UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended January 31, 20062007

OR

For the transition period from            to            .

Commission File number 0-21764

Perry Ellis International, Inc.

(Exact Name of Registrant as Specified in Its Charter)

(305) 592-2830

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

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

Common Stock, par value $.01 per share

(Title of each class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  ¨    No  x

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 the 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.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨    Accelerated filer  x    Non- accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  x

The aggregate market value of the voting stock held by non-affiliates of the registrant is approximately $174,168,574$189,564,687 (as of July 29, 2005)31, 2006).

The number of shares outstanding of the registrant’s Common Stock is 9,608,01214,687,871 (as of April 12, 2006)10, 2007).

DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated by reference:

Portions of the Company’s Proxy Statement for the 20062007 Annual Meeting—Part II and Part III

Unless the context otherwise requires, all references to “Perry Ellis,” the “Company,” “we,” “us” or “our” include Perry Ellis International, Inc. and its subsidiaries. References in this report to the Tropical acquisition refer to our acquisition of certain domestic operating assets of Tropical Sportswear Int’l Corporation and its subsidiaries and Tropical’s United Kingdom subsidiary in February 2005. References in this report to annual financial data for Perry Ellis refer to fiscal years ended January 31. This Form 10-K contains references to trademarks held by us and those of third parties.

General information about Perry Ellis can be found atwww.pery.com. We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current report on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 available free of charge on our website, as soon as reasonably practicable after they are electronically filed with the SEC.

FORWARD-LOOKING STATEMENTS

We caution readers that this report and the portions of the proxy statement incorporated by reference into this report include “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on current expectations rather than historical facts and they are indicated by words or phrases such as “anticipate,” “could,” “may,” “might,” “potential,” “predict,” “should,” “estimate,” “expect,” “project,” “believe,” “intend,” “plan,” “envision,” “continue,” “intend,” “target,” “contemplate,” or “will” and similar words or phrases or comparable terminology. We have based such forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements, many of which are beyond our control. Some of the factors that could affect our financial performance, cause actual results to differ from our estimates, or underlie such forward-looking statements, are as set forth below and in various places in this report and in the portions of the proxy statement incorporated by reference, including under the headings Item 1 “Business,” Item 1A “Risk Factors,” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report. These factors include:

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You are cautioned that all forward-looking statements involve risks and uncertainties, detailed in our filings with the SEC. You are cautioned not to place undue reliance on these forward-looking statements, which are valid only as of the date they were made. We undertake no obligation to update or revise any forward-looking statements to reflect new information or the occurrence of unanticipated events or otherwise.

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PART I

Overview

We are one of the leading apparel companies in the United States. We control a portfolio of major men’s and women’s brands, some of which were established over 100 years ago. We design, source, market and license our products nationally and internationally at multiple price points and across all major levels of retail distribution in up to 15,000 doors. Our portfolio of highly recognized brands includes the Perry Ellis and Perry Ellis Portfolio,^® family of brands, which we believe together generate over $1 billion in annual retail sales, Axis^®, Tricots St. Raphael^®, Jantzen^®, John Henry^®, Cubavera^®, the Havanera Co.^®, Natural Issue^®, Munsingwear^®, Grand Slam^®, Original Penguin^® by Munsingwear^® (“Original Penguin”), Mondo di Marco^®, Redsand^®, Pro Player^®, Manhattan^®, Axist^®, Savane^®, Farah^®, Gotcha^®, Girl Star^® and MCD.MCD^®. We also (i) license the Nike^® brand for swimwear and swimwear accessories, (ii)license the JAG^® brand for men’s and women’s swimwear and cover-ups, (iii) are the worldwide master licensee for PING^® golf apparel, (iv) license the PGA TOUR^®, including Champions Tour for golf apparel, and (iii) license(v) are the PGA Tour brandDockers^® licensee for golf apparel.outerwear.

We distribute our products primarily to wholesale customers that represent all major levels of retail distribution including department stores, national and regional chain stores, mass merchants, specialty stores, sporting goods stores, green grass golf shops, the corporate wear market, as well as clubs and independent retailers in the United States, Canada, and the United Kingdom.Kingdom and Europe. Our largest customers include Federated/May Department Stores, Inc. (“Federated/May”), Dillard’s Inc. (“Dillard’s”), Wal-Mart Stores, Inc. (“Wal-Mart”), J.C. Penney Company (“J.C. Penney”), and Kohl’s Corporation and Sam’s Wholesale Club.(“Kohl’s”). As of AprilMarch 1, 2006,2007, we also operated 3235 Perry Ellis retail outlet stores located primarily in upscale retail outlet malls across the United States as well as 35 Original Penguin retail stores located in upscale demographic markets. In addition, we leverage our design, sourcing and logistics expertise by offering a limited number of private label programs to retailers. In order to maximize the worldwide exposure of our brands and generate high margin royalty income, we license our brands through approximately 5645 domestic and approximately 10194 international license agreements.

Our wholesale business, which is comprised of men’s sportswear and women’s and men’ssportswear, swimwear and swimwear accessories, accounted for 97% of our total revenues in fiscal 2006,2007, and our licensing business accounted for approximately 3% of our total revenues in fiscal 2006.2007. We have traditionally focused on the men’s sportswear market, which represented approximately 93%92% of our total wholesale revenues in fiscal 2006,2007, while our women’s and men’s swimwear market represented approximately 7%8% of our total wholesale revenues in fiscal 2006.2007.

Our licensing business is a significant contributor to our operating income. We license the brands we own to third parties for the manufacturing and marketing of various products in distribution channels and countries in which we do not distribute those brands, including men’s and women’s apparel and footwear, men’s suits, underwear, loungewear, outerwear, fragrances, eyewear and accessories. These licensing arrangements raise the overall awareness of our brands without requiring us to make capital investments or incur additional operating expenses.

On February 26, 2005, we acquired certain domestic operating assets of Tropical Sportswear Int’l Corporation and its subsidiaries and Tropical’s United Kingdom subsidiary. Tropical was a leading designer, marketer and distributor of men’s branded and private label bottoms to all channels of distribution. With the Tropical acquisition, we have become one of the largest suppliers of men’s bottoms in the United States, added significant revenues, further strengthened and balanced our product mix, and added to our portfolio of brands. The Tropical acquisition also provided us with a state-of-the-art distribution facility in Tampa, Florida and a strong platform to expand our existing brands into Europe as a result of the acquired U.K. subsidiary.

We employ a three-dimensional strategy in the design, sourcing, marketing and licensing of our products that focuses on diversity of brands, products and distribution channels. Through this strategy, we provide our products to a broad range of customers, which reduces our reliance on any single distribution channel, customer, or demographic group and minimizes competition among our brands.

Diversity of Brands. We maintain a portfolio of 2527 highly recognized brands that we either own or license. We are focused on brands that appeal to fashion conscious consumers across all income levels. We design, source, market and license most of our products on a brand-by-brand basis targeting distinct consumer demographic and lifestyle profiles. For example, we market the Perry Ellis and Original Penguin brands to higher-income consumers and market the Grand Slam, John Henry and the Havanera Co. brands to middle-income consumers. In addition, we market brands that appeal to women through our Jantzen family of swimwear products, which include Jantzen, Nike, JAG, and Perry Ellis, as well as through Original Penguin products.swimwear and sportswear.

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Diversity of Product Categories. We design and market apparel in a broad range of men’s product categories and select women’s product categories, which increases the stability of our business. Our menswear offerings include casual sportswear and bottoms, dress shirts and pants, jeans wear, golf apparel, sweaters, sports apparel, swimwear and swim accessories, active wear, outerwear and leather accessories. Our women’s wear offerings include swimwear, swim accessories and sportswear. We believe that our product diversity decreases our dependence on any one product or fashion trend and has contributed substantially to our growth.

Diversity of Distribution Channels. We market our products through all major levels of retail distribution, which allows us to reach a broad range of consumers in the United States, Canada, and the United Kingdom.Kingdom and Europe. We distribute through department stores, national and regional chain stores, mass merchants, specialty stores, sporting goods stores, green grass golf shops, the corporate wear market, as well as clubs and other independent retailers in the United States, Canada and the United Kingdom. Our products are distributed through up to 15,000 doors at some of the nation’s leading retailers, including Federated/May, Dillard’s, Wal-Mart, Stores, Inc., J.C. Penney, Company, Kohl’s, Corporation, and Sam’s Wholesale Club.Mervyn’s LLC (“Mervyn’s”).

The following table illustrates the current diversity of the brands and products we produce and market and their respective distribution channels:

Our Competitive Strengths

We believe that our competitive strengths position us to capitalize on several trends that have affected the apparel industry in recent years. These trends include:

We believe that we have the following competitive strengths in our industry:

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Portfolio of nationally and internationally recognized brands. We currently own or license a portfolio of 2527 brands, which enjoy high recognition within their respective consumer segments. We believe that these brands have built a loyal following of fashion-conscious consumers and retailers who desire high quality, well-designed products. We license the Dockers, Nike, PING, JAG, Champions Tour and PGA TourTOUR brands, which we believe are highly recognizable brands within their various product categories. We also license several of our brands to third parties for products in distribution channels and countries in which we do not distribute those brands. We believe that brand recognition is critical in the apparel industry, where strong brand names help define consumer preferences and drive selling space at retailers.

Diversified product offering and distribution model. We market a diverse array of products under our numerous brands at multiple price points and across multiple levels of retail distribution. Our menswear offerings include casual sportswear and bottoms, dress shirts and pants, jeans wear, golf apparel, sweaters, sports apparel, swimwear and swim accessories, active wear, outerwear and leather accessories. Our women’s wear offerings include swimwear, sportswear and swim accessories. Our products are distributed through up to 15,000 doors at department stores, national and regional chain stores, mass merchants, specialty stores, sporting goods stores, green grass golf shops, the corporate wear market and independent retailers in the United States and Canada. As a result of the Tropical acquisition, we have begunsuccessfully expanded product and brand distribution of product in the United Kingdom and Europe, and believe opportunities exist for further international expansion of our brand base. As of AprilMarch 1, 2006,2007, we also operated 3235 Perry Ellis retail outlets and 35 Original Penguin retail stores and believe opportunity exists to further expand our retail store base. Our diversified product offerings and distribution model reduce our reliance on any one product, demographic group, merchandise preference or distribution channel and minimizes competition among our brands.

Strong relationships with our retailers. We believe that our established relationships with retailers allow us to maximize the selling space dedicated to our products, monitor our brand presentation and merchandising selection, and proactively introduce new brands and products. Because of our quality brands and products, dedication to customer service, design expertise and sourcing capabilities, we have developed and maintained long-standing relationships with our largest customers, including Dillard’s (more than 25 years), Federated/May Department Stores (more than 25 years), J.C. Penney (more than 25 years), Wal-Mart (15(16 years), and Kohl’s (12(13 years).

Strong licensing capabilities and relationships. We license many of the brands we own, and, as a result, have gained experience in identifying potential licensing opportunities. We have established relationships with many licensees and believe these relationships provide opportunities to grow our revenues and earnings. Our brands are solidly positioned in retail outlets at all major levels of retail distribution and have increased our exposure nationally and internationally. We believe that our broad portfolio of brands also appeals to licensees because it gives licensees the opportunity to sell their products into different distribution channels. For example, a manufacturer of men’s accessories might license the Cubavera brand to enter the department store channel. By licensing our owned brands, we offer consumers a complete product assortment by brand. We also coordinate our marketing efforts with licensees, thereby maximizing exposure for our brands and our return on investment.

Sophisticated global low-cost sourcing capabilities. We have sourced our products globally for approximately 40 years and employ sophisticated logistics and supply chain management systems to maintain maximum flexibility. Our network of worldwide company owned sourcing partnersoffices and some agents enables us to meet our customers’ needs in an efficient and high quality manner without relying on any one vendor, factory, or country. In fiscal 2006,2007, based on the total dollar value, we sourced our products from Asia (73%(65%), Central and South America (22%(26%) and the Middle East (5%(9%). We maintain a staff of experienced sourcing professionals in five offices in China (including Hong Kong), as well as in the United States, South Korea, Taiwan, Vietnam, Bangladesh, Nicaragua, and the Dominican Republic. Our sourcing offices closely monitor our suppliers and provide strict quality assurance analyses that allow us to consistently maintain our high quality standard for our customers. We have a compliance department that works closely with our quality assurance staff to ensure that our sourcing partners comply with Company-mandated and country-specific labor and employment regulations. We believe that sourcing our products overseas allows us to manage our inventories more effectively and avoid incurring the costs of maintaining and operating production facilities. Because of our sourcing experience, capabilities and relationships, we believe that we are well positioned to take advantage of the changing textile and apparel quota environment.

Design expertise and advanced technology. We maintain a staff of designers, merchandisers and artists who are supported by a staff of design professionals, including assistant designers, technical designers, graphic artists and production assistants. Our in-house design staff designs substantially all of our products using advanced computer-aided design technology that minimizes the time-intensive and costly production of sewn prototypes prior to customer approval. In addition, this technology provides our customers with products that have been custom designed for their specific needs and meet current fashion trends. We employ advanced fabric and design technologies to ensure a proper fit and outstanding performance when we create our women’s and men’s swimwear. We regularly upgrade our computer technology to enhance

our design capabilities, facilitate communication with our global suppliers and customers on a real-time basis, react faster to new product developments by competitors and meet changes in customer needs.

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We use PerrySolutions, our software system, which enables our sales planners to manage our retail customers’ inventory at the SKU level. This system helps maximize the sales and margins of our products by increasing inventory turns for the retailer, which in turn reduces our product returns and markdowns and increases our profitability. We also use PerrySolutions during the assortment planning process to allocate the correct quantities for the initial rollout of product at retail.

Proven ability to integrate acquisitions. Since 1993, we have been successful in selectively acquiring, managing, developing and positioning 2527 highly recognized brands within our business, including Munsingwear (1996), Perry Ellis (1999), John Henry (1999), Manhattan (1999), Jantzen (2002), the brands owned by Perry Ellis Menswear, LLC and Redsand (2003), Farah and Savanethe brands owned by Tropical (2005) and Gotcha, Girl Star and MCD (2006)(2005/2006). We believe our experience prepared us for the successful integration of the Tropical business in 2005.

As part of an extensive integration process for each brand, we have:

Experienced management team. Our senior management team averages more than 2728 years in the apparel industry and has extensive experience in growing and rejuvenating brands, structuring licensing agreements, and building strong relationships with global suppliers and retailers. In addition, George Feldenkreis, our chairman and chief executive officer, and Oscar Feldenkreis, our vice chairman, president and chief operating officer, renewed their employment agreements through February 1, 2010.

