to pay all utility
charges, insurance premiums, increases in property taxes and certain other
costs. Certain of the Company's leases permit the lessor to terminate the lease
if specified minimum sales levels are not met. See Note 13 of Notes to the
Company's Consolidated Financial Statements for additional information with
respect to the Company's store leases.

ITEM 3.      LEGAL PROCEEDINGS

LEGAL PROCEEDINGS

         Boucheron. In December 1993, the patent holder and exclusive licensee
in the U.S. of Boucheron filed a complaint against us in the United States
District Court for the Southern District of New York alleging that we infringed
upon their exclusive right to sell the Boucheron bottle and is seeking $1.5
million in damages. Their theory is that they have a valid patent for the
bottles and that Perfumania's sales of such bottles infringes upon their patent
rights. We believe that a patentee cannot control by resort to an infringement
suit the resale of a patented article which it has sold. We filed a motion to
dismiss during February 1994. On March 20, 1995, the court denied our motion to
dismiss, and on April 14, 1995, we filed an answer to the complaint. Discovery
is in progress.

         Other. Perfumania is characterized as an insider as defined by the
United States Bankruptcy Code, in the liquidating plan of reorganization filed
on April 6, 1998 by L. Luria & Son, Inc. in the United States Bankruptcy Court,
Southern District of Florida. In October 1998, the committee of unsecured
creditors in Luria's bankruptcy proceedings filed a complaint with the United
States Bankruptcy Court, Southern District of Florida to recover substantial
funds from Perfumania. The complaint alleges that Luria's made preference
payments, as defined by the Bankruptcy Court, to us and seeks to recover
preference payments, and seeks to disallow any and all claims of Perfumania
against Luria's until Perfumania pays for the preference payments. In July 1999,
we agreed with the committee of unsecured creditors to settle all claims held by
Luria's against us for the sum of $1.2 million, payable over the next nine
months according to a repayment schedule. This settlement is subject to the
approval of the Bankruptcy Court. The full amount of the settlement was accrued
for in our financial statements for the year ending January 31, 1998 and January
30, 1999.

         From time to time, we are involved in various legal proceedings in the
ordinary course of business.

ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         On December 16, 1998 the Company held its annual meeting of
shareholders. At the annual meeting, the shareholders elected Ilia Lekach, Simon
Falic, Jerome Falic, Marc Finer, Robert Pliskin and Carole Ann Taylor to the
Board of Directors.



                                       9
<PAGE>   10


<TABLE>
<CAPTION>
                                           SHARES     SHARES VOTED     SHARES VOTED      ABSTAIN/
              TOTAL                         VOTED          FOR            AGAINST        WITHHELD    NON-VOTES
              ------                       ------     ------------     ------------      --------    ---------
<S>                                       <C>         <C>              <C>               <C>         <C>
Ilia Lekach                               3,304,273    3,299,973          --              4,300           --
Simon Falic                               3,304,273    3,299,973          --              4,300           --
Jerome Falic                              3,304,273    3,299,973          --              4,300           --
Marc Finer                                3,304,273    3,299,973          --              4,300           --
Robert Pliskin                            3,304,273    3,299,973          --              4,300           --
Carole Ann Taylor                         3,304,273    3,299,973          --              4,300           --
</TABLE>



                                       10
<PAGE>   11

                                    PART II.

ITEM 5.      MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
             MATTERS

MARKET INFORMATION

         The Company's Common Stock is traded on the Nasdaq Stock Market under
the symbol PRFM. The following table sets forth the high and low closing sales
prices for the Company's Common Stock for the periods indicated, as reported by
the Nasdaq Stock Market.

<TABLE>
<CAPTION>
            FISCAL 1997                            HIGH                              LOW
            -----------                            ----                              ---
<S>                                             <C>                                <C>
First Quarter                                   $ 3 11/16                          $ 2 19/64
Second Quarter                                  $  4 5/16                          $   2 7/8
Third Quarter                                   $   3 7/8                          $   2 5/8
Fourth Quarter                                  $   3 3/4                          $   2 1/4

<CAPTION>
            FISCAL 1998                            HIGH                              LOW
            -----------                            ----                              ---
<S>                                             <C>                                <C>
First Quarter                                   $   3 1/4                          $   2 1/4
Second Quarter                                  $ 2 13/16                          $  1 9/16
Third Quarter                                   $ 1 11/16                          $   13/32
Fourth Quarter                                  $      12                          $   17/32

<CAPTION>
            FISCAL 1999                            HIGH                              LOW
            -----------                            ----                              ---
<S>                                             <C>                                <C>
First Quarter                                   $ 8 11/16                          $   2 3/4
Second Quarter                                  $  4 7/32                          $   3
Third Quarter (through September 17)            $ 3 15/16                          $  2 5/16
</TABLE>

         As of September 17, 1999, there were 81 holders of record of the
9,156,434 outstanding shares of Common Stock. The closing sales price for the
Common Stock on September 17, 1999 was $3 15/16.

DIVIDEND POLICY

         The Company has not declared or paid any dividends on the Common Stock
and does not currently intend to declare or pay cash dividends in the
foreseeable future. Payment of dividends, if any, will be at the discretion of
the Board of Directors after taking into account various factors, including the
Company's financial condition, results of operations, current and anticipated
cash needs and plans for expansion. The Company is prohibited from paying cash
dividends under its line of credit with LaSalle National Bank.

ITEM 6.      SELECTED FINANCIAL DATA

         The selected financial data presented below for the last five fiscal
years and as of the end of each such fiscal years are derived from the Company's
consolidated financial statements and should be read in conjunction with such
financial statements and related notes.

         The Company's fiscal year end is the Saturday closest to January 31.
All references herein to fiscal years are to the calendar year in which the
fiscal year begins; for example, fiscal year 1998 refers to the fiscal year that
began on February 1, 1998 and ended on January 30, 1999.



                                       11
<PAGE>   12

<TABLE>
<CAPTION>
                                                                                FISCAL YEAR ENDED
                                                       --------------------------------------------------------------------------
                                                       JANUARY 30,     JANUARY 31,     FEBRUARY 1,    FEBRUARY 3,     JANUARY 28,
                                                          1999            1998            1997           1996             1995
                                                       -----------     -----------     -----------    -----------     -----------
                                                                   (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<S>                                                    <C>             <C>             <C>            <C>             <C>
STATEMENT OF OPERATIONS DATA:
Net sales, wholesale division .......................  $   40,466      $   34,032      $   30,317     $    36,200     $    38,484
Net sales, retail division ..........................     134,790         129,562         108,603          92,957          77,094
                                                       ----------      ----------      ----------     -----------     -----------
   Total net sales ..................................     175,256         163,594         138,920         129,157         115,578
                                                       ----------      ----------      ----------     -----------     -----------
Gross profit, wholesale division ....................       7,545           7,942           7,614           8,784           7,573
Gross profit, retail division .......................      57,072          58,032          52,346          43,384          36,076
                                                       ----------      ----------      ----------     -----------     -----------
   Total gross profit ...............................      64,617          65,974          59,960          52,168          43,649
                                                       ----------      ----------      ----------     -----------     -----------
Selling, general and administrative expenses.........      72,502          64,219          48,165          43,372          37,081
Provision for doubtful accounts .....................          --           1,730             500             310              27
Provision for impairment of assets and store
   closings..........................................       1,035           2,515             169           1,232             623
Depreciation and amortization .......................       4,480           4,698           3,772           3,300           2,903
                                                       ----------      ----------      ----------     -----------     -----------
   Total operating expenses .........................      78,017          73,162          52,606          48,214          40,634
                                                       ----------      ----------      ----------     -----------     -----------
Income (loss) from operations before other income
   (expense) ........................................     (13,400)         (7,188)          7,354           3,954           3,015
Other income (expense)
   Interest expense, net* ...........................      (4,882)         (4,696)         (4,110)         (3,144)         (2,415)
   Other, net .......................................         645             762             478             396             357
                                                       ----------      ----------      ----------     -----------     -----------
Income (loss) before income taxes* ..................     (17,637)        (11,122)          3,722           1,206             957
(Provision) benefit for income taxes ................      (1,337)            321          (1,647)            796             368
                                                       ----------      ----------      ----------     -----------     -----------
Income (loss) before cumulative effect of change
   in accounting principle* .........................     (18,974)        (10,801)          2,075           2,002           1,325
                                                       ----------      ----------      ----------     -----------     -----------
Cumulative effect of change in accounting
   principle, net of income tax benefit of $380,958 .          --            (632)             --              --              --
Net income (loss)* ..................................  $  (18,974)     $  (11,433)     $    2,075     $     2,002     $     1,325
                                                       ==========      ==========      ==========     ===========     ===========
Weighted average shares outstanding:
   Basic ............................................   6,659,882       7,025,236       7,183,462       6,973,670       6,155,733
   Diluted ..........................................   6,659,882       7,025,236       7,633,588       7,067,291       6,210,542
Basic income (loss) per share net of cumulative
   effect of change in accounting principle* ........  $    (2.85)     $    (1.63)     $     0.29     $      0.29     $      0.22
Diluted income (loss) per share net of cumulative
   effect of change in accounting principle* ........  $    (2.85)     $    (1.63)     $     0.27     $      0.28     $      0.21

SELECTED OPERATING DATA:
Number of stores open at end of period ..............         289             285             262             194             175
Comparable store sales increase .....................           0%              0%            3.6%            4.1%            5.9%

BALANCE SHEET DATA:
Working capital (deficit) ...........................  $   (3,835)     $   18,473      $   32,614     $    29,688     $    26,452
Total assets ........................................      95,129         113,908         129,365          93,026          78,916
Long-term debt, less current portion(1) .............       3,404           5,643           5,708           1,815           1,367
Total stockholders' equity ..........................      17,636          35,169          48,782          44,761          42,946
</TABLE>

--------------

*        As disclosed in Note 11 to the consolidated financial statements, the
         net income and the net income per share for fiscal year 1996 was
         restated to account for the value attributable to the beneficial
         conversion feature on certain debt issued in fiscal year 1996.

(1)      Amount includes redeemable common equity of $471 as of January 30, 1999
         but does not include long-term severance payables of $1,038 as of
         January 30, 1999.


(2)      Amount includes notes and interest receivable from shareholder and
         officers as of January 28, 1995, February 3, 1996, February 1, 1997,
         January 31, 1998 and January 30, 1999 in the amount of $913, $538,
         $543, $814 and $542, respectively.

         The fiscal 1998 financial statements have been prepared assuming we
will continue as a going concern. We have violated certain debt covenants
contained in our bank line of credit agreement; however, we obtained a waiver
from the bank on July 14, 1999.



                                       12
<PAGE>   13

ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
             RESULTS OF OPERATIONS

GENERAL

         During the last three fiscal years, the Company's retail division has
accounted for the majority of the Company's net sales and gross profit. The
Company's overall profitability depends principally on the Company's ability to
purchase a wide selection of merchandise at favorable prices. Other factors
affecting the Company's profitability include general economic conditions, the
availability to the Company of volume discounts and, in the retail division, the
number of stores in operation, the timing of store openings and closings and the
effect of special promotions offered by the Company.

         The following table sets forth items from the Company's Consolidated
Statements of Operations expressed as a percentage of net sales for the periods
indicated.

                             PERCENTAGE OF NET SALES
<TABLE>
<CAPTION>
                                                                                  FISCAL YEAR
                                                                       --------------------------------
                                                                         1998        1997         1996
                                                                       -------      -------      ------
<S>                                                                    <C>          <C>          <C>
Net sales, wholesale division .....................................      23.1%        20.8%        21.8%
Net sales, retail division  .......................................      76.9         79.2         78.2
                                                                       ------       ------       ------
   Total net sales ................................................     100.0        100.0        100.0
Gross profit, wholesale division ..................................      18.6         23.3         25.1
Gross profit, retail division .....................................      42.3         44.8         48.2
                                                                       ------       ------       ------
Total gross profit ................................................      36.9         40.3         43.2
Selling, general and administrative expenses ......................      41.4         39.2         34.6
Provision for doubtful accounts ...................................        --          1.1          0.4
Provision for impairment of assets and store closings .............       0.6          1.5          0.2
Depreciation and amortization .....................................       2.6          2.9          2.7
                                                                       ------       ------       ------
   Total operating expenses .......................................      44.6         44.7         37.9
                                                                       ------       ------       ------
   Income (loss) from operations before other income (expenses) ...      (7.7)        (4.4)         5.3
                                                                       ------       ------       ------
Other income (expense):
   Interest, net ..................................................      (2.8)        (2.9)        (2.9)
   Other, net .....................................................       0.4          0.5          0.3
                                                                       ------       ------       ------
Income (loss) before income taxes* ................................     (10.1)        (6.8)         2.7
                                                                       ------       ------       ------
(Provision) benefit for income taxes ..............................      (0.8)         0.2         (1.2)
Income (loss) before cumulative effect of change in accounting
   principle ......................................................     (10.9)        (6.6)         1.5
                                                                       ------       ------       ------
Cumulative effect of change in accounting principle, net of income
   tax benefit ....................................................        --         (0.4)          --
                                                                       ------       ------       ------
Net income (loss)* ................................................     (10.9)%       (7.0)%        1.5%
                                                                       ======       ======       ======

</TABLE>


*    As disclosed in Note 11 to the Consolidated Financial Statements, the net
     income and net income per share for 1996 was restated to account for the
     value of the beneficial conversion feature of certain debt issued in fiscal
     year 1996.

RESULTS OF OPERATIONS

     RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

         Perfumania does not provide forecasts of future financial performance.
Forward-looking statements in this Annual Report are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995, and,
in connection therewith, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected and in
the future could affect the Company's actual results and could


                                       13
<PAGE>   14
cause such results to differ materially from those expressed in forward-looking
statements made by or on behalf of the Company.

         Seasonality. The Company has historically experienced higher sales in
the third and fourth fiscal quarters than in the first and second fiscal
quarters. Significantly higher fourth fiscal quarter retail sales result from
increased purchases of fragrances as gift items during the Christmas holiday
season. The Company's quarterly results may also vary due to the timing of new
store openings, net sales contributed by new stores and fluctuations in
comparable sales of existing stores. A variety of factors affect the sales
levels of new and existing stores, including the retail sales environment and
the level of competition, the effect of marketing and promotional programs,
acceptance of new product introductions, adverse weather conditions and general
economic conditions.

         Lack of Long-term Agreements With Suppliers. The Company's success
depends to a large degree on its ability to provide an extensive assortment of
brand name and designer fragrances. The Company has no long-term purchase
contracts or other contractual assurance of continued supply, pricing or access
to new products. While the Company believes it has good relationships with its
vendors, the inability to obtain merchandise from one or more key vendors on a
timely basis, or a material change in the Company's ability to obtain necessary
merchandise could have a material adverse effect on its results of operations.

         Dependence on Line of Credit. As discussed above, the Company
experiences significant seasonal fluctuations in its sales and operating
results, as is common with many specialty retailers. The Company utilizes its
line of credit to fund inventory purchases and to support new retail store
openings. Any future limitation on the Company's borrowing ability and access to
financing could limit the Company's ability to open new stores and to obtain
merchandise on satisfactory terms. The Company has violated certain debt
covenants contained in its bank line of credit agreement. On July 14, 1999, the
Company obtained a waiver of default from the bank through September 30, 1999
and for the year ended January 30, 1999. See additional discussion under
"Liquidity and Capital Resources."

         Dependence on Key Personnel. Jerome Falic, the Company's President, is
primarily responsible for the Company's merchandise purchases, and has developed
strong, reliable relationships with suppliers, as well as customers of the
Wholesale division in the United States, Europe, Asia and South America. The
loss of service his, or any of the Company's other current executive officers
could have a material adverse effect on the Company.

         Qualified Accountants' Report. In reporting on the Company's audited
consolidated financial statements as of January 30, 1999 and January 31, 1998
and for each of the three years in the period ended January 30, 1999, the report
of the Company's independent accountants contained an explanatory paragraph
indicating factors which create substantial doubt about the Company's ability to
continue as a going concern. Such factors include recurring net losses in fiscal
1998 and 1997 and a default on the Company's bank line of credit agreement as a
result of the Company's violation of certain debt covenants. On July 14, 1999
the Company obtained a waiver of default from the bank through September 30,
1999 as of and for the year ending January 30, 1999.


         Ability to Manage Growth. While the Company has grown significantly in
the past several years, there is no assurance that the Company will sustain the
growth in the number of retail stores and revenues that it has achieved
historically. The Company's growth is dependent, in large part, upon the
Company's ability to open and operate new retail stores on a profitable basis,
which in turn is subject to, among other things, the Company's ability to secure
suitable store sites on satisfactory terms, the Company's ability to hire, train
and retain qualified management and other personnel, the availability of
adequate capital resources and the successful integration of new stores into
existing operations. There can be no assurance that the Company's new stores
will achieve sales and profitability comparable to existing stores, or that the
opening of new locations will not cannibalize sales at existing locations.

         Litigation. As is often the case in the fragrance and cosmetics
business, some of the merchandise purchased by suppliers such as the Company may
have been manufactured by entities who are not the owners of the trademarks or
copyrights for the merchandise. If the Company were called upon or challenged by
the owner of a particular trademark or copyright to demonstrate that the
specific merchandise was produced and sold with the proper authority and the
Company were unable to do so, the Company could, among other things, be
restricted from



                                       14
<PAGE>   15

reselling the particular merchandise or be subjected to other liabilities, which
could have an adverse effect on the Company's business and results of
operations.

         Year 2000 Readiness. The Year 2000 issue is the result of computer and
other business systems being written using two digits rather than four to
represent the year. Many of our time sensitive applications and business systems
and the applications and business systems of our business partners may recognize
a date using "00" as the year 1900 rather than the year 2000, which could result
in system failure or disruption of operations. Although the Year 2000 problem
will impact us and our business partners, we have made a preliminary assessment
of our Year 2000 exposure and, primarily because our major management
information systems are in the process of being upgraded, we believe we will be
able to achieve Year 2000 readiness for our internal systems by the fourth
quarter of 1999. We are also developing a plan of communication with our
significant business partners to obtain appropriate assurances that the Year
2000 issues are resolved in a timely manner. We believe that we will
satisfactorily resolve all significant Year 2000 problems and that the related
costs will not be material. However, our estimates of Year 2000 related costs
are based on numerous assumptions, including the continued availability of
certain resources, the ability to acquire accurate information regarding third
party suppliers and the ability to correct all relevant applications and third
party modification plans. We may not achieve our estimated costs and actual
costs could differ materially from those anticipated. Moreover, the failure of a
major vendor's systems to operate properly with respect to the Year 2000 problem
on a timely basis or a Year 2000 conversion that is incompatible with our
systems could seriously harm our business, financial condition and results of
operations. In addition, a significant portion of our stores' purchases are made
with credit cards, and our operations may be seriously harmed if our customers
are unable to use their credit cards due to Year 2000 problems that are not
remedied by their credit card vendors.

