UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549










FORM
10-KSB /A









(MARK
      ONE)x
            ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31, 2007ORo
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from  ______________ to
      ______________




Commissions
file number-033-07075-LA





THE FASHION HOUSE HOLDINGS,
INC.


(Name of
Small Business Issuer in Its Charter)




COLORADO
            33-1079781(State
      or other jurisdiction of  incorporation or
    organization)
            (IRS
      Employer  Identification No.)






16633
      Ventura Blvd.,
      6thFloor,Encino,California
            91436(Address
      of principal executive offices)
            (Zip
      Code)




(818)
907-0400


(Issuer’s
telephone number)





Securities
registered under Section 12(g) of the Exchange Act:





Title of Each
      Class
            
            Name of Each Exchange on Which
      RegisteredNone
            
            N/A





Check
whether the issuer (1) has filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 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 day Yes R No £





Check if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not
contained in this form, and no disclosure will be contained, to the best of
Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. R





Indicate
by check mark whether the registrant is a shell company Yes £ No R





The
Registrant’s revenues for the fiscal year ended December 31, 2007 were
$6,579,335.





The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days, was $199,097 as of the
close of April 23, 2008.





As of
April 23, 2008, the Registrant had 24,887,063 shares of its common stock
outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





The
issuer has not incorporated by reference into this annual report: (1) any annual
report to the issuer’s securities holders, (2) any proxy or information
statement, or (3) any Annual Report on Form 10-KSB filed pursuant to Rule 424(b)
or (c) of the Securities Act.





Transitional
Small Business Disclosure Format (check one): Yes £ No R


Table of Contents




The Fashion House Holdings, Inc.


FISCAL
YEAR 2007 FORM 10-KSB ANNUAL REPORT





INDEX





PagePART
      IItem
      1.
            Description of
      Business
            3Item
      1/A.
            Risk Factors
            7Item
      2.
            Description of
      Property
            11Item
      3.
            Legal
      Proceedings
            12Item
      4.
            Submission of
      Matters to a Vote of Security Holders
            13PART
      IIItem
      5.
            Market for
      Common Equity and Related Stockholder Matters
            14Item
      6.
            Management’s
      Discussion and Analysis or Plan of Operation
            15Item
      7.
            Financial
      Statements
            23Item
      8.
            Changes in and
      Disagreements with Accountants on Accounting and Financial
      Disclosure
            23Item
      8/A.
            Controls and
      Procedures
            23Item
      8/ B.
            Other
      Information
            24PART
      IIIItem
      9.
            Directors,
      Executive Officers, Promoters and Control Persons; Compliance with Section
      16(a) of the Exchange Act
            25Item
      10.
            Executive
      Compensation
            29Item
      11.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            31Item
      12.
            Certain
      Relationships and Related Transactions and Director
      Independence
            33Item
      13.
            Exhibits
            35Item
      14.
            Principal
      Accountants Fees and Services
            37Signatures
            38










Table of Contents








PART
I





Item 1.Descriptionof Business





SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS





In this
annual report on Form 10-KSB we make a number of statements, referred to as
“forward-looking
statements”, which are intended to convey our expectations or predictions
regarding the occurrence of possible future events or the existence of trends
and factors that may impact our future plans and operating results. These
forward-looking statements are derived, in part, from various assumptions and
analysis we have made in the context of our current business plan and
information currently available to us and in light of our experience and
perceptions of historical trends, current conditions and expected future
developments and other factors we believe to be appropriate in the
circumstances. You can generally identify forward-looking statements through
words and phrases such as “seek”, “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, “budget”, “project”, “may be”, “may continue”, “may likely result”, and similar
expressions. When reading any forward-looking statement you should remain
mindful that all forward-looking statements are inherently uncertain as they are
based on current expectations and assumptions concerning future events or future
performance of our company, and that actual results or developments may vary
substantially from those expected as expressed in or implied by that statement
for a number of reasons or factors, including those relating to:





•       our
ability to design, market and manufacture our future products;





•      our ability to protect
our intellectual property rights and operate our business without infringing
upon the intellectual property rights of others;





•whether or not markets for
our products develop and, if they do develop, the pace at which they
develop;





•       our ability to attract the qualified
personnel to implement our growth strategies;





•       our ability to develop sales and
distribution capabilities;





•       the accuracy of our estimates and
projections;





•       our ability to fund our short-term and
long-term financing needs;





•       changes
in our business plan and corporate strategies; and





•      other risks and
uncertainties discussed in greater detail in the sections of this annual report,
including those captioned “Risk Factors” and “Management’s Discussion And
Analysis"





Each
forward-looking statement should be read in context with, and with an
understanding of, the various other disclosures concerning our company and our
business made elsewhere in this annual report as well as other public reports
filed with the United States Securities and Exchange Commission (the “SEC”). You should not place
undue reliance on any forward-looking statement as a prediction of actual
results or developments. We are not obligated to update or revise any
forward-looking statement contained in this annual report to reflect new events
or circumstances unless and to the extent required by applicable
law.




3
 Table of Contents





OUR
COMPANY





We were
incorporated in Colorado on April 22, 1986. Since our exchange reorganization
and merger, effective as of August 19, 2005, our principal business is the
design, development and marketing of women’s dress footwear with an emphasis on
celebrity appeal, style, quality and fit. We target the moderate to
premium-priced categories of the footwear industry in order to achieve strong
gross margins. Our business centers on the licensing of recognized brand names.
Our licensed brands have included Richard Tyler Couture (a high fashion line)
tyler, Richard Tyler (a bridge line), Oscar by Oscar de la Renta (a more
affordable designer line), O Oscar by Oscar de la Renta (a dress casual line for
the young and price conscious), Blass by Bill Blass (moderate priced casual),
Bill Blass Couture (a high fashion line), Isaac Isaac Mizrahi line and a new
Mizrahi couture brand. We have sold over 100 different styles of designer
footwear through independent retailers, specialty retailers and department
stores. Our products have appeared in Aglie’s, Bloomingdales, Dillard’s,
Federated, Macy’s (East and West), Nordstrom’s, Parisian’s, Pinque Palace,
Rich’s and Saks Fifth Avenue, among others. We have also sold shoes through the
Victoria Secret Catalog and portals such as Zappos.com. We believe that this
distribution strategy distinguishes us from footwear and apparel companies that
supply the discount or mass merchant channels.