Our Business Strategy

Our strategy is to continue to pursue our three-dimensional approach by developing and enhancing our portfolio of brands, increasing the scope of our product offerings and expanding distribution for our brands, while continuing our focus on growth and profitability through the execution of the following strategies:

Continue to strengthen the competitive position and recognition of our brands. We intend to continue enhancing the recognition of our brands by aggressively marketing our brands to both consumers and retailers. We manage each brand individually, developing a distinct brand and marketing strategy for every product category and distribution channel. We participate in cooperative advertising in print and broadcast media, as well as market directly to consumers through billboards, event sponsorships, celebrity sponsorships, special event advertisements and advertisements in selected periodicals. In addition, we continue to have a strong presence at trade shows, such as “M.A.G.I.C.” in Las Vegas, Market Week in New York, and golf, surf and swim shows and events throughout the country. Licensing our brands to third parties also enhances brand recognition by providing increased customer exposure domestically and internationally, as well as opportunities for future product extensions.

Continue to diversify our product line. We intend to continue to expand the range of our product lines, thereby capitalizing on the name recognition, popularity, and discrete target customer segmentation of our major brands. The Perry Ellis Menswear acquisition took us into the men’s better market and collection market for sportswear, dress shirts, bottoms and leather accessories and, through the Axis and Tricots St. Raphael brands into the better sportswear market. We have used the Axis and Tricots St. Raphael brands, as well as the expertise of Perry Ellis Menswear’s sales and marketing personnel, to expand our sweater business. In 2006, we began a licensing agreement with Levi Strauss to offer Dockers outerwear product. In addition, we will continue to seek licensing opportunities that will expand our collection of products.

Increase penetration in each channel. We will continue to selectively pursue new ways to increase our penetration of existing channels of distribution for our products, focusing on maintaining the integrity of our products and reinforcing our image at existing and new retail stores, as well as introducing our products to geographic areas and consumer sectors that are

presently less familiar

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with our products. We will also seek to expand our business with our existing customers by offering them products that are compelling and different from those in the marketplace and by capitalizing on our relationships with them by offering them more of our products.

Adapt to our continually changing marketplace. We will continue to make the necessary investments and implement strategies to meet the growing needs of our customers on a timely basis in the ever-changing apparel industry. We are currently focusing on expanding our business in the following areas:

Expand our licensing opportunities. Since our acquisition of Munsingwear in 1996, we have significantly expanded the licensing of our brands to third parties for various product categories. We intend to continue to license our brands to existing and new licensees as profitable opportunities arise. We will also use our brand portfolio to expand our licensing activities in women’s wear, sportswear, and sportswear.fragrances. We continue to explore licensing opportunities where we see opportunities for growth, such as Latin America, Europe and Asia. We will continue to provide our licensing partners with strong brands, design expertise and innovative marketing strategies. In addition to the revenues and brand awareness that licensing provides us, we also believe that licensing our brands benefits us by reducing the volatility of our operating income.

Pursue strategic acquisitions and opportunities. We intend to continue our strategy of making selective acquisitions to expand our portfolio of brands and add new product lines as our industry continues to follow the consolidation trend of our retailers. We will continue to internally develop new brands and logical extensions of existing brands as opportunities in the marketplace arise. We intend to pursue acquisition opportunities in a disciplined manner as they become available and focus on products or categories that have high consumer awareness and are difficult to duplicate from a technical or logistical standpoint. Since our initial public offering in 1993, we have acquired, or obtained licenses for, several brands, including Munsingwear, Perry Ellis, John Henry, Manhattan, Jantzen, PING, Nike, Dockers, Mondo di Marco, Axis, Tricots St. Raphael, Redsand, Pro Player, PGA Tour,TOUR, Savane, Farah, Champions Tour, Links Edition, Gotcha, Girl Star and MCD. We believe that our history of selectively acquiring under-marketed or under-performing brands and incorporating them into our efficient infrastructure generates a superior return on investment for us.

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Recent Developments

On February 26,In November 2005, we acquired certain domestic operating assetscompleted the acquisition of Tropical and its subsidiaries and Tropical’s United Kingdom subsidiary for $83.4 million, which included $2.7 millionprimarily all of acquisition costs. The acquisition was funded from our senior credit facility.

Tropical was a leading designer, marketer and distributor of men’s branded and private label bottoms to all channels of distribution. With the Tropical acquisition, we have become one of the largest suppliers of men’s bottoms in the United States, added significant revenues, further strengthened and balanced our product mix, and added to our portfolio of brands. The Tropical acquisition also provided us with a state-of-the-art distribution facility in Tampa, Florida and a strong platform to expand our existing brands into Europe as a result of the acquired U.K. subsidiary.

In the fourth quarter of fiscal 2006, we acquired the worldwide intellectual property of the leading California lifestyle company Gotcha International, including the Gotcha, Girl Star, and MCD trademarkstrademarks.

In April 2006, we reached an agreement with Levi Straus & Co. for the manufacture and distribution of Dockers^® men’s cloth outerwear in the intellectual property license agreements for approximately $12 million.United States and Mexico. The line encompasses men’s jackets, coats and synthetic fleece. We believe that this acquisition broadens our active sportswear arena by diversifying theour product base, attracting new customers and strengthensstrengthening our relationships with existing customers.

In May 2006, we entered into a licensing agreement with JAG Licensing, LLC to manufacture and distribute JAG men’s and women’s swimwear and cover-ups in the United States, Canada and Mexico.

On December 6, 2006, the Company signed a definitive agreement with and re-acquired from Parlux Fragrances Inc. (“Parlux”) for $42 million all rights, titles, interests, tangible and intangible assets, and for $21 million, inventory that Parlux maintained pursuant to a global license agreement to manufacture and distribute perfumery, fragrances, lotions, toiletries and cosmetics under the Perry Ellis brand. The agreement to re-acquire the Perry Ellis fragrance license and related assets in a cash transaction for a total of approximately $63 million was effective as of December 6, 2006, of which the inventory portion is subject to potential post-closing price adjustments. The Company funded this acquisition through its senior credit facility.

Subsequently, on January 25, 2007, the Company entered into an agreement (the “Agreement”) with Falic Fashion Group, LLC, a Florida limited liability company and a wholly owned subsidiary of Duty Free Americas, Inc. (“Falic”), pursuant to which the Company agreed to sell to Falic the assets purchased from Parlux. The total sales price for the assets sold was approximately $63 million of which $42 million related to tangible and intangible assets and $21 million was attributed to inventory and is subject to certain post-closing price adjustments.

Simultaneously with our sale of the fragrance assets, we entered into a license agreement with Falic pursuant to which we granted Falic an exclusive worldwide license to use certain trademarks in connection with the Perry Ellis brand with respect to the manufacture, advertising and sale of fragrance and other related products.

Brands

In fiscal 2006,2007, approximately 80%78% of our net salestotal revenues were from branded productslabel sales as compared to 75% in fiscal 2005 when 89% of our net sales were from branded products. The decrease is due primarily to the addition of Tropical private label operations.2006. We currently own 2221 and license 36 nationally recognized brands whoseand the products we sourceare sourced and sellsold through all major levels of retail distribution. Our owned brands include the Perry Ellis Perry Ellis America,family, Axis, Tricots St. Raphael, Jantzen, John Henry, Cubavera, the Havanera Co., Natural Issue, Munsingwear, Grand Slam, Original Penguin, Mondo di Marco, Redsand, Pro Player, Manhattan, Axist, Savane, Farah, Gotcha, Girl Star and MCD. We have developed over 42 sub-brands from these brands, including Perry Ellis PortfolioAmerica and Southpoint. We also distribute the PING, Nike, JAG, Dockers, Champions Tour and PGA TourTOUR brands under license arrangements.

We license the Perry Ellis brand, our premier brand, and many of our other brands for products in distribution channels in which we do not sell directly to retailers. In addition, we license our brands internationally. Our depth of brand selection enables us to target consumers across a wide range of ages, incomes and lifestyles, reduces our reliance on any single distribution channel, customer or demographic group, and minimizes competition among brands.

Perry Ellis. The Perry Ellis and Perry Ellis Americaportfolio brands, which we believe together generate over $1 billion in annual retail sales, are associated with elegance, quality, value, comfort and innovative designs. The Perry Ellis brand appeals primarily to higher-income, status conscious, professional 25-40 year-old men. The Perry Ellis branded products are sold in upscale department, specialty, and major department stores. We also license the Perry Ellis brand to third parties for a wide variety of apparel and non-apparel products.

Axis and Axist. The Axis brand is associated with the casual “California” lifestyle that affords quality, value, comfort and innovative designs. The Axis brand appeals primarily to higher-income, status conscious, professional 30-50 year-old men. We sell sportswear and activewear under the Axis brand, which is sold primarily at upscale department and specialty stores. The Axist brand appeals to middle-income men. The brand is associated with quality and value and is exclusively sold at Kohl’s.

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Tricots St. Raphael. The Tricots St. Raphael brand is associated with a sophisticated dress casualtraditional lifestyle featuring quality, unique designs and fabrics. The Tricots St. Raphael brand appeals primarily to higher-income, status conscious, professional 40-60 year-old men. We sell sportswear and sweaters under the Tricots St. Raphael brand, which is sold primarily at upscale department and specialty stores.

Jantzen and Southpoint. The Jantzen brand has a history of over 90 years and has been synonymous with swimwear design and innovation. The brand’s iconic red diving girl logo has evolved for almost a century and remains eternally timeless. Utilizing its products arerich archival collection combined with its modern day approach to marketing, the collection is sold in upscale, specialty and major department stores and specialty stores. We sell men’s and women’s swimwear under the Jantzen brand, as well as women’s swimwear under the Southpoint brand. We also introduced men’s and licensed women’s sportswear under the Jantzen brand to capitalize on its rich history and reputation for quality.

John Henry. The John Henry brand appeals to middle-income 25-45 year-old men. The brand is well known, is associated with quality and value, and is primarily sold in national and regional chain stores. Our John Henry product offerings form a “dress casual collection” as John Henry is considered a designer brand at national and regional chain stores.

Cubavera and the Havanera Co. The Cubavera and the Havanera Co. brands appeal to Hispanic males between the ages of 25-45 and consumers who embrace Hispanic lifestyle brands. Cubavera is currently sold in major department stores as well as specialty stores around the country, while the Havanera Co. brand is sold in national chain stores.exclusively at JC Penney.

Natural Issue. The Natural Issue brand appeals to middle-income 25-55 year-old men. Natural Issue’s products include dress casual shirts, sweaters and pants. We have expanded our pants products to include the Natural Issue Executive Khaki pants line with cotton fabric, as well as twill and corduroy fabrics. Natural Issue is primarily sold in national and regional chain stores.

Grand Slam. Grand Slam is an American heritage brand and appeals to middle-income 30-60 year-old men who prefer classic casual golf apparel. The Grand Slam brand is primarily sold in department stores as well as national golf and regional chains.at Kohl’s.

Original Penguin. We re-introduced the Original Penguin brand with its signature penguin icon logo in fiscal 2003, which is a lifestyle product for the Generation X and Y men and women who are suburban upper-middle class, ages 18 to 35.class. The line offers vintage inspired sportswear that its targeted consumers’ fathers used to wear. The product line is primarily sold at upscale department and upper tier specialty stores and includes apparel, shoes and accessory items. The brand was introduced to the European market in fiscal 2007.

Mondo di Marco. The Mondo di Marco collection represents the essence of its Italian heritage with a modern sportswear approach and appeals to status-driven 25-45 year old men. The brand is sold at upscale department stores and upper tier specialty stores.

Redsand. Founded on the beaches of Southern California, Redsand is firmly rooted in the progressive youth culture. Inspired by the independent spirit fundamental to the coastal lifestyle, the brand is designed to inspire self-expression and is a product of the fusion of nature, music, surf and art. Redsand is sold in department stores and national specialty and surf store chains.

Pro Player. Pro Player is an authentic brand with tremendous unisex and cross-generational appeal. The brand is committed to innovative design and quality fabrics, and appeals to health conscious 22-35 year old men who enjoy outdoor activities. The brand is sold at national and regional chain stores.

Savane. We acquired the Savane brand as part of the Tropical acquisition on February 26, 2005. TheThis brand is associated with quality, value, performance and innovative designs and appeals primarily to middle-income, professional 30-50 year-old men. Its products are sold in department stores and specialty stores.

Farah. We acquired the Farah brand as part of the Tropical acquisition on February 26, 2005. TheThis brand is associated with value and comfort and appeals primarily to middle-income, 30-50 year-old men in the United States.Kingdom. Farah brand bottoms currently hold the top market share position in the United Kingdom with its products distributed in department stores, specialty stores, mail order and discount club markets and primarily appeals to middle-income, 40-60 year-old men.markets.

Gotcha.We acquired the Gotcha brand during fiscal 2006. The brand is marketed as an accessible California youth lifestyle brand, widely distributed to mid-tier and sporting goodsaction sports accounts. The company is also buildinghas a strong portfolio of licensees, both domestically and internationally, selected for their expertise in specific categories.

Girl Star.We acquired the Girl Star brand during fiscal 2006. The brand is being distributed toJuniors swimwear launched in 2007 with placement in better department stores sporting goods and specialty accounts. The brandIn 2008 we will be relaunched in the junior swimwear range,continue to develop this distribution, while licensee candidates are being interviewed for complimentary juniorcomplementary product lines.

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MCD.We acquired the MCD brand during fiscal 2006. The brand will be relaunched focusing on the action sports specialty market. The Springspring 2007 program will target the hardcore surf/skate youth consumer.

Manhattan. The Manhattan brand is associated with dress casual apparel sold primarily to mass merchants and upscale specialty stores.

Dockers. We have a license agreement with Levi Straus & Co. to manufacture and distribute men’s cloth outerwear in the United States and Mexico. The line includes men’s jackets, coats and synthetic fleece. We believe that this license agreement broadens our product base and attracts new customers.

PGA TOUR and Champions Tour.We are the exclusive U.S. men’s apparel licensee for the PGA TOUR and Champions Tour brands for department and chain store channels of distribution. The license expires July 31, 2007 and contains a five year automatic renewal. The PGA TOUR features the game’s biggest names and most competitive players in the world. The official season covers virtually every major market in North America with hundreds of thousands of on-site fans and millions of television viewers worldwide. Products under the PGA TOUR label include golf shirts, outerwear, sweaters, pants and shorts. The brand is sold to mid-tier department stores and sporting good stores. Our agreement with the PGA TOUR also includes the rights to sell apparel under the Champions Tour label. The Champions Tour showcases the most accomplished and revered players in golf. Formerly called the Senior PGA TOUR, the Champions Tour has been labeled the most successful senior sports venture in history. Products under both the PGA TOUR and the Champions Tour label include golf shirts, outerwear, sweaters, pants and shorts. The brand is sold exclusively through Federated/May Department Stores.