         We are preparing contingency plans which will include the
identification of our most reasonably likely worst case scenarios. Currently,
the most reasonably likely sources of risk to us include (a) the disruption of
our internal inventory management system, (b) the inability of principal
suppliers or logistics providers to be Year 2000-ready, which could result in
delays in product deliveries from the suppliers or logistics providers, and (c)
failure of systems and necessary infrastructure including electricity supply. We
are preparing plans to flow inventory around an assumed period of disruption to
our stores, which could include accelerating distribution of high volume
merchandise and critical products to reduce the impact of significant failure.

         Other. We have been characterized as an insider as defined by the
United States Bankruptcy Code, in the liquidating plan of reorganization filed
on April 6, 1998 by L. Luria & Son, Inc. in the United States Bankruptcy Court,
Southern District of Florida. In October 1998, the committee of unsecured
creditors in Luria's bankruptcy proceedings filed a complaint with the United
States Bankruptcy Court, Southern District of Florida. The complaint alleges
that Luria's made preference payments, as defined by the Bankruptcy Court, to
us. The complaint seeks recovery of the preference payments, and disallows any
and all of our claims against Luria's until we have made full payment of the
preference payments. In July 1999, we agreed with the committee of unsecured
creditors to settle all claims held by Luria's against us for the sum of $1.2
million, payable over the next nine months according to a repayment schedule.
This settlement is subject to the approval of the Bankruptcy Court. The full
amount of the settlement was accrued for in our financial statements for the
years ending January 31, 1998 and January 30, 1999.

         In December 1993, the patent holder and exclusive licensee in the U.S.
of Boucheron filed a complaint against us in the United States District Court
for the Southern District of New York alleging that the Company infringed upon
their exclusive right to sell the Boucheron bottle and is seeking $1.5 million
in damages. Their theory is that they have a valid patent for the bottles and
that our sales of such bottles infringes upon their patent rights. The Company
believes that a patentee cannot control by resort to an infringement suit the
resale of a patented article which it has sold. The Company filed a motion to
dismiss during February 1994. On March 20, 1995, the court denied our motion to
dismiss, and on April 14, 1995, the Company filed an answer to the complaint.
Discovery is in progress.



                                       15
<PAGE>   16

RESTATEMENT OF 1996 NET INCOME PER COMMON SHARE TO REFLECT RECENT SEC
  ANNOUNCEMENT REGARDING CERTAIN TREATMENT OF CONVERTIBLE DEBT TRANSACTIONS

         In a 1997 announcement, the staff of the Securities and Exchange
Commission ("SEC") indicated that when debt is convertible at a discount from
the then current common stock market price, the discounted amount reflects at
that time an incremental yield, e.g. a "beneficial conversion feature", which
should be recognized as a return to the debt holders. In March 1996, the Company
issued $3,000,000 of 5% Convertible Debentures (the "Debentures") in a
Regulation S offering to non-U.S. persons. The debentures were convertible into
shares of common stock of the Company at any time after May 21, 1996. Based on
the market price of the Company's common stock, the debentures had a beneficial
conversion feature of $529,412 at such point in time. Because of the SEC
announcement, the Company has restated its 1996 net income and net income per
common share information to reflect such accounting treatment. The net effect of
the restatement represents a non-cash interest charge in the determination of
net income.

COMPARISON OF FISCAL YEARS 1998 AND 1997

         NET SALES

         Net sales increased 7.1% from $163.6 million in fiscal year 1997 to
$175.3 million in fiscal year 1998. The increase in net sales during fiscal year
1998 was due to a 4.0% increase in retail sales (from $129.6 million to $134.8
million), and a 18.9% increase in wholesale sales (from $34.0 million to $40.5
million). The increase in retail sales was principally due to an increase in the
number of stores operated during fiscal year 1998 compared to fiscal year 1997,
as comparable store sales were flat compared to the prior year. We believe that
various sales promotions held during the year to stimulate sales and reduce
inventory levels resulted in lower average sales per customer, which contributed
to the flat comparable store sales. We operated 289 and 285 stores at the end of
fiscal years 1998 and 1997, respectively. The increase in wholesale sales was
due to our efforts to reduce inventory levels of certain non-designer
fragrances.

         GROSS PROFIT

         Gross profit decreased 2.1% from $66.0 million in fiscal year 1997
(40.3% of total net sales) to $64.6 million in fiscal year 1998 (36.9% of total
net sales) as a result of higher inventory loss provisions (see below), higher
sales and gross profit in the retail division offset by lower gross profit in
the wholesale division.

         Gross profit for the wholesale division decreased from $7.9 million in
fiscal year 1997 to $7.5 million in fiscal year 1998 due mainly to a $330,000
increase in inventory provisions. The wholesale division's gross margin in
fiscal 1998 was 18.6% compared to 23.3% in fiscal year 1997. The decrease in
gross margin was due to the increase in sales of non-designer fragrances in the
wholesale division and the overall ratio of wholesale sales to retail sales in
fiscal year 1998. Wholesale sales historically yield a lower gross margin when
compared to retail sales.

         Gross profit for the retail division decreased 1.7% from $58.0 million
in fiscal year 1997 to $57.1 million in fiscal year 1998, principally as a
result of $1.6 million increase in the inventory provision, offset by higher
retail sales volume. As a percentage of net retail sales, gross profit for the
retail division decreased from 44.8% in fiscal year 1997 to 42.3% in fiscal year
1998. The decrease was due to store promotions discussed above as well as
increases in the inventory provisions, freight expense and inventory shrinkage.
Inventory provisions were increased to bring the carrying cost of certain
non-designer fragrance merchandise to their estimated carrying values. The
Company will reduce inventory levels of this non-designer fragrance merchandise
in fiscal year 1999. Freight expenses increased primarily due to the necessity
of shipping merchandise from the Company's distribution center to its retail
stores using express freight service during the 1998 holiday season. This
resulted from a temporary failure in our inventory management system to properly
replenish the merchandise at our retail stores. Inventory shrinkage increased
due to the replenishment situation discussed above and increased movement of
inventory due to the closing of 32 retail stores. We expect these expenses to
decrease in fiscal year 1999 because non-designer fragrance merchandise will be
reduced to a minimum, the management information system will be upgraded in
fiscal year 1999 and the Company will not be closing a significant number of
retail stores. Furthermore, we have



                                       16
<PAGE>   17

hired additional loss prevention and distribution center management personnel to
ensure that shrinkage expense is reduced to an acceptable level.

         OPERATING EXPENSES

         Operating expenses increased $4.9 million in fiscal year 1998 compared
to fiscal year 1997, due principally to (a) a $8.3 million increase in selling,
general and administrative expenses, which includes a charge of $1.9 million
related to severance agreements with two executive officers and (b) a $1.0
million provision for disposition of fixed assets relating to retail stores
which were either closed during fiscal year 1998, or are scheduled to close
during fiscal year 1999. We do not expect to incur a significant provision for
disposition of fixed assets in fiscal year 1999 as the fixed assets for all
stores expected to be closed in fiscal year 1999 were expensed in fiscal year
1998. The increase in selling, general and administrative expense was primarily
the result of increases in rent, payroll and other costs associated with the
operation of an average of 10 additional stores during fiscal year 1998.
Depreciation and amortization decreased $0.2 million in fiscal year 1998
compared to fiscal year 1997. As a percentage of net sales, operating expenses
decreased from 44.7% in fiscal year 1997 to 44.6% in fiscal year 1998.

         INTEREST EXPENSE

         Interest expense (net) increased 4.0% from $4.7 million in fiscal year
1997 to $4.9 million in fiscal 1998. The increase was principally due to
increased use of lease financing for new store furniture and fixtures. See
"Liquidity and Capital Resources."

         INCOME TAXES

         The provision for income taxes in fiscal 1998 was $1.3 million, which
includes an increase in the valuation allowance of $1.2 million to provide fully
for the net deferred tax assets since management believes that it is more likely
than not that these amounts will not be realized due to our recurring losses.

         As a result of the foregoing, we had a net loss of $19.0 million in
fiscal 1998 compared to a net loss of $11.4 million in fiscal 1997.

COMPARISON OF FISCAL YEARS 1997 AND 1996

         NET SALES

         Net sales increased 17.8% from $138.9 million in fiscal year 1996 to
$163.6 million in fiscal year 1997. The increase in net sales during fiscal year
1997 was due to a 19.3% increase in retail sales (from $108.6 million to $129.6
million), and a 12.3% increase in wholesale sales (from $30.3 million to $34.0
million). The increase in retail sales was principally due to an increase in the
number of stores operated during fiscal year 1997 compared to fiscal year 1996,
as comparable store sales were flat compared to the prior year. We believe that
various promotions held during the year to stimulate sales and reduce and
rebalance inventory levels resulted in lower average sales per customer, which
contributed to the flat comparable store sales. We operated 285 and 262 stores
at the end of fiscal years 1997 and 1996, respectively.

         GROSS PROFIT

         Gross profit increased 10.0% from $60.0 million in fiscal year 1996
(43.2% of total net sales) to $66.0 million in fiscal year 1997 (40.3% of total
net sales) as a result of higher sales and gross profit in both the wholesale
and retail divisions.

         Gross profit for the wholesale division increased from $7.6 million in
fiscal year 1996 to $7.9 million in fiscal year 1997. The wholesale division's
gross margin in fiscal 1997 was 23.3% compared to 25.1% in fiscal year 1996.

         Gross profit for the retail division increased 10.9% from $52.3 million
in fiscal year 1996 to $58.0 million in fiscal year 1997, principally as a
result of higher retail sales volume. As a percentage of net retail sales, gross



                                       17
<PAGE>   18

profit for the retail division decreased from 48.2% in fiscal year 1996 to 44.8%
in fiscal year 1997. The decrease was due to promotions discussed above as well
as a $1.3 million increase in inventory provisions. Inventory provisions were
increased to bring the carrying cost of certain non-designer fragrance
merchandise to their estimated carrying values.

         OPERATING EXPENSES

         Operating expenses increased $20.6 million in fiscal year 1997 compared
to fiscal year 1996, due principally to (a) a $16.1 million increase in selling,
general and administrative expenses, which includes $1.7 million of losses
suffered from operating Perfumania's Nature's Elements stores before their
conversion and/or closure, (b) a $2.4 million increase in provision for
impairment of assets and store closing and (c) a $1.2 million write off of
accounts receivable from L. Luria & Son, Inc. The increase in selling, general
and administrative expense was primarily the result of increases in rent,
payroll and other costs associated with the operation of an average of 64
additional stores during fiscal year 1997. The average number of stores during
fiscal 1997 includes 20 temporary holiday-only stores. We intend to continue to
use temporary stores in an effort to reduce our inventories. The increase in
provision for doubtful account occurred primarily because of increased
write-offs of wholesale accounts receivable. See "Liquidity and Capital
Resources." After performing a review of certain retail store locations with
significant negative cash flows, we recognized a non-cash impairment charge of
$2.2 million, representing a reduction of the carrying amounts of fixed assets
at those store locations to their estimated recoverable amounts. We also
recorded a loss of $0.3 million on disposition of fixed assets relating to
retail stores which were closed during fiscal year 1997. Due to the heavy
concentration of sales in the fourth quarter of each fiscal year, we do not
believe it is meaningful to make impairment determinations on an interim basis
during the year. Depreciation and amortization increased $0.9 million in fiscal
year 1997 compared to fiscal year 1996, due to increased fixed assets associated
with retail stores. As a percentage of net sales, operating expenses increased
from 38.0% in fiscal year 1996 to 44.7% in fiscal year 1997 due to the above
reasons.

         INTEREST EXPENSE

         Interest expense (net) increased 14.3% from $4.2 million in fiscal year
1996 to $4.7 million in fiscal 1997. The increase was principally due to the
increase in our line of credit from $30 to $35 million during fiscal 1997, as
well as increased use of lease financing for new store furniture and fixtures,
offset by a one-time non-cash interest charge of $529,412 for a beneficial
conversion feature of convertible debt in fiscal 1996 (see Note 11 to the
consolidated financial statements). See "Liquidity and Capital Resources".

         INCOME TAXES

         The benefit for income taxes in fiscal 1997 was $0.3 million, which
includes an increase in the valuation allowance of $3.4 million for deferred tax
assets due to their uncertain realization.

         As a result of the foregoing, we had a loss before cumulative effect of
a change in accounting principle of $10.8 million in fiscal 1997 compared to a
net income of $2.1 million in fiscal 1996.

LIQUIDITY AND CAPITAL RESOURCES

         Our principal capital requirements are to fund inventory purchases and
for new store openings. We financed these capital requirements primarily through
borrowings under our working capital lines of credit, cash flows from
operations, lease financing of store furniture and fixtures and short-term
borrowings from related parties and other individuals.

         On May 15, 1998, we extended our $35 million revolving line of credit
facility with LaSalle National Bank, from April 1999 to April 2001. Advances
made under the line of credit are based on a formula of eligible inventories and
receivables, bear interest at 2% above the bank's prime rate (9.75% at January
30, 1999, however, see discussion below regarding events of default and default
rate interest), and are payable on demand. Advances are secured by a first lien
on all of our assets and assignment of a life insurance policy on one of our
officers.



                                       18
<PAGE>   19
         Our $35 million line of credit contains covenants requiring the
maintenance of minimum tangible net worth and book value and the achievement of
specified levels of quarterly results of operations. The line of credit also
contains limitations on additional borrowings, capital expenditures, number of
new store openings and purchases of treasury stock and prohibits distribution of
dividends. As of January 30, 1999, we were in violation of some of the above
covenants and, as a result of these violations, were in default under the line
of credit agreement. As a result, the Company incurred the default rate of
interest, prime plus 4% (11.75% at January 30, 1999) beginning December 1998 and
the bank can demand payment of the amounts outstanding under the line of credit
agreement. The violations consist primarily of the Company failing to maintain
the minimum tangible net worth and net income levels established by the
financial covenants, purchasing treasury stock and exceeding the limit on new
store openings. On July 14, 1999, the Company obtained a waiver of default from
the bank through September 30, 1999 as of and for the year ended January 30,
1999. Future outstanding borrowings will bear interest at the prime rate plus
four percent. The bank agreed to less restrictive covenants provided that
certain events commence prior to September 30, 1999. One such event includes
that perfumania.com, inc. (a wholly-owned subsidiary) is to receive at least $10
million from a contemplated initial public offering of its shares, of which at
least $2 million is to be repaid to the Company. Management believes that the
conditions included in the waiver will be met by September 30, 1999, however,
there can be no assurance of this. Should we be unable to meet these conditions,
we may be required to repay outstanding amounts (totaling approximately $34.8
million as of September 17, 1999) and obtain alternative sources of financing.
Although we believe we would be able to obtain a comparable line of credit with
another lender, in the interim period, we could also be required to take other
actions to reduce our reliance on working capital financing and generate
additional working capital, which could include delaying the opening of new
stores, reducing inventory purchases and/or reducing our wholesale and retail
selling prices to generate more cash. Any such actions, or our failure to obtain
additional financing in an amount sufficient to support our current and planned
levels of operation, could adversely affect our business and operating results.

         Management believes that its borrowing capacity under the current bank
line of credit facility, or from an alternative line of credit facility,
projected cash flows from operations, anticipated proceeds from the initial
public offering of perfumania.com, inc. and other short term borrowings will be
sufficient to support working capital needs, capital expenditures and debt
service for the next twelve months.

         On August 31, 1999, we entered into a stock purchase agreement with an
affiliated Company through common ownership. The agreement calls for the
transfer of 1,512,406 shares of our treasury stock to this affiliated company in
consideration for a partial reduction of our outstanding trade indebtedness
balance of approximately $4.5 million. The transfer price was based on a per
share price of $2.98, which approximates 90% of the closing price of our common
stock for the previous 20 business days. Pursuant to this agreement the parties
entered into a registration rights agreement dated August 31, 1999, which grants
the affiliated company demand registration rights. We recorded an extraordinary
loss of approximately $314,000 which will be taken to income in the third
quarter of fiscal year 1999.

         In July 1999, we entered into a Securities Purchase Agreement and
issued an aggregate of $2 million worth of our Series B Convertible Notes, which
are convertible into common stock. The Notes contain a beneficial conversion
feature of approximately $981,000 which will be taken by us as a non-cash
interest charge to income in the second quarter of fiscal year 1999. The
agreement requires us to file a registration statement with the Securities and
Exchange Commission within forty-five days after the date of issuance of the
convertible notes. The Conversion Price is the lower of (A) $3.40625 per share,
subject to adjustment and (B) the floating conversion price determined by
multiplying (1) the average closing bid price of the common stock for the three
trading days immediately preceding the date of determination, by (2) 80%,
subject to adjustment. The conversion price may be adjusted pursuant to
antidilution provisions in the convertible note.

         In July 1999, we obtained a $2.5 million unsecured loan from a
wholesale customer bearing an interest rate of 24%. The loan is payable in full
December 1999.

         In April 1999, we entered into a Securities Purchase Agreement and
issued an aggregate of $2 million worth of our Series A Convertible Notes, which
are convertible into common stock. The Notes contain a beneficial conversion
feature of approximately $385,000 which will be taken by us as a non-cash
interest charge to income in the first quarter of fiscal year 1999. The
agreement requires us to file a registration statement with the Securities and
Exchange Commission within forty-five days after the date of issuance of the
convertible notes. The conversion price is the lower of (A) $4.35 per share,
subject to adjustment and (B) the floating conversion price determined by
multiplying (1) the average closing bid price of the common stock for the three
trading days immediately preceding the date of determination, by (2) 80%,
subject to adjustment. The conversion price may be adjusted pursuant to
antidilution provisions in the convertible note. If the conversion price
decreases, we are obligated to issue additional shares of common stock.

         In March 1999, we entered into Subscription Agreements for the sale of
235,293 shares of our common stock to a group of private investors at a price of
$8.50 per share. The proceeds of $2 million were received in January 1999. The
Subscription Agreements require that we file this registration statement with
the Securities and Exchange Commission within six months from the date of the
agreement to permit the registered resale of the shares by the investors in open
market transactions. If, on the effective date of the registration statement,
the market price is less than $8.50 per share, we are obligated to reimburse the
investor group the lesser of (a) the product of the difference between $8.50 and
the closing bid price of the common stock on the effective date of this
registration statement multiplied by the number of shares issued under the
Subscription Agreements or (b) the product of $2.00 multiplied by the number of
shares issued under the Subscription Agreements. As of January 30, 1999, the
potential redeemable amount of $470,588 was recorded as redeemable common equity
and the remaining $1,529,412 was recorded as capital in excess of par value in
the accompanying balance sheets.



                                       19
<PAGE>   20

         On March 21, 1996, we sold 180,000 shares of common stock for
approximately $956,000 in a private placement.

         On March 25, 1996, we issued $3,000,000 of 5% Convertible Debentures in
a Regulation S offering to non-U.S. persons. The debentures were convertible at
any time after May 21, 1996 into shares of common stock, at a conversion price
for each share of common stock equal to eighty-five percent of the market price
of the common stock on the date of conversion, not to exceed $8.50 per share of
common stock. The debentures were converted to approximately 918,000 shares of
the common stock in the second quarter of fiscal 1996. See Note 11 of the
consolidated financial statements.