Our
wholly-owned subsidiary, The Fashion House, Inc., was organized in Delaware on
April 11, 2002. Our corporate office is located at 16633 Ventura Blvd., 6th Floor,
Encino, CA 91436. Our telephone number is (323) 939-3031. Our website
address is http://www.thefashionhouseinc.com. Information contained in our
website is not a part of this report on Form 10-KSB.





History
and Development of the Company





We were
originally incorporated in Colorado as Kimbell — deCar Corporation on April 22,
1986. Kimbell — deCar’s principal purpose was importation of men’s and ladies’
clothing and related products and accessories for wholesale purchasers in the
United States. Kimbell — deCar Corporation had not realized any revenue from its
initial business plan and had incurred a substantial working capital deficit.
The business failed in 1990 and Kimbell — deCar Corporation was inactive
beginning in 1990. At that time, Kimbell — deCar Corporation had nominal
business activities and could be considered a “shell company.”





TDI
Holding Corporation executed a Reverse Share Exchange Agreement with The Fashion
House, Inc., a Delaware corporation (“Fashion House”), and shareholders of 100%
of the common stock of Fashion House on August 19, 2005. Under the Exchange
Agreement, TDI Holding Corporation would implement a reverse-stock-split on a
21.8 to 1 basis such that one share would equal 1/21.8 shares of common stock.
On August 19, 2005, and in connection with the Exchange Agreement, TDI Holding
Corporation amended its Articles of Incorporation implementing the foregoing
reverse-stock-split with an effective date of August 29, 2005. The number of
shares of common stock of TDI Holding Corporation issued and outstanding prior
to the reverse share exchange was approximately 21,938,308 shares. As a result
of the reverse-stock-split, this number was reduced to approximately 1,006,344
shares of common stock. In consideration of 100% of the outstanding shares of
Fashion House, TDI Holding Corporation agreed to issue 14,114,200
post-reverse-split shares of its common stock to the Fashion House shareholders.
As a result of the closing of the Exchange Agreement, Fashion House became a
wholly-owned subsidiary of TDI Holding Corporation.





The
exchange reorganization and merger allowed The Fashion House, Inc to become a
wholly-owned subsidiary of TDI Holding Corporation, a publicly held shell
company, without having to pursue the traditional registration process. From and
after the closing of the reorganization and merger, our principal asset became,
and continued to be, The Fashion House, Inc. On August 19, 2005, TDI Holding
Corporation changed its name to The Fashion House Holdings, Inc. We refer herein
to The Fashion House Holdings, Inc. as “Fashion House”, the “Company, “we” or
“us”.





Reduction
of Operations, Chapter 11 Filing and Planned Operations





On
January 15, 2008, the Company terminated a substantial portion of its operations
because of its continuing cash flow deficits.  Prior to that date, on
December 15, 2007, in order to reduce its monthly rent obligation, the Company
established a new corporate office by leasing space on a month to month basis at
the office location of Westrec Capital Partners, LLC (“Westrec”). On January 15,
2008, concurrent with the reduction of its business operations, the Company
surrendered its San Vicente office space.  Westrec is considered a
control stockholder of the Company and the Company’s Interim Chief Financial
Officer is a part-time and temporary employee of an affiliate of
Westrec.





4
 Table of Contents




On April
16, 2008, the Company and its wholly owned subsidiary filed voluntary
petitions under Chapter 11 of the US Bankruptcy Code with the United States
Bankruptcy Court, Central District of California, file numbers
1:08-BK-12363-KT and 1:08-BK-12359-KT, respectively.




Our
current operations include sales at our retail outlet opened on March 31,
2008, located at 607 West Knoll, West Hollywood California. This store
operates under the name Shoe Bliss and occupies 1,500 square feet
of retail space.   At Shoe Bliss, we sell well known
designer brands at a discount between 50 to 75% of the retail prices. Our shoes
sell in our retail store for $39 to $120, while similar shoes retail in the
market place from $140 to $300.  This retail division allows us
to reduce warehousing expenses, produce current income, and keep
our brand names in the market, thus preserving our goodwill.




We are
also currently indentifying and negotiating new designer licenses to actively
resume our women’s wholesale business, which was curtailed in January 2008 as
part of our business reorganization plans.




We plan
to emerge from Chapter 11 proceedings operating two divisions, wholesale and
retail.  Our reorganization plan includes resuming our historical
wholesale business model of licensing, designing, manufacturing and
marketing designer brand women’s footwear.  We are presently in
discussions with several haute couture designers to license their brands.
We will retain our successful pattern of building high end
footwear for these licensed brands and selling the product in domestic and
international markets.  We will also introduce diffusion lines for the same
brands at more affordable price points of $79 to $ 150.  The Company
will continue to limit business to designer brands that highlight design
aspects in order to capitalize on brand recognition.




We plan
to expand our retail division by opening Shoe Bliss stores in the
State of California and ultimately across the United States.





BRAND
LICENSING PRACTICES





As a
result of our continued cash flow deficits, most of our license agreements have
either been terminated for non-payment of royalties (Isaac and Oscar), or have
expired on their original termination date and have not been renewed
(Tyler).  Due to a continuing decline in the demand for Blass
footwear, this license agreement was mutually terminated. At this time, we do
not have any active license agreements in place. We are presently in discussions
with several haute couture designers to license their brands. However, there can
be no assurances that we will be successful in obtaining additional
licenses.





MANUFACTURING





When we
have obtained new designer footwear licenses, we will source our products
entirely through independent foreign third-party manufacturing facilities. We
provide independent manufacturers with detailed specifications and quality
control standards. We source footwear products from Italy, Brazil and China,
with most manufacturing taking place in China due to the lower cost of
production in China. The other major advantage of China is that all trade with
the Company is U.S. dollar based, so the currency risk is minimized. In the case
of Italy, payment occurs in Euros and therefore involves currency risk as the
Euro fluctuates against the dollar and there is also some currency risk in
Brazil. There were no significant gains or losses related to the fluctuations
during the years ended December 31, 2007 and 2006.





The
minimum factory orders to our Chinese producers are 5,000 pairs per new
construction type, and 1,200 pairs per style. The base of the shoe is considered
the construction, and the higher parts (the “uppers”) are the
styling.