Nike. We have a license agreement with Nike to design and market men’s, women’s, junior’s, boy’s and girl’s swimwear, men’s and junior’s competitive swimwear, and swimwear apparel and accessories. Swim products are sold through sporting good stores, specialty stores, team dealers and department stores. The license agreement expires in May 2009, with a potential renewal through 2011.

JAG. We acquired the exclusive license for JAG branded men’s and women’s swimwear and cover-ups in May 2006. The license expires June 30, 2011 and we have the automatic option to renew the license for three years. This brand has been a major player in the swimwear arena for the past two decades. JAG swimwear is intended for an active woman seeking functionality and style from her swimwear. It is sold in major department stores, national chains and specialty stores.

PING. We have aare the worldwide apparel master licenselicensee for men’s, boy’s and ladies apparel for the prestigious PING golf brand, which appeals to golfers and high-income, status conscious 25-50 year-old men. The license expires in December 2007,2008, with annual renewal extensions. The brand is a well-known golf brand, which we positioned to be associated with the highest standard of quality in the golf business. Products under this brand include golf shirts, sweaters, shorts and outerwear. The brand is sold primarily in golf shops, top-tier specialty, department stores and the corporate wear market.

Other Brands.We also own the Manhattan brand. The Manhattan brand is associated with dress casual apparel sold primarily at mass merchants and upscale specialty stores.

Private Label. In addition to our sales of branded products, we sell products to retailers for marketing as private label for their own store lines. In fiscal 2006,2007, we sold private label products to Saks, Inc., Dillard’s,Kohl’s, Dillards, J.C. Penney, Goody’s,Mervyns, Sears, BJ’s Wholesale Club, Stein Mart, Inc. and Wal-Mart. Private label sales generally yield lower gross margins than sales of comparable branded products. Private label sales accounted for approximately 20%, 11%,22% and 9%,25% of net salesour total revenues during fiscal 2006, 2005,2007 and 2004,2006, respectively. The overall increase in themajority of our fiscal 2007 private label business as a percentage ofsales relate to our net sales, from fiscal 2005, is a result of the impact of the Tropical acquisition,bottoms product category, which included private label bottoms programs with several retailers.utilizes our production and replenishment expertise.

Products and Product Design

We offer a broad line of high quality men’s casual sportswear, dress shirts and pants, jeans wear, golf apparel, sweaters, sports apparel, outerwear, swimwear and swim accessories, active wear and leather accessories. Our women’s wear offerings include swimwear and swim accessories and sportswear. Substantially all of our products are designed by our in-house staff utilizing our advanced computer-aided design technology. This technology enables us to produce computer-generated simulated samples that display how a particular style will look in a given color and fabric before it is actually produced. These samples can be printed on paper or directly onto fabric to accurately present the colors and patterns to a potential customer. In addition, we can quickly alter the simulated sample in response to our customers’ comments, such as change of color, print layout, collar style and trimming, pocket details and/or placket treatments. The use of computer-aided design technology minimizes the time-consuming and costly need to produce actual sewn samples prior to retailer approval, allows us to create custom-designed products meeting the specific needs of customers and reduces a product’s time to market, from conception to the delivery of the product to customers.

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In designing our apparel products, we seek to promote consumer appeal by combining functional, colorful and high quality fabrics with creative designs and graphics. Styles, color schemes and fabrics are also selected to encourage consumers to coordinate outfits and form collections, thereby encouraging multiple purchases. Our designers stay abreast of the latest design trends, fabrics, colors, styles and consumer preferences by attending trade shows, periodically conducting market research in Europe and the United States and using outside consultants. Our purchasing department also seeks to improve the quality of our fabrics by staying informed about the latest trends in fabric all over the world. In addition, we actively monitor the retail sales of our products to determine changes in consumer trends.

In accordance with standard industry practices for licensed products, we have the right to approve the concepts and designs of all products produced and distributed by our licensees.

Our products include:

ShirtsTops. We offer a broad line of sport shirts, whichdress shirts, sweaters, fleece, outerwear and jackets. This includes cotton and cotton-blend printed, yarn-dyed and solid knit shirts, cotton woven shirts, silk, cotton and rayon printed button front sport shirts, linen sport shirts, golf shirts, and embroidered knits and woven shirts. Our shirt line also includes dress shirts, dress casual shirts, brushed twill shirts, jacquard knits and yarn-dyed flannels. Additionally, we are one of the leading distributors of guayabera-style shirts in the United States. We market shirts under a number of our own brands as well as the private labels of our retail customers. Our shirtstops are produced in a wide range of men’s sizes, including sizes for the big and tall men’s market. Sales of shirtstops accounted for approximately 44%, 60%46%, and 57%60% of our net sales during fiscal 2007, 2006, 2005, and 2004,2005, respectively. The reduction of shirttops sales as a percentage of total net sales in fiscal 20062007 from previous years is a direct result of the Tropical acquisition in February, 2005.

Bottoms. Our bottoms line includes a variety of styles of wool, wool-blend, linen and polyester/rayon dress pants, casual pants in cotton and polyester/cotton and linen/cotton walking shorts. We market our bottoms as single items or as a collection to complement our shirt lines. Sales of bottoms accounted for approximately 44%45%, 19%44%, and 21%19% of our net sales during fiscal 2007, 2006, 2005, and 2004,2005, respectively. The sale of bottoms in fiscal 2006 represented2007 continued to represent a significantly greater percentage of our net sales as a result of the Tropical acquisition.

Swimwear. Our swimwear line includes women’s, men’s and junior’s swimwear and accessories. Sales of swimwear and accessories accounted for approximately 7%8%, 13%7% and 13% of net sales during fiscal 2007, 2006 2005 and 2004,2005, respectively. The decline in sales from previous years representsslight increase over fiscal 2006 reflects the impactintroduction of the Tropical acquisition,JAG line, as well as our continued focus on reducing overall swimwear levels to improve profitability.improving profitability and distribution of the Jantzen line.

Other ProductsAccessories. We also offer sweaters, vests, jackets, pullovers and leather accessories under our existing brands, as well as private label. The majority of the other productsaccessories we sell are sweaters and leather accessories. Other productsAccessories accounted for approximately 5%3%, 8%3%, and 9%8% of net sales during each of fiscal 2007, 2006 2005 and 2004,2005, respectively.

Licensing Operations

We license the brands we own, and sublicense some of the brands we license, to third parties for various product categories in distribution channels and countries where we do not distribute our brands. Licensing enhances the images of our brands by widening the range, product offerings and distribution of products sold under our brands without requiring us to make capital investments or incur additional operating expenses. As a result of this strategy, we have gained experience in identifying potential licensing opportunities and have established relationships with many licensees. Our licensing operation is also a significant contributor to our operating income.

As of January 31, 2006,2007, we were the licensor in approximately 157139 license agreements, 5645 domestic and 10194 international, for various products including footwear, men’s suits, sportswear, dress shirts and bottoms, underwear, loungewear, outerwear, active wear, neckwear, fragrances, eyewear and accessories. Wholesale sales of licensed products by our licensees were approximately $444 million, $438 million, $456 million, and $434$456 million in fiscal 2007, 2006, 2005, and 2004,2005, respectively. We received royalties from these sales of approximately $22.2 million, $21.9 million, $22.8 million, and $21.7$22.8 million in fiscal 2007, 2006, 2005, and 2004,2005, respectively. We believe that our long-term licensing opportunities will continue to grow domestically and internationally. See our Consolidated Financial Statements and the related notes in this report for further information.

Although the Perry Ellis brand has international recognition, we still perceive the brand to be under-penetrated in international markets such as Europe and Asia. We are actively attempting to obtain licensees for the Perry Ellis brand in international markets. We believe that our brand and licensing experience will enable us to capitalize on these international opportunities and that the Tropical acquisition will assist us in this endeavor. In addition, we believe that the Jantzen brand’s history of over 90 years will allow us to take advantage of many domestic and international licensing opportunities.

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To maintain a brand’s image, we closely monitor our licensees and approve all licensed products. In evaluating a prospective licensee, we consider the candidate’s experience, financial stability, manufacturing performance and marketing ability. We also evaluate the marketability and compatibility of the proposed products with our other products. We regularly monitor product design, development, merchandising and marketing of licensees, and schedule meetings throughout the year with licensees to ensure quality, uniformity and consistency with our products. We also give our licensees a view of our products and fashion collections and our expectations of where its products should be positioned in the marketplace. In addition to approving, in advance, all of our licensees’ products, we also approve their advertising, promotional and packaging materials.

As part of our licensing strategy, we work with our licensees to further enhance the development, image, and sales of their products. We offer licensees marketing support, and our relationships with retailers help the licensees generate higher revenues.

Our license agreements generally extend for a period of three to five years with options to renew prior to expiration for an additional multi-year period based upon a licensee meeting certain performance criteria. The typical agreement requires that the licensee pay us the greater of a royalty based on a percentage of the licensee’s net sales of the licensed products or a guaranteed minimum royalty that typically increases over the term of the agreement. Generally, licensees are required to contribute to us additional monies for advertising and promotion of the licensed products in their covered territory.

Marketing, Distribution and Customers

We market our apparel products to customers principally through the direct efforts of our in-house sales staff, independent commissioned sales representatives who work exclusively for us, and other non-exclusive independent commissioned sales representatives who generally market other product lines as well as ours. We also attend major industry trade shows and “market weeks” in the apparel industry and trade shows in our swimwear, golf, and corporate businesses.

We operate 3235 retail outlet stores through which we sell Perry Ellis products directly to the public. These retail stores are generally located in upscale retail outlet malls. We also operate 35 retail stores through which we sell Original Penguin products and operate 3 stores1 store near one of our corporate warehouse facilities. We recently launched E-commerce web sites for our Perry Ellis and Original Penguin brands.

We believe that customer service is a key factor in successfully marketing our apparel products. We coordinate efforts with customers to develop products meeting their specific needs using our design expertise and computer-aided design technology. Utilizing our sourcing capabilities, we strive to produce and deliver products to our customers on a timely basis.

Our in-house sales staff is responsible for customer follow-up and support, including monitoring prompt order fulfillment and timely delivery. We utilize an Electronic Data Interchange, or EDI systemand the Internet for certain customers in order to provide advance-shipping notices, process orders and conduct billing operations. In addition, certain customers use the EDI system to communicate their weekly inventory requirements per store to us. We then fill these orders either by shipping directly to the individual stores or by sending shipments, individually packaged and bar coded by store, to a centralized customer distribution center.

We use PerrySolutions, our software system that enables our sales planners to manage our retail customers’ inventory at the SKU level. This system helps maximize the sales and margins of our products by increasing inventory turns for the retailer, which in turn reduces our product returns and markdowns and increases our profitability. We also use demographic mapping data software that helps us develop specific micro-market plans for our customers and provide them with enhanced returns on our various product lines.

We have recently invested in the Oracle Retail (formally known as Retek and Profit Logic) suite of products with the purposegoal of reducing markdowns, increasing inventory turns and increasing revenues while automating the process. The different modules will allow us to monitor our customers’ product by store and quickly react to changes in consumer behavior. The suite also includes best of breed store inventory and point of sales software, which will allow us to keep just in time inventory at our retail stores. This investment shows our commitment to understanding our consumer in order to strengthen our brands as well as our effort to support the continued expansion of our direct retail businesses. Additionally we invested in Trade Management Oracle Financials software to quickly and positively resolve customer claims, while tracking employee accountability. These products are expected to be implemented during the last half of fiscal 2007.

We sell merchandise to a broad spectrum of retailers, including national and regional chain, upscale department, mass merchant and specialty stores. Our largest customers include Federated/May, Department Stores, Dillard’s, Wal-Mart, J.C. Penney, Kohl’s, and Sam’s Wholesale Club.Kohl’s. We have developed and maintained long-standing relationships with these customers, including Dillard’s (more than 25 years), Federated/May Department Stores (more than 25 years), J.C. Penney (more than 25 years), Wal-Mart (15(16 years) and Kohl’s (12(13 years). We also sell merchandise to corporate wear distributors.

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Net sales to our five largest customers accounted for approximately 46%50%, 32%46%, and 39%32% of net sales in fiscal 2007, 2006, and 2005, respectively. For fiscal 2007, three customers accounted for over 10% of net sales Kohl’s, Federated/May and 2004,Wal-Mart accounted for approximately 13%, 11% and 11% of net sales, respectively. For fiscal 2006, two customers accounted for over 10% of net sales Federated/May Department Stores and Wal-Mart accounted for approximately 13% and 11% of net sales, respectively. NoFor fiscal 2005, no customer however, representedaccounted for more than 10% of our net sales during fiscal 2005. For fiscal 2004, net sales to Kohl’s accounted for approximately 10% of our net sales.

Advertising and Promotions

We advertise to customers through print advertisements in a variety of consumer and trade magazines and newspapers and through outdoor advertising such as billboards strategically placed to be viewed by consumers. In order to promote our men’s sportswear at the retail level, we participate in cooperative advertising in print and broadcast media, which features our products in our customers’ advertisements. The cost of this cooperative advertising is shared with our customers. We also conduct various in-store marketing activities with our customers, such as retail events and promotions, the costs of which are shared by our customers. These events and promotions are in great part orchestrated to coincide with high volume shopping times such as holidays (Christmas and Thanksgiving) and Father’s Day. In addition to event promotion, we place perennial displays and signs of our products in retail establishments.

We use direct consumer advertising in selected markets featuring the Perry Ellis, Cubavera, the Havanera Co., Jantzen, Savane and Original Penguin brand names through the placement of highly visible billboards, sponsorships and special event advertising. We also maintain informational websites featuring our brands. We create and implement editorial and public relations strategies designed to heighten the visibility of our brands. All of these activities are coordinated around each brand in an integrated marketing approach.

These same strategies, modified for each individual market are used for our international efforts in more than a dozen other countries.

Seasonality and Backlog

Our products have historically been geared towards lighter weight apparel generally worn during the spring and summer months. We believe that this seasonality has been reduced with our introduction of fall, winter and holiday merchandise. The swimwear business, however, is highly seasonal in nature, with the vast majority of our sales occurring in our first and fourth quarter.

We generally receive orders from our retailers approximately five to seven months prior to shipment. For the majority of our sales, we have orders from our retailers before we place orders with our suppliers. A summary of the order and delivery cycle for our four primary selling seasons, excluding swimwear, is illustrated below:

Sales and receivables are recorded when inventory is shipped. Our backlog of orders includes confirmed and unconfirmed orders, which we believe, based on our past experience and industry practice will be confirmed. As of April 1, 2006,2007, the backlog for orders of our products, all of which are expected to be shipped during fiscal 2007,2008, was approximately $343$388 million, as compared to approximately $365$343 million as of April 11, 2005.1, 2006. The amount of unfilled orders at a point in time is affected by a number of factors, including the mix of product, the timing of the receipt and processing of customer orders and the scheduling of the sourcing and shipping of the product, which in most cases depends on the desires of the customer. Our backlog is also affected by an on-going trend among retailers to reduce the lead-time on their orders. In recent years, our customers have been more cautious of their inventory levels and have delayed placing orders and re-orders compared to our previous experience. Due to these factors, and because of the Tropical acquisition, a comparison of unfilled orders from period to period is not necessarily meaningful and may not be indicative of eventual actual shipments.