         In fiscal year 1998, net cash provided by operating activities was
approximately $13.0 million, which was primarily due to our reduction in
inventories and receivables.

         Trade receivables primarily relate to our wholesale business. Trade
receivables due from customers at January 30, 1999 were $4.1 million. At fiscal
year end 1998, approximately $1.3 million of the trade receivables, net, were
more than 90 days past due. Allowance for doubtful accounts was approximately
$0.7 million at January 30, 1999 and was considered adequate by management based
on its write-off experience during the last three years and an analysis of the
aging of its trade receivables at January 30, 1999.

         During fiscal year 1998, inventories decreased by approximately $15.5
million due to (a) our efforts to reduce inventory levels and (b) an inventory
provision during the fourth quarter of $3.8 million related primarily to
non-designer fragrances Perfumania intends to liquidate in fiscal 1999.

         Net cash used in investing activities in fiscal year 1998 was
approximately $9.5 million, principally due to capital expenditures related to
opening new stores and renovation of existing stores. We intend to slow our
growth and open only 7 stores in fiscal 1999 versus 36 stores in fiscal 1998. In
addition, we do not plan any significant renovations of existing stores in
fiscal 1999, whereas 18 Nature's stores were completely remodeled in fiscal
1998. Thus, store-related capital expenditures for fiscal 1999 are projected to
be significantly lower than fiscal 1998. Although we intend to upgrade various
components of our management information systems and will also make various
hardware and software enhancements, total capital expenditures for fiscal 1999
are projected to be $4.0 million of which approximately $1.8 million pertains to
new store openings and $2.2 million pertains to hardware, software and other
corporate improvements. Currently, our average capital expenditure for opening a
store is approximately $175,000, including furniture and fixtures, equipment and
other items, which average approximately $50,000 per store, build-out costs,
which average approximately $120,000 per store, and pre-opening expenses, such
as the hiring and training of new employees and travel, which average
approximately $5,000 per store. In addition, initial inventory (not including
inventory replenishment) in a new store ranges from approximately $100,000
during the first fiscal quarter to approximately $140,000 during the Christmas
holiday season. Wholesale inventory levels vary significantly during the fiscal
year depending upon availability, price and selection of merchandise available
for purchase, and seasonality. We generally carry at least four months' supply
of inventory for our retail and wholesale divisions.

         We also repurchased approximately 294,000 shares of our common stock
for $0.9 million in fiscal 1998.

SEASONALITY AND QUARTERLY RESULTS

         Our operations have historically been seasonal, with generally higher
sales in the third and fourth fiscal quarters than in the first and second
fiscal quarters. Significantly higher fourth fiscal quarter retail sales result
from increased purchases of fragrances as gift items during the Christmas
holiday season. Our quarterly results may also vary due to the timing of new
store openings, net sales contributed by new stores and fluctuations in
comparable sales of existing stores. Wholesale sales vary by fiscal quarter as a
result of the selection of merchandise available for sale and the need for us to
stock our retail stores for the Christmas holiday season. Therefore, the results
of any interim period are not necessarily indicative of the results that may be
expected during a full fiscal year. See Note 15 of the Notes to Consolidated
Financial Statements for additional information regarding quarterly financial
data.



                                       20
<PAGE>   21

YEAR 2000 COMPLIANCE

         The following critical application systems areas are the focus of our
Y2K compliance efforts: (a) merchandising, (b) inventory management and
distribution, (c) point-of-sales systems, (d) human resources and (e) finance
and accounting. The merchandising and finance and accounting systems are
currently being upgraded utilizing vendor software certified as Y2K compliant.
The inventory management and distribution systems as well as the point-of-sales
and human resources systems will be upgraded in the third quarter of 1999. Our
hardware and communications network is currently being inventoried, assessed,
and where instances of non-compliance are noted, upgraded and tested.

         We have not incurred material costs to date in the process, and do not
believe that the cost of additional actions will have a material effect on our
operating results or financial condition. However, we have established a budget
totaling approximately $1.5 million for the acquisition of computer hardware and
software that will assist in the Year 2000 assessment and remediation activities
to be completed no later than the third quarter of 1999. Our current systems may
contain undetected errors or defects with Year 2000 date functions that may
result in material costs. In addition, we use third-party equipment and
software, including non-information technology systems, such as facilities and
distribution equipment, that may not be Year 2000 compliant. Failure of
third-party equipment, software or content to operate properly with regard to
the Year 2000 issue could require us to incur unanticipated expenses to remedy
problems, which could have a material adverse effect on our business, operating
results and financial condition.

         We are currently assessing whether third parties in our supply and
distribution chain are adequately addressing their Year 2000 compliance issues.
We have initiated formal communications with our significant suppliers and
service providers to determine the extent to which our systems may be vulnerable
if suppliers and providers fail to address and correct their own Year 2000
issues. We cannot guarantee that the systems of suppliers or other companies on
which we rely will be Year 2000 compliant.

         We will track the Year 2000 compliance status of our material vendors
and suppliers via our own internal vendor compliance effort. Year 2000
correspondence will be sent to critical vendors and suppliers by the second
quarter of 1999, with continued follow up for those who fail to respond. All
vendor responses will be evaluated to assess any possible risk to or effect on
our operations. Prior to mid 1999, we expect to implement additional procedures
for assessing the Year 2000 compliance status of our most critical vendors and
will modify our contingency plans accordingly.

         We are preparing contingency plans which will include the
identification of our most reasonably likely worst case scenarios. Currently,
the most reasonably likely sources of risk to us include (a) the disruption of
our internal inventory management system, (b) the inability of principal
suppliers or logistics providers to be Year 2000-ready, which could result in
delays in product deliveries from such suppliers or logistics providers and (c)
failure of hardware and software utilized by transportation vendors as a result
of a general failure of systems and necessary infrastructure such as electricity
supply. We are preparing plans to flow inventory around an assumed period of
disruption to our stores, which could include accelerating distribution of high
volume merchandise and critical products to reduce the impact of significant
failure.

         Based on our current assessment efforts, we do not believe that Year
2000 issues will have a material adverse effect on our financial condition or
results of operations. However, our Year 2000 issues and any potential business
interruptions, costs, damages or losses related thereto, are dependent, to a
significant degree, upon the Year 2000 compliance of third parties, such as
government agencies, vendors and suppliers. Consequently, we are unable to
determine at this time whether Year 2000 failures will materially affect our
business. We believe that our compliance efforts have and will reduce the impact
of any failures.

RECENT ACCOUNTING STANDARDS.

         In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components. In June 1997, the FASB also issued
Statement of


                                       21
<PAGE>   22

Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures
about Segments of an Enterprise and Related Information." This Statement
establishes standards for reporting information about a company's operating
segments and related disclosures about its products, services, geographic areas
of operations and major customers. Both Statements were adopted by us in 1998.

         In March 1998, the AICPA issued Statement of Financial Position 98-1,
("SOP 98-1") "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance for capitalization of
certain costs incurred in the development of internal-use software and is
effective for financial statements for years beginning after December 15, 1998.
SOP 98-1 was adopted in fiscal 1998 and had no significant impact on the results
of operations, cash flows or financial position.

         In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities," which requires us to expense preopening expenses as
incurred. We early adopted SOP 98-5 in fiscal year 1997. See Note 2 of Notes to
Consolidated Financial Statements.

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). Among other provisions, SFAS No. 133
establishes accounting the reporting standards for derivative instruments and
for hedging activities. It also requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for financial statements for fiscal years beginning after June 15, 2000.
Management has not determined the effect, if any, of adopting SFAS No. 133.

CHANGES IN FOREIGN EXCHANGE RATES CREATE RISK.

         Although large fluctuations in foreign exchange rates could have a
material effect on the prices we pay for products we purchase from outside the
United States, the prices obtainable for sales denominated in foreign currencies
and wholesale sales to foreign customers, such fluctuations have not been
material to our results of operations to date. Transactions with foreign
suppliers generally are in United States dollars. We believe that inflation has
not had a material impact on our results of operations and that we are generally
able to pass through any cost increases in the form of increased sales prices.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

         The Company's exposure to market risk for changes in interest rates
relates primarily to its bank line of credit. The bank line of credit bears
interest at a variable rate, as discussed above under "Liquidity and Capital
Resources". The Company mitigates interest rate risk by continuously monitoring
the interest rates.

         The table below presents the outstanding principal amount and the
related fair value, together with maturity date as of January 30, 1999 and the
weighted average interest rate for the Company's bank line of credit. (See
"Liquidity and Capital Resources" and Notes 2 and 8 of the Notes to Consolidated
Financial Statements.)

<TABLE>
<CAPTION>
                                                  OUTSTANDING                         WEIGHTED
                                                   PRINCIPAL                           AVERAGE
                                                    AMOUNT          FAIR VALUE      INTEREST RATE         MATURITY DATE
                                                  -----------       ----------      -------------         -------------
<S>                                               <C>               <C>             <C>                   <C>
Bank Line of Credit.....................           $30,035,019      $30,035,019          10.83%            April 2001
</TABLE>




                                       22
<PAGE>   23

ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial information and the supplementary data required in
response to this Item are as follows:

<TABLE>
<CAPTION>

                                                                                                           PAGE
                                                                                                           ----
<S>                                                                                                        <C>
Report of Independent Certified Public Accountants................................................          24

Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998...........................          25

Consolidated Statements of Operations for the Fiscal Years Ended January 30, 1999, January 31,
   1998 and February 1, 1997......................................................................          26

Consolidated Statements of Changes in Stockholders' Equity for the Fiscal Years Ended January 30,
   1999, January 31, 1998 and February 1, 1997....................................................          27

Consolidated Statements of Cash Flows for the Fiscal Years Ended January 30, 1999, January 31,
   1998 and February 1, 1997......................................................................          28

Notes to Consolidated Financial Statements........................................................          29

Schedule II - Valuation and Qualifying Accounts and Reserves......................................          45
</TABLE>




                                       23
<PAGE>   24


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


To the Board of Directors and
Stockholders of Perfumania, Inc.

In our opinion, the consolidated financial statements listed in the index
appearing under Item 8 and Item 14(a)(1) and (2) of this Form 10-K present
fairly, in all material respects, the financial position of Perfumania, Inc. and
its subsidiaries at January 30, 1999 and January 31, 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended January 30, 1999 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred recurring net losses
in fiscal 1998 and 1997 and has a working capital deficit of $3.8 million at
January 30, 1999. In addition, the Company was in default of its bank line of
credit agreement as a result of its violation of certain debt covenants. These
debt covenant violations have been subsequently waived by the bank. There is no
assurance that the Company will be able to generate future net income or secure
a long-term credit facility, which creates substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

As discussed in Note 11, in 1997 the Company restated its fiscal 1996 net income
and net income per common share calculation to comply with new requirements of
the Securities and Exchange Commission Staff position on accounting for
convertible securities having beneficial conversion features.

As explained in Note 2, in 1997 the Company changed its method of accounting for
preopening expenses to conform with new requirements of the American Institute
of Certified Public Accountants.

PricewaterhouseCoopers LLP
Miami, Florida

April 29, 1999,
except for the fourth
paragraph of Note 2 and
the second paragraph of
Note 8 as to which the
date is July 14, 1999.




                                       24
<PAGE>   25


                                PERFUMANIA, INC.
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>

                                                                                   JANUARY 30,         JANUARY 31,
                                                                                      1999                1998
                                                                                   -----------        -------------
<S>                                                                                <C>                <C>
ASSETS:
Current assets:
   Cash and cash equivalents ................................................      $  1,745,603       $   1,554,117
   Trade receivables, less allowance for doubtful accounts of $704,954 in
     1999 and 1998 ..........................................................         4,108,847           5,186,473
   Advances to suppliers ....................................................         8,065,301           7,611,036
   Inventories, net of reserve of $4,163,251 and $2,750,000 in 1999 and
     1998, respectively .....................................................        53,880,132          73,137,842
   Prepaid expenses and other current assets ................................         1,417,187           2,044,658
   Tax refund receivable ....................................................                --             814,766
   Deferred tax asset, net ..................................................                --           1,219,856
                                                                                   ------------       -------------
     Total current assets ...................................................        69,217,070          91,568,748

Property and equipment, net .................................................        23,180,462          18,307,240
Leased equipment under capital leases, net ..................................         1,373,878           2,266,674
Other assets, net ...........................................................         1,357,966           1,764,906
                                                                                   ------------       -------------
     Total assets ...........................................................      $ 95,129,376       $ 113,907,568
                                                                                   ============       =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
   Bank line of credit and current portion of notes payable .................      $ 32,800,627       $  34,139,766
   Accounts payable - non-affiliates ........................................        14,329,013          13,308,914
   Accounts payable - affiliates ............................................        15,812,240          16,958,163
   Accrued expenses and other liabilities ...................................         9,205,316           6,848,923
   Income taxes payable .....................................................           485,098             505,098
   Current portion of obligations under capital leases ......................           419,487           1,030,340
   Due to related parties ...................................................                --             304,483
                                                                                   ------------       -------------
     Total current liabilities ..............................................        73,051,781          73,095,687
Long-term portion of notes payable ..........................................         2,370,684           4,709,434
Long-term portion of obligations under capital leases .......................           562,552             933,615
Long-term severance payables ................................................         1,037,859                  --
                                                                                   ------------       -------------
     Total liabilities ......................................................        77,022,876          78,738,736

Commitments and contingencies ...............................................                --                  --
Redeemable common equity (Note 11) ..........................................           470,588                  --

Stockholders' equity:
   Preferred stock, $.01 par value, 1,000,000 shares authorized, none
     issued .................................................................                --                  --
   Common stock, $.01 par value, 25,000,000 shares authorized, 8,614,491
     and 7,845,291 shares issued at 1999 and 1998, respectively .............            86,145              78,453
   Capital in excess of par value ...........................................        54,440,009          52,386,361
   Treasury stock, at cost, 1,512,406 and 1,218,360 shares at 1999 and
     1998, respectively .....................................................        (5,413,002)         (4,521,068)
   Accumulated deficit ......................................................       (30,935,097)        (11,960,599)
   Notes and interest receivable from shareholder and officers ..............          (542,143)           (814,315)
                                                                                   ------------       -------------
     Total stockholders' equity .............................................        17,635,912          35,168,832
                                                                                   ------------       -------------
     Total liabilities and stockholders' equity .............................      $ 95,129,376       $ 113,907,568
                                                                                   ============       =============
</TABLE>


          See accompanying notes to consolidated financial statements.



                                       25
<PAGE>   26


                                PERFUMANIA, INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                         FISCAL YEAR ENDED
                                                                  ------------------------------------------------------
                                                                    JANUARY 30,        JANUARY 31,           FEBRUARY 1,
                                                                       1999               1998                  1997
                                                                  -------------       -------------       -------------
                                                                                                      (AS RESTATED, NOTE 11)
<S>                                                               <C>                 <C>                 <C>
Net sales:
  Non-affiliated customers .................................      $ 175,255,633       $ 161,593,736       $ 136,446,104
  Affiliates ...............................................                 --           1,999,823           2,473,623
                                                                  -------------       -------------       -------------
                                                                    175,255,633         163,593,559         138,919,727
                                                                  -------------       -------------       -------------
Cost of goods sold:
  Non-affiliated customers .................................        110,638,432          96,053,329          76,706,903
  Affiliates ...............................................                 --           1,566,489           2,252,850
                                                                  -------------       -------------       -------------
                                                                    110,638,432          97,619,818          78,959,753
                                                                  -------------       -------------       -------------
Gross profit ...............................................         64,617,201          65,973,741          59,959,974
                                                                  -------------       -------------       -------------
Operating expenses:
  Selling, general and administrative expenses .............         72,501,987          64,219,379          48,165,392
  Provision for doubtful accounts ..........................                 --           1,730,000             500,000
  Provision for impairment of assets and store closings ....          1,034,717           2,514,818             169,159
  Depreciation and amortization ............................          4,480,681           4,697,816           3,771,508
                                                                  -------------       -------------       -------------
       Total operating expenses ............................         78,017,385          73,162,013          52,606,059
                                                                  -------------       -------------       -------------
Income (loss) from operations before other income
   (expense) ...............................................        (13,400,184)         (7,188,272)          7,353,915
                                                                  -------------       -------------       -------------
Other income (expense):
  Interest expense:
    Affiliates .............................................            (22,486)           (124,250)           (148,647)
    Other ..................................................         (4,938,365)         (4,617,070)         (4,004,754)
                                                                  -------------       -------------       -------------
                                                                     (4,960,851)         (4,741,320)         (4,153,401)
                                                                  -------------       -------------       -------------
  Interest income:
    Affiliates .............................................             43,440              42,450              39,480
    Other ..................................................             35,057               2,660               3,499
                                                                  -------------       -------------       -------------
                                                                         78,497              45,110              42,979
                                                                  -------------       -------------       -------------
  Other income .............................................            645,446             762,138             478,179
                                                                  -------------       -------------       -------------
Total other income (expense) ...............................         (4,236,908)         (3,934,072)         (3,632,243)
                                                                  -------------       -------------       -------------
Income (loss) before income taxes ..........................        (17,637,092)        (11,122,344)          3,721,672
(Provision) benefit for income taxes .......................         (1,337,406)            321,192          (1,646,731)
                                                                  -------------       -------------       -------------
Income (loss) before cumulative effect of change in
   accounting principle ....................................        (18,974,498)        (10,801,152)          2,074,941
Cumulative effect of change in accounting principle, net
   of income tax benefit of $380,958 .......................                 --            (631,418)                 --
                                                                  -------------       -------------       -------------
Net income (loss) ..........................................      $ (18,974,498)      $ (11,432,570)      $   2,074,941
                                                                  =============       =============       =============
Basic income (loss) per common share:
Income (loss) before cumulative effect of change in
   accounting principle ....................................      $       (2.85)      $       (1.54)      $        0.29
Cumulative effect of change in accounting principle ........                 --               (0.09)                 --
                                                                  -------------       -------------       -------------
Net income (loss) ..........................................      $       (2.85)      $       (1.63)      $        0.29
                                                                  =============       =============       =============
Diluted income (loss) per common share:
Income (loss) before cumulative effect of change in
   accounting principle ....................................      $       (2.85)      $       (1.54)      $        0.27
Cumulative effect of change in accounting principle ........                 --               (0.09)                 --
                                                                  -------------       -------------       -------------
Net income (loss) ..........................................      $       (2.85)      $       (1.63)      $        0.27
                                                                  =============       =============       =============
Weighted average number of shares outstanding:
  Basic ....................................................          6,659,882           7,025,236           7,183,462
                                                                  =============       =============       =============
  Diluted ..................................................          6,659,882           7,025,236           7,633,588
                                                                  =============       =============       =============
</TABLE>

          See accompanying notes to consolidated financial statements.