There is
a lingering impression in the higher end of the market that Italy and Brazil
will always be associated with better quality workmanship and higher-grade
materials than China. In general, Italian and Brazilian factories are smaller
and use premium materials and construction. We believe this impression is
changing and that Chinese materials and quality are rapidly improving to compete
with established Italian manufacturers. As a safeguard, our management monitors
the production processes in both countries to ensure high quality standards and
timely delivery.





We also
engage foreign agencies to assist in product fulfillment, quality control and
inspection, customs and delivery logistics on our behalf. Our foreign agencies
are located in areas where our shoes were manufactured—in Florence, Italy, Porto
Alegre, Brazil, and Dong Wong, China. We do not maintain long-term purchase
commitments with manufacturers, but instead use individual purchase orders. We
attempt to use multiple sources for manufacturing our products in an effort to
reduce the risk of reliance on any one facility or company. However, most of our
manufacturing is done by one Chinese manufacturer. We believe that the various
raw materials and components used in our products were generally available in
the market at competitive prices.





Our
outsourced manufacturing model enables us to scale production and sales with
minimal fixed capital requirements. The time between order placement and
fulfillment averages 90 to 120 days. Thirty days prior to the shipment of the
goods, we issue a letter of credit (in U. S. dollars) to the factory or agent
for the amount of the shipment.




5
 Table of Contents





PRODUCT
SALES CYCLE





For the
footwear business, approximately 60% of sales are predicated on orders placed in
advance of the selling season and the remaining sales occur during the selling
season. We design and develop new product introductions to coincide with these
established seasons. We reduce inventory risk resulting from changing trends and
product acceptance by pre-selling over 60% of our total unit
volume.





COMPETITION





We face
intense competition in the footwear industry. We compete with numerous domestic
and foreign designers and marketers, many of which have greater financial,
distribution and marketing resources, and better brand recognition. We believe
our ability to compete depends upon being able to anticipate and respond to
changing consumer demands in a timely manner, maintaining brand reputation and
authenticity, developing high quality products with broad appeal, pricing at
appropriate levels for the target markets, providing strong and effective
marketing support, ensuring product availability and effectively accessing the
Company’s distribution channels.





We
compete directly with designers who design and manufacture their own footwear,
as well as with other footwear companies who license the rights to design and
manufacture designer footwear. Manolo Blahnik and Jimmy Choo are examples of
well known designers who design their own products. These designers are not
lifestyle design labels (i.e., apparel and related products) but rather only
design footwear. Some lifestyle brands also design and manufacture their own
footwear, such as Burberry. We hope to target major lifestyle design brands and
obtain licenses to design and manufacture footwear. Many such brands are already
licensing such design and manufacture rights to other companies. Louis Vuitton
(LVMH) is the licensee for Marc Jacobs (and formerly was a licensee for Richard
Tyler) and Fendi footwear. BCGB Girls has licensed footwear design and
manufacturing rights to VCNM LLC, a privately held company. Brand names such as
Dr. Sholl’s and Carlos Santana have licensed footwear design and manufacturing
rights to a footwear company named Brown Shoe Company. In the case of Cole-Haan,
rather than obtain license rights,Nike acquired the entire company and now
designs and manufactures footwear under the Cole-Haan brand.





Accordingly,
not only do our footwear products compete with the footwear products of other
designers, we also compete with other footwear companies to obtain additional
designer licenses. We focus our new license development efforts on major
lifestyle designer brands that are not currently well-known for footwear, yet
have a well-known and recognized brand, and could benefit from our expertise in
footwear design.





MARKETING
AND ADVERTISING





We
conduct no marketing or advertising for ourselves outside of attending trade
shows. All marketing and advertising dollars are spent on behalf of our licensed
brands. We advertise and promote our various brands through a variety of
methods, including product packaging, print advertising in trade publications,
co-op advertising with existing retail customers, and direct consumer marketing.
Additionally, our employees attend tradeshows and mingle with retail customers
seeking buyers for our licensed products. These venues provide a platform for
the unveiling of new products and an important source of pre-season orders. We
also enjoy success in having both established and break out celebrities wear our
shoes, which correlates to extensive coverage in high fashion and
celebrity-focused media outlets.





GOVERNMENT
REGULATION AND PROBABILITY OF AFFECTING BUSINESS





Our
operations are subject to the effects of international treaties and regulations.
We are also subject to the effects of international trade agreements and
embargos by entities such as the World Trade Organization. Generally, these
international trade agreements benefit our business rather than burden it
because they tend to reduce trade quotas, duties, taxes and similar impositions.
However, these trade agreements may also impose restrictions that could have had
an adverse impact on our business, by limiting the countries from whom we can
purchase our fabric or other component materials, or limiting the countries
where we market and sell our products. Labeling and advertising of our products
is subject to regulation by the Federal Trade Commission. We believe that we are
in substantial compliance with these regulations.





EMPLOYEES





As of
April 23, 2008, we have four employees.  During 2007, prior to the
planned reorganization, we employed an average of approximately 25
employees.




6
 Table of Contents





Item 1A. Risk
Factors




Our
business could be harmed by any of these risks. The trading price of our common
stock could decline due to any of these risks, and you may lose all or part of
your investment. In assessing these risks, you should also refer to the other
information contained in this Annual Report on Form 10-KSB, including our
financial statements and related notes.





RISKS
RELATED TO OUR BUSINESS





AS A COMPANY IN THE EARLY STAGE OF
DEVELOPMENT WITH AN UNPROVEN BUSINESS STRATEGY, OUR LIMITED HISTORY OF
OPERATIONS MAKES EVALUATION OF OUR BUSINESS AND PROSPECTS
DIFFICULT.





Our
business prospects are difficult to predict because of our limited operating
history, early stage of development and unproven business strategy. Since our
exchange reorganization and merger, effective as of August 19, 2005, we are
involved in the designing, developing and marketing of women’s dress footwear.
Although management believes that our footwear products have significant profit
potential, we may not attain profitable operations and our management may not
succeed in realizing our business objectives.





WE HAVEAN ACCUMULATED DEFICIT OF
$33,952,329AND WORKING CAPITAL DEFICIENCY OF $
15,481,970AS OF
DECEMBER 31, 2007 ANDHAVE RECEIVED A
REPORT FROM OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM WHICH EXPRESSES A
GOING CONCERN UNCERTAINTY. WE MAY NEVERACHIEVE PROFITABILITY





Prior to
our Chapter 11 filing, we had incurred significant net losses for the past few
years, including a net loss of $11,204,662 in 2007. As of December 31, 2007, we
had an accumulated deficit of $33,952,329 and working capital deficiency of
$15,481,970. Our losses have resulted principally from expenses incurred for
selling, general and administrative, payroll, minimum royalty payments and
interest. To date, we have not yet generated sufficient recurring revenues. No
assurances can be given when we will ever be profitable.