Supply of Products and Quality Control

We currently use independent contract manufacturers to supply the substantial majority of the products we sell. Of the total dollar value of sourced products in fiscal 2006, 73%2007, 65% was sourced from suppliers in Asia, 22%26% was sourced from suppliers in South and Central America and 5%9% was sourced from suppliers in the Middle East, respectively. We believe that the use of numerous

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independent contract manufacturers allows us to maximize production flexibility, while avoiding significant capital expenditures, work-in-process inventory build-ups and the costs of maintaining and operating production facilities. We have had relationships with some suppliers for as long as 30 years, however, none of these relationships are formal or require either party to purchase or supply any fixed quantity of product.

The vast majority of our products are purchased as “full packages,” where we place an order with the supplier and the supplier purchases all the raw materials, assembles the garments and ships them to our distribution facilities or third party facilities. As of January 31, 2006, we had shifted the vast majority of our Tropical business to a “full package” model. Finished goods are generally shipped to either our distribution facilities or to third-party facilities around the United States for repackaging and distribution to customers.

We maintain a staff of experienced sourcing professionals in five offices in China (including Hong Kong), as well as the United States, South Korea, Taiwan, Vietnam and the Dominican Republic. This staff sources our products worldwide, monitors our suppliers’ purchases of raw material, and monitors production at contract manufacturing facilities in order to ensure quality control and timely delivery. We also operate through independent agents in Asia and the Middle East. Our personnel based in our Miami, Florida office perform similar functions with respect to our suppliers in Central America. We conduct inspections of samples of each product prior to cutting by contractors during the manufacturing process and prior to shipment. We also have full-time quality assurance inspectors in Latin America and the Caribbean and in each of our overseas offices.

Generally, the foreign contractors purchase the raw material in accordance with our specifications. Raw materials, which are in most instances made and/or colored especially for us, consist principally of piece goods and yarn and are specified by us from a number of foreign and domestic textile mills and converters.

We are committed to ethical sourcing standards and require our independent contractors to comply with our code of conduct. We monitor compliance by our foreign contract manufacturers with applicable laws and regulations relating to, for example, the payment of wages, working conditions and the environment. As part of our compliance program, we maintain

compliance departments in the United States and overseas and routinely perform audits of our contract manufacturers and require corrective action when appropriate.

Import and Import Restrictions

Our import operations are subject to constraints imposed by bilateral trade agreements between the United States and a number of foreign countries. These agreements impose quotas on the amount and type of goods that can be imported into the United States from thesesome countries. Most of our imported products are also subject to United States customs duties.

We closely monitor developments in quotas, duties, and tariffs and continually seek to minimize our exposure to these risks through, among other things, geographical diversification of our contract manufacturers, maintaining our overseas offices, allocating overseas production to product categories where more quotas are available, and shifting of production among countries and manufacturers.

Under the terms of the World Trade Organization (“WTO”) Agreement on Textiles and Clothing, WTO members removed all quotas effective January 1, 2005, and the current environment over textile quotas continues to rapidly change. While the danger of quota embargoes has largely subsided since the removal of quotas for most WTO member countries, threats to some apparel categories in China (and most recently, Vietnam) present themselves on occasion through proposed protectionist legislation in the US Congress. These events are closely monitored and our board and executive level memberships in various apparel trade associations ensure early awareness and communication to our sourcing staff.

We believe that our extensive management and sourcing capability, our flexible sourcing model, and our experience and relationships throughout the world enable us to take advantage of the changing textile and apparel environment. Because of our sourcing experience, capabilities and relationships, we believe we are well positioned to take advantage of the changing textile and apparel quota environment.

Competition

The apparel industry is highly competitive and fragmented. Our competitors include numerous apparel designers, manufacturers, importers, licensors, and our own customers’ private label programs, many of which are larger and have greater financial and marketing resources than we have available to us. We believe that the principal competitive factors in the industry are: (1) brand name and brand identity, (2) timeliness, reliability and quality of services provided, (3) market share and visibility, (4) price, and (5) the ability to anticipate customer and consumer demands and maintain appeal of products to customers.

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We strive to focus on these points and have proven our ability to anticipate and respond quickly to customer demands with our brands, range of products and our ability to operate within the industry’s production and delivery constraints. We believe that our continued dedication to customer service, product assortment and quality control, as well as our aggressive pursuit of licensing and acquisition opportunities, directly addresses the competitive factors in all market segments. Our established brands and relationships with retailers have resulted in a loyal following of customers.

We understand that the level of competition and the nature of our competitors vary by product segment. In particular, in the mass market channel, manufacturers constitute our main competitors in this less expensive segment of the market, while high profile domestic and foreign designers and licensors account for our main competitors in the more upscale segment of the market. Although we have been able to compete successfully to date, there can be no assurance that significant new competitors will not develop in the future.

Trademarks

Our material trademarks are registered with the United States Patent and Trademark Office and in other countries. We regard our trademarks and other proprietary rights as valuable assets that are critical in the marketing of our products, and, therefore, we vigorously protect our trademarks against infringements.

Employees

As of March 23, 2006,20, 2007, we had approximately 1,9581,930 employees worldwide compared to approximately 2,0151,950 employees as of April 6, 2005.March 23, 2006. Some of our employees at our Winnsboro, South Carolina distribution facility are subject to a collective bargaining agreement, which expires in August 2008. None of our other employees are subject to collective bargaining agreements. We consider our employee relations to be satisfactory.

Our business faces certain risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of or that we currently think are immaterial may also impair our business. If any of the events or circumstances described as risks below or elsewhere in this report actually occurs, our business, results of operations or financial condition could be materially and adversely affected.

We rely on a few key customers, and a significant decrease in business from or the loss of any one key customer or key program would substantially reduce our revenues and harm our business.

We derive a significant amount of our revenues from a few major customers. For example, net sales to our five largest customers totaled approximately 46%50%, 32%46%, and 39%32% of net sales during fiscal 2007, fiscal 2006, and fiscal 2005, respectively. For fiscal 2007, three customers accounted for over 10% of net sales Kohl’s, Federated/May and fiscal 2004,Wal-Mart accounted for 13%, 11% and 11% of net sales respectively. For fiscal 2006, two customers accounted for over 10% of net sales, Federated/May Department Stores and Wal-Mart accounted for approximately 13% and 11% of net sales, respectively. During fiscal 2005, no customer accounted for more then 10% of our net sales. Kohl’s represented 10% of our net sales during fiscal 2004. A significant decrease in business from or loss of any of our major customers could harm our financial condition by causing a significant decline in revenues attributable to such customers.

Although we have long-standing relationships with many of our customers, we do not have long-term contracts with any of them and purchases generally occur on an order-by-order basis. We believe that purchasing decisions are generally made independently by individual department stores within a company-controlled group. There has been a trend, however, toward more centralized purchasing decisions. As such decisions become more centralized, the risk to us of such concentration increases. Furthermore, our customers could curtail or cease their business with us because of changes in their strategic and operational initiatives, such as an increased focus on private label, consolidation with another retailer, changes in our customer’s buying patterns, financial instability and other reasons. If our customers curtail or cease business with us, our revenues could significantly decrease and our financial condition could be significantly harmed.

We may not be able to anticipate consumer preferences and fashion trends, which could negatively affect acceptance of our products by retailers and consumers and result in a significant decrease in net sales.

Our failure to anticipate, identify and respond effectively to changing consumer demands and fashion trends could adversely affect acceptance of our products by retailers and consumers and may result in a significant decrease in net sales or leave us with a substantial amount of unsold inventory. We believe that our success depends on our ability to anticipate, identify and respond to changing fashion trends in a timely manner. Our products must appeal to a broad range of consumers whose preferences cannot be

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predicted with certainty and are subject to rapid change. We may not be able to continue to develop appealing styles or successfully meet constantly changing consumer demands in the future. In addition, any new products or brands that we introduce may not be successfully received by retailers and consumers. Due to the fact that we began marketing women’s apparel with the acquisition of the Jantzen swimwear business in fiscal 2003, we may be more subject to additional changes in fashion trends as women’s fashion trends have historically changed more rapidly than men’s. If our products are not successfully received by retailers and consumers and we are left with a substantial amount of unsold inventory, we may be forced to rely on markdowns or promotional sales to dispose of excess, slow-moving inventory. If this occurs, our business, financial condition, results of operations and prospects may be harmed.

We are dependent upon the revenues generated by our licensing alliances and the loss or inability to renew certain licenses could reduce our royalty income and consequently reduce our net income.

AAlthough a relatively small portion of our net income is derived from licensing income received from our licensing partners. Thepartners, the interruption of the business of several of our licensing partners or the lose of several licenses at any one time could adversely affect our royalty income and net income. Licensing income accounted for $21.9$22.2 million or 2.6%2.7 % of total revenues for fiscal 2006.2007.

We currently license the Dockers, PING, Nike, JAG, Champions Tour and PGA TourTOUR brands from third parties. These licenses vary in length of term, renewal conditions and royalty obligations. The average term of these licenses is three to five years with automatic renewals depending upon whether we achieve certain targeted sales goals. We may not be able to renew or extend any of these licenses on favorable terms, if at all. If we are unable to renew or extend any of these licenses, we could experience a decrease in net sales.

Our business could be harmed if we do not deliver quality products in a timely manner.

Our sourcing, logistics and technology functions operate within substantial production and delivery requirements and subjects us to the risks associated with unaffiliated manufacturers, transportation and other risks. If we do not comply with customer product requirements or meet their delivery requirements, our customers could reduce our selling prices, require significant margin support, reduce the amount of business they do with us, or cease to do business with us, all of which would harm our business.

Because we do business abroad, our business could be harmed if changes, in political or economic stability, laws, exchange rates, or foreign trade policies should occur.

Our relationship with our foreign suppliers subjects us to the risks of doing business abroad. As a result of our suppliers, in some instances, being at great geographic distances from us, our transportation costs are increased and longer lead times are required, which reduces our flexibility. Our finished goods are also subject to import duties, quotas and other restrictions. Other risks in doing business with foreign suppliers include political or economic instability, any significant fluctuations in the value of the dollar against foreign currencies, terrorist activities, and restrictions on the transfer of funds. Although we have not been affected in a material way by any of the foregoing factors, we cannot predict the likelihood or frequency of any such events occurring and any material disruption may have an adverse affect on our business.

We may face challenges integrating the operations of any businesses we may acquire, which may negatively impact our business.

As part of our strategy of making selective acquisitions, we acquire new brands and product categories. Acquisitions have inherent risks, including the risk that the projected sales and net income from the acquisition may not be generated, the risk that the integration is more costly and takes longer than anticipated, risks of retaining key personnel, and risks associated with unanticipated events and unknown legal liabilities. Any of these and other risks may harm our business.

With respect to previous acquisitions, we faced many challenges in consolidating functions and integrating management procedures, personnel and operations in an efficient and effective manner, which if not managed as projected, could have negatively impacted our business. Some of these challenges included increased demands on management related to the significant increase in the size and diversity of our business after the acquisition, the dedication of management’s attention to implement our strategies for the business, the retention and integration of key employees, determining aspects of the acquired business that were to be kept separate and distinct from our other businesses, and difficulties in assimilating corporate culture and practices into ours. We expect that we will face similar challenges if we make significant acquisitions in the future.

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We have a significant amount of debt, which could have important negative consequences to us, including making it difficult for us to satisfy all of our obligations in the event we experience financial difficulties.

We have a significant amount of debt. As of January 2006,2007, we had $259$237 million of debt outstanding (excluding amounts outstanding under our letter of credit facilities).

Our substantial indebtedness could have important consequences, including:

Our ability to pay interest on our indebtedness and to satisfy our other debt obligations will depend upon, among other things, our future operating performance and cash flow and our ability to refinance indebtedness when necessary. Each of

these factors is, to a large extent, dependent on general economic, financial, competitive, legislative, regulatory and other factors beyond our control. If, in the future, we cannot generate sufficient cash from operations to make scheduled payments on our indebtedness or to meet our liquidity needs or other obligations, we will need to refinance our existing debt, obtain additional financing or sell assets. We cannot assure that we will be able to renegotiate or refinance any of our debt on commercially reasonable terms or at all. In addition, our interest expense may increase if general economic conditions result in an increasing interest rate environment because most of our debt is based on variable as opposed to fixed rates. We cannot assure that our business will generate cash flow, or that we will be able to obtain funding sufficient to satisfy our debt service requirements.

We operate in a highly competitive and fragmented industry and our failure to successfully compete could result in a loss of one or more significant customers.

The apparel industry is highly competitive and fragmented. Our competitors include numerous apparel designers, manufacturers, importers and licensors, many of which have greater financial and marketing resources than us. We believe that the principal competitive factors in the apparel industry are:

The level of competition and the nature of our competitors varies by product segment with low-margin, mass-market manufacturers being our main competitors in the less expensive segment of the market and U.S. and foreign designers and licensors competing with us in the more upscale segment of the market. If we do not maintain our brand names and identities and continue to provide high quality and reliable services on a timely basis at competitive prices, we may not be able to continue to compete in our industry. If we are unable to compete successfully, we could lose one or more of our significant customers, which, if not replaced, could negatively impact our sales and financial performance.

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We depend on certain key personnel the loss of which could negatively impact our ability to manage our business.

Our future success depends to a significant extent on retaining the services of certain executive officers and directors, in particular George Feldenkreis, our chairman of the board and chief executive officer, and Oscar Feldenkreis, our president and chief operating officer. They are each party to an employment agreement which expires in 2010. The loss of the services of either George Feldenkreis or Oscar Feldenkreis, or any other key member of management, could have a material adverse effect on our ability to manage our business. Our continued success is dependent upon our ability to attract and retain qualified management, administrative and sales personnel to support our future growth. Our inability to do so may have a significant negative impact on our ability to manage our business.

None.

We own our principal executive and administrative office, warehouse and distribution facility, which is located in a 230,000 square foot facility in Miami, Florida. This facility is encumbered by an $11.4$11.2 million mortgage.mortgage, due August 1, 2009. For purposes of potential future expansion, we own approximately three acres of land adjacent to this facility.