                                       26
<PAGE>   27


                                PERFUMANIA, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
        FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997 (AS RESTATED, NOTE 11)
                       FISCAL YEAR ENDED JANUARY 31, 1998
                     AND FISCAL YEAR ENDED JANUARY 30, 1999


<TABLE>
<CAPTION>
                                                      COMMON STOCK              CAPITAL IN                  TREASURY STOCK
                                                      -------------              EXCESS OF                  ---------------
                                                  SHARES         AMOUNT          PAR VALUE             SHARES             AMOUNT
                                                  ------         ------          ---------             ------             ------
<S>                                             <C>              <C>            <C>                 <C>               <C>
Balance at February 3, 1996 ............        6,707,700        $67,077        $ 47,959,464            23,000        $  (123,323)
Exercise of stock options ..............            2,000             20               8,230                --                 --
Conversion of debentures ...............          918,091          9,181           2,978,085                --                 --
Beneficial conversion
   feature of debentures ...............               --             --             529,412                --                 --
Issuance of common stock ...............          180,000          1,800             954,450                --                 --
Purchases of treasury  stock ...........               --             --                  --           644,900         (2,531,787)
Net change in notes and
   interest receivable
   from shareholder and
   officers ............................               --             --                  --                --                 --
Net income for the fiscal
   year ended February 1, 1997 .........               --             --                  --                --                 --
                                               ----------        -------        ------------        ----------        -----------
Balance at February 1, 1997 ............        7,807,791         78,078          52,429,641           667,900         (2,655,110)
Exercise of stock options ..............           37,500            375             116,812                --                 --
Purchases of treasury stock ............               --             --                  --           550,460         (1,865,958)
Other ..................................               --             --            (160,092)               --                 --
Net change in notes and
   interest receivable
   from shareholder and officers .......               --             --                  --                --                 --
Net loss for the fiscal
   year ended January 31, 1998..........               --             --                  --                --                 --
                                               ----------        -------        ------------        ----------        -----------
Balance at January 31, 1998.............        7,845,291         78,453          52,386,361         1,218,360         (4,521,068)

Exercise of stock options ..............          684,200          6,842             310,865                --                 --
Purchases of treasury stock.............               --             --                  --           294,046           (891,934)
Issuance of common stock ...............           85,000            850             213,371                --                 --
Proceeds on common stock
   to be issued ........................               --             --           1,529,412                --                 --
Net change in notes and
   interest receivable
   from shareholder and ................               --             --                  --                --                 --
   officers
Net loss for the fiscal
   year ended January 30, 1999 .........               --             --                  --                --                 --
                                               ----------        -------        ------------        ----------        -----------
Balance at January 30, 1999 ............        8,614,491        $86,145        $ 54,440,009         1,512,406        $(5,413,002)
                                               ==========        =======        ============        ==========        ===========

<CAPTION>

                                                                                   NOTES AND
                                                                                    INTEREST
                                                                                   RECEIVABLE
                                                                                      FROM
                                                           ACCUMULATED             SHAREHOLDER
                                                             DEFICIT              AND OFFICERS            TOTAL
                                                           -----------            ------------        -----------
<S>                                                        <C>                    <C>                 <C>
Balance at February 3, 1996 ............                   $ (2,602,970)          $(538,065)          $ 44,762,183
Exercise of stock options ..............                             --                  --                  8,250
Conversion of debentures ...............                             --                  --              2,987,266
Beneficial conversion
   feature of debentures ...............                             --                  --                529,412
Issuance of common stock ...............                             --                  --                956,250
Purchases of treasury stock ............                             --                  --             (2,531,787)
Net change in notes and
   interest receivable
   from shareholder and
   officers ............................                             --              (4,791)                (4,791)
Net income for the fiscal
   year ended February 1, 1997 .........                      2,074,941                  --              2,074,941
                                                           ------------           ---------           ------------
Balance at February 1, 1997 ............                       (528,029)           (542,856)            48,781,724
Exercise of stock options ..............                             --                  --                117,187
Purchases of treasury stock ............                             --                  --             (1,865,958)
Other ..................................                             --                  --               (160,092)
Net change in notes and
   interest receivable
   from shareholder and ................                             --            (271,459)              (271,459)
   officers
Net loss for the fiscal
   year ended January 31, 1998..........                    (11,432,570)                 --            (11,432,570)
                                                           ------------           ---------           ------------
Balance at January 31, 1998 ............                    (11,960,599)           (814,315)            35,168,832

Exercise of stock options ..............                             --                  --                317,707
Purchases of treasury stock.............                             --                  --               (891,934)
Issuance of common stock ...............                             --                  --                214,221
Proceeds on common stock
   to be issued ........................                             --                  --              1,529,412
Net change in notes and
   interest receivable
   from shareholder and ................                             --             272,172                272,172
   officers
Net loss for the fiscal
   year ended January 30, 1999 .........                    (18,974,498)                 --            (18,974,498)
                                                           ------------           ---------           ------------
Balance at January 30, 1999 ............                   $(30,935,097)          $(542,143)          $ 17,635,912
                                                           ============           =========           ============

</TABLE>



          See accompanying notes to consolidated financial statements.

                                       27
<PAGE>   28


                                PERFUMANIA, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                              FISCAL YEAR ENDED
                                                                            ------------------------------------------------------
                                                                            JANUARY 30, 1999   JANUARY 31, 1998   FEBRUARY 1, 1997
                                                                            ----------------   ----------------   ----------------
                                                                                                                    (As restated,
                                                                                                                       Note 11)
<S>                                                                         <C>                <C>                <C>
Cash flows from operating activities:
   Net income (loss)..................................................        $(18,974,498)      $ (11,432,570)      $ 2,074,941
Adjustments to reconcile net income (loss) to net cash provided
   by operating activities:
   Provision for deferred taxes ......................................           1,219,856                  --           380,528
   Capitalized preopening costs ......................................                  --                  --          (940,550)
   Provision for doubtful accounts ...................................                  --           1,730,000           500,000
   Provision/writedown for inventory losses ..........................           3,764,665           1,810,000           190,000
   Depreciation and amortization .....................................           4,480,681           4,697,816         3,771,508
   Provisions for impairment of assets ...............................                  --           2,200,000                --
   Loss on disposition of property and equipment .....................           1,034,717             314,818           169,159
   Beneficial conversion feature of debentures .......................                  --                  --           529,412
   Cumulative effect of change in accounting principle, net ..........                  --             631,418                --
     of tax benefit
   Stock compensation ................................................             214,221                  --                --
   Change in operating assets and liabilities, (increase) decrease in:
     Trade receivables:
       Customers .....................................................           1,077,626           5,358,686           716,959
       Affiliates ....................................................                  --             653,657          (653,657)
     Advances to suppliers ...........................................            (454,265)         (2,587,318)         (712,058)
     Inventories .....................................................          15,493,045          10,162,581       (24,288,235)
     Prepaid expenses and other current assets .......................             627,471            (184,818)         (707,745)
     Tax refund receivable ...........................................             814,766            (814,766)               --
     Other assets ....................................................             406,940            (539,266)         (123,998)
     Increase (decrease) in:
     Accounts payable ................................................            (125,824)         (5,861,438)       17,314,213
     Accrued expenses and other liabilities ..........................           2,356,398           2,908,483         1,088,386
     Income taxes payable ............................................             (20,006)           (816,105)        1,321,203
     Long term severance payable .....................................           1,037,859                  --                --
     Negative goodwill ...............................................                  --            (470,000)               --
                                                                              ------------        ------------      ------------
      Net cash provided by operating activities ......................          12,953,652           7,761,178           630,066
                                                                              ------------        ------------      ------------
Cash flows from investing activities:
   Additions to property and equipment ...............................          (9,495,824)         (7,207,114)       (7,341,901)
                                                                              ------------        ------------      ------------
   Net cash used in financing activities .............................          (9,495,824)         (7,207,114)       (7,341,901)
                                                                              ------------        ------------      ------------
Cash flows from financing activities:
   Net borrowings under bank line of credit and loans payable ........          (3,677,888)          2,957,170         7,208,943
   Net increase (decrease) in due to related parties .................            (304,483)           (465,517)           90,000
   Principal payments under capital lease obligations ................            (981,916)           (952,805)         (639,892)
   Net advances to shareholder and officers ..........................             272,172            (271,459)           (4,791)
   Issuance of debentures ............................................                  --                  --         2,935,361
   Proceeds from issuance of common stock ............................           2,000,000                  --           956,250
   Proceeds from exercise of stock options ...........................             317,707             117,187             8,250
   Stock issuance costs ..............................................                  --            (160,092)               --
   Purchases of treasury stock .......................................            (891,934)         (1,865,958)       (2,531,787)
                                                                              ------------        ------------      ------------
      Net cash (used in) provided by financing activities ............          (3,266,342)           (641,474)        8,022,334
                                                                              ------------        ------------      ------------
Increase (decrease) in cash and cash equivalents .....................             191,486             (87,410)        1,310,499
Cash and cash equivalents at beginning of period .....................           1,554,117           1,641,527           331,028
                                                                              ------------        ------------      ------------
Cash and cash equivalents at end of period ...........................        $  1,745,603        $  1,554,117      $  1,641,527
                                                                              ============        ============      ============
</TABLE>





          See accompanying notes to consolidated financial statements.


                                       28
<PAGE>   29



                                PERFUMANIA, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - NATURE OF BUSINESS:

         Perfumania, Inc. ("Perfumania") and its subsidiaries (collectively, the
"Company") is a specialty retailer and wholesaler of fragrances and related
products. The Company's retail stores consist of stores located in regional
malls, manufacturer's outlet malls, airports and on a stand-alone basis in
suburban strip shopping centers. The number of retail stores in operation at
January 30, 1999, January 31, 1998 and February 1, 1997 were 289, 285 and 262,
respectively.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:

         Significant accounting principles and practices used by the Company in
the preparation of the accompanying consolidated financial statements are as
follows:

FISCAL YEAR END

         The Company's fiscal year ends the Saturday closest to January 31 to
enable the Company's operations to be reported in a manner which more closely
coincides with general retail reporting practices and the financial reporting
needs of the Company. In the accompanying notes, fiscal year 1998, 1997 and 1996
refers to the year ended January 30, 1999, January 31, 1998 and February 1,
1997, respectively.

MANAGEMENT ESTIMATES

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The most significant estimates made by management in the
accompanying financial statements relate to the allowance for doubtful accounts,
inventory reserves, self insurance health care reserves, long-lived asset
impairments and estimated useful lives of property and equipment. Actual results
could differ from those estimates.

BASIS OF PRESENTATION

         The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
consolidated financial statements, the Company incurred net losses of
approximately $18.9 million and $11.4 million during the fiscal years ended
January 30, 1999 and January 31, 1998, respectively, and has a working capital
deficit of $3.8 million at January 30, 1999. In addition, the Company was in
violation of certain debt covenants contained in its bank line of credit
agreement as of and for the year ended January 30, 1999. These debt covenant
violations have been subsequently waived by the bank as of July 14, 1999 (See
Note 8).

         Management's plan to improve the results of operations include
decreasing the number of store openings in 1999, closing a number of its
non-profitable stores, improving the effectiveness of its sales promotions
practices, continuing to improve the existing merchandise mix and to promote the
private label bath, body and cosmetic line, continuing to liquidate slow moving
inventories and reducing selling, general and administrative expenses.

         In order to obtain additional funding, the Company plans to make an
initial public offering of the common stock of perfumania.com, inc., a wholly
owned subsidiary of the Company, to raise approximately $25-$32 million. The net
proceeds of the offering will be used for working capital and other general
corporate purposes and also repayment of any outstanding indebtedness to the
Company as well as reduction of the outstanding balance in the Company's line of
credit (See Note 16).

         Additionally, in April 1999 and July 1999, the Company issued a total
of $4 million of convertible notes to a group of private investors and in July
1999 the Company obtained a $2.5 million short-term unsecured loan from a
wholesale customer (See Note 16).

         Although management believes that its borrowing capacity under the
current line of credit facility, or from an alternative line of credit facility,
projected cash flows from operations, anticipated proceeds from the initial
public offering of perfumania.com, inc. and other short term borrowings will be
sufficient to support working capital needs, capital expenditures and debt
service for the next twelve months, there is no assurance, however, that the
Company will be able to improve its results of operations based on management's
plan or obtain such funding on a timely basis.

         These factors among others may indicate that the Company will be unable
to continue as a going concern for a reasonable period of time. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

                                       29
<PAGE>   30

PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of
Perfumania and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.

REVENUE RECOGNITION

         Revenue from wholesale transactions is recorded upon shipment of
inventory. Revenue from retail sales is recorded, net of discounts and estimated
returns, upon customer purchase. Estimates of returns are based on the Company's
operating history and are reviewed on a quarterly basis for adequacy.

ADVANCES TO SUPPLIERS

         Advances to suppliers represent prepayments to wholesale vendors on
pending inventory purchase orders.

INVENTORIES

         Inventories, consisting predominantly of finished goods, are stated at
the lower of cost or market, cost being determined on a moving average cost
basis. The cost of inventory includes product cost and freight charges.
Provision for potentially slow moving or damaged inventory is recorded based on
management's analysis of inventory levels, turnover ratios, future sales
forecasts and through specific identification of obsolete or damaged
merchandise.

PROPERTY AND EQUIPMENT

         Property and equipment is carried at cost, less accumulated
depreciation and amortization. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets.
Leasehold improvements are amortized over the term of the lease or the estimated
useful lives of the improvements, whichever is shorter. Costs of major additions
and improvements are capitalized and expenditures for maintenance and repairs
which do not extend the useful life of the asset are expensed when incurred.
Gains or losses arising from sales or retirements are included in income
currently.

PREOPENING EXPENSES

         Prior to fiscal 1997, the Company capitalized expenses associated with
the opening of new retail locations and training of personnel. These costs
typically included occupancy costs incurred prior to store opening, travel
expenses, store managers' salaries and grand opening costs paid to the mall. The
Company amortized these amounts over 18 months.

         In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of
Start-Up Activities", which requires the Company to expense preopening expenses
as incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998, does not require restatement of prior periods
and is applied as of the beginning of the fiscal year in which the SOP is first
adopted. The Company early adopted SOP 98-5 in fiscal 1997 and has reported the
initial application as a cumulative effect of a change in accounting principle
in the Consolidated Statement of Operations for the year ended January 31, 1998.
The effect of the change in accounting principle was to increase the net loss
before cumulative effect of change in accounting principle reported for 1997 by
approximately $631,000 or $0.09 per share.

INCOME TAXES

         Income tax expense is based principally on pre-tax financial income.
Deferred tax assets and liabilities are recognized for the difference between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.



                                       30
<PAGE>   31

BASIC AND DILUTED INCOME (LOSS) PER SHARE

     Basic income (loss) per common share is computed by dividing income (loss)
available to common stockholders, after giving effect in fiscal year 1996 to the
restatement related to the beneficial conversion feature in connection with
convertible debt (See Note 11), by the weighted average number of common shares
outstanding during the period. Diluted income (loss) per common share includes
the dilutive effect of those stock options where the average market price of the
common shares exceeds the option exercise prices for the respective years, and
the dilutive effect of those convertible notes which are convertible into common
stock.

         Basic and diluted earnings per share for income (loss) before
cumulative effect of change in accounting principle is computed as follows:

<TABLE>
<CAPTION>
                                                                             FISCAL YEAR
                                                      ----------------------------------------------------------
                                                          1998                   1997                   1996
                                                          ----                   ----                   ----
                                                                                                   (AS RESTATED,
                                                                                                      NOTE 11)
<S>                                                  <C>                    <C>                  <C>
Numerator:
   Income (loss) before cumulative effect
     of change in accounting principle               $ (18,974,498)         $ (10,801,152)       $   2,074,941
                                                     -------------          -------------        -------------
Denominator:
   Denominator for basic income (loss) per
     share(1)                                            6,659,882              7,025,236            7,183,462

Effect of dilutive securities:
   Options to purchase common stock                             --                     --              450,126
                                                     -------------          -------------        -------------
   Denominator for dilutive income (loss)
     per share(1)                                        6,659,882              7,025,236            7,633,588
                                                     -------------          -------------        -------------
Income (loss) per share before cumulative
   effect of change in accounting principle:
Basic                                                $       (2.85)         $       (1.54)       $        0.29
                                                     =============          =============        =============
Diluted                                              $       (2.85)         $       (1.54)       $        0.27
                                                     =============          =============        =============
Antidilutive securities not included in the
   diluted earnings (loss) per share
   computation:
   Options to purchase common stock                        391,222              1,724,150            1,472,861
   Exercise price                                    $0.41 - $2.75          $2.75 - $5.63        $2.75 - $8.50
</TABLE>
----------------
(1) The fiscal year 1998 amounts include the weighted average effect of 235,293
    shares, which were contingently issuable as of January 30, 1999.

CASH AND CASH EQUIVALENTS

         The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.

FAIR VALUE OF FINANCIAL INSTRUMENTS

         Statement of Financial Accounting Standards No. 107 ("SFAS 107"),
"Disclosures about Fair Value of Financial Instruments" requires disclosure on
the fair value of financial instruments held by the Company. SFAS 107 defines
the fair value of a financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing parties. The
following methods and assumptions were used to estimate fair value:



                                       31
<PAGE>   32

         -        The carrying amounts of cash and cash equivalents, accounts
                  receivable and accounts payable approximate fair value due to
                  their short-term nature;

         -        The fair value of the Company's bank line of credit,
                  obligations under capital leases and loans payable are based
                  on current interest rate and repayment terms of the individual
                  notes, and;

         -        Long-term severance payable approximates fair value because
                  discounted cash flows using current interest rates for debt
                  with similar characteristics and maturity were used to
                  estimate its carrying value.

ASSET IMPAIRMENT

         The Company reviews long-lived assets and makes a provision for
impairment whenever events or changes in circumstances indicate that the
projected cash flows of related activities may not provide for cost recovery. An
impairment loss is recorded when the net book value of assets exceeds projected
undiscounted future cash flows on a store by store basis. The impairment loss
is determined based on the difference between the carrying amount and the fair
value of the assets, at a particular store location. The estimated fair value
is based on anticipated future cash flows discounted at a rate commensurate
with the risk involved.

STOCK BASED COMPENSATION

         The Company accounts for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for stock Issued to Employees ("APB 25"), and provides pro forma
disclosure of net income and earnings per share as if the fair value based
method prescribed by Statement of Financial Accounting Standards No. 123
("SFAS 123") had been applied in measuring compensation expense for options
granted in 1998 and 1997. In accordance with APB 25 compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock.

RECLASSIFICATION

         Certain fiscal 1996 and 1997 amounts have been reclassified to conform
with the fiscal 1998 presentation.

RECENT ACCOUNTING PRONOUNCEMENTS

         In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income," which establishes standards for reporting and display of
comprehensive income and its components. In June 1997, the FASB also issued
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures
about Segments of an Enterprise and Related Information." This Statement
establishes standards for reporting information about a company's operating
segments and related disclosures about its products, services, geographic areas
of operations and major customers. Both Statements were adopted by us in 1998.

         In March 1998, the AICPA issued Statement of Financial Position 98-1
("SOP 98-1"), "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 provides guidance for capitalization of
certain costs incurred in the development of internal-use software and is
effective for financial statements for years beginning after December 15, 1998.
SOP 98-1 was adopted in fiscal 1998 and had no significant impact on the results
of operations, cash flows or financial position.