Our
independent registered public accounting firm has added an explanatory paragraph
to its report issued in connection with the financial statements for each of the
years ended December 31, 2007, and 2006 relative to the substantial doubt about
our ability to continue as a going concern. Our ability to obtain additional
funding will determine our ability to continue as a going concern. Our financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.





WE WILL REQUIRE ADDITIONAL FINANCING
TO SUSTAIN OUR OPERATIONS AND WITHOUT IT WE WILL NOT BE ABLE TO EMERGE FROM OUR
CHAPTER 11 PROCEEDINGS AND CONTINUE OPERATIONS.





At
December 31, 2007, we had cash on hand of $6,390 and we used cash in operations
of $7,270,198 during the year then ended. We will need additional funds to
continue our operations, and such additional funds may not be available when
required. Our inability to raise additional working capital at all or to raise
it in a timely manner would negatively impact our ability to fund our
operations, to generate revenues, and to otherwise execute our business plan,
leading to the reduction or suspension of our operations and ultimately our
going out of business. We have no committed sources of additional capital. For
the foreseeable future, we intend to fund our operations and capital
expenditures from limited cash flow from operations, our cash on hand and equity
and debt financings. If our capital resources are insufficient, we will have to
raise additional funds. We may need additional funds to emerge from our Chapter
11 proceedings and continue our operations, pursue business opportunities (such
as expansion, acquisitions of complementary businesses or the development of new
products or services), to react to unforeseen difficulties or to respond to
competitive pressures. We cannot assure you that any financing arrangements will
be available in amounts or on terms acceptable to us, if at all. If additional
financing is not available when required or is not available on acceptable
terms, we may be unable to fund our operations, successfully promote our current
products, license new products or enhance our products and services, take
advantage of business opportunities, or respond to competitive pressures, any of
which could have a material adverse effect on our business and the value of your
shares. If we choose to raise additional funds through the issuance of equity
securities, you may experience significant dilution of your ownership interest,
and holders of the additional equity securities may have rights senior to those
of the holders of our common stock. If we obtain additional financing by issuing
debt securities, the terms of these securities could restrict or prevent us from
paying dividends and could limit our flexibility in making business
decisions.




OUR CONTINUED OPERATIONS DEPEND ON
CURRENT FASHION TRENDS. IF OUR PRODUCTS AND DESIGN DO NOT CONTINUE TO BE
FASHIONABLE, OUR BUSINESS COULD BE ADVERSELY AFFECTED.





The
novelty and the design of our footwear are important to our success and
competitive position, and the inability to continue to develop and offer such
unique products to our customers could harm our business. We cannot be certain
that designer footwear will continue to be fashionable. Should the trend steer
away from designer footwear, sales could decrease and our business could be
adversely affected. In addition, there are no assurances that our future designs
will be successful, and any unsuccessful designs could adversely affect our
business.




7
 Table of Contents




OUR
BUSINESS COULD SUFFER IF WE NEED TO ADD OR REPLACE MANUFACTURERS.





Although
we designed and marketed our products, we outsourced manufacturing to third
party manufacturers. Outsourcing the manufacturing component of our business is
common in the footwear industry and we competed with other companies for the
production capacity of our manufacturers. Because we are a small enterprise and
many of the companies with which we compete have greater financial and other
resources than we have, they may have an advantage in the competition for
production capacity. We outsourced our production to eight manufacturers. If we
experience a significant increase in demand, or if we need to replace any of the
manufacturers that we used, we may have to expand our third party manufacturing
capacity. We cannot be assured that this capacity will be available to us, or
that if available it will be available on terms that are acceptable to us. If we
cannot produce a sufficient quantity of our products to meet demand or delivery
schedules, our customers might reduce demand, reduce the purchase price they are
willing to pay for our products or replace our product with the product of a
competitor, any of which could have a material adverse effect on our financial
condition and operations.





OUR
BUSINESS COULD SUFFER FROM THE FINANCIAL INSTABILITY OF OUR
CUSTOMERS.





We sell
our products primarily to retail and distribution companies in the United States
on open account with 30 to 60 day payment terms. In foreign markets, we try to
obtain a letter of credit or wire transfer upon shipment, but these arrangements
are not always possible. Financial difficulties with a customer could result in
serious losses for our company.





IF OUR COMPETITORS MISAPPROPRIATE OUR
PROPRIETARY KNOW-HOW AND TRADE SECRETS, IT COULD HAVE A MATERIAL ADVERSE
AFFECT ON OUR BUSINESS.





We depend
heavily on the design expertise of our design team. If any of our competitors
copies or otherwise gains access to or develops similar products independently,
we might not be able to compete as effectively. The measures we take to protect
our designs may not be adequate to prevent their unauthorized use. Further, the
laws of foreign countries may provide inadequate protection of such intellectual
property rights. We may need to bring legal claims to enforce or protect such
intellectual property rights. Any litigation, whether successful or
unsuccessful, could result in substantial costs and diversions of resources. In
addition, notwithstanding the rights we have secured in our intellectual
property, other persons may bring claims against us that we have infringed on
their intellectual property rights or claims that our intellectual property
right interests are not valid. Any claims against us, with or without merit,
could be time consuming and costly to defend or litigate and therefore could
have an adverse affect on our business.





WE DEPEND ON KEY PERSONNEL IN A
COMPETITIVE MARKET FOR SKILLED EMPLOYEES, AND FAILURE TO RETAIN AND ATTRACT
QUALIFIED PERSONNEL COULD SUBSTANTIALLY HARM OUR BUSINESS.





We rely
to a substantial extent on the management, marketing and product development
skills of our key employees, particularly John Hanna, our co-founder and Chief
Executive Officer to formulate and implement our business plan. Our success
depends to a significant extent upon our ability to retain and attract key
personnel. Competition for employees can be intense in the footwear industry and
the process of locating key personnel with the right combination of skills is
often lengthy. The loss of the services of our key personnel may significantly
delay or prevent the achievement of our business goals and could have a material
adverse effect on us.





OUR BUSINESS AND THE SUCCESS OF OUR
PRODUCTS COULD BE HARMED IF WE ARE UNABLE TO MAINTAIN THEIR BRAND
IMAGE.