We lease threetwo facilities from our chairman and chief executive officer, in Miami, totaling approximately 103,00066,000 square feet, which house warehouse distribution and administrative office functions. Two of theseThese facilities have ten year leases expiring in 2014 and one of these facilities is leased on a month-to-month basis.2014.

We own a 345,000 square foot distribution center in Seneca, South Carolina, a 380,000 square foot distribution facility in Winnsboro, South Carolina, and a 305,000 square foot distribution facility in Tampa, Florida. The facility in Tampa, Florida is encumbered by a $14.9 million mortgage due June 7, 2016.

We own three administrative office units totaling 12,000 square feet in a building in Beijing, China. These facilities are encumbered by $1.2$1.1 million in mortgages.mortgages due October 12, 2015.

We lease several locations in New York City, totaling approximately 157,000 square feet, with leases expiring from December 2007 to May 2014. These locations are used for office, design, and showroom space.

We lease 35,94719,000 square feet for office space used by our swimwear business in Portland, Oregon, pursuant to a lease, which expires in December 2009.

We lease 10,700 square feet for office space used by our action sportsbrand business in Irving, California, pursuant to a lease, which expires in August 2008.

We lease 5,540 square feet of office space used by our outerwear business in Seattle, Washington, pursuant to a lease which expires 2011.

We lease 10,000 square feet of office space used by our California lifestyle sportswear brands in Los Angeles, California, pursuant to a lease which expires 2010.

We also lease 3640 retail stores, comprising approximately 96,000105,000 square feet of selling space.

In January 2007, Victory International (USA) LLC (“Victory”) filed a lawsuit against us and other named defendants in the United States District Court for the District of New Jersey, alleging fraud, interference with contract and other violations, in connection with our rejection of consent to the request by Parlux Fragrances, Inc. (“Parlux”) to assign the Perry Ellis fragrance license to Victory. In March 2007, Victory filed an amended complaint adding additional defendants, and adding allegations of price fixing and racketeering by defendants. Victory is subjectseeking $250 million in damages. We believe we have defenses to all claims raised in this lawsuit and suits against it,are vigorously defending the lawsuit. In addition, we believe that this claim is without merit and isthat under the initiatorterms of claimsour purchase agreement with Parlux we have indemnification rights.

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Accordingly, pursuant to the Agreement dated December 6, 2006, between Parlux and suits against othersus for the purchase of the fragrance assets and termination of the Perry Ellis fragrance license, we have notified Parlux that we are seeking indemnification and reimbursement for all costs and expenses relating to the Victory lawsuit. In February 2007, Parlux filed a complaint in the ordinaryCircuit Court of the 11^th Judicial Circuit in and for Miami-Dade County, Florida against us seeking declaratory relief that Parlux does not have an obligation to indemnify us for the costs and expenses relating to the Victory litigation, and we filed our answer. In March 2007, Parlux filed a motion for speedy disposition, which is pending. We believe that this claim is without merit and we are vigorously defending the claim.

We are also a party to other pending legal proceedings arising in the normal course of business, including claims arising from the use of its trademarks. Perry Ellis doesWe do not believe that the resolution of any pending claims will have a material adverse effect on itsour business, financial condition or results of operations.

Not Applicable.

PART II

Our common stock has beenis currently listed for trading on the NASDAQ Global Select Market under the symbol “PERY” and was previously listed for trading on the Nasdaq Global Market (formerly the Nasdaq National MarketMarket) under the symbol “PERY” since June 1999. Prior to that date, our trading symbol was “SUPI” based upon our former name, Supreme International Corporation. The following table sets forth, for the periods indicated, the range of high and low per share bids of our common stock as reported by the Nasdaq National Market. Such quotations represent inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Fiscal 2006 and 2007 share prices have been restated to give effect to the 3 for 2 stock split in December 2006.

As of April 12, 2006,10, 2007, there were approximately 130132 shareholders of record of our common stock. We believe the number of beneficial owners of our common stock is in excess of 1,100.

We have not paid any cash dividends since our inception and do not contemplate doing so in the near future. Payment of cash dividends is prohibited under our senior credit facility and indentures governing our senior secured notes and senior subordinated notes. See Notes 15 through 1819 to the consolidated financial statements of Perry Ellis included in Item 8 of this

Report. Any future decision regarding payment of cash dividends will depend on our earnings and financial position and such other factors, as our board of directors deems relevant.

The section under the heading “Executive Compensation” entitled “Equity

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Equity Compensation Plan Information for Fiscal 2006” in2007

The following table summarizes as of January 31, 2007 the Company’s Proxy Statementshares of our common stock subject to outstanding awards or available for the 2006 annual meeting of shareholders is incorporated herein by reference.future awards under our equity compensation plans.

For additional information concerning the Company’s capitalization please see Note 24, “Stock Options and Warrants” of the Notes to the Consolidated Financial Statements included in Item 8.

The following graph compares the cumulative total shareholder return on our common stock with the cumulative total shareholder return on the Nasdaq Composite and The S&P Apparel, Accessories & Luxury Goods Index commencing on February 1, 2002 and ending January 31, 2007. The graph presented in our 2006 proxy statement compared the cumulative total shareholder return on our common stock with the cumulative total return on the Nasdaq Stock Market – U. S. Index. We have changed the index to the Nasdaq Composite Index because the Nasdaq Stock Market – U. S. index was eliminated in July 2006. As a result of the elimination of the Nasdaq Stock Market – U. S. Index, we cannot provide a comparison of the newly selected index to the previously used index The graph assumes that $100 was invested on February 1, 2002 in our common stock or in the Nasdaq Composite Index and The S&P Apparel, Accessories & Luxury Goods Index, and that all dividends are reinvested. Past performance is not necessarily indicative of future performance.

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Between August 1, 2005February 2006 and November 28, 2005,April 2006, we issuedgranted stock options to three employees to purchase an aggregate of 15,50023,400 shares of restrictedour common stock which vest over a four-year period. The totalat exercise prices ranging between $13.77 and $15.09 per share. These options were all granted at the fair market value of the restricted sharesour common stock on the date of grant, vest over a period of between four and five years and expire 10 years after the grant was approximately $338,000. Exemptiondate of issuance. The grants of these options were made in private transactions, without registration, pursuant to the exemption from registration underprovided by Section (4)(2) of the Securities Act was basedof 1933, as amended.

During the last quarter of fiscal 2007, we did not purchase any shares of our common stock, no one made any such purchases on our behalf, and none of our affiliates purchased any shares of our common stock except upon the grounds that the issuanceexercise of securities did not involve a public offering within the meaning of Section 4(2) of the Securities Act.outstanding stock options.

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Summary Historical Financial Information

(Amounts in thousands, except for per share data)

The following selected financial data is qualified by reference to, and should be read in conjunction with, the Consolidated Financial Statements of Perry Ellis and related Notes thereto included in Item 8 of this Reportreport and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Shares and per share data have been restated to give effect to the 3 for 2 stock split in December 2006.

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under accounting principles generally accepted accounting principlesin the United States of America, and does not represent cash flow from operations. Accordingly, do not regard this figure as an alternative to cash flowsEBITDA is presented solely as a supplemental disclosure because we believe that it is a common measure of liquidity. We believe that EBITDA provides some indication of Perry Ellis’ ability to satisfy its debt obligations but is not necessarily comparable with similarly titled measures for other companies. See “Statement of Cash Flows”operating performance in our consolidated financial statements.the apparel industry. The following provides a reconciliation of net income to EBITDA:

Overview

We began operations in 1967 as Supreme International Corporation and initially focused our efforts on marketing guayabera shirts, and other men’s apparel products targeted at the Hispanic market in Florida and Puerto Rico. Over time we expanded our product line to offer a variety of men’s sport shirts. In 1988, we developed the Natural Issue brand and completed our initial public offering in 1993. In 1996, we began an expansion strategy through the acquisition of brands including the Munsingwear family of brands in 1996, the John Henry and Manhattan brands from Perry Ellis Menswear in 1999 and the Perry Ellis brand in 1999. Following the Perry Ellis acquisition, we changed our name from Supreme International Corporation to Perry Ellis International, Inc. to better reflect the name recognition that the brand provided. In 2002, we acquired the Jantzen brand and in June 2003 we acquired Perry Ellis Menswear, our largest licensee, giving us greater control of the Perry Ellis brand, as well as adding other brands owned by Perry Ellis Menswear. In February 2005, we completed the Tropical acquisition, making us one of the largest supplier’s of bottoms in the United States. In January 2006, we completed the acquisition of primarily all of the worldwide intellectual property of the leading California lifestyle company Gotcha International, including the Gotcha, Girl Star and MCD logo trademarks and the intellectual property license agreements.

We are one of the leading apparel companies in the United States. We control a portfolio of major men’s and women’s brands, some of which were established over 100 years ago. We design, source, market and license our products nationally and internationally at multiple price points and across all major levels of retail distribution throughin up to 15,000 doors. Our portfolio of highly recognized brands includes the Perry Ellis and Perry Ellis Portfolio,family of brands, which we believe together generate over $1 billion in annual retail sales, Axis, Tricots St. Raphael, Jantzen, John Henry, Cubavera, the Havanera Co., Natural Issue, Munsingwear, Grand Slam, Original Penguin, Mondo Didi Marco, Redsand, Pro Player, Manhattan, Axist, Savane, Farah, Gotcha, Girl Star and MCD. We also (i) license the Nike brand for swimwear and swimwear accessories, (ii) license the JAG, across multiple distribution channels and look for further expansion in this area. brand for men’s and women’s swimwear and cover-ups, (iii) are the worldwide master licensee for PING golf apparel, and (iii)(iv) license the PGA TOUR, including Champions Tour brand for golf apparel.apparel, and (v) are the Dockers licensee for outerwear.

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We distribute our products primarily to wholesale customers that represent all major levels of retail distribution including department stores, national and regional chain stores, mass merchants, specialty stores, sporting goods stores, green grass golf shops, the corporate incentivewear market, as well as clubs and independent retailers in the United States, Canada, and the United Kingdom.Kingdom and Europe. Our largest customers include Federated/May, Department Stores, Inc., Dillard’s, Inc., Wal-Mart, Stores, Inc., J.C. Penney, Company, Kohl’s Corporation, and Sam’s Wholesale Club.Kohl’s. As of AprilMarch 1, 2006,2007, we also operated 3235 Perry Ellis retail outlet stores located primarily in upscale retail outlet malls across the United States as well as 35 Original Penguin retail stores located in upscale demographic markets. In addition, we leverage our design, sourcing and logistics expertise by offering a limited number of private label programs to retailers. In order to maximize the worldwide exposure of our brands and generate high margin royalty income, we license our brands through approximately 5645 domestic and approximately 10194 international license agreements.

Our wholesale business, which is comprised of men’s sportswear and women’s and men’ssportswear, swimwear and swimwear accessories, accounted for 97% of our total revenues in fiscal 2006,2007, and our licensing business accounted for approximately 3% of our total revenues in fiscal 2006.2007. We have traditionally focused on the men’s sportswear market, which represented approximately 93%92% of our total wholesale revenues in fiscal 2006,2007, while our women’s and men’s swimwear market represented approximately 7%8% of our total wholesale revenues in fiscal 2006.2007.

Our licensing business is a significant contributor to our operating income. We license the brands we own to third parties for the manufacturing and marketing of various products in distribution channels and countries in which we do not distribute those brands, including men’s and women’s apparel and footwear, men’s suits, underwear, loungewear, outerwear, fragrances, eyewear and accessories. These licensing arrangements raise the overall awareness of our brands without requiring us to make capital investments or incur additional operating expenses.

On February 26, 2005, we acquired certain domestic operating assets of Tropical Sportswear Int’l Corporation and its subsidiaries and Tropical’s United Kingdom subsidiary. Tropical was a leading designer, marketer and distributor of men’s branded and private label bottoms to all channels of distribution. With the Tropical acquisition, we have become one of the largest suppliers of men’s bottoms in the United States, added significant revenues, further strengthened and balanced our product mix, and added to our portfolio of brands. The Tropical acquisition also provided us with a state-of-the-art distribution facility in Tampa, Florida and a strong platform to expand our existing brands into Europe as a result of the acquired U.K. subsidiary.

We employ a three-dimensional strategy in the design, sourcing, marketing and licensing of our products that focuses on diversity of brands, products and distribution channels. Through this strategy, we provide our products to a broad range of customers, which reduces our reliance on any single distribution channel, customer, or demographic group and minimizes competition among our brands.

Our products have historically been geared towards lighter weight apparel generally worn during the spring and summer months. We believe that this seasonality has been reduced with our introduction of fall, winter, and holiday merchandise. Our swimwear business, however, is highly seasonal in nature, with the significant majority of its sales occurring in our first and fourth quarters. Our higher-priced products generally tend to be less sensitive to either economic or weather conditions. Seasonality can be affected by a variety of factors, including the mix of advance and fill-in orders, the amount of sales to different distribution channels, and overall product mix among traditional merchandise, fashion merchandise and swimwear. We expect that revenues for our second quarter will typically be lower than our other quarters due to the impact of seasonal sales.

We believe that our future growth will come as a result of organic growth from our continued emphasis on our existing brands; new and expanded product lines; domestic and international licensing opportunities; international, direct retail and E-commerce opportunities and selective acquisitions and opportunities that fit strategically with our business model. Our future results may be impacted by risks and trends set forth in “Item 1A. Risk Factors” and elsewhere in this report.

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Recent Accounting Pronouncements

See Notes to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” for recent accounting pronouncements.

Critical Accounting Policies

Included in the footnotes to the consolidated financial statements in this report is a summary of all significant accounting policies used in the preparation of our consolidated financial statements. We follow the accounting methods and practices as required by accounting principles generally accepted in the United States of America (“GAAP”). In particular, our critical accounting policies and areas we use judgment are in the areas of revenue recognition, the estimated collectability of accounts receivable, the recoverability of obsolete or overstocked inventory, the impairment of long-lived assets that are our trademarks, the recoverability of deferred tax assets, and the measurement of retirement related benefits.benefits and stock-based compensation.

Revenue Recognition. Sales are recognized at the time legal title to the product passes to the customer, generally FOB Perry Ellis’ distribution facilities, net of trade allowances and a provision for estimated returns and other allowances. Royalty income is recognized when earned on the basis of the terms specified in the underlying contractual agreements. We believe that our revenue recognition policies conform to Staff Accounting Bulletin No. 101,Topic 13:Revenue Recognition in Financial Statements.

Accounts Receivable. We maintain an allowance for doubtful accounts receivables and an allowance for estimated trade discounts, co-op advertising, allowances provided to retail customers to flow goods through the retail channel, and losses resulting from the inability of our retail customers to make required payments considering historical and anticipated trends. Management reviewsreview theses allowances and considers the aging of account balances, historical bad debt experience, changes in customer creditworthiness, current economic trends, customer payment activity and other relevant factors. Should any of these factors change, the estimates made by management may also change, which could affect the level of future provisions.