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). Among other provisions, SFAS No. 133
establishes accounting the reporting standards for derivative instruments and
for hedging activities. It also requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 is effective
for financial



                                       32
<PAGE>   33
statements for fiscal years beginning after June 15, 2000. Management has not
determined the effect, if any, of adopting SFAS No. 133.

NOTE 3 - ACQUISITION:

         In November 1996, the Company acquired substantially all of the assets
of Nature's Elements Holding Corporation ("Nature's") which included the service
mark and trade name "Nature's Elements" and the stock of its subsidiary. Prior
to the acquisition, all of Nature's liabilities, both at the parent and
subsidiary level were transferred to a liquidating trust. Subsequent to the
acquisition, the stock of the subsidiary was liquidated and the Company received
inventory and store fixtures and assumed the obligation for 34 leases (including
1 seasonal store) for approximately $2.2 million, of which $1.7 million was
represented by a note payable. The Company has since closed 11 locations,
renovated 18 locations and the remaining locations will either be renovated or
subleased by mid 1999. The acquisition was accounted for as a purchase and
accordingly, Nature's results are included in the consolidated financial
statements since the date of acquisition. The estimated fair value of the
acquired assets exceeded the purchase price. The excess of estimated fair value
of the assets acquired over cost was $3.5 million of which $3 million reduced
the fair value of non-current assets acquired to a zero value and $0.5 million
was allocated to negative goodwill, which was reduced to zero in 1997 due to
writedown of inventory purchased. The assets and business acquired were not
material in relation to consolidated financial statements.

NOTE 4 - STATEMENTS OF CASH FLOWS:

         Supplemental disclosures of cash flow information:

<TABLE>
<CAPTION>
                                                                              FISCAL YEAR ENDED
                                                            ----------------------------------------------------
                                                            JANUARY 30,         JANUARY 31,          FEBRUARY 1,
                                                               1999                 1998                 1997
                                                            -----------         -----------          -----------
<S>                                                         <C>                 <C>                  <C>
Cash paid during the period for:
   Interest......................................           $  4,830,230         $  4,671,039        $  3,459,563
   Income taxes..................................           $     20,000         $  1,012,000        $     71,138
</TABLE>

         Supplemental disclosures of noncash activities:

         The Company issued in 1996 a $1.7 million note payable due to the
acquisition discussed in Note 3.

         In December 1996, the Company entered into an agreement with a vendor
whereby approximately $3.6 million of accounts payable was converted to a note
payable (see Note 8).

NOTE 5 - INVENTORIES:

         During 1998, 1997 and 1996, the Company recorded a provision of $3.8
million, $1.8 million and $0.2 million, respectively, to reduce the carrying
value of certain fragrances the Company intends to liquidate. These amounts
represent management's best estimate of the inventories' net realizable value.

NOTE 6 - PROPERTY AND EQUIPMENT:

         Property and equipment includes the following:

<TABLE>
<CAPTION>
                                                                                                        ESTIMATED
                                                             JANUARY 30,            JANUARY 31,        USEFUL LIVES
                                                                1999                   1998             (IN YEARS)
                                                            -------------          -------------       -----------
<S>                                                         <C>                    <C>                 <C>
Furniture, fixtures and equipment                           $  15,959,500          $  15,213,721           5-7
Leasehold improvements                                         21,235,443             14,995,361            10
                                                            -------------          -------------
                                                               37,194,943             30,209,082
Less: Accumulated depreciation and amortization               (14,014,481)           (11,901,842)
                                                            -------------          -------------
                                                            $  23,180,462          $  18,307,240
                                                            =============          =============
</TABLE>



                                       33
<PAGE>   34

NOTE 7 - NOTE AND INTEREST RECEIVABLE FROM SHAREHOLDER AND OFFICERS:

         Notes and interest receivable from shareholder and officers consists of
the following:

<TABLE>
<CAPTION>
                                                                                   JANUARY 30,          JANUARY 31,
                                                                                      1999                  1998
                                                                                   ----------           -----------
<S>                                                                                <C>                  <C>
Notes and interest receivable from officers                                        $      --             $  315,612
Note and interest receivable from shareholder                                         542,143               498,703
                                                                                   ----------            ----------
                                                                                   $  542,143            $  814,315
                                                                                   ==========            ==========
</TABLE>

         The note receivable from shareholder resulted from the sale of a
condominium to the shareholder at its book value in 1991. The shareholder
assumed the balance of the related mortgage and issued an unsecured note payable
to the Company for $282,519, bearing interest at 9.5%. The note initially
matured in December 1993 and has been subsequently renewed through December
2000. Total interest income recognized during fiscal years 1998, 1997 and 1996
was approximately $43,000, $43,000 and $40,000, respectively. Accrued interest
receivable at January 30, 1999 and January 31, 1998 amounted to approximately
$85,000 and $42,000, respectively.

         Purchases of products from a company affiliated through common
ownership amounted to approximately $24,333,000, $21,437,000, and $30,735,000,
in fiscal year 1998, 1997 and 1996, respectively. The amount due to this company
at January 30, 1999 and January 31, 1998, was approximately $15,812,000 and
$16,958,000, respectively. Amounts due to this affiliate are non-interest
bearing.

         Other income in fiscal year 1996 includes $110,000 of warehousing fees
received from an affiliated company.

         Prior to signing an employment agreement effective February 1, 1999,
the Company's Chief Executive Officer provided consulting services to the
Company. Total consulting expense to this officer was $500,000 during 1998, of
which $325,000 was accrued as of January 30, 1999.

NOTE 8 - BANK LINE OF CREDIT AND NOTES PAYABLE:

         The bank line of credit and notes payable consist of the following:

<TABLE>
<CAPTION>
                                                                                                JANUARY 30,        JANUARY 31,
                                                                                                   1999                1998
                                                                                              -------------        -----------
<S>                                                                                           <C>                  <C>
Bank line of credit, bearing interest at the bank's prime rate plus 2% (11.75%
at January 30, 1999), interest payable monthly, expiring in April
2001, secured by a pledge of substantially all of the Company's assets..............          $ 30,035,019        $  31,657,946

Notes payable bearing interest ranging from approximately 10.0% - 14.7%, payable
in monthly installments ranging from $481 to $7,500 including
interest, through July 1999 secured by equipment....................................                14,928               61,374

Notes payable bearing interest ranging from approximately 8.5%-10.8%, payable in
monthly installments of $109,315, including interest, through
December 2001, secured by fixtures..................................................             2,841,267            3,394,396

Note payable bearing interest at approximately 10.25%, payable in monthly
installments of $50,000, including interest, with final payment of $200,000
in November 1999 (See Note 3).......................................................               727,609            1,119,744

Note payable bearing interest at approximately 10.25%, payable in monthly
installments of $75,000, including interest, with final payment of $65,736
in November 2000 (See Note 4)......................................................              1,552,488            2,615,740
                                                                                              ------------        -------------
                                                                                                35,171,311           38,849,200
Less: current portion..............................................................            (32,800,627)         (34,139,766)
                                                                                              ------------        -------------
Long-term portion..................................................................           $  2,370,684        $   4,709,434
                                                                                              ============        =============
</TABLE>



                                       34
<PAGE>   35

         The aggregate maturities of the bank line of credit and notes payable
at January 30, 1999 are as follows:


<TABLE>
<CAPTION>
              FISCAL YEAR
              <S>                                                                     <C>
              1999........................................................            $32,800,627
              2000........................................................              1,698,120
              2001........................................................                528,540
              2002........................................................                123,966
              2003........................................................                 20,058
                                                                                      -----------
                                                                                      $35,171,311
                                                                                      ===========
</TABLE>

         The Company's $35 million line of credit contains covenants requiring
the maintenance of minimum tangible net worth, book value and achieving
specified levels of quarterly results of operations. The line of credit also
contains limitations on additional borrowings, capital expenditures, number of
new store openings, purchases of treasury stock and prohibits distribution of
dividends. As of January 30, 1999, the Company was in violation of certain of
the above covenants. As a result, the bank can demand payment of the amounts
outstanding under the line of credit agreement. In addition, as a result of
these violations, the Company incurred the default rate of interest, prime plus
4% (11.75% at January 30, 1999) beginning December 1998. On July 14, 1999, the
Company obtained a waiver of default from the bank through September 30, 1999 as
of and for the year ended January 30, 1999 (See Note 16).

         Advances made under the line of credit are based on a formula of
eligible inventories and receivables. At January 30, 1999, the Company had
available under the line of credit approximately $4,248,000. Advances are
secured by a first lien on substantially all of the Company's assets and
assignment of a life insurance policy on one of the Company's officers.

         The Company's line of credit is guaranteed to the extent of $3,000,000
each by two stockholders of the Company.

NOTE 9 - IMPAIRMENT OF ASSETS:

         Based on a review of the Company's retail store locations with negative
cash flows, the Company recognized non-cash impairment charges relating to its
retail segment of $0.2 million, $2.5 million and $1.0 million during fiscal
years ended 1996, 1997 and 1998, respectively. These charges were determined
based on the difference between the carrying amount of the assets, representing
primarily fixtures and leasehold improvements, at a particular store location
and the fair value of the assets on a store by store basis. The estimated fair
value was based on anticipated future cash flow discounted at a rate
commensurate with the risk involved. These impairment losses are included in
"Provision for impairment of assets and store closings," in the accompanying
Consolidated Statement of Operations.



                                       35
<PAGE>   36

NOTE 10 - INCOME TAXES:

         The (provision) benefit for income taxes is comprised of the following
amounts:

<TABLE>
<CAPTION>
                                                               FISCAL YEAR ENDED
                                        --------------------------------------------------------
                                         JANUARY 30,           JANUARY 31,           FEBRUARY 1,
                                            1999                  1998                  1997
                                        -----------           -----------           -----------
<S>                                     <C>                   <C>                   <C>
Current:
   Federal ...................          $        --           $   814,766           $(1,084,088)
   State .....................             (117,550)             (459,000)             (182,244)
                                        -----------           -----------           -----------
                                           (117,550)              355,766            (1,266,332)
                                        -----------           -----------           -----------
Deferred:
   Federal ...................           (1,219,856)              346,384              (380,399)
   State .....................                   --                    --                    --
                                        -----------           -----------           -----------
                                         (1,219,856)              346,384              (380,399)
                                        -----------           -----------           -----------

Total tax (provision)  benefit          $(1,337,406)          $   702,150           $(1,646,731)
                                        ===========           ===========           ===========
</TABLE>

         The income tax provision differs from the amount obtained by applying
the statutory Federal income tax rate to pretax income as follows:

<TABLE>
<CAPTION>
                                                                                FISCAL YEAR ENDED
                                                                 ------------------------------------------------
                                                                  JANUARY 30,       JANUARY 31,       FEBRUARY 1,
                                                                      1999               1998            1997
                                                                 -------------     -------------    -------------
<S>                                                              <C>               <C>              <C>
Benefit (provision) at federal statutory rates............       $   7,161,669       $ 4,066,060      $(1,531,251)

Valuation allowance against current year benefit..........          (7,161,669)
State taxes...............................................            (117,550)
Recognized net operating loss carryforward................                  --                --          115,810
(Increase) reduction in the valuation allowance...........          (1,219,856)       (3,405,000)              --
Beneficial conversion feature of debentures...............                  --                --         (205,000)
Other.....................................................                  --            41,090          (26,290)
                                                                 -------------       -----------      -----------
(Provision) benefit for income taxes......................       $  (1,337,406)      $   702,150      $(1,646,731)
                                                                 =============       ===========      ===========
</TABLE>


         Net deferred tax assets reflect the tax effect of the following
differences between financial statement carrying amounts and tax bases of assets
and liabilities:

<TABLE>
<CAPTION>
                                                                                     JANUARY 30,      JANUARY 31,
                                                                                        1999              1998
                                                                                    ------------      -----------
<S>                                                                                 <C>               <C>
Assets:
   Net operating losses carryforward.......................................         $  7,473,729      $   244,771
   Inventory...............................................................            1,923,888        1,944,521
   Property and equipment..................................................            1,904,756        1,283,375
   Allowance for doubtful accounts and other...............................              319,011          319,011
   Reserves................................................................              982,601          714,970
   Other...................................................................              136,157          118,208
                                                                                    ------------      -----------
Total deferred tax assets..................................................           12,740,142        4,624,856
                                                                                      ----------      -----------
Valuation allowance........................................................          (12,740,142)      (3,405,000)
                                                                                    ------------      -----------
Net deferred tax assets....................................................         $         --      $ 1,219,856
                                                                                    ============      ===========
</TABLE>

         During fiscal 1998, the Company provided a valuation allowance of
$12,740,142 for deferred tax assets as management believes that it is more
likely than not that the benefit of the deferred tax asset will not be realized.
Realization of future tax benefits related to the deferred tax assets is
dependent on many factors, including the Company's ability to generate taxable
income within the net operating loss carryforward period. Management has
considered these factors in reaching its conclusion as to the valuation
allowance for financial reporting purposes.



                                       36
<PAGE>   37

NOTE 11 - STOCKHOLDERS' EQUITY:

STOCK SUBSCRIPTION

         In March 1999, the Company entered into Subscription Agreements for the
sale of 235,293 shares of the Company's common stock to a group of private
investors at the agreed upon price of $8.50 per share. The proceeds of $2
million were received in January 1999. The Subscription Agreements require that
the Company file the appropriate registration statements with the Securities and
Exchange Commission within six months from the date of the Subscription
Agreements to permit the registered resale of the shares by the investors in
open market transactions. If on the effective date of the registration
statement, the market price is less than $8.50 per share, the Company is
obligated to reimburse the investor group the lesser of 1) the product of the
difference between $8.50 and the closing bid price of the Company's common stock
on the effective date of the registration statement multiplied by the number of
shares issued under the Subscription Agreements or 2) the product of $2.00
multiplied by the number of shares issued under the Subscription Agreements. As
of January 30, 1999, the potential redeemable amount of $470,588 was recorded as
redeemable common equity and the remaining $1,529,412 was recorded as capital in
excess of par value in the accompanying balance sheets.

         In March 1996, the Company sold 180,000 shares of common stock for
approximately $956,000 in a private placement.

DEBENTURES

         In March 1996, the Company issued $3,000,000 of 5% Convertible
Debentures (the "Debentures") in a Regulation S offering to non-U.S. persons.
The debentures were convertible into shares of common stock of the Company, at
any time after May 21, 1996, at a conversion price for each share of common
stock equal to eighty-five percent of the market price of the common stock on
the date of conversion, not to exceed $8.50 per share of common stock. The
debentures were converted into approximately 918,000 shares of common stock in
the second quarter of 1996.

         In a 1997 announcement, the staff of the Securities and Exchange
Commission ("SEC") indicated that when debt is convertible at a discount from
the then current common stock market price, the discounted amount represents an
incremental yield, e.g. a "beneficial conversion feature", which should be
recognized as a return to the debt holders. Based on the market price of the
Company's debentures at the date of issuance, the debentures issued by the
Company had a beneficial conversion feature of $529,412 at such point in time.
Because of the SEC announcement, the Company has restated its 1996 net income
and net income per common share information to reflect such accounting
treatment. The net effect of the restatement represents a non-cash interest
charge to net income.

STOCK WARRANTS

         In connection with its initial public offering, the Company issued
warrants to purchase 150,000 shares of common stock. The warrants were
exercisable until December 19, 1996 at an exercise price equal to $12.75. The
holders of such warrants attempted to exercise the warrants in fiscal 1996. The
Company disputed the method of determining the exercise price for such warrants
which resulted in litigation. During fiscal year 1997, the Company settled the
litigation and agreed to issue an aggregate of 85,000 shares of common stock.
These shares were issued during the first quarter of fiscal year 1998 and
accordingly, the Company recorded an expense of approximately $214,000 which
represented the fair value of the common stock on the date of issuance.

PREFERRED STOCK

         The Company's Articles of Incorporation authorize the issuance of up to
1,000,000 shares of preferred stock. The preferred stock may be issued from time
to time at the discretion of the Board of Directors without stockholders'
approval. The Board of Directors is authorized to issue these shares in
different series and, with


                                       37
<PAGE>   38

respect to each series, to determine the dividend rate, and provisions regarding
redemption, conversion, liquidation preference and other rights and privileges.
As of January 30, 1999, no preferred stock had been issued.

STOCK OPTION PLANS

         Under the Company's Stock Option Plan (the "Stock Option Plan") and
Directors Stock Option Plan (the "Directors Plan") (collectively, the "Plans"),
2,500,000 shares of common stock and 60,000 shares of common stock,
respectively, are reserved for issuance upon exercise of options. The Company's
Board of Directors, or a committee thereof, administers and interprets the Stock
Option Plan. The Stock Option Plan provides for the granting of both "incentive
stock options" (as defined in Section 422A of the Internal Revenue Code) and
non-statutory stock options. Options can be granted under the Stock Option Plan
on such terms and at such prices as determined by the Board, except that the per
share exercise price of options will not be less than the fair market value of
the common stock on the date of grant. Only non-employee directors are eligible
to receive options under the Directors Plan. The Directors Plan provides for an
automatic grant of an option to purchase 2,000 shares of common stock upon
election as a director of the Company and an automatic grant of 4,000 shares of
common stock upon such person's re-election as a director of the Company, in
both instances at an exercise price equal to the fair value of the common stock
on the date of grant.

         During October 1998, the Company offered each employee, who had
previously been granted options to purchase the Company's stock, the opportunity
to change the option price effective October 27, 1998 (the "Repricing"). Under
the terms of the Repricing, all previously granted stock options would be
cancelled, and the employee would be granted the same number of options at the
fair market value of the Company's common stock on October 27, 1998, which was
$0.50 per share. No other terms to the stock options were amended. At the time
of the offer, the Company had approximately 80 employees who had been granted
options to purchase the Company's common stock with option prices ranging from
$2.75 to $6.84. The Repricing plan was accepted by all employees with respect to
outstanding stock options.

         The Company uses the measurement prescribed by APB 25. Had compensation
costs for the Company's Plans been determined based on the fair market value at
the grant dates of options granted consistent with the method of SFAS 123, the
Company's net (loss) income and diluted net (loss) income per share would have
been reduced (increased) to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                                     FISCAL YEARS
                                                                   ------------------------------------------------
                                                                      1998              1997              1996
                                                                   ------------     ------------      -------------
                                                                                                      (AS RESTATED,
                                                                                                         NOTE 11)
<S>                                           <C>                  <C>              <C>               <C>
Net income (loss):                            As reported          $(18,974,498)    $(11,432,570)      $ 2,074,941
                                              Proforma             $(19,735,008)    $(11,939,613)      $ 1,946,867
Diluted net income (loss) per share:          As reported          $      (2.85)    $      (1.63)      $      0.27
                                              Proforma             $      (2.96)    $      (1.68)      $      0.26
</TABLE>

         In calculating the pro forma net income (loss) and net income (loss)
per share for 1998, 1997 and 1996, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions used for grants in 1998, 1997 and
1996:

<TABLE>
<CAPTION>
                                                                       1998              1997             1996
                                                                   -------------     -------------     ------------
<S>                                                                <C>               <C>               <C>
Expected life (years).......................................        3 - 7 years       3 - 7 years      4 - 7 years
Interest rate...............................................          6.02%             6.52%             6.39%
Volatility..................................................           102%               39%               41%
Dividend yield..............................................             0%                0%                0%
</TABLE>




                                       38
<PAGE>   39

         Options granted under the Stock Option Plan are exercisable after the
period or periods specified in the option agreement, and options granted under
the Directors Plan are exercisable immediately. Options granted under the Plans
are not exercisable after the expiration of 10 years from the date of grant. The
Plans also authorize the Company to make loans to optionees to enable them to
exercise their options.