Our success is dependent in large part
to the strength of the brand names we license. If we are unable to timely and
appropriately respond to changing consumer demand, the brand name and brand
image we license may be impaired. Even if we react appropriately to changes in
consumer preferences, consumers may consider those brand images to be outdated
or associate those brands with styles of footwear that are no longer
popular.




OUR
BUSINESS COULD BE HARMED IF WE FAIL TO MAINTAIN PROPER INVENTORY
LEVELS.





We place
orders with our manufacturers for some of our products prior to the time we
receive all of our customers’ orders. We do this to minimize purchasing costs,
the time necessary to fill customer orders and the risk of non-delivery.
However, we may be unable to sell the products we have ordered in advance from
manufacturers or that we have in our inventory. Inventory levels in excess of
customer demand may result in inventory write-downs, and the sale of excess
inventory at discounted prices could significantly impair our brand image and
have a material adverse effect on our operating results and financial condition.
Conversely, if we underestimate consumer demand for our products or if our
manufacturers fail to supply the quality products that we require at the time we
need them, we may experience inventory shortages. Inventory shortages might
delay shipments to customers, negatively impact retailer and distributor
relationships, and diminish brand loyalty.




8
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COMPETITION IN THE FOOTWEAR INDUSTRY
IS FIERCE.





The
fashionable footwear industry is highly competitive and barriers to entry are
low. Our competitors include specialty companies as well as companies with
diversified product lines. The recent substantial growth in the sales of
fashionable footwear has encouraged the entry of many new competitors and
increased competition from established companies. A number of our competitors
have significantly greater financial, technological, engineering, manufacturing,
marketing and distribution resources than we do. Their greater capabilities in
these areas may enable them to better withstand periodic downturns in the
footwear industry, compete more effectively on the basis of price and production
and more quickly develop new products. In addition, new companies may enter the
markets in which we compete, further increasing competition in the footwear
industry. We believe that our ability to compete successfully depends on a
number of factors, including the strength of our licensors’ brand names,
effective advertising and marketing, fashionable styling.  High
quality and value are the most important competitive factors and the Company
plans to employ these elements as it develops its products, but there are many
other factors beyond our control. We may not be able to compete successfully in
the future, and increased competition may result in price reductions, reduced
profit margins, loss of market share and an inability to generate cash flows
that are sufficient to maintain or expand our development and marketing of new
products, which would adversely impact the trading price of our common
shares.





OUR OPERATING RESULTS COULD BE
NEGATIVELY IMPACTED BY OUR SALES CONCENTRATION IN ANY ONE BRAND.





If any
one brand or group of similar lifestyles of our footwear (evening wear, day
wear, city wear, sport wear) were to represent a substantial portion of our net
sales, we could be exposed to risk should consumer demand for such brand or
lifestyle decrease in subsequent periods. We are attempting to hedge this risk
by increasing our range of brands and for each brand a broad range of lifestyle
products (evening wear, day wear, city wear, sport wear). However, this may
change in the future and fluctuations in sales of any given style that
represents a significant portion of our future net sales could have a negative
impact on our operating results.





OUR BUSINESS MODEL IS DEPENDENT ON
OUR ABILITY TO SECURE AND MAINTAIN LICENSES FROM MAJOR, WELL-KNOWN
DESIGNERS.





Our
business strategy is to approach well-known designers of lifestyle products
(i.e., apparel and related accessories) and license the rights to provide
footwear under the designer’s brand. If we are unable to obtain additional
licenses, our business plan would be significantly impaired.





OUR INTERNATIONAL MANUFACTURING
OPERATIONS ARE SUBJECT TO THE RISKS OF DOING BUSINESS ABROAD, WHICH COULD AFFECT
OUR ABILITY TO MANUFACTURE OUR PRODUCTS IN INTERNATIONAL MARKETS, OBTAIN
PRODUCTS FROM FOREIGN SUPPLIERS OR CONTROL THE COSTS OF OUR
PRODUCTS.





Substantially
all of our net sales during 2007 were derived from sales of footwear
manufactured in foreign countries, with most manufactured in China and certain
couture lines manufactured in Italy and Brazil. Foreign manufacturing is subject
to a number of risks, including:




·
            political
      and social unrest;


·
            changing
      economic conditions;


·
            currency
      exchange rate fluctuations;


·
            international
      political tension and terrorism;


·
            work
      stoppages;


·
            electrical
      shortages;


·
            transportation
      delays;


·
            loss
      or damage to products in transit;


·
            expropriation;


·
            nationalization;


·
            the
      imposition of tariffs and trade duties both international and
      domestically;


·
            import
      and export controls and other non-tariff
  barriers;


·
            exposure
      to different legal standards (particularly with respect to intellectual
      property);


·
            compliance
      with foreign laws; and


·
            changes
      in domestic and foreign governmental
policies.




9
 Table of Contents





In
particular, because most of our products are manufactured in China, adverse
change in trade or political relations with China or political instability in
China would severely interfere with the manufacture of our products and would
materially adversely affect our operations. Foreign manufacturers may be more
susceptible to electrical shortages than U.S. manufacturers, which may cause
them, in some cases, to shut down production at least one day a week. These
electrical shortages may extend the production time necessary to produce our
orders, and there may be circumstances in the future where we may have to incur
premium freight charges to expedite product to our customers. If we incur a
significant amount of premium charges to airfreight product for our customers,
our gross profit will be negatively affected if we are unable to collect those
charges.





In
addition, if we, or our foreign manufacturers, violate United States or foreign
laws or regulations, we may be subject to extra duties, significant monetary
penalties, the seizure and the forfeiture of the products we are attempting to
import or the loss of our import privileges. Possible violations of United
States or foreign laws or regulations could include inadequate record keeping of
our imported products, misstatements or errors as to the origin, quota category,
classification, marketing or valuation of our imported products, fraudulent
visas or labor violations. The effects of these factors could render our conduct
of business in a particular country undesirable or impractical and have a
negative impact on our operating results.




OUR BUSINESS COULD BE HARMED IF OUR
CONTRACT MANUFACTURERS OR SUPPLIERS VIOLATE LABOR OR OTHER
LAWS.