Inventories. Our inventories are valued at the lower of cost or market value. Estimates and judgment are required in determining what items to stock and at what levels, and what items to discontinue and how to value them. We evaluate all of our inventory style-size-color stock keeping units, or SKUs, to determine excess or slow-moving SKUs based on orders on hand and projections of future demand and market conditions. For those units in inventory that are so identified, we estimate their market value or net sales value based on current realization trends. If the projected net sales value is less than cost, on an individual SKU basis, we write down inventory to reflect the lower value. This methodology recognizes projected inventory losses at the time such losses are evident rather than at the time goods are actually sold.

Intangible Assets. We have, at the present time, only one class of indefinite lived assets, trademarks. We review our intangible assets with indefinite useful lives for possible impairments on an annual basis in accordance with SFASStatement of Financial Accounting Standards (“SFAS”) No. 142 and perform impairment testing as of February 1^st of each year by among other things, obtaining independent third party valuations. We evaluate the “fair value” of our identifiable intangible assets for purposes of recognition and measurement of impairment losses. Evaluating indefinite useful life assets for impairment involves certain judgments and estimates, including the interpretation of current economic indicators and market valuations, and our strategic plans with regard to our operations, historical and anticipated performance of our operations and other factors. If we incorrectly anticipate these trends or unexpected events occur, our results of operations could be materially affected.

Deferred Taxes.Taxes. We account for income taxes under the liability method. Deferred tax assets and liabilities are recognized based on the differences between financial statement and tax basis of assets and liabilities using presently enacted tax rates. A valuation allowance is recorded, if required, to reduce deferred tax assets to that portion which is expected to more likely than not be realized.

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The ultimate realization of the deferred tax asset is dependent upon the generation of future taxable income during the periods prior to the expiration of the related net operating losses. If our estimates and assumptions about future taxable income are not appropriate, the value of our deferred tax asset may not be recoverable, and may result in an increase to our valuation allowance that will impact current earnings.

In addition to judgments associated with valuation accounts, our current tax provision can be affected by our mix of income and identification or resolution of uncertain tax positions. Because income from domestic and international sources may be taxed at different rates, the shift in mix during a year or over years can cause the effective tax rate to change. We base our rate during the year on our best estimate of an annual effective rate, and update those estimates quarterly.

Retirement-Related Benefits. The pension obligations related to our defined benefit pension plans are developed from actuarial valuations. Inherent in these valuations are key assumptions, including the discount rate, expected return of plan assets, future compensation increases, and other factors, which are updated on an annual basis. Management is required to consider current market conditions, including changes in interest rates, in making these assumptions. Actual results that differ from the assumptions are accumulated and amortized over

future periods, and therefore, generally affect the recognized pension expense or benefit and our pension obligation in future periods. The fair value of plan assets is based on the performance of the financial markets, particularly the equity markets. Therefore, the market value of the plan assets can change dramatically in a relatively short period of time. Additionally, the measurement of the plan’s benefit obligation is highly sensitive to changes in interest rates. As a result, if the equity market declines and/or interest rates decrease, the plan’s estimated accumulated benefit obligation could exceed the fair value of the plan assets and therefore, we would be required to establish an additional minimum liability, which would result in a reduction in shareholder’s equity for the amount of the shortfall. For fiscal 2007, 2006 2005 and 2004,2005, we did not record an additional minimum pension liability calculatedliability.

Stock-Based Compensation.Our stock-based award programs are intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. As of January 31, 2007, we had three stock-based compensation plans.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), “Share-Based Payment,” which amended SFAS No. 123. SFAS No. 123(R) requires that share-based awards granted to employees be fair valued on the date of grant and the related expense recognized over the requisite service period, which is generally the vesting period of the award. We adopted SFAS No. 123(R) on February 1, 2006, the first day of fiscal 2007. Prior to fiscal 2006, we accounted for stock-based compensation under Accounting Principles Board (“APB”) Opinion No. 25 which required recognition of compensation expense using the provisionsintrinsic value method, whereby compensation expense was determined as the excess of the market value of the underlying stock over the exercise price of the option at the date of grant. Consequently, no stock-based compensation expense for stock option grants was reflected in net income as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant.

Beginning February 1, 2007, we have applied the modified prospective application of SFAS No. 87.123(R) to all our stock-based awards. In accordance with SFAS No. 123(R), compensation cost must be recognized over the requisite service period if it is probable that the performance condition will be satisfied. We use our best judgment to determine whether it is probable the performance conditions will be satisfied at each reporting period and record compensation costs accordingly; however, the recognition or non-recognition of such compensation cost remains subject to uncertainty. If the performance conditions are not met for performance vesting restricted stock, no compensation costs will be recognized for those shares and any compensation cost recognized previously for those shares will be reversed.

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The fair value of these options is estimated at the date of grant using the Black-Scholes Option Pricing Model. This model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including: expected volatility based on the historical price of the our common stock over the expected life of the option; the risk free rate of return based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option; the expected life based on the period of time the options are expected to be outstanding using historical data to estimate option exercise and employee termination; and dividend yield based on our history and expectation of dividend payments. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

Our Results of Operations for Fiscal 20062007

The following table sets forth, for the periods indicated, selected items in our consolidated statements of income expressed as a percentage of total revenues:

The following is a discussion of our results of operations for the fiscal year ended January 31, 2007 (“fiscal 2007”) as compared with the fiscal year ended January 31, 2006 (“fiscal 2006”) asand fiscal 2006 compared with the fiscal year ended January 31, 2005 (“fiscal 2005”).

Our Fiscal 2007 Results as compared to our Fiscal 2006 Results

Net sales. Net sales in fiscal 2007 were $807.6 million, a decrease of $19.9 million, or 2.4%, from $827.5 million in fiscal 2006. This decline is mainly due to approximately $55 million from the impact of retail consolidation and the elimination of certain private label sportswear programs during the first half of the year, offset by net sales increases across a number of our business units, including bottoms, Perry Ellis accessories, swimwear and action sports, direct retail and international.

Accessories

Royalty income. Royalty income in fiscal 2005 compared2007 was $22.2 million, an increase of $0.3 million, or 1.4%, from $21.9 million in fiscal 2006. The increase was due primarily to our addition of the Gotcha trademarks, as well as an increase in royalty income from the Farah and Savane licenses, offset by lower fragrance royalties. Royalty income is derived from agreements entered into by us with our licensees, which average three to five years in length. The vast majority of our license agreements require licensees to pay us a royalty based on net sales and require licensees to pay a guaranteed minimum royalty. Approximately 75% of our royalty income was attributable to guaranteed minimum royalties with the balance attributable to royalty income in excess of the guaranteed minimums for fiscal year ended2007.

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Gross profit. Gross profit was $275.8 million in fiscal 2007, an increase of $13.3 million, or 5.0%, from $262.5 million in fiscal 2006. Despite lower sales during fiscal 2007, as compared to fiscal 2006, gross profit increased because of improved wholesale margins as discussed below. As a percentage of total revenue, gross profit margins were 33.2% in fiscal 2007 compared to 30.9% in fiscal 2006, an increase of 230 basis points.The improvement in the gross profit percentage was a result of improved wholesale margins, particularly Perry Ellis, swimwear, international, and direct to consumer retail.

Wholesale gross profit margins (which exclude the impact of royalty income) were 31.4% in fiscal 2007, compared to 29.1% in fiscal 2006. As described above, the increase came as a result of improved gross profit margin across several businesses, and strong retail sell-through performance which lowered our end of season clearance/markdown support and decreased off-price sales, as a result of better inventory planning and improved sourcing costs.

Selling, general and administrative expenses. Selling, general and administrative expenses in fiscal 2007 were $204.9 million, an increase of $9.7 million, or 5.0%, from $195.2 million in fiscal 2006. As a percentage of total revenues, selling, general and administrative expenses increased to 24.7% in fiscal 2007 as compared to 23.0% in fiscal 2006. The increase in selling, general and administrative expenses, on a percentage basis, is attributed to startup costs related to our expansion in direct to consumer retail, our wholesale expansion of Original Penguin in Europe and initial costs associated with the establishment of our Seattle based outerwear and JAG swimwear operations, offset by efficiencies in distribution and planned reductions in other selling, general and administrative expenses. Selling, general and administrative expenses also include approximately $0.8 million, or $0.05 per fully diluted share, related to stock option compensation expense as a result of the adoption of SFAS No. 123(R) and the introduction in our Long-Term Incentive Compensation plan of restricted share awards.

Depreciation and amortization. Depreciation and amortization in fiscal 2007 was $11.6 million, an increase of $2.0 million, or 20.8%, from $9.6 million in fiscal 2006. The increase is primarily due to an increase in property and equipment purchased during the second half of fiscal 2006 and the first half of fiscal 2007. As of January 31, 2004 (“2007, we owned approximately $72.0 million of property, plant and equipment as compared to approximately $66.6 million as of January 31, 2006.

Cost on early extinguishment of debt.We incurred debt extinguishment costs of approximately $3.0 million during the first quarter of fiscal 2004”)2007, including call premium costs, write-off of bond issuance costs and costs associated with the termination of derivatives related to the redemption of our 9 ¹/2% senior secured notes on March 15, 2006.

Interest expense. Interest expense in fiscal 2007 was $21.1 million, a decrease of $.8 million, or 3.7%, from $21.9 million in fiscal 2006. The overall decrease in interest expense is primarily attributable to the decrease in our average borrowings under our senior credit facility, a shift of borrowings from the credit facility to a new lower interest rate mortgage, and the elimination of the senior secured notes payable during the first quarter of Fiscal 2007. The overall decrease was offset by increased interest expense primarily attributable to the impact of the elimination of the interest rate swaps on our senior subordinated notes and the increase in prime and LIBOR rates during fiscal 2007 as compared to fiscal 2006. We ended fiscal 2007 with $61.3 million in borrowings on our senior credit facility compared to a balance of $40.4 million for fiscal 2006.

Income taxes. The income tax provision for fiscal 2007 was $12.3 million, a $0.3 million decrease as compared to $12.6 million for fiscal 2006. For fiscal 2007, our effective tax rate was 34.9% as compared to 35.3% in fiscal 2006. The primary decrease in the effective rate was due to higher international operations which experience a lower tax rate.

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Net income. Net income in fiscal 2007 was $22.4 million, a decrease of $.3 million, or 1.3%, from $22.7 million in fiscal 2006 as a result of the above-mentioned factors.

Our Fiscal 2006 Results as compared to our Fiscal 2005 Results

Net sales. Net sales in fiscal 2006 were $827.5 million, an increase of $193.7 million, or 30.6%, from $633.8 million in fiscal 2005. The men’s wholesale business grew by 34.7% or approximately $220.0 million, consisting of organic growth of 2.6%, or approximately $17 million, and 32.1%, or approximately $203.0 million attributed to the Tropical acquisition. This growth was partially offset by the planned reduction in our swimwear business of approximately $27 million.

Royalty income. Royalty income in fiscal 2006 was $21.9 million, a decrease of $0.9 million, or 3.9%, from $22.8 million in fiscal 2005. The decrease in royalty income was principally due to the termination of our Perry Ellis active and women’s wear licenses, partially offset by the addition of new licensing agreements, as well as increased royalty income from existing licenses such as Original Penguin, Pro Player, Farah and Savane. Royalty income is derived from agreements entered into by us with our licensees, which average three years in length. The vast majority of our license agreements require licensees to pay us a royalty based on net sales and require licensees to pay a guaranteed minimum royalty. Approximately 71% of our royalty income was

attributable to guaranteed minimum royalties with the balance attributable to royalty income in excess of the guaranteed minimums for fiscal 2006.

Gross profit. Gross profit was $262.5 million in fiscal 2006, an increase of $54.4 million, or 26.1%, from $208.1 million in fiscal 2005. The increase in gross profit was primarily attributed to the increase in the gross profit of the men’s wholesale business in the amount of approximately $56.8 million, offset by a decline in the gross profit dollars in our swimwear business due to lower sales levels and royalty income. As a percentage of total revenue, gross profit margins were 30.9% in fiscal 2006 compared to 31.7% in fiscal 2005. The decline in gross profit margins as a percentage of total revenues is due to a decline in royalty income as a percentage of our total revenues (due to the Tropical acquisition). Wholesale gross profit margins (which exclude the impact of royalty income) were essentially flat at 29.1% in fiscal 2006, compared to 29.2% in fiscal 2005.

Selling, general and administrative expenses. Selling, general and administrative expenses in fiscal 2006 were $195.2 million, an increase of $41.9 million, or 27.3%, from $153.3 million in fiscal 2005. As a percentage of total revenues, selling, general and administrative expenses improved slightly to 23.0% in fiscal 2006 as compared to 23.3% in fiscal 2005, primarily as a result of cost-effective expense management during the year. The increase in selling, general and administrative expenses is primarily attributable to additional expenses incurred by our acquisition of the Tropical business, offset by the results of expense management strategies.

Depreciation and amortization. Depreciation and amortization in fiscal 2006 was $9.6 million, an increase of $3.0 million, or 45.5%, from $6.6 million in fiscal 2005. The increase is due to depreciation expense as a result of the Tropical acquisition in the amount of $0.9 million for fiscal 2006, as well as, the impact of property, equipment and systems purchases during fiscal 2006 and 2005. As of January 31, 2006, we owned approximately $66.6 million of property, plant and equipment as compared to approximately $49.0 million as of January 31, 2005.

Interest expense. Interest expense in fiscal 2006 was $21.9 million, an increase of $7.3 million, or 50.0%, from $14.6 million in fiscal 2005. The overall increase in interest expense is primarily attributable to: (i) increased indebtedness under our senior credit facility as a result of the Tropical acquisition, under our senior credit facility, (ii) the impact of the elimination of the interest rate swaps on our senior subordinated notes, and (iii) the impact of increased Prime and LIBOR rates during fiscal 2006. We ended fiscal 2006 with $40.4 million in borrowings on our senior credit facility compared to a balance of $10.8 million for fiscal 2005.

Income taxes. The income tax provision for fiscal 2006 was $12.6 million, a $0.4 million increase as compared to $12.2 million for fiscal 2005. For fiscal 2006, our effective tax rate was 35.3% as compared to 36.3% in fiscal 2005. The primary decrease in the effective rate was due to a lower tax rate experienced by our international operations.

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Net income. Net income in fiscal 2006 was $22.7 million, an increase of $1.7 million, or 8.1%, from $21.0 million in fiscal 2005 as a result of the above-mentioned factors.