         A summary of the Company's option activity, and related information for
each of the three fiscal years ended January 30, 1999 follows:

<TABLE>
<CAPTION>
                                                              1998                            1997                        1996
                                                          ------------                    ------------                ------------
                                                            WEIGHTED-                       WEIGHTED-                   WEIGHTED-
                                                            AVERAGE                         AVERAGE                     AVERAGE
                                                           EXERCISABLE                    EXERCISABLE                  EXERCISABLE
                                        SHARES               PRICE         SHARES            PRICE         SHARES        PRICE
                                      ----------          ------------   ----------       ------------   ----------   ------------
<S>                                   <C>                 <C>            <C>              <C>            <C>          <C>
Outstanding at beginning of year       1,724,150          $       3.18    1,494,600       $       3.19    1,348,800   $       3.16
Granted ........................       1,926,750 (1)              0.46      332,750               3.28      149,000           3.50
Exercised ......................        (684,200)                 0.45      (37,500)              3.13       (2,000)          4.13
Cancelled ......................      (1,208,100)(1)              2.99      (65,700)              3.84       (1,200)          2.96
                                      ----------          ------------   ----------       ------------   ----------   ------------
Outstanding at end of year .....       1,758,600          $       0.46    1,724,150       $       3.18    1,494,600   $       3.19
                                      ----------          ------------   ----------       ------------   ----------   ------------
Options exercisable at end of
   year ........................       1,600,275          $       0.46    1,541,400       $       3.14    1,475,500   $       3.17
Weighted-average fair value of
   options granted during the
   year ........................       1,926,750          $       0.46      332,750       $       1.48      149,000   $       1.49
</TABLE>



(1)      Includes 1,130,600 options cancelled and then subsequently re-granted
as part of the repricing.



         The following table summarizes information about stock options
outstanding at January 30, 1999:

<TABLE>
<CAPTION>
                                                         WEIGHTED-       WEIGHTED-                       WEIGHTED-
RANGE OF                                                  AVERAGE         AVERAGE                         AVERAGE
EXERCISE                                   NUMBER         EXERCISE      CONTRACTUAL        NUMBER        EXERCISE
PRICES                                  OUTSTANDING        PRICE            LIFE        OUTSTANDING       PRICES
                                        -----------      ---------      -----------     -----------      ---------
<S>                                     <C>              <C>            <C>             <C>              <C>
$0.41 - $0.50....................         1,750,600      $   0.46             7           1,592,275       $  0.46
$2.75............................             8,000          2.75             7               8,000          2.75
                                        -----------      ---------      -------         -----------       --------
                                          1,758,600      $   0.46             7           1,600,275       $  0.46
                                        ===========      ========       =======         ===========       =======
</TABLE>

NOTE 12 - EMPLOYEE BENEFIT PLANS:

         The Company has a 401(k) Savings and Investment Plan ("the Plan").
Pursuant to such plan, participants may make contributions to the Plan up to a
maximum of 15% of total compensation or $9,500 (or such higher amount as is
prescribed by the Secretary of the Treasury for cost of living adjustments),
whichever is less, and the Company, in its discretion, may match such
contributions to the extent of 25% of the first 4% of a participant's
contribution. The Company's matching contributions vest over a 5-year period. In
addition to matching contributions, the Company may make additional
contributions on a discretionary basis in order to comply with certain Internal
Revenue Code regulations prohibiting discrimination in favor of highly
compensated employees. The Company's matching contributions during fiscal years
1998, 1997 and 1996 were not significant.


NOTE 13 - COMMITMENTS AND CONTINGENCIES:

         The Company is self-insured for employee medical benefits under the
Company's group health plan. The Company maintains stop loss coverage for
individual medical claims in excess of $50,000 and for annual Company medical
claims which exceed approximately $2,000,000 in the aggregate. While the
ultimate amount of claims incurred are dependent on future developments, in
management's opinion, recorded reserves are adequate to cover the future payment
of claims. However, it is possible that recorded reserves may not be adequate to
cover the future payment of claims. Adjustments, if any, to estimates recorded
resulting from ultimate claim payments will be reflected in operations in the
periods in which such adjustments are known. The self-insurance reserve at
January 30, 1999 and January 31, 1998 was approximately $520,000 and $338,000,
respectively.



                                       39
<PAGE>   40
         In the fourth quarter of 1998, the Company entered into severance
agreements with two executive officers. The Company, using the borrowing
interest rate on its line of credit, (prime plus 2%) discounted the future
commitment payments resulting in a non-recurring charge of approximately
$1,900,000. Under the terms of the agreements, both officers will receive
severance payments over a three-year term beginning December 1998. The resulting
expense is reflected in selling, general and administrative expenses in the
accompanying consolidated statements of operation. In addition, as part of the
severance agreement with one of the executive officers, the officer received
429,000 shares of common stock at no cost and, accordingly, the Company recorded
additional compensation expense of approximately $176,000.

         The Company leases space for its office, warehouse and retail stores.
The lease terms vary from one to ten years, in some cases with options to renew
for longer periods. Various leases contain clauses which adjust the base rental
rate by the prevailing Consumer Price Index, as well as additional rent based on
a percentage of gross sales in excess of a specified amount.

         Rent expense for fiscal year 1998, 1997, and 1996 approximated
$15,972,000, $14,398,000, and $11,223,000, respectively. Future minimum lease
commitments under these operating leases at January 30, 1999 are as follows:

<TABLE>
<CAPTION>

FISCAL YEAR
-----------
<S>                                                                                                   <C>
1999....................................................................................              $15,750,000
2000....................................................................................               14,196,000
2001....................................................................................               11,575,000
2002....................................................................................                8,556,000
2003....................................................................................                5,855,000
Thereafter..............................................................................               12,908,000
                                                                                                      -----------
Total future minimum lease payments.....................................................              $68,840,000
                                                                                                      ===========
</TABLE>



         The following is a schedule of future minimum lease payments under
capital leases together with the present value of the net minimum lease
payments, at January 30, 1999:

<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S>                                                                                                    <C>
1999                                                                                                   $  526,050
2000                                                                                                      265,314
2001                                                                                                      190,485
2002                                                                                                      194,724
2003                                                                                                        8,774
                                                                                                       ----------
Total future minimum lease payments                                                                     1,185,347
Less: amount representing interest                                                                       (203,308)
                                                                                                       ----------
Present value of minimum lease payments                                                                $  982,039
Less: current portion                                                                                    (419,487)
                                                                                                       ----------
                                                                                                       $  562,552
                                                                                                       ==========
</TABLE>


         The depreciation expense relating to capital leases is included in
depreciation and amortization expense.

         As of January 30, 1999, the Company had entered into 7 additional store
leases at locations under construction.

         In December of 1993, the patent holder and exclusive licensee in the
U.S. of Boucheron filed a complaint against the Company in the Southern District
of New York for infringing upon their exclusive right to sell the Boucheron
bottle. The plaintiffs' theory is based on the fact that they have a valid
patent for the bottles and that Perfumania's sales of such bottles infringes
upon their patent rights. The Company believes that a patent holder cannot in
any way control by resort to an infringement suit the resale of a patented
article which he has sold. The Company filed a motion to dismiss during February
1994. On March 20, 1995 the Court denied the Company's motion to dismiss and on
April 14, 1995, the Company filed its answer to the complaint. Discovery is in
progress.



                                       40
<PAGE>   41

         In the opinion of management and counsel, the ultimate outcome of the
aforementioned litigation will not have a material effect on the accompanying
financial statements.

         During 1997 and 1996, the Company made sales to L. Luria & Son, Inc,
("Luria's") in the amounts of $1,999,823 and $2,473,623, respectively. The
Company wrote off in 1997 receivables from Luria's in the approximate amount of
$1,200,000. The Company has been characterized as an insider as defined by the
United States Bankruptcy Code, in the liquidating plan of reorganization filed
on April 6, 1998 by Luria's in the United States Bankruptcy Court as defined by
the United States Bankruptcy Code, Southern District of Florida. In October
1998, the committee of unsecured creditors in Luria's bankruptcy proceedings
filed a complaint with the United States Bankruptcy Court, Southern District of
Florida to recover substantial funds from the Company. The complaint alleges
that Luria's made preference payments, as defined by the Bankruptcy Court, to
the Company and seeks recovery of said preference payments, as well as
disallowing any and all claims of the Company against Luria's until full payment
of the preference payments have been made (See Note 16).

         The Company is also involved in various other legal proceedings in the
ordinary course of business.

         Management cannot presently predict the outcome of these matters,
although management believes, upon the advice of legal counsel, that the Company
would have meritorious defenses and that the ultimate resolution of these
matters should not have a materially adverse effect on the Company's financial
position or result of operations.

NOTE 14 - SEGMENT INFORMATION:

         The Company operates in two industry segments, specialty retail sale
and wholesale distribution of fragrances and related products. Financial
information for these segments is summarized in the following table:


<TABLE>
<CAPTION>
                                                                     FISCAL YEAR ENDED
                                                  ----------------------------------------------------
                                                     JANUARY 30         JANUARY 31          FEBRUARY 1
                                                       1999               1998                1997
                                                  ------------        ------------        ------------
<S>                                               <C>                 <C>                 <C>
Net sales to external customers:
   Wholesale .............................        $ 40,465,689        $ 34,031,744        $ 30,316,598
   Retail ................................         134,789,944         129,561,815         108,603,129
                                                  ------------        ------------        ------------
     Total net sales to external customers        $175,255,633        $163,593,559        $138,919,727
                                                  ============        ============        ============
Intersegment sales:
   Wholesale .............................        $ 18,477,729        $ 80,022,607        $ 77,956,573
   Retail ................................                  --                  --                  --
                                                  ------------        ------------        ------------
     Total intersegment sales ............        $ 18,477,729        $ 80,022,607        $ 77,956,573
                                                  ============        ============        ============
Cost of goods sold:
   Wholesale .............................        $ 32,920,317        $ 26,090,395        $ 22,702,968
   Retail ................................          77,718,115          71,529,423          56,256,785
                                                  ------------        ------------        ------------
     Total cost of goods sold ............        $110,638,432        $ 97,619,818        $ 78,959,753
                                                  ============        ============        ============
Gross profit:
   Wholesale .............................        $  7,545,372        $  7,941,349        $  7,613,630
   Retail ................................          57,071,829          58,032,392          52,346,344
                                                  ------------        ------------        ------------
     Total gross profit ..................        $ 64,617,201        $ 65,973,741        $ 59,959,974
                                                  ============        ============        ============
Inventories:
   Wholesale .............................        $  8,227,522        $ 20,368,792        $ 32,051,346
   Retail ................................          45,652,610          52,769,050          53,059,077
                                                  ------------        ------------        ------------
     Total inventories ...................        $ 53,880,132        $ 73,137,842        $ 85,110,423
                                                  ============        ============        ============
Depreciation and amortization:
   Retail ................................        $  4,480,681        $  4,697,816        $  3,771,508
                                                  ------------        ------------        ------------
                                                  $  4,480,681        $  4,697,816        $  3,771,508
                                                  ============        ============        ============
Capital expenditures:
   Retail ................................        $  8,849,837        $  6,831,944        $  6,798,159
                                                  ------------        ------------        ------------
                                                  $  8,849,837        $  6,831,944        $  6,798,159
                                                  ============        ============        ============
</TABLE>


                                       41
<PAGE>   42


         An unaffiliated customer of the wholesale segment accounted for
approximately 6%, 8% and 11% of the consolidated net sales in fiscal year 1998,
1997 and 1996, respectively, and 0% and 18% of the consolidated net trade
accounts receivable balance at January 30, 1999 and January 31, 1998,
respectively.

         In fiscal year 1998, 1997 and 1996, the wholesale segment included
foreign sales of approximately $2.9 million, $1.7 million and $3.8 million,
respectively.




                                       42
<PAGE>   43

NOTE 15 - QUARTERLY FINANCIAL DATA (UNAUDITED):

         The following table sets forth the Company's unaudited quarterly
summarized financial data for the periods indicated (dollar amounts are in
thousands). Certain of the quarterly information has been restated, as described
below.

<TABLE>
<CAPTION>
                                                             FISCAL YEAR 1998                    FISCAL YEAR 1997
                                               --------------------------------------------    --------------------
                                                  1ST        2ND         3RD         4TH         1ST         2ND
                                                  QTR        QTR         QTR         QTR         QTR         QTR
                                               --------    --------    --------    --------    --------    --------
<S>                                            <C>         <C>         <C>         <C>         <C>         <C>
Wholesale division ..........................  $ 13,468    $ 10,235    $  6,993    $  9,770    $  6,541    $  8,333
Retail division .............................    25,000      29,450      30,091      50,249      23,447      28,952
Total net sales .............................    38,468      39,685      37,084      60,019      29,988      37,285
Gross profit ................................    14,806      16,511      15,020      18,280      12,906      15,628
Loss before cumulative effect of change in
   accounting principle .....................    (2,772)     (1,273)     (3,859)    (11,070)     (1,998)       (457)
Cumulative effect of change in accounting
   principle ................................        --          --          --          --        (632)         --
Net loss ....................................  $ (2,772)   $ (1,273)   $ (3,859)   $(11,070)   $ (2,630)   $   (457)
Basic loss per common share:
   Loss before cumulative effect of change
      in accounting principle ...............  $  (0.42)   $  (0.20)   $  (0.59)   $  (1.64)   $  (0.28)   $  (0.06)
   Cumulative effect of change in accounting
      principle .............................        --          --          --          --       (0.09)         --
Net loss ....................................  $  (0.42)   $  (0.20)   $  (0.59)   $  (1.64)   $  (0.37)   $  (0.06)
Diluted loss per common share:
   Loss before cumulative effect of change
      in accounting principle ...............  $  (0.42)   $  (0.20)   $  (0.59)   $  (1.64)   $  (0.28)   $  (0.06)
   Cumulative effect of change in accounting
      principle .............................        --          --          --          --    $  (0.09)         --
Net loss ....................................  $  (0.42)   $  (0.20)   $  (0.59)   $  (1.64)   $  (0.37)   $  (0.06)
% of total net sales for fiscal year ........      21.9%       22.6%       21.2%       34.3%       18.3%       22.8%
# of retail stores at end of each period ....       284         287         294         289         270         271
Net loss as previously reported .............  $ (2,772)   $ (1,273)   $ (3,859)   $(11,070)   $ (2,039)   $   (498)
Cumulative effect of change in accounting ...        --          --          --          --        (564)         68
   principle
Provision for doubtful accounts .............        --          --          --          --          --          --
Income tax (provision) benefit ..............        --          --          --          --         (27)        (27)
Net loss as adjusted ........................  $ (2,772)   $ (1,273)   $ (3,859)   $(11,070)   $ (2,630)   $   (457)

<CAPTION>
                                                 FISCAL YEAR 1997
                                               --------------------
                                                  3RD        4TH
                                                  QTR        QTR
                                               --------    --------
<S>                                            <C>         <C>
Wholesale division ..........................  $  8,590    $ 10,568
Retail division .............................    30,185      46,978
Total net sales .............................    38,775      57,546
Gross profit ................................    15,913      21,527
Loss before cumulative effect of change in
   accounting principle .....................    (1,226)     (7,122)
Cumulative effect of change in accounting
   principle ................................        --          --
Net loss ....................................  $ (1,226)   $ (7,122)
Basic loss per common share:
   Loss before cumulative effect of change
      in accounting principle ...............  $  (0.17)   $  (1.05)
   Cumulative effect of change in accounting
      principle .............................        --          --
Net loss ....................................  $  (0.17)   $  (1.05)
Diluted loss per common share:
   Loss before cumulative effect of change
      in accounting principle ...............  $  (0.17)   $  (1.05)
   Cumulative effect of change in accounting
      principle .............................        --          --
Net loss ....................................  $  (0.17)   $  (1.05)
% of total net sales for fiscal year ........      23.7%       35.2%
# of retail stores at end of each period ....       283         285
Net loss as previously reported .............  $   (878)   $ (7,555)
Cumulative effect of change in accounting ...       121          21
   principle
Provision for doubtful accounts .............      (700)        700
Income tax (provision) benefit ..............       231        (288)
Net loss as adjusted ........................  $ (1,226)   $ (7,122)
</TABLE>


                                       43
<PAGE>   44


         As disclosed in Note 2, the Company changed its method of accounting
for preopening expenses in 1997 and has reported the initial applications as a
cumulative effect of a change in accounting principle. Accordingly, the
Company's net loss and net loss per common share for all quarters in 1997 in the
above table has been restated to reflect this change.

         The Company originally recorded a $700,000 provision for doubtful
accounts in relation to Luria's (See Note 13) in the fourth quarter of 1997. It
was subsequently determined that the provision should have been recorded in the
third quarter of 1997, the time of Luria's filing its liquidating plan of
reorganization.

         During the fourth quarter of fiscal year 1998 and 1997, the Company
recorded a reserve for inventory losses of approximately $3.8 million and $1.8
million, respectively (See Note 5).

         NOTE 16 - EVENTS SUBSEQUENT TO THE REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS (UNAUDITED):

         In April 1999, the Company entered into a Securities Purchase Agreement
and issued an aggregate of $2 million worth of its Series A Convertible Notes,
which are convertible into common stock. The Notes contain a beneficial
conversion feature of approximately $385,000 which will be taken by the Company
as a non-cash interest charge to income in the first quarter of fiscal year
1999. The agreement requires the Company to file a registration statement with
the Securities and Exchange Commission within forty-five days after the date of
issuance of the convertible notes. The conversion price is the lower of (A)
$4.35 per share, subject to adjustment and (B) the floating conversion price
determined by multiplying (1) the average closing bid price of the common stock
for the three trading days immediately preceding the date of determination, by
(2) 80%, subject to adjustment. The conversion price may be adjusted pursuant to
antidilution provisions in the convertible note. If the conversion price
decreases, the Company is obligated to issue additional shares of common
stock.

         On July 14, 1999, the Company obtained a waiver of default from the
bank though September 30, 1999 as of and for the year ended January 30, 1999.
Future outstanding borrowings will bear interest at the prime rate plus four
percent. The bank agreed to less restrictive covenants provided that certain
events commence prior to September 30, 1999. One such event includes that
perfumania.com, inc. (a wholly-owned subsidiary) is to receive at least $10
million from a contemplated initial public offering of its shares, of which at
least $2 million is to be repaid to the Company.