We
require our independent contract manufacturers and suppliers to operate in
compliance with applicable United States and foreign laws and regulations.
Manufacturers are required to certify that neither convicted, forced or
indentured labor (as defined under United States law) nor child labor, as
defined by the manufacturer’s country, is used in the production process, that
compensation is paid in accordance with local law and that their factories are
in compliance with local safety regulations. Although we promote ethical
business practices, we do not control them or their labor practices. If one of
our independent contract manufacturers or suppliers violates labor or other laws
or diverges from those labor practices generally accepted as ethical in the
United States, it could result in adverse publicity for us, damage our
reputation in the United States or render our conduct of business in a
particular foreign country undesirable or impractical, any of which could harm
our business.




FOREIGN CURRENCY FLUCTUATIONS COULD
ADVERSELY AFFECT OUR PROFITABILITY.





We
generally sell our products in U.S. dollars. However, we source substantially
all of our products overseas and the cost of these products may be affected by
changes in the value of the relevant currencies. Changes in currency exchange
rates may also affect the relative prices at which we and foreign competitors
sell products in the same market. There can be no assurance that foreign
currency fluctuations will not have a material adverse impact on our business,
financial condition and results of operations.





WE
EXPERIENCE SEASONAL AND QUARTERLY FLUCTUATIONS IN DEMAND FOR OUR
PRODUCTS.





Our
quarterly results may fluctuate quarter to quarter as a result of the timing of
holidays, weather, the timing of larger shipments of footwear, market acceptance
of our products, the mix, pricing and presentation of the products offered and
sold, the hiring and training of additional personnel, the timing of inventory
write downs, the cost of materials, the incurrence of other operating costs and
factors beyond our control, such as general economic conditions and actions of
competitors. Accordingly, the results of operations in any quarter will not
necessarily be indicative of the results that may be achieved for a full fiscal
year or any future quarter.





RISKS
RELATED TO OWNERSHIP OF OUR SECURITIES





SINCE OUR SHARES ARE THINLY TRADED
AND TRADING ON THE OTC BULLETIN BOARD MAY BE SPORADIC BECAUSE IT IS NOT AN
EXCHANGE, OUR SHAREHOLDERS MAY HAVE DIFFICULTY RESELLING THEIR SHARES OF OUR COMMON
STOCK.





Our
common stock is quoted on the OTC Bulletin Board and is thinly traded. In the
past, our trading price has fluctuated as the result of many factors that may
have little to do with our operations or business prospects. In addition, the
OTC Bulletin Board is not an exchange and, because trading of the securities on
the OTC Bulletin Board is often more sporadic than the trading of securities
listed on an exchange or the NASDAQ Stock Market, our shareholders may have
difficulty reselling any of our common shares.




10
 Table of Contents





WE DO NOT ANTICIPATE PAYING ANY CASH
DIVIDENDS IN THE FORESEEABLE FUTURE, WHICH MAY REDUCE ANY RETURN ON AN
INVESTMENT IN OUR COMMON STOCK.





We plan
to use any of our earnings; to the extent we have earnings, to fund our
operations. We do not plan to pay any cash dividends in the foreseeable future.
We cannot guarantee that we will, at any time, generate sufficient surplus cash
that would be available for distribution as a dividend to the holders of our
common stock. Therefore, any return on investment in our common stock would
derive from an increase in the price of our stock, which may or may not
occur.





WE ARE CONTROLLED BY OUR SENIOR
LENDER, AND AS A RESULT, THE TRADING PRICE FOR OUR SHARES MAY BE
DEPRESSED AND
THESENIOR
LENDERCAN TAKE ACTIONS
THAT MAY BE ADVERSE TO YOUR INTERESTS.





In
August, 2007, Westrec Capital Partners, LLC obtained warrants to purchase common
stock that would provide it with a greater than 80% beneficial ownership of the
Company.





The
senior lender will have the ability to exert substantial influence over all
matters requiring approval by our stockholders, including the election and
removal of directors and any proposed merger, consolidation or sale of all or
substantially all of our assets. In addition, they could dictate the management
of our business and affairs. This concentration of ownership could have the
effect of delaying, deferring or preventing a change in control, or impeding a
merger or consolidation, takeover or other business combination that could be
favorable to you. This significant concentration of beneficial share ownership
may also adversely affect the trading price for our common stock because
investors may perceive disadvantages in owning stock in companies with
controlling stockholders.





WE ARE SUBJECT TO THE PENNY STOCK
RULES. THESE RULES MAY ADVERSELY AFFECT TRADING IN OUR COMMON
STOCK.





Our
common stock is a “low-priced” security under the “penny stock” rules
promulgated under the Securities Exchange Act of 1934. In accordance with these
rules, broker-dealers participating in transactions in low-priced securities
must first deliver a risk disclosure document which describes the risks
associated with such stocks, the broker-dealer’s duties in selling the stock,
the customer’s rights and remedies and certain market and other information.
Furthermore, the broker-dealer must make a suitability determination approving
the customer for low-priced stock transactions based on the customer’s financial
situation, investment experience and objectives. Broker-dealers must also
disclose these restrictions in writing to the customer, obtain specific written
consent from the customer, and provide monthly account statements to the
customer. The effect of these restrictions will probably decrease the
willingness of broker-dealers to make a market in our common stock, decrease
liquidity of our common stock and increase transaction costs for sales and
purchases of our common stock as compared to other securities.





Stockholders
should be aware that, according to Securities and Exchange Commission Release
No. 34-29093, the market for penny stocks has suffered in recent years from
patterns of fraud and abuse. Such patterns include (i) control of the market for
the security by one or a few broker-dealers that are often related to the
promoter or issuer; (ii) manipulation of prices through prearranged matching of
purchases and sales and false and misleading press releases; (iii) boiler room
practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (iv) excessive and undisclosed
bid-ask differential and markups by selling broker-dealers; and (v) the
wholesale dumping of the same securities by promoters and broker-dealers after
prices have been manipulated to a desired level, along with the resulting
inevitable collapse of those prices and with consequent investor losses. Our
management is aware of the abuses that have occurred historically in the penny
stock market. Although we do not expect to be in a position to dictate the
behavior of the market or of broker-dealers who participate in the market,
management will strive within the confines of practical limitations to prevent
the described patterns from being established with respect to our
securities.





Item 2.Descriptionof Property





Our
corporate office was located in approximately 1,872 square feet of leased office
space at 6310 San Vicente Blvd., Los Angeles, California. This lease was to
expire in June 2010. On December 15, 2007, in order to reduce its monthly rent
obligation, the Company established a new corporate office by leasing space on a
month to month basis at the office location of Westrec Capital Partners, LLC. On
January 15, 2008, concurrent with the reduction of its business operations, the
Company surrendered its San Vicente office space.