Our Fiscal 2005 Results as compared to our Fiscal 2004 Results

Net sales. Net sales in fiscal 2005 were $633.8 million, an increase of $149.6 million, or 30.9%, from $484.2 million in fiscal 2004. The increase in net sales reflects strong organic growth of approximately $70 million from our core wholesale and swimwear businesses as well as approximately $80 million of growth from the Perry Ellis Menswear acquisition, completed in June 2003. Organic sales growth of $70 million was comprised of $53 million, from increased growth in multiple brands in our men’s wholesale business, such as Cubavera, Axist, John Henry, Original Penguin and Mondo di Marco, and a $17 million growth in our swimwear business, such as Jantzen, Nike and Southpoint.

Royalty income. Royalty income in fiscal 2005 was $22.8 million, an increase of $1.1 million, or 5.1%, from $21.7 million in fiscal 2004. This increase was comprised of approximately $3 million in increases in

royalty income from both new licenses in various brands such as Perry Ellis, Original Penguin, Cubavera and others as well as increased royalties from existing licenses. These increases were partially offset by the loss of approximately $2 million in royalty income previously received from Perry Ellis Menswear prior to our acquisition in June 2003. Royalty income is derived from agreements entered into by us with our licensees, which average three years in length. The vast majority of our license agreements require licensees to pay us a royalty based on net sales and require licensees to pay a guaranteed minimum royalty. Approximately 75% of our royalty income was attributable to guaranteed minimum royalties with the balance attributable to royalty income in excess of the guaranteed minimums for each of fiscal 2005 and 2004.

Gross profit. Gross profit was $208.1 million in fiscal 2005, an increase of $41 million, or 24.5%, from $167.1 million in fiscal 2004. This increase was due to our strong organic growth and the Perry Ellis Menswear acquisition. As a percentage of total revenue, gross profit margins were 31.7% in fiscal 2005 compared to 33.0% in fiscal 2004. The decrease in gross profit margin rate was primarily attributable to (a) lower swimwear business gross margins in fiscal 2005 and (b) the decrease in royalty income as a percentage of our total revenues, as a result of the Perry Ellis Menswear acquisition. Wholesale gross profit margins (which exclude the impact of royalty income) was 29.2% in fiscal 2005, compared to 30.0% in fiscal 2004, with this decrease attributable to lower swimwear business gross margins as a result of higher off price sales of product.

Selling, general and administrative expenses. Selling, general and administrative expenses in fiscal 2005 were $153.3 million, an increase of $36.0 million, or 30.7%, from $117.3 million in fiscal 2004. Approximately $25 million of this increase was due to the Perry Ellis Menswear acquisition, with the balance of the growth attributable to costs associated with supporting our strong organic sales growth. As a percentage of total revenues, selling, general and administrative expenses were essentially flat, at 23.3% in fiscal 2005 as compared to 23.2% in fiscal 2004, primarily as a result of cost-effective expense management during the year.

Depreciation and amortization. Depreciation and amortization in fiscal 2005 was $6.6 million, an increase of $1.6 million, or 32.0%, from $5.0 million in fiscal 2004. The increase is due to the Perry Ellis Menswear acquisition, as well as the impact of property, equipment and systems purchases in fiscal 2005 and 2004. As of January 31, 2005, we owned approximately $49 million of property, plant and equipment as compared to approximately $39 million as of January 31, 2004.

Interest expense/Cost of early extinguishment of debt. Interest expense in fiscal 2005 was $14.6 million, a decrease of $1.8 million, or 11.0%, from $16.4 million in fiscal 2004. Additionally, in fiscal 2004, we incurred $7.3 million of costs on early extinguishment of debt associated with the redemption of certain senior subordinated notes that did not reoccur in fiscal 2005. The decrease in interest expense during fiscal 2005 is attributable to (a) lower average borrowings under the senior credit facility during the fiscal year as a result of cash flow from operations and our public offering of 950,000 shares of common stock completed in June 2004 and (b) lower effective interest costs as a result of refinancing of our $100 million 12  ¹/4% senior subordinated notes, which were partially hedged with derivative hedging transactions, with the $150 million 8 ⁷/8% senior subordinated notes issued in September 2003, which were fully hedged with derivative hedging transactions.

As of January 31, 2005, we had $233.0 million in long-term debt as compared to $257.2 million as of January 31, 2004. The decrease in long-term debt is a result of cash flow from operations, as well as, the impact of the public offering of 950,000 shares of common stock completed in June 2004. The impact of derivative hedging transactions is described further in “Item 3: Quantitative and Qualitative Disclosures about Market Risks.”

Income taxes. Income tax provision in fiscal 2005 was $12.2 million, a $4.5 million increase or 58%, from $7.7 million in fiscal 2004. For fiscal 2005, our effective tax rate was 36.3% as compared to 36.5% in fiscal 2004.

Net income. Net income in fiscal 2005 was $21.0 million, an increase of $7.8 million, or 59.4%, from $13.2 million in fiscal 2004 as a result of the above-mentioned factors.

Our Liquidity and Capital Resources

We rely primarily upon cash flow from operations and borrowings under our senior credit facility and letter of credit facilities to finance our operations, acquisitions and capital expenditures. We believe that as a result of the planned growth in our business, our working capital requirements will increase to accommodate higher accounts receivable and inventories.inventories. As of January 31, 2006,2007, our total working capital was $228.6$229.7 million as compared to $207.8$228.6 million as of January 31, 2005.2006. We believe that our cash flows from operations and borrowings under our senior credit facility and letter of credit facilities are sufficient to meet our working capital needs. We also believe that our real estate assets, which have a net book value of $28.7 million at January 31, 2007, have a substantially higher market value of approximately $50 million. These real estate assets provide us with additional capital resources. Additional borrowings against these real estate assets, however, would be subject to certain loan to value criteria established by lending institutions. Currently we have mortgage loans on these properties totaling $27.1 million.

Net cash provided by operating activities was $81.0$31.6 million in fiscal 20062007 as compared to cash provided by operating activities of $23.5$80.5 million in fiscal 20052006 and $11.3$23.1 million used in operations in fiscal 2004.2005. The increasedecrease of $57.5$48.9 million in the level of cash provided by operating activities in fiscal 20062007 as compared to fiscal 20052006 is primarily attributable to higher net income, as well as increased accounts payable leverage on inventory purchases, along with strong collections of accounts receivable, including the collection of accounts receivable and the turnover of inventory acquired in the Tropical acquisition.acquisition during fiscal 2006 that did not occur in fiscal 2007, an increase in accounts receivable of $5.2 million and inventory of $11.5 million in fiscal 2007 as compared to a decrease in accounts receivable of $13.3 million and inventory of $29.4 million during fiscal 2006. The increase of $34.8$57.4 million in the level of cash used in operating activities in fiscal 20052006 as compared to fiscal 20042005 is primarily attributable to the decrease in inventory, and the increase in accounts payable and accrued expenses, and higher net income.

Net cash used in investing activities was $16.8 million in fiscal 2007, which primarily reflects the purchases of property and equipment of $16.0 million, marketable securities of $2.6 million and re-acquisition of certain fragrance assets under the Perry Ellis name from Parlux, offset by the sale of the same assets for $63 million. Net cash used in investing activities was $106.6 million in fiscal 2006, which primarily reflects the acquisition of Tropical, net of cash acquired, for $79.9 million, the purchases of property and equipment of $14.5 million and the purchase of additional trademarks of $12.3 million in the Gotcha acquisition. Net cash used in investing activities was $17.8 million in fiscal 2005, which primarily reflects the purchases of property and equipment of $14.0 million and the purchase of additional trademarks of $3.8 million.

Net cash used in investingfinancing activities was $44.9 million in fiscal 2004,2007 was $20.4 million, which primarily reflects payments of $58.4 million to extinguish our senior secured notes and $0.6 million in connection with the cash portiontermination of the acquisition of Perry Ellis Menswear for $34.5 million, netswap agreements. The use of cash acquired, purchaseswas off set by net borrowings of property and equipment$21.0 million from our senior credit facility, as well as proceeds from our Tampa facility real estate mortgage loan of $8.7$14.8 million and proceeds from the purchaseexercise of the Redsand trademark for $1.8stock options of $2.7 million. We anticipate capital expenditures during fiscal 2007 to approximate $16 million to $18 million for property, equipment and systems.

Net cash provided by financing activities in fiscal 2006 was $30.1$30.5 million, which primarily reflects the net borrowings on our senior credit facility of $29.6 million, proceeds from the exercise of employee stock options of $2.1 million and the payment for the termination of the swap agreement of $1.2 million. Net cash used in financing activities in fiscal 2005 was $1.6$1.2 million, which primarily reflects the net payments to our senior credit facility of $23.9 million, net proceeds of $21.1 million from our public offering of 950,000 shares of common stock completed in June 2004 and proceeds from the exercise of employee stock options of $0.9 million. Net

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Acquisitions

On December 6, 2006, the Company signed a definitive agreement with and re-acquired from Parlux Fragrances Inc. (“Parlux”) for $42 million all rights, titles, interests, tangible and intangible assets, and for $21 million, inventory that Parlux maintained pursuant to a global license agreement to manufacture and distribute perfumery, fragrances, lotions, toiletries and cosmetics under the Perry Ellis brand. The agreement to re-acquire the Perry Ellis fragrance license and related assets in a cash provided by financing activities in fiscal 2004transaction for a total of approximately $63 million was $52.4 million,effective as of December 6, 2006, of which primarily reflects the net proceeds from ourinventory portion is subject to potential post-closing price adjustments. The Company funded this acquisition through its senior credit facilityfacility.

Subsequently, on January 25, 2007, the Company entered into an agreement (the “Agreement”) with Falic Fashion Group, LLC, a Florida limited liability company and a wholly owned subsidiary of $11.8Duty Free Americas, Inc. (“Falic”), pursuant to which the Company agreed to sell to Falic the assets purchased from Parlux. The total sales price for the assets sold was approximately $63 million net proceeds fromof which $42 million related to tangible and intangible assets and $21 million was attributed to inventory and is subject to certain post-closing price adjustments.

Simultaneously with our offeringsale of our 8 ^7/8% senior subordinated notesthe fragrance assets, we entered into a license agreement with Falic pursuant to which we granted Falic an exclusive worldwide license to use certain trademarks in connection with the Perry Ellis brand with respect to the manufacture, advertising and sale of $146.8 million, proceeds from the exercise of employee stock options of $2.1 million, offset by payments to redeem our 12 ¹/4% senior subordinated notes of $107.3 million, which included a redemption premium,fragrance and purchases of treasury stock of $1.0 million.

The Tropical Sportswear Acquisitionother related products.

On February 26, 2005, we acquired certain domestic operating assets of Tropical and its subsidiaries and Tropical’s United Kingdom subsidiary for $83.4 million. The acquisition was funded from our senior credit facility.

Tropical was a leading designer, marketer and distributor of men’s branded and private label bottoms to all channels of distribution. With the Tropical acquisition, we believe we have become one of the largest suppliers of men’s bottoms in the United States, added significant revenues, further strengthened and balanced our product mix, and added to our portfolio of brands. The Tropical acquisition also provides us with a state-of-the-art distribution facility in Tampa, Florida and a strong platform to expand our existing brands into Europe as a result of the acquired U.K. subsidiary.

Senior Credit Facility

The following is a description of the terms of the senior credit facility with Wachovia Bank, National Association, as amended, and does not purport to be complete and is subject to, and qualified in its entirety by reference to, all the provisions of the senior credit facility: (i) the line is up to $175 million;million, except for a short term increase to $210 million which will expire May 1, 2007 to accommodate the Parlux transaction; (ii) the inventory borrowing limit is $90 million; (iii) the sublimit for letters of credit is up to $60 million; (iv) the amount of letter of credit facilities available outside of the facility is $110$100 million and (v) the outstanding balance is due at the maturity date of OctoberFebruary 1, 2007.2009.

Certain Covenants. The senior credit facility contains certain covenants, which, among other things, requires us to maintain a minimum EBITDA if availability falls below a certain minimum. It may restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We are prohibited from paying cash dividends under these covenants. We are currently in compliance with all of our covenants under the senior credit facility. We could be materially harmed if we violate any covenants as the lenders under the senior credit facility could declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. If we are unable to repay those amounts, the lenders could proceed against our assets. In addition, a violation could also constitute a cross-default under the indenture and mortgage, resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.

Borrowing BaseBase.. Borrowings under the senior credit facility are limited under its terms to a borrowing base calculation, which generally restricts the outstanding balances to the lesser of either (1) the sum of (a) 85.0% of eligible receivables plus (b) 85.0% of our eligible factored accounts receivables up to $50.0 million plus (c) the lesser of (i) the inventory loan limit, or (ii) the lesser of (A) 65.0% of eligible finished goods inventory, or (B) 85.0% of the net recovery percentage (as defined in the senior credit facility) of

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eligible inventory, or (2) the loan limit; and in each case minus (x) 35.0% of the amount of outstanding letters of credit for eligible inventory, (y) the full amount of all other outstanding letters of credit issued pursuant to the senior credit facility which are not fully secured by cash collateral, and (z) licensing reserves for which we are the licensee of certain branded products.

Interest. Interest on the principal balance under the senior credit facility accrues, at our option, at either (a) our bank prime lending rate with adjustments depending upon our quarterly average excess availability plus excess cash or leverage ratio or (b) 1.60%1.30% above the rate quoted by our bank as the average monthly Eurodollar Rate (“Eurodollar”) for 1-, 2-, 3- and 6-month1-month Eurodollar deposits with 20 to 25 basis point adjustments depending upon our quarterly average excess availability plus excess cash and leverage ratio at the time of borrowing.

Security. As security for the indebtedness under the senior credit facility, we granted the lenders a first priority security interest in substantially all of our existing and future assets other than our trademark portfolio, existing as of March 2002, including, without limitation, accounts receivable, inventory deposit accounts, general intangibles, equipment and capital stock or membership interests, as the case may be, of certain subsidiaries.

Lenders under the senior credit facility had a second priority security interest in our trademark portfolio as of March 2002 and a first priority lien on the rest of our trademarks.

On February 24, 2006, we amended the senior credit facility to allow the borrowing base to be increased in accordance with specific terms noted in the credit facility agreement and to release the lien on the trademarks.

Letter of Credit Facilities

As of January 31, 2006,2007, we maintained sevensix U.S. dollar letter of credit facilities totaling $170.0$160.0 million, one letter of credit facility totaling $3.3$3.2 million utilized by our Canadian joint venture, and one letter of credit facility totaling $0.5$0.6 million utilized by our United Kingdom subsidiary. Each letter of credit is secured primarily by the consignment of merchandise in transit under that letter of credit and certain subordinated liens on our assets. As of January 31, 2006,2007, there was $120.3$102.6 million available under existing letter of credit facilities.

Subsequent to fiscal 2006, a U.S. dollar letter of credit facility totaling $10.0 million was cancelled.