         In July 1999, the Company agreed with the committee of unsecured
creditors to settle all claims held by Luria's against us for the sum of $1.2
million, payable over the next nine months according to a repayment schedule.
This settlement is subject to the approval of the Bankruptcy Court. The full
amount of the settlement was accrued for in the Company's financial statements
as of January 31, 1998, January 30, 1999 and May 1, 1999.

         In July 1999, the Company entered into a Securities Purchase Agreement
and issued an aggregate of $2 million worth of its Series B Convertible Notes,
which are convertible into common stock. The Notes contain a beneficial
conversion feature of approximately $981,000 which will be taken by the Company
as a non-cash interest charge to income in the second quarter of fiscal year
1999. The agreement requires the Company to file a registration statement with
the Securities and Exchange Commission within forty-five days after the date of
issuance of the convertible notes. The Conversion Price is the lower of (A)
$3.40625 per share, subject to adjustment and (B) the floating conversion price
determined by multiplying (1) the average closing bid price of the common stock
for the three trading days immediately preceding the date of determination, by
(2) 80%, subject to adjustment. The conversion price may be adjusted pursuant to
antidilution provisions in the convertible note.

         In July 1999, the Company obtained a $2.5 million unsecured loan from a
wholesale customer bearing an interest rate of 24%. The loan is payable in full
December 1999.

         On August 31, 1999, the Company entered into a stock purchase agreement
with an affiliated Company through common ownership. The Agreement calls for the
transfer of 1,512,406 shares of the Company's treasury stock to this affiliated
company in consideration for a partial reduction of the Company's outstanding
trade indebtedness balance of approximately $4.5 million. The transfer price was
based on a per share price of $2.98, which approximates 90% of the closing price
on the Company's common stock for the previous 20 business days. Pursuant to
this agreement the parties entered into a registration rights agreement dated
August 31, 1999, which grants the affiliated company demand registration rights.
The Company recorded an extraordinary loss of approximately $314,000 which will
be taken to income in the third quarter of fiscal year 1999.

         On September 28, 1999, perfumania.com, inc., a wholly-owned subsidiary
of the Company, made an initial public offering of its common stock representing
approximately 47% of the common stock outstanding following the offering.
perfumania.com, inc. offered 3,500,000 shares of its common stock, which
included 1,000,000 shares held by the Company. The offering raised approximately
$24.5 million.  The net proceeds of the offering will be used for working
capital and other general corporate purposes and also repayment of any
outstanding indebtedness to the Company as well as reduction of the outstanding
balance in the Company's line of credit.
                                       44
<PAGE>   45



                                PERFUMANIA, INC.
          SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES


<TABLE>
<CAPTION>
                                                                              ADDITIONS
                                              ----------------------------------------------------------------------------
                                               BALANCE AT      CHARGED TO      CHARGED TO                        BALANCE
                                               BEGINNING       COSTS AND         OTHER                           AT END
                                               OF PERIOD        EXPENSE         ACCOUNTS      DEDUCTIONS        OF PERIOD
                                              ------------    -----------      ----------     -----------      -----------
<S>                                           <C>             <C>              <C>            <C>              <C>
FOR THE YEAR ENDED
FEBRUARY 1, 1997:
Accounts receivable                           $   472,804     $   500,000      $       --     $  (724,418)(1)  $   248,386
Inventory                                         750,000         190,000              --              --          940,000

FOR THE YEAR ENDED
JANUARY 31, 1998:

Accounts receivable                               248,386       1,730,000              --      (1,273,432)(1)      704,954
Inventory                                         940,000       1,810,000              --              --        2,750,000
Self insurance                                         --         297,710         187,449(2)     (146,937)(3)      338,222
Deferred tax asset valuation allowance                 --       3,405,000              --              --        3,405,000

FOR THE YEAR ENDED
JANUARY 30, 1999:

Accounts receivable                               704,954              --              --              --          704,954
Inventory                                       2,750,000       3,764,665              --      (2,351,414)(4)    4,163,251

Self insurance                                    338,222       1,295,410         541,484(2)   (1,654,491)(3)      520,625

Deferred tax asset valuation allowance          3,405,000       9,335,142              --              --       12,740,142
</TABLE>
-------------------------

(1)  Represents amounts written off against accounts receivable.

(2)  Represents employee contributions.

(3)  Represents benefit/premium payments.

(4)  Represents amounts written off against inventory.



                                       45
<PAGE>   46



ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURES

None.



                                       46
<PAGE>   47




                                    PART III.

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



DIRECTORS AND EXECUTIVE OFFICERS

         Our directors and executive officers are as follows:

<TABLE>
<CAPTION>
               NAME                           AGE                        POSITION
------------------------------------          ---      -------------------------------------------------
<S>                                           <C>      <C>
Ilia Lekach.........................          50       Chairman of the Board and Chief Executive Officer
Jerome Falic........................          35       President and Vice Chairman of the Board
Marc Finer..........................          37       President of the Retail Division and Director
Donovan Chin........................          32       Chief Financial Officer, Secretary and Director
Claire Fair.........................          39       Vice President of Human Resources
Robert Pliskin(1)(2)(3).............          75       Director
Carole Ann Taylor(1)(2)(3)..........          53       Director
Horatio Groisman, M.D.(2)(3)........          46       Director
</TABLE>

-----------------
(1)      Member of Audit Committee.

(2)      Member of Compensation Committee.

(3)      Member of Stock Option Committee.


         ILIA LEKACH is a co-founder of Perfumania and was Perfumania's Chief
Executive Officer and Chairman of the Board since its incorporation in 1988
until his resignation in April 1994. Mr. Lekach was re-appointed the
Perfumania's Chief Executive Officer and Chairman of the Board on October 28,
1998. He is also Chairman of the Board and Chief Executive Officer of Parlux
Fragrances, Inc., a publicly traded manufacturer of fragrance and related
products. In August 1996, Mr. Lekach became an officer and director with L.
Luria & Son, Inc., a publicly traded specialty discount retailer. On August 13,
1997, L. Luria & Son, Inc., filed for relief under Chapter 11 of the Bankruptcy
Code and has since been liquidated. See "Certain Relationships and Related
Transactions."

         JEROME FALIC was appointed President on October 28, 1998. Mr. Falic has
been a Vice President of Perfumania since Perfumania's inception and a director
of Perfumania since August 1994. Mr. Falic was appointed Perfumania's Vice
Chairman of the Board in September 1994.

         MARC FINER has been the President of Perfumania's Retail Division since
March 1994 and a director since August 1994. Mr. Finer was the President of
Parfums Expresso, Inc. and Parfums D'Arte, wholesale distributors of fragrances
in Puerto Rico, from their inception in August 1986 until March 1994.

         DONOVAN CHIN was appointed Chief Financial Officer and Secretary of
Perfumania in February of 1999. Prior to this appointment, Mr. Chin served as
Corporate Controller of Perfumania from May 1995 to February 1999 and Assistant
Corporate Controller from May 1993 to May 1995. Previously, Mr. Chin was
employed by Price Waterhouse LLP in its Miami audit practice.

         CLAIRE FAIR was appointed Vice President of Human Resources in August
1996. From November 1993 to August 1996, she served as Perfumania's Director of
Human Resources. Previously, she was the Director of Employee Relations with
Sterling, Inc.


                                       47

<PAGE>   48

         ROBERT PLISKIN was appointed a director of Perfumania in October 1991.
Mr. Pliskin served as President of Longines Wittnauer Watch Company from 1971 to
1980 when he became President of the Seiko Time Corporation, a position he held
until 1987. In 1987 he became the President of Hattori Corporation of America, a
distributor of watches and clocks, until his retirement in 1993. Mr. Pliskin is
a member of our Audit, Compensation and Stock Option Committees.

         CAROLE ANN TAYLOR was appointed a director of Perfumania in June 1993.
From 1987 to 1998, Ms. Taylor was the owner and president of the Bayside Company
Store, a retail souvenir and logo store at Bayside Marketplace in Miami,
Florida. During this time she has also been a partner of the Jardin Bresilien
Restaurant also located at the Bayside Marketplace. Currently, Ms. Taylor is the
owner of Miami To Go, Inc., a retail and wholesale logo and souvenir
merchandising and silkscreening company. She is also a partner at Miami Airport
Duty Free Joint Venture with Greyhound Leisure Services which owns and operates
the 19 duty free stores at Miami International Airport. She serves as director
of the Miami-Dade Chamber of Commerce, the Greater Miami Convention & Visitors
Bureau and the Miami Film Festival. Ms. Taylor is a member of our Audit,
Compensation and Stock Option Committees.

         DR. HORATIO GROISMAN was appointed a Director of Perfumania in March
1999. Dr. Groisman has been a practicing physician since 1981, specializing in
head and neck surgery, and currently has offices in Miami, Aventura and
Hollywood, Florida. Dr. Groisman is a member of our Compensation and Stock
Option Committees.

         Perfumania's officers are elected annually by the Board of Directors
and serve at the discretion of the Board. Perfumania's directors hold office
until the next annual meeting of shareholders and until their successors have
been duly elected and qualified.

SECTION 16(A)  BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10
percent of the Company's Common Stock, to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of Common Stock. Officers, directors and greater than 10 percent
shareholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.

         To the Company's knowledge, based solely on review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended January 30, 1999, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than 10 percent beneficial owners were complied with except that one
report relating to one transaction was filed late by each Jerome Falic and
Robert Pliskin, respectively and two reports representing two transactions for
Claire Fair have not been filed as of May 28, 1999.

         On October 28, 1999, the Company repriced the outstanding options
issued under the Company's 1991 Stock Option Plan. As of May 28, 1999 each of
the following individuals has not met the filing requirement with respect to
those options which were cancelled in connection with the repricing: Ilia
Lekach, Jerome Falic, Marc Finer, Claire Fair, Simon Falic, Ron Friedman, Robert
Pliskin, and Carole A. Taylor.


                                       48
<PAGE>   49


ITEM 11.     EXECUTIVE COMPENSATION

         The following table sets forth compensation awarded to, earned by or
paid to (a) our Chief Executive Officer, (b) each of the three other highly
compensated executive officers of Perfumania who were serving as executive
officers at the end of the last completed fiscal year, other than the Chief
Executive Officer, whose compensation exceeded $100,000 at the end of the last
fiscal year (collectively, the "Named Executive Officers"), for services
rendered to Perfumania during fiscal year 1998, 1997 and 1996, and (c) those
individuals for whom disclosures would have been provided but for the fact that
the individual was not serving as an executive officer of Perfumania at the end
of the last fiscal year.

                                            SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                         ANNUAL COMPENSATION                               LONG-TERM COMPENSATION
                                      -------------------------                       -------------------------------
                                                                                       NO. OF
                                                                    OTHER ANNUAL      SECURITIES
       NAME AND             FISCAL                                  COMPENSATION      UNDERLYING     OTHER ANNUAL
  PRINCIPAL POSITION         YEAR     SALARY ($)      BONUS ($)       ($) (1)          OPTIONS       COMPENSATION ($)
---------------------       ------    ----------      ---------     ------------      ----------     ----------------
<S>                         <C>       <C>             <C>           <C>               <C>            <C>
Ilia Lekach (2)              1998              0              0        500,000(3)       775,000(8)             0
   Chairman of the Board
   and Chief Executive
   Officer

Jerome Falic (4)             1998        259,034              0              0          334,500(8)             0
   President and Vice        1997        246,700              0              0                0                0
   Chairman of the Board     1996        236,250         61,000              0                0                0

Marc Finer                   1998        200,401              0              0           60,000(8)             0
   President, Retail         1997        183,912              0              0           50,000                0
   Division                  1996        169,962         22,500              0                0                0

Claire Fair                  1998        116,855              0              0           26,500(8)             0
   Vice President of         1997        114,980              0              0           15,000                0
   Human Resources           1996         85,809              0              0            3,000                0

Simon Falic (5)              1998        316,598              0              0          154,500(8)     1,303,588(6)
                             1997        304,813              0              0                0                0
                             1996        287,163         75,000              0                0                0

Ron A. Friedman (7)          1998        228,981              0              0          429,000(8)       826,232(6)
                             1997        246,700              0              0                0                0

                             1996        236,250         61,000              0                0                0
</TABLE>

-------------

(1)  The column for "Other Annual Compensation" does not include any amounts for
     executive perquisites and any other personal benefits, such as the cost of
     automobiles, life insurance and disability insurance because the aggregate
     dollar amount per executive is less than 10% of his annual salary and
     bonus.

(2)  Ilia Lekach was re-appointed Chief Executive Officer and Chairman of the
     Board on October 28, 1998.

(3)  Amount reported represents consulting fees paid to Ilia Lekach during
     fiscal 1998 prior to his employment by Perfumania. Signing bonus for
     services rendered in fiscal 1998.

(4)  Jerome Falic was appointed as President following the resignation of Simon
     Falic on January 29, 1999.

(5)  Simon Falic resigned on January 29, 1999, at which time he served as
     President, Chief Financial Officer, Chief Operating Officer, Treasurer and
     Secretary.

(6)  Represents severance payments in accordance with individual separation
     agreements with each receiving the amount indicated over a 36-month term.

(7)  Mr. Friedman resigned on October 28, 1998 as Chief Financial Officer, Chief
     Operating Officer, Treasurer and Secretary.

(8)  Includes options repriced effective October 28, 1998 in the following
     amounts: Ilia Lekach (375,000); Jerome Falic (100,000); Mark Finer
     (60,000); Claire Fair (21,500), Simon Falic (100,000); and Ron Friedman
     (429,000).



                                       49
<PAGE>   50



                      OPTION GRANTS DURING FISCAL YEAR 1998

         The following table sets forth certain information concerning grants of
stock options made during fiscal year 1998 to the Named Executive Officers and
the two individuals for whom disclosures would have been provided but for the
fact that the individuals were not serving as an executive officer of Perfumania
at the end of the last fiscal year.

<TABLE>
<CAPTION>
                                              INDIVIDUAL OPTION GRANTS IN FISCAL YEAR 1998
                     ----------------------------------------------------------------------------------------------------
                                      % OF TOTAL
                                        OPTIONS                                          POTENTIAL REALIZABLE VALUE AT
                       NUMBER         GRANTED TO                                         ASSUMED ANNUAL RATES OF STOCK
                     OF OPTIONS      EMPLOYEES IN     EXERCISE PRICE   EXPIRATION      PRICE APPRECIATION FOR OPTION TERM
      NAME           GRANTED (1)    FISCAL 1998 (4)     PER SHARE         DATE             5% (1)           10% (1)
------------------  ------------    ---------------   --------------   ----------     -----------------------------------
<S>                 <C>             <C>               <C>              <C>            <C>                <C>
Ilia Lekach              400,000          21%               $0.41           2008         $  117,938      $  260,760
                         375,000(2)       20%               $0.50           2008         $  103,156      $  298,125

Jerome Falic              34,500(3)        4%               $0.50           2008         $   10,850      $   27,428
                         200,000          25%               $0.41           2008         $   51,578      $  130,380
                         100,000(2)        5%               $0.50           2008         $   31,450      $   79,500

Marc Finer                60,000(2)        3%               $0.50           2008         $   18,870      $   47,700

Claire Fair                5,000(3)        *                $0.50           2008         $    1,573      $    3,975
                          21,500(2)        1%               $0.50           2008         $    6,762      $   17,093

Simon Falic               54,500(3)        3%               $0.50           2008         $   71,140      $   43,328
                         100,000(2)       13%               $0.50           2008         $   31,450      $   79,500

Ron Friedman              54,000           3%               $0.50           2008         $   16,983      $   42,930
                         375,000          19%               $0.50           2008         $  117,938      $  298,125
</TABLE>

---------------

*    Indicates that amount is less than 1%.

(1)  In accordance with the rules of the Securities and Exchange Commission, the
     potential realizable values for such options shown in the table presented
     above are based on assumed rates of stock price appreciation of 5% and 10%
     compounded annually from the date the options were granted to their
     expiration date. These assumed rates of appreciation do not represent the
     Company's estimate or projection of the appreciation of shares of common
     stock of the Company.

(2)  The indicated options were initially granted prior to fiscal 1998 and were
     subject to the Company's repricing effective October 28, 1998. Pursuant to
     repricing, these options were cancelled and reissued with an exercise price
     of $0.50.

(3)  The indicated options were granted during fiscal 1998 prior to the
     repricing and were subject to the Company's repricing. Pursuant to
     repricing, these options were cancelled and reissued with an exercise price
     of $0.50.

(4)  Total stock option grants during fiscal 1998 were 1,926,750 of which
     1,130,600 represents options cancelled and subsequently re-granted as part
     of the repricing.

                                       50

<PAGE>   51

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                        AND FISCAL YEAR-END OPTION VALUES

         The following table sets forth certain information concerning option
exercises in fiscal year 1998 and the number of unexercised stock options held
by the Named Executive Officers and the two individuals for whom disclosure
would have been provided but for the fact that the individuals were not serving
as executive officers of Perfumania at the end of the last fiscal year.

<TABLE>
<CAPTION>
                                                                            NUMBER OF               VALUE OF UNEXERCISED
                                    NUMBER OF                         UNEXERCISED OPTIONS AT        IN-THE-MONEY OPTIONS
                                 SHARES ACQUIRED        VALUE          FISCAL YEAR-END (#)         AT FISCAL YEAR-END ($)
NAME                               ON EXERCISE         REALIZED      EXERCISABLE/UNEXERCISABLE    EXERCISABLE/UNEXERCISABLE
----------------------------     ---------------       ---------     -------------------------    -------------------------
<S>                              <C>                   <C>           <C>                          <C>
Ilia Lekach.................               --                 --             775,000/0                $  8,061,938/0

Jerome Falic................               --                 --             334,500/0                $  2,439,386/0

Marc Finer..................           33,000          $ 120,375              27,000/0                $    280,868/0

Claire Fair.................            9,500          $  97,532           9,500/7,500                $98,824/78,019

Simon Falic.................               --                 --             154,500/0                $  1,607,186/0

Ron A. Friedman.............          429,000          $ 175,890                  --                            --
</TABLE>

LONG-TERM INCENTIVE AND PENSION PLANS

         The Company does not have any long-term incentive or pension plans.

DIRECTOR COMPENSATION

         Perfumania pays each nonemployee director a $6,500 annual retainer and
reimburses directors for expenses relating to their activities as directors of
Perfumania. In addition, nonemployee directors are eligible to receive stock
options under the Directors Stock Option Plan.

         When a person is elected as a director of Perfumania, pursuant to the
terms of the Director Stock Option Plan, the director is automatically granted
an option to purchase 2,000 shares of common stock and upon the directors
re-election he is granted an option to purchase 4,000 shares of common stock,
with the exercise price in both instances equal to the fair market value of the
common stock on the date of grant.

EMPLOYMENT AGREEMENTS

         Effective February 1, 1999, Perfumania entered into 3-year employment
agreements with Ilia Lekach and Jerome Falic. The employment agreements provide
for annual salaries of $400,000 and $318,347, respectively, subject to
cost-of-living increases, or 5% if higher. The employment agreements provide
that Mr. Lekach and Mr. Falic will continue to receive their annual salary until
the expiration of the term of their employment agreements if their employment is
terminated by Perfumania for any reason other than death, disability or cause
(as defined in the employment agreements). The agreements contain a performance
bonus plan which provides for additional compensation and grant of stock
options, if Perfumania meets certain net income levels. The employment
agreements also prohibit the employees from directly or indirectly competing
with Perfumania during the term of their employment and for one year after
termination of employment except in the case of termination of employment by
Perfumania without cause.