On March
31, 2008, the Company opened a retail store to sell its fashion shoes direct to
the public. The store operates under the name Shoe Bliss and is leased on a
month to month basis for a monthly rental payment of $5,000. The store location
has 1,500 square feet of space at 607 West Knoll Street, West Hollywood,
CA.  We believe this facility is suitable for our operating activities
at this time.




11
 Table of Contents





Item 3.LegalProceedings





On April
16, 2008, the Company and its wholly owned subsidiary filed voluntary
petitions under Chapter 11 of the US Bankruptcy Code with the United States
Bankruptcy Court, Central District of California, file numbers
1:08-BK-12363-KT and 1:08-BK-12359-KT, respectively. Active litigation at the
time of this bankruptcy filing will be moved to the bankruptcy
court.




William
Bradhan and Richard Traweek v. The Fashion House, Inc., John Hanna





This
matter was filed October 26, 2005, seeking damages for breach of contract and
fraud regarding oral arrangements with the Company’s subsidiary. On April 10,
2007, a Notice of Entry of Judgment was filed with the court for the amount of
$460,000, which includes interest at 10% per year.  No appeal was
filed. In connection with this judgment, the Company has accrued $300,000 in
accounts payable and accrued expenses in the accompanying consolidated balance
sheet based on management’s best estimate of the ultimate settlement of this
matter.





Artful
Mind Industrial, Ltd.





On March
6, 2007, the Company was served with a complaint, which Artful Mind Industrial
Ltd. (“Artful Mind”) filed on March 1, 2007 alleging that the Company failed to
make payments owed under a Settlement Agreement (the “Agreement”) entered into
between Artful Mind, Go Moda Limited and the Company in September 27, 2006.
Artful Mind seeks judgment for the full amount of all payments due, which
approximates $295,000, together with interest at a rate of 9% per annum
beginning on January 14, 2007 and costs of collection, including reasonable
attorneys’ fees incurred. Based on the event of a default, of not timely paying
the final two payments, the entire balance of all payments due were accelerated
and became immediately due and interest on all unpaid amounts accrued at a rate
of 9% per annum. The complaint states that the Company is currently in default
on the final two payments. On October 2, 2007, a default judgment was entered
for $315,055, including interest and court costs. The Company has included this
amount as accounts payable and accrued expenses in the accompanying consolidated
balance sheet. A restraining order on $136,847 of the Company’s cash balances at
Comerica Bank was obtained and is classified as restricted cash at December 31,
2007. The Company’s senior secured lender filed a lawsuit subsequent to December
31, 2007 to block payment of these funds to Artful Minds.  The matter is
currently pending.





TCK
Designs, LTD.





On May
11, 2007, a complaint was filed in New York by TCK Designs, LTD alleging breach
of contract for terminating a purported one year agreement without making
payment to the plaintiff. The plaintiff sought damages in the amount of $37,500,
plus legal fees and interest. A default judgment was entered on September 24,
2007. On October 31, 2007, an Order to Show Cause with Temporary Restraints was
filed in New Jersey, barring the Company’s public warehouse in New Jersey from
moving goods stored at that location. On November 5, 2007, at the Company’s
request, the Court granted a partial release on the restraining order allowing
the Company to continue shipping goods from the public warehouse.  The
Company was required by the court to maintain $100,000 of goods at the warehouse
and a cash deposit of $40,000 in its attorney’s trust account. The Company had
the option of placing an additional $20,000 in the attorney trust account to
fully release all goods in the warehouse.  The Company’s senior
secured lender filed a lawsuit subsequent to December 31, 2007 to block payment
of these funds to TCK Designs, LTD.  The court denied this request and
the funds were remitted to the plaintiff.




12
 Table of Contents





Barry K.
Rothman





On
October 26, 2007, a complaint was filed in Los Angeles by Barry K. Rothman
against the Company, John Hanna, Westrec Capital Partners, LLC and a principal
of Westrec Capital Partners, LLC for breach of contract in the amount of
$141,733 and appointment of receiver.  The suit relates to failure to
pay for legal services. The matter is currently pending.




Bowne of
Los Angeles





On
December 21, 2007 a complaint was filed in Los Angeles by Bowne of Los Angeles,
Inc. for breach of contract in the approximate amount of $20,000. The matter is
currently pending.





6310 San
Vicente Associate, LLC





On
February 15, 2008, a complaint was filed in Los Angeles against the Company by
6310 San Vicente Associates, Inc., the Company’s former landlord for breach of
contract for failure to pay rent in the approximate amount of $26,000. The
matter is currently pending.


.


Oscar De
La Renta, Ltd





On
February 19, 2008, a complaint was filed in New York by Oscar De La Renta Ltd.
against the Company for breach of contract, unfair competition, and trademark
infringement relating to failure to make royalty payments in connection with the
Company’s license agreement with Oscar De La Renta, Ltd. The plaintiff seeks
damages totaling $1,786,015. The matter is currently pending.





Nikki
DeLaTorre v. The Fashion House, Inc., John Hanna, Tom Anzures, DOES 1-10, was
settled for $25,000 in September 2006.





Isometric
Exhibit, Inc. v. The Fashion House, Inc. and DOES 1 to 10, was settled for
$17,500 in October 2006.





In
addition, we are subject from time to time to litigation, claims and suits
arising in the ordinary course of business. As of December 31, 2007, we were not
a party to any material litigation, claim or suit whose outcome we believe will
have a material effect on our financial condition, operating results, or cash
flows, other than the cases discussed above.





Item 4.Submissionof Matters to a Vote of Security
Holders





No
matters were submitted to a vote of our stockholders during the fourth quarter
of the fiscal year ended December 31, 2007.




13
 Table of Contents





PART
II





Item 5.Marketfor Common Equity and Related Stockholder
Matters





Market
Information





Our
common stock is traded on Over the Counter Bulletin Board (“OTCBB”) under the
symbol “FHHI.OB.” The following table sets forth the range of high and low bid
quotations for each of quarter of the last two fiscal years. These quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions.





High
            
            
            LowFiscal
      Year 2006First
      Quarter
            
            $
            2.35
            
            
            $
            0.97Second
      Quarter
            
            $
            1.90
            
            
            $
            0.60Third
      Quarter
            
            $
            0.73
            
            
            $
            0.25Fourth
      Quarter
            
            $
            0.55
            
            
            $
            0.15





Fiscal
      Year 2007First
      Quarter
            
            $
            0.55
            
            
            $
            0.25Second
      Quarter
            
            $
            0.31
            
            
            $
            0.13Third
      Quarter
            
            $
            0.11
            
            
            $
            0.02Fourth
      Quarter
            
            $
            0.03
            
            
            $
            0.01




As of
December 31, 2007, there were approximately 489 holders of record of our common
stock.




The
transfer agent and registrar for our common stock is Corporate Stock Transfer,
Inc.
  Dividends





We have
never declared or paid dividends on our common stock. We intend to retain
earnings, if any, for the operation and expansion of our business, and therefore
do not anticipate paying any cash dividends in the foreseeable future. Any
future determination to pay cash dividends will be at the discretion of our
board of directors, and will be dependent upon our financial condition, results
of operations, capital requirements and other factors as our board may deem
relevant at that time.





Recent
Sales of Unregistered Securities




Warrants




During
the year ended December 31, 2006, the Company issued a warrant to purchase
50,000 shares of restricted common stock to a consultant in connection with the
performance of consulting services. The warrant was valued at $28,000 (based on
the Black Scholes option pricing model), has an exercise price of $1.00, vested
upon grant and expires in December 2016.




Effective
December 20, 2006, the Company entered into an amended credit enhancement
agreement with Westrec, in which, among other things, Westrec agreed to extend
its guarantee on behalf of the Company to amounts owed to a bank and include its
guarantee on amounts owed to CIT, the Company’s factor. In exchange for the
additional concessions, the Company modified the warrants originally granted to
Westrec to increase the number of warrants granted from 5,000,000 to 9,000,000
and decrease the exercise price from $0.65 to $0.40 and extended the maturity
date to September 2007.




14
 Table of Contents





During
the year ended December 31, 2006, the Company issued warrants to purchase an
aggregate of 660,000 shares of the Company’s common stock in connection with
liquidated damages clauses of certain registration rights agreements, and in
connection with the issuance of notes payable. The warrants vested upon grant,
have exercise prices ranging from $1.00 - $1.25 and expire through
2016.




The
issuance of securities described above was deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act
as transactions by an issuer not involving any public offering. The recipients
of securities in each such transaction represented their intention to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the share certificates and other instruments issued in such transactions. The
sales of these securities were made without general solicitation or
advertising.




During
the year ended December 31, 2007, the Company issued warrants to purchase
approximately 110,000 shares of the Company’s common stock in connection with
liquidated damages clauses of certain registration rights
agreements.





The
Company failed to raise $4,000,000 of net proceeds from the sale of equity
securities by August 3, 2007, as required by the amended Westrec warrant
agreement. Accordingly, the exercise price of the warrant was reduced to $0.05
per share and the number of shares of common stock to be purchased was increased
to 80,277,472. In connection with the warrant modification, the Company
recognized as expense approximately $6,928,000 in August 2007. Based on the
number of shares of common stock issuable upon exercise of the warrant and other
potentially issuable shares, the Company determined that it does not have enough
authorized shares to settle all such obligations and that the feature was an
embedded derivative instrument pursuant to SFAS No. 133. In addition, under the
provisions of EITF Issue No. 00-19, the Company classified all other
non-employee warrants as derivative liabilities and recorded them at their fair
values at each balance sheet date until such time as the Company increased its
authorized shares or it has enough authorized shares to settle the issuance of
its convertible debt, options and warrants.





During
the year ended December 31, 2007, warrants to purchase a total of 97,341,708
shares of common stock were granted to Westrec under the Amended and Restated
Credit Enhancement Agreement, as amended on July 9, 2007 (see Note 6 to the
financial statements). As of December 31, 2007, Westrec had been granted a total
of 106,537,244 warrants.




Item 6.Management’sDiscussion and Analysis or Plan of
Operation





Some of
the statements made by us in this Annual Report on Form 10-KSB are
forward-looking in nature, including but not limited to, statements relating to
our future revenue and expenses, licensing agreements, product development,
market acceptance, and our management’s plans and objectives for our current and
future operations, and other statements that are not historical facts.
Forward-looking statements include, but are not limited to, statements that are
not historical facts, and statements including forms of the words “intend”,
“believe”, “will”, “may”, “could”, “expect”, “anticipate”, “plan”, “possible”,
and similar terms. Actual results could differ materially from the results
implied by the forward-looking statements due to a variety of factors, many of
which are discussed throughout this Annual Report and in our SEC filings.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We undertake no obligation
to publicly release any revisions to these forward-looking statements that may
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events, unless required by law. Factors that could
cause actual results to differ materially from those expressed in any
forward-looking statement made by us include, but are not limited
to:


·
              our
      ability to finance our activities and maintain our financial
      liquidity;
 ·
              our
      ability to enter into new licensing agreements and to maintain and renew
      existing licensing agreements;
 ·
              changes
      in consumer preferences or fashion
trends;
 ·
              disruption
      in product shipment;
 ·
              changes
      in import regulations;
 ·
              our
      dependence on a small number of large
customers;
 ·
              changes
      in our relationships with vendors and other resources;
  and
 ·
              intensely
      competitive industry conditions.
  15
 Table of Contents
 The
following discussion should be read in conjunction with our audited consolidated
financial statements and the related notes that appear elsewhere in this annual
report.





We were
originally incorporated in Colorado as Kimbell - deCar Corporation on April 22,
1986. Kimbell - deCar Corporation’s business failed in 1990 and Kimbell - deCar
Corporation was inactive beginning in 1990. At that time, Kimbell - DeCar
Corporation had nominal business activities and could be considered a “shell
company.”





On August
19, 2005, a “reverse merger” was effected through a Reverse Share Exchange
Agreement among TDI Holding Corporation (“TDI Holding”), The Fashion House, Inc.
and shareholders of 100% of the common stock of Fashion House, Inc. In
consideration for all of the shares of The Fashion House, Inc., TDI Holding
agreed to issue 14,114,200 shares of the Company’s common stock and received
$325,000 in cash from the Fashion House, Inc., which was distributed to the
shareholders of TDI Holding. As part of the reverse merger, The Fashion House,
Inc. shareholders became shareholders of TDI Holding, The Fashion House