$57 Million Senior Secured Notes Payable

In fiscal 2003,March 2002, we issued $57$57.0 million 9 ¹/2% senior secured notes due March 15, 2009. The proceeds of the offering were used to finance the Jantzen acquisition, to reduce the amount of outstanding debt under the previous senior credit facility and as additional working capital. The proceeds to us were $55.6 million yielding an effective interest rate of 9.74% after deduction of discounts. We entered into certain derivative hedging transactions described in “Item 7A: Quantitative and Qualitative Disclosures about Market Risks” in order to minimize debt service costs related to these senior secured notes.

The senior secured notes were secured by a first priority security interest granted in our existing portfolio of trademarks and licenses as of March 2002. The senior secured notes were senior secured obligations of ours and rankedpari passuin right of payment with all of our existing and future senior indebtedness. The senior secured notes were effectively senior to all of our unsecured indebtedness to the extent of the value of the assets securing the senior secured notes.

On March 15, 2006, we exercised the call provision of the $57.0 million 9 ¹/2% senior secured notes. The call provision permitted the notes to be redeemed at a premium of 102.375%, and in connection with this transaction, we expect to incurincurred costs on early extinguishment of debt extinguishment costs of approximately $3.0 million during the first quarter of fiscal 2007, including call premium costs, write-off of bond issue costs and costs associated with the termination of derivatives related to the senior secured notes.

Certain Covenants. The indenture governing the senior secured notes contained certain covenants which restricted our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We were prohibited from paying cash dividends under these covenants. We were in compliance with all of the covenants in this indenture.

$150 million Senior Subordinated Notes Payable

In fiscal 2004, we issued $150 million 8 ^7/8% senior subordinated notes, due September 15, 2013. The proceeds of this offering were used to redeem previously issued $100 million 12 ¹/4% senior subordinated notes and to pay down the outstanding balance of the senior credit facility at that time. The proceeds to us were $146.8 million yielding an effective interest rate of 9.1%. We entered into certain derivative hedging transactions described in “Item 7A: Quantitative and Qualitative Disclosures about Market Risks” in order to minimize debt service costs related to these senior subordinated notes.

Certain Covenants. The indenture governing the senior subordinated notes contains certain covenants which restrict our ability and the ability of our subsidiaries to, among other things, incur additional indebtedness in

certain circumstances, redeem or repurchase capital stock, make certain investments, or sell assets. We are currently in compliance with all of the covenants in this indenture. We are prohibited from paying cash dividends under these covenants. We could be materially harmed if we violate any covenants because the indenture’s trustee could declare the outstanding notes, together with accrued interest, to be immediately due and payable, which we may not be able to satisfy. In addition, a violation could also constitute a cross-default under the senior credit facility, the letter of credit facilities and the real estate mortgage and the indenture relating to our senior secured notes resulting in all of our debt obligations becoming immediately due and payable, which we may not be able to satisfy.

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Real Estate Mortgages

In fiscal 2003, we acquired our main administrative office, warehouse and distribution facility in Miami and partially refinancedfinanced the acquisition of the facility with an $11.6 million mortgage. The real estate mortgage loan contains certain covenants. We are currently in compliance with all of our covenants under the real estate mortgage.mortgage loan. We could be materially harmed if we violate any covenants because the lender under the real estate mortgage could declare all amounts outstanding thereunder to be immediately due and payable, which we may not be able to satisfy. In addition, a violation could constitute a cross-default under our senior credit facility, the letter of credit facilities and indenture relating to our senior subordinated notes resulting in all our of debt obligations becoming immediately due and payable.payable, which we may not be able to satisfy. The mortgage loan matures on August 1, 2009. Interest is fixed at 7.123%

In October 2005, we acquired three administrative office units in a building in Beijing, China. The aggregate purchase price was $2.3 million, including closing costs. These purchases were partially financed with three variable interest mortgage loans totaling $1.2 million dollars in the aggregate. The mortgagesmortgage loans mature on October 12, 2015. Interest rate is at Prime.

In June 2006, we entered into a mortgage loan for $15 million secured by our Tampa facility. The loan is due on June 7, 2016. Principal and interest of $297,000 are due quarterly based on a 20 year amortization with the outstanding principal due at maturity. Interest is set at 6.25% for the first five years, at which point it will be reset based on the terms and conditions of the promissory note.

Contractual Obligations and Commercial Contingent Commitments

The following tables illustrate the principal balance of our contractual obligations and commercial contingent commitments as of January 31, 20062007 and include the effects of the transactions and amendments discussed above that occurred during the year ended January 31, 2006:2007:

		Payments Due by Period
		(in thousands)
Contractual Obligations		Total			Less than 1 year			1-3 years			4-5 years			After 5 years
Senior subordinated notes payable		$	150,000		$	—		$	—		$	—		$	150,000
Senior credit facility		$	61,347		$	—		$	61,347		$	—		$	—
Real estate mortgages		$	27,277		$	469		$	12,235		$	172		$	14,401
Operating leases		$	48,205		$	9,505		$	24,374		$	5,555		$	8,771
Royalty minimum guaranties		$	22,038		$	4,643		$	15,409		$	1,986		$	—
Total contractual cash obligations		$	308,867		$	14,617		$	113,365		$	7,713		$	173,172
		Amount of Contingent Commitment Expiration Per Period
Other Commercial Contingent Commitments		Total			Less than 1 year			1-3 years			4-5 years			After 5 years
Letters of credit		$	56,541		$	56,541		$	—		$	—		$	—
Standby letters of credit		$	4,602		$	4,602		$	—		$	—		$	—
Total commercial commitments		$	61,143		$	61,143		$	—		$	—		$	—
Total contractual obligations and other commercial contingent commitments		$	370,010		$	75,760		$	113,365		$	7,713		$	173,172

Management believes that the combination of borrowing availability under the amended senior credit facility, letter of credit facilities, and funds anticipated to be generated from operating activities, will be sufficient to meet our operating and capital needs in the foreseeable future.

Off-Balance Sheet Arrangements

We are not a party to any “off-balance sheet arrangements”, as defined by applicable GAAP and SEC rules.

Derivative Financial Instruments

Derivative financial instruments such as interest rate swap contracts and foreign exchange contracts, are recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair value of derivative financial instruments are either recognized in income or shareholders’ equity (as a component of comprehensive income), depending on whether the derivative qualifies to be used to hedge changes in fair value or cash flows. See “Item 7A – Quantitative and Qualitative Disclosures About Market Risk” for further discussion about derivative financial instruments.

Effects of Inflation and Foreign Currency Fluctuations

We do not believe that inflation or foreign currency fluctuations significantly affected our financial position and results of operations as of and for the fiscal year ended January 31, 2006.2007.

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The market risk inherent in our financial statements represents the potential changes in the fair value, earnings or cash flows arising from changes in interest rates. We manage this exposure through regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. Our policy allows the use of derivative financial instruments for identifiable market risk exposure, including interest rate. We do not enter intoOur significant derivative financial contracts for trading or other speculative purposes except asare discussed below.

Derivatives on $57 Million Senior Secured Notes Payable

In conjunction with the fiscal 2003 offering of $57 million of 9 ¹/2% senior secured notes due March 15, 2009, we entered intoWe had an interest rate swap and option agreements (the “$57 million Swap Agreement”) for an aggregate notional amount of $57 million in order to minimizemanage the debt servicingoverall borrowing costs associated with theour 9 ¹/2% senior secured notes. The $57 million Swap Agreement was scheduled to terminate on March 15, 2009. Under the $57 million Swap Agreement, we were entitled to receive semi-annual interest payments on September 15 and March 15 at a fixed rate of 9 ¹/2% and were obligated to make semi-annual interest payments on September 15 and March 15 at a floating rate based on the three-month LIBOR rate plus 369 basis points for the period through March 15, 2009. The $57 million Swap Agreement had optional call provisions with trigger dates of March 15, 2005, March 15, 2006 and March 15, 2007, which contained premium requirements in the event the call was exercised. In March 2006, we terminated the $57 million Swap Agreement, in connection withAgreement. See footnote 17 to the exercise of the call provision of the $57 million of 9 ¹/2% senior secured notes.consolidated financial statements for further information. The $57 million Swap Agreement was a fair value hedge as it had beenwas designated against the 9 ¹/2% senior secured notes carrying a fixed rate of interest and converted such notes to variable rate debt. The $57 million Swap Agreement iswas reflected at fair value in our consolidated balance sheet with a corresponding offset to the designated item. The fair value of the $57 million Swap Agreement recorded on our condensed consolidated balance sheet was $0.5 million and $2.7 million as of January 31, 2006 and 2005, respectively.2006.

In fiscal 2004, we entered intoWe also had an interest rate cap agreement (the “$57 million Cap Agreement”) for an aggregate notional amount of $57 million associated with the 9 ¹/2% senior secured notes. TheIn March 2006, we terminated the $57 million Cap Agreement was scheduledAgreement. See footnote 17 to terminate on March 15, 2009. In March 2006, the Company terminated the $57

million Cap Agreement, in connection with the exercise of the call provision of the $57 million of 9 ¹/2% senior secured notes.consolidated financial statements for further information. The $57 million Cap Agreement capped the interest rate on the senior secured notes at 10%. The $57 million Cap Agreement did not qualify for hedge accounting treatment, resulting in a $30,000 and $50,000 decrease of recorded interest expense on the consolidated statement of income for the fiscal yearyears ended January 31, 2007 and 2006, respectively and a $300,000 increase of recorded interest expense on the consolidated statement of income for the fiscal year ended January 31, 2005. The fair value of the $57 million Cap Agreement recorded on our condensed consolidated balance sheet was ($0.6) million586,000) as of January 31, 2006 and 2005.2006.

In fiscal 2003, we entered into an interest rate floor agreement for an aggregate notional amount of $57 million associated with the 9 ¹/2% senior secured notes. The $57 million Floor Agreement expired on March 15, 2005.

Derivatives on $150 million Senior Subordinated Notes Payable

In conjunction with the fiscal 2004 offering of $150 million of 8 ^7/8% senior subordinated notes due September 15, 2013, we entered intoWe had interest rate swap agreements (the “$150 million Swap Agreement”) with Merrill Lynch & Co., Inc. (“Merrill”) and Wachovia Bank N. A. (“Wachovia”) each with a notional amount of $75 million for an aggregate notional amount of $150 million in order to manage the overall borrowing costs associated with the new senior subordinated notes. The $150 million Swap Agreement was scheduled to terminate on September 15, 2013. Under the $150 million Swap Agreement, we were entitled to receive semi-annual interest payments on September 15 and March 15 at a fixed rate of 8 ^7/8% and were obligated to make semi-annual interest payments on September 15 and March 15 at a floating rate based on the six-month LIBOR rate plus 394 basis points for the period through September 15, 2013.

On April 29, 2005, we terminated the $75 million notional amount swap agreement with Wachovia. In connection with the termination, we paid $495,000. The termination payment was comprised of the fair market value of the swap in the amount of $578,000 less accrued interest of $83,000. The fair value at the termination date will be amortized over the remaining life of the $150 million senior subordinated notes payable.

On May 2, 2005, we terminated the $75 million notional amount swap agreement with Merrill. In connection with the termination, we paid $540,000. The termination payment was comprised of the fair market value of the swap in the amount of $632,000 less accrued interest of $92,000. The fair value will be amortized over the remaining life of the $150 million senior subordinated notes payable.

The fair value of the $150 million Swap Agreement recorded on the consolidated balance sheet was $1.5 million as of January 31, 2005.

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The table below provides information about the Company’s derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including interest rate swaps and debt obligations:

Expected Maturity Date

Fiscal Years Ended January 31,

(In Millions)

See pages F-1 through F-37F-38 appearing at the end of this report.

None.

As required by Exchange Act Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our Chairman of the Board and Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of January 31, 2006.2007.

The purpose of disclosure controls is to ensure that information required to be disclosed in our reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief

Financial Officer, to allow timely decisions regarding required disclosure. The purpose of internal controls is to provide reasonable assurance that our transactions are properly authorized, our assets are safeguarded against unauthorized or improper use and our transactions are properly recorded and reported to permit the preparation of our financial statements in conformity with generally accepted accounting principles.

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Our management does not expect that our disclosure controls or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable rather than absolute assurance that the objectives of the control system are met. The design of a control system must also reflect the fact that there are resource constraints, with the benefits of controls considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud (if any) within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that simple errors or mistakes can occur. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Our internal controls are evaluated on an ongoing basis by our internal audit function and by other personnel in our organization. The overall goals of these various evaluation activities are to monitor our disclosure and internal controls and to make modifications as necessary, as disclosure and internal controls are intended to be dynamic systems that change (including improvements and corrections) as conditions warrant. Part of this evaluation is to determine whether there were any significant deficiencies or material weaknesses in our internal controls, or whether we had identified any acts of fraud involving personnel who have a significant role in our internal controls. Significant deficiencies are control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements. Material weaknesses are particularly serious conditions where the internal control does not reduce to a relatively low level the risk that misstatements caused by error or fraud may occur in amounts that would be material in relation to the financial statements and not be detected within a timely period by employees in the normal course of performing their assigned functions.

Based upon this evaluation, our Chairman of the Board and Chief Executive Officer and our Chief Financial Officer concluded that, subject to the limitations noted above, both our disclosure controls and procedures and our internal controls and procedures were effective as of January 31, 20062007 in timely alerting them to material information required to be included in our periodic SEC filings and that information required to be disclosed by us in these periodic filings was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that our internal controls were effective as of January 31, 20062007 to provide reasonable assurance that our financial statements were fairly presented in conformity with generally accepted accounting principles.

During January 2007, the last fiscal quarter, thepayroll function was brought in house, and as such, certain interim internal controls of the domestic operations of Tropical Sportswear Int’l Corporation were changedput in place and fully integrated intowe are currently evaluating our current system of internal controls.controls for any additional controls required.

Other than the changes noted above, there have been no other changes in our internal controls over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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MANAGEMENT’S REPORT ON INTERNAL CONTROL

April 16, 2007

To the Stockholders of Perry Ellis International, Inc.

Management of Perry Ellis International is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the company’s internal control over financial reporting as of January 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework.

Based on our assessment, management believes that, as of January 31, 2007, the company’s internal control over financial reporting was effective.

The company’s independent registered public accounting firm, Deloitte & Touche LLP, has issued an attestation report on our assessment of the company’s internal control over financial reporting. Their report appears on the following page.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Perry Ellis International, Inc.

Miami, Florida

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control, that Perry Ellis International, Inc. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of January 31, 2007, based on criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of January 31, 2007, is fairly stated, in all material respects, based on the criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 31, 2007, based on the criteria established inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.

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We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended January 31, 2007 of the Company and our report dated April 16, 2007 expressed an unqualified opinion on those financial statements.

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