         Effective August 1996, Perfumania entered into a 3-year employment
agreement with Marc Finer and Claire Fair. The employment agreements provide for
an annual salary of $175,000 and $100,000, respectively, subject to
cost-of-living increases, or 5% if higher. The agreements provide that Mr. Finer
and Ms. Fair will continue to receive their salary until the expiration of the
term of the employment agreement if his employment is terminated by Perfumania
for any reason other than death, disability or cause (as defined in the
employment agreements). There is a performance bonus plan in the agreement,
which provides for additional compensation and


                                       51

<PAGE>   52

a grant of stock options, if Perfumania meets certain net income levels. The
employment agreements also prohibit them from directly or indirectly competing
with Perfumania during the term of their employment and for one year after
termination of employment except in the case of termination of employment by
Perfumania without cause.

SEPARATION AGREEMENTS

         Upon his resignation, Mr. Simon Falic entered into a separation
agreement with Perfumania, pursuant to which we will make $1,303,588 in
severance payments to him, subject to applicable withholding taxes, which is
payable as follows: $300,000 in January 1999 and the balance payable in monthly
installments of $26,529 during fiscal 1999, $27,855 during fiscal 2000 and
$29,248 during fiscal 2001. Mr. Falic continues to receive health, dental and
life insurance coverage, on the same basis as prior to his resignation for an
additional 36 months.

         Upon his resignation, Mr. Friedman entered into a separation agreement
with Perfumania pursuant to which we will make severance payments of $826,232,
subject to applicable withholding taxes, payable as follows: $119,046 in January
1999 and the balance in monthly installments of $20,136 from February through
October 1999 and $18,948 from November 1999 through November 2001. Mr. Friedman
will continue to receive health, dental and life insurance coverage, on the same
basis as prior to his resignation for an additional 36 months. Additionally, we
shall convert the previously granted options into shares of common stock.

HISTORICAL INFORMATION REGARDING REPRICING OF OPTIONS

         The following table sets forth information concerning the repricing of
options held by Named Executive Officers of the Company. The table reflects all
repricings of options in fiscal 1998.

<TABLE>
<CAPTION>
                                                                                                           LENGTH OF
                                                                                                        ORIGINAL OPTION
                                                          MARKET PRICE                                  TERM REMAINING
                                           NUMBER OF       OF STOCK AT      EXERCISE                      AT DATE OF
                                            OPTIONS          TIME OF     PRICE AT TIME       NEW         REPRICING OR
                                          REPRICED OR     REPRICING OR    OF REPRICING     EXERCISE        AMENDMENT
           NAME                DATE         AMENDED         AMENDMENT     OR AMENDMENT      PRICE         (IN YEARS)
-----------------------      --------     ------------    ------------   -------------     --------     ---------------
<S>                          <C>          <C>             <C>            <C>               <C>          <C>
Jerome Falic...........      10/27/98          100,000        $0.50          $ 2.75          $0.50            6.0
                             10/27/98           34,500        $0.50          $2.875          $0.50           9.33
                                               -------
                                               134,500

Mark Finer.............      10/27/98           50,000        $0.50          $3.375          $0.50            8.6
                             10/27/98           10,000        $0.50          $ 3.00          $0.50           6.33
                                               -------
                                                60,000

Claire Fair............      10/27/98           26,500        $0.50          $ 2.75          $0.50            6.0

Simon Falic............      10/27/98          100,000        $0.50          $ 2.75          $0.50            6.0
                             10/27/98           54,500        $0.50          $2.875          $0.50           9.33
                                               -------
                                               154,500

Ron Friedman...........      10/27/98          175,000        $0.50          $ 2.75          $0.50            6.0
                             10/27/98          100,000        $0.50          $ 3.25          $0.50           7.25
                             10/27/98          100,000        $0.50          $ 3.50          $0.50           5.58
                             10/27/98           54,000        $0.50          $2.875          $0.50           9.33
                                               -------
                                               429,000

Ilia Lekach............      10/27/98          375,000        $0.50          $3.125          $0.50            5.4
</TABLE>


                                       52

<PAGE>   53

COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS REPORT ON FISCAL 1998 OPTION
REPRICINGS

         On October 28, 1998, the Compensation Committee approved a repricing of
all outstanding stock options under the Company's Stock Option Plan and the
Directors Stock Option Plan. All outstanding stock options were cancelled and
each option holder was granted the same number of stock options at the fair
market value of the Company's common stock on October 27, 1998, which was $0.50.
No other terms of the stock options were amended. A total of 1,130,600 stock
options were repriced as of this date, of which 842,500 were held by officers
and directors of the Company.

         We approved the repricing because we believe that equity interests are
a significant factor in the Company's ability to attract and retain key
employees, and are critical to the Company's long-term goals. The stock options
that were repriced had option prices ranging from $2.75 to $6.84. During fiscal
year 1998, the market value of the Company's common stock had declined
significantly, reaching a price as low as $0.41 in October 1998. This continued
decline in the market price of the common stock was contrary to the incentive
objectives of the stock option plans and in order not to negatively impact the
Company's ability to retain key employees, the Compensation Committee approved
this repricing of all outstanding stock options under both option plans.


                                            Robert Pliskin
                                            Carole Ann Taylor



                                       53
<PAGE>   54


ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth, as of September 17, 1999, information
with respect to the beneficial ownership of Perfumania's common stock by (i)
each person known by Perfumania to beneficially own more than 5% of the
outstanding shares of common stock, (ii) each director of Perfumania, (iii) each
Named Executive Officer, and (iv) all directors and executive officers of
Perfumania as a group.

<TABLE>
<CAPTION>
                                                                               COMMON STOCK BENEFICIALLY OWNED
                                                                            -------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER (1)                                         SHARES                PERCENT(8)
-------------------------------------------------------------------         -------------------        ----------
<S>                                                                         <C>                        <C>
Ilia Lekach........................................................         1,459,995 (2)(3)(4)           14.7%
Simon Falic(5).....................................................           683,050 (2)(4)               7.2%
Rachmil Lekach.....................................................           675,125 (2)(4)               7.3%
Jerome Falic.......................................................           923,230 (3)(4)               9.7%
Marc Finer.........................................................            27,000 (4)                    *
Claire Fair........................................................            18,000 (4)                    *
Robert Pliskin.....................................................             4,000 (4)                    *
Carole A. Taylor...................................................             3,800 (4)                    *
Donovan Chin.......................................................             9,500 (4)                    *
Horatio Groisman, M.D..............................................             2,000 (4)                    *
Parlux Fragrances, Inc.(6).........................................         1,512,406                     16.5
All directors and executive officers as a group (8 persons)........         2,447,525 (7)                 23.7%
</TABLE>

-------------

*    Less than 1%.

(1)  The address of each of the beneficial owners identified is 11701 NW 101st
     Road, Miami, Florida 33178 except as otherwise noted.

(2)  Ilia Lekach, Simon Falic and Rachmil Lekach jointly own with their spouses
     the shares set forth opposite their respective names.

(3)  Includes 12,300 shares of common stock owned by Pacific Investment Group, a
     corporation wholly owned by Mr. Lekach.

(4)  Includes shares of common stock issuable upon the exercise of stock options
     within 60 days of September 17, 1999 in the following amounts: Ilia Lekach
     (775,000); Rachmil Lekach (150,000); Simon Falic (334,500); Jerome Falic
     (334,500); Robert Pliskin (4,000); Marc Finer (27,000); Donovan Chin
     (9,500); Horatio Groisman, M.D. (2,000); Claire Fair (17,000); and Carole
     A. Taylor (3,800).

(5)  The address of Mr. Simon Falic is 150 Harbor Way, Bal Harbour, Florida
     33154.

(6)  The address of Parlux is 3725 S.W. 30th Avenue, Ft. Lauderdale, Florida
     33312.

(7)  Includes 1,172,800 shares of common stock issuable upon the exercise of
     stock options within 60 days of September 17, 1999.

(8)  Based on 9,156,434 shares outstanding on September 17, 1999.

                                       54

<PAGE>   55


ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Relationship with Parlux. Parlux Fragrances, Inc. is a public company
engaged in the manufacture of fragrances. Ilia Lekach, our Chairman of the Board
and Chief Executive Officer, and one of our principal shareholders, is the
Chairman of the Board of Parlux. During fiscal year 1998, 1997 and 1996 we
purchased approximately $24.3, $21.4 and $30.7 million, respectively, of
merchandise from Parlux, representing approximately 27%, 26% and 29%,
respectively, of our total purchases. We believe that our purchases of
merchandise from Parlux, were, except for credit terms, on terms no less
favorable to us than could reasonably be obtained in arm's length transactions
with independent third parties. On August 31, 1999, the Company entered into a
stock purchase agreement with Parlux. The agreement calls for the transfer of
1,512,406 shares of the Company's treasury stock to Parlux in consideration for
a partial reduction of the Company's outstanding trade indebtedness balance of
approximately $4.5 million. The transfer price was based on a per share price
of $2.98, which approximates 90% of the closing price on the Company's
common stock for the previous 20 business days. Pursuant to this agreement the
parties entered into a registration rights agreement dated August 31, 1999,
which grants Parlux demand registration rights.

         Relationship with L. Luria & Son, Inc. L. Luria & Son, Inc. is a public
company that was a specialty discount retailer selling a broad line of products.
Ilia Lekach, our Chairman of the Board and Chief Executive Officer, and one of
our principal shareholders, was the Chairman of the Board of Luria's. During
fiscal year 1998, 1997 and 1996, we sold approximately $0, $2.0 and $2.5
million, respectively, of merchandise to Luria's, representing approximately 0%,
1% and 2%, respectively, of our total sales. We believe that our sales of
merchandise to Luria's, were, except for credit terms, on terms no less
favorable to us than could reasonably be obtained in arm's length transactions
with independent third parties. During August 1997, Luria's filed for relief
under Chapter 11 of the United States Bankruptcy Code. We are an unsecured
creditor of Luria's and in fiscal year 1997 we wrote off receivables from
Luria's in the amount of $1.2 million. We have been characterized as an insider
as defined by the United States Bankruptcy Code, in the liquidating plan of
reorganization filed on April 6, 1998 by Luria's in the United States Bankruptcy
Court, Southern District of Florida. In August 1998, the committee of unsecured
creditors in Luria's bankruptcy proceedings filed a complaint with the United
States Bankruptcy Court, Southern District of Florida, to recover substantial
funds from us. The complaint alleges that Luria's made preference payments, as
defined by the Bankruptcy Court, to us and seeks recovery of said preference
payments, as well as the disallowment of any and all claims of us against
Luria's until full payment of the preference payments have been made. In July
1999, we agreed with the committee of unsecured creditors to settle all claims
held by Luria's against us for the sum of $1.2 million, payable over the next
nine months according to a repayment schedule. This settlement is subject to the
approval of the Bankruptcy Court. The full amount of the settlement was accrued
for in our financial statements for the year ending January 30, 1999 and January
31, 1998.

         Related Party Indebtedness. From time to time we have borrowed money
for working capital purposes from our principal shareholders and executive
officers and members of their immediate families. The highest aggregate amounts
of our indebtedness to such persons during fiscal year 1998, 1997 and 1996,
respectively, amount outstanding at the end of fiscal year 1998, 1997 and 1996,
respectively, the maturity date of such indebtedness and the interest rate
payable by us at the end of fiscal year 1998, 1997 and 1996, respectively, were
as set forth in the following table:

<TABLE>
<CAPTION>
                                             HIGHEST AMOUNT      AMOUNT
                                              OUTSTANDING     OUTSTANDING AT
                             FISCAL          DURING FISCAL      FISCAL YEAR      MATURITY             ANNUAL
                              YEAR               YEAR              END             DATE            INTEREST RATE
                             ------          --------------   --------------  -----------------    -------------
<S>                          <C>             <C>              <C>             <C>                  <C>
Israel Friedman(1)            1998             $356,352                $0       November 1998       Prime plus 2%
                              1997              786,483           304,483     Payable on Demand     Prime plus 2%
                              1996              770,000           770,000     Payable on Demand               15%
</TABLE>

-----------------

(1)  Father of Ron A. Friedman, our previous Chief Financial Officer, Chief
     Operating Officer and Secretary.

         As of the end of fiscal year 1998, 1997 and 1996, Ilia Lekach was
indebted to us pursuant to an unsecured note, in the amount of $457,243,
$457,243 and $417,763, respectively, issued in connection with his purchase of a


                                       55

<PAGE>   56

condominium from us in October 1991. The note accrues interest at the rate of
9.5% and matures on December 31, 2000.

         Prior to becoming employed as our Chief Executive Officer effective
February 1, 1999, Ilia Lekach provided consulting services to us. The total
consulting fees paid to him during fiscal year 1998 was $500,000.
No consulting fees were paid to Mr. Lekach in fiscal 1997 or fiscal 1996.



                                       56


<PAGE>   57


                                    PART IV.


ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.

         (a)      The following documents are filed as part of this report:

                  (1)      Financial Statements

         An index to financial statements for the fiscal years ended January 30,
1999, January 31, 1998 and February 1, 1997 appears on page 23.

                  (2)      Financial Statement Schedule

         The following statement schedule for the fiscal years ended January 30,
1999, January 31, 1998 and February 1, 1997 are submitted herewith:

<TABLE>
<CAPTION>
                                                                                                                   ITEM
                                                                                                                FORM 10-K
                                                                                                                  NUMBER
                                                                                                                   PAGE
                                                                                                                ---------
         <S>                                                                                                    <C>
         Schedule II - Valuation and Qualifying Accounts and Reserves......................................         52
</TABLE>

         All other financial schedules are omitted because they are not
applicable, or the required information is otherwise shown in the financial
statements or notes thereto.

                  (3)      Exhibits

<TABLE>
<CAPTION>
                                                                                                                  PAGE NUMBER
                                                                                                                OR INCORPORATED
                                                                                                                  BY REFERENCE
   EXHIBIT                                               DESCRIPTION                                                  FROM
   -------      ----------------------------------------------------------------------------------------------  ---------------
   <S>          <C>                                                                                             <C>
    3.1            Amended and Restated Articles of Incorporation                                                     (1)

    3.2            Bylaws                                                                                             (2)

    4.1            Warrant Agreement between the Company and Josephthal, Lyon & Ross Incorporated                     (3)

   10.1            Executive Compensation Plans and Arrangements                                                      (5)

                   (a)   Employment Agreement, dated as of February 1, 1995, between the Company and Simon
                         Falic
                   (b)   Employment Agreement, dated as of February 1, 1995, between the Company and Jerome
                         Falic
                   (c)   Employment Agreement, dated as of February 1, 1995, between the Company and Ron
                         Friedman
                   (d)   Consulting Agreement, dated as of January 1, 1994, between the Company and Rachmil
                         Lekach
                   (e)   Consulting Agreement, dated as of May 2, 1995, between the Company and Ilia Lekach

   10.3            Amendments to the Loan and Security Agreements between the Company and LaSalle                     (5)
                      National Bank dated July 29, 1994, and September 30, 1994
</TABLE>


                                       57


<PAGE>   58


<TABLE>
<CAPTION>
                                                                                                                  PAGE NUMBER
                                                                                                                OR INCORPORATED
                                                                                                                  BY REFERENCE
   EXHIBIT                                               DESCRIPTION                                                  FROM
   -------      ----------------------------------------------------------------------------------------------  ---------------
   <S>          <C>                                                                                             <C>
   10.4         Amendments to the Loan and Security Agreements between the Company and LaSalle                     (6)
                   National Bank dated March 29, 1996

   10.5         1991 Stock Option Plan, as amended                                                                 (6)

   10.6         1992 Directors Stock Option Plan, as amended                                                       (6)

   10.7         Regulation S 5% Convertible Debentures Agreement                                                   (6)

   10.8         Regulation S Stock Subscription Agreement                                                          (6)

   10.9         Amendments to the Loan and Security Agreements between LaSalle National Bank dated                 (7)
                   April 16, 1997

   21.1         Subsidiaries of the Registrant                                                                     (6)

   23.1         Consent of PricewaterhouseCoopers LLP                                                              (9)

   27.1         Financial Data Schedule (for SEC use only)                                                         (9)
</TABLE>

(1)  Incorporated by reference to the exhibit of the same description filed with
     the Company's 1993 Form 10-K (filed April 28, 1994).

(2)  Incorporated by reference to the exhibit of the same description filed with
     the Company's Registration Statement on Form S-1 (No. 33-46833).

(3)  Incorporated by reference to the exhibit of the same description filed with
     the Company's Registration Statement on Form S-1 (No. 33-43556).

(4)  Incorporated by reference to the exhibit of the same description filed with
     the Company's Registration Statement on Form S-8 (filed October 13, 1994).

(5)  Incorporated by reference to the exhibit of the same description filed with
     the Company's 1994 Form 10-K (filed April 20, 1995).

(6)  Incorporated by reference to the exhibit of the same description filed with
     the Company's 1995 Form 10-K (filed April 26, 1996).

(7)  Incorporated by reference to the exhibit of the same description filed with
     the Company's 1996 Form 10-K (filed May 2, 1997)

(8)  Incorporated by reference to the exhibit of the same description filed with
     the Company's 1997 Form 10-K (filed May , 1998)

(9)  Filed herewith.

     (b)      Reports on Form 8-K

              None.



                                       58

<PAGE>   59



                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
October 7, 1999
                                      PERFUMANIA, INC.


                                      By: /s/ ILIA LEKACH
                                          ----------------------------------
                                          Ilia Lekach, Chairman of the Board
                                          and Chief Executive Officer


         Pursuant to the requirements of the Securities Exchange act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.


<TABLE>
<CAPTION>
             SIGNATURE                                          TITLE                                    DATE
-----------------------------------                     -------------------------                  ----------------
<S>                                                     <C>                                        <C>
/s/ ILIA LEKACH                                         Chairman of the Board and                  October 7, 1999
-----------------------------------                     Chief Executive Officer
Ilia Lekach

/s/ JEROME FALIC                                        President and Vice Chairman                October 7, 1999
-----------------------------------                     of the Board
Jerome Falic

/s/ DONOVAN CHIN                                        Chief Financial Officer                    October 7, 1999
-----------------------------------                     and Director
Donovan Chin

/s/ MARC FINER                                          President of the Retail Division           October 7, 1999
-----------------------------------                     and Director
Marc Finer

/s/ ROBERT PLISKIN                                      Director                                   October 7, 1999
-----------------------------------
Robert Pliskin

/s/ CAROLE ANN TAYLOR                                   Director                                   October 7, 1999
-----------------------------------
Carole Ann Taylor

/s/ HORACIO GROISMAN, M.D.                              Director                                   October 7, 1999
-----------------------------------
Horacio Groisman, M.D.
</TABLE>


                                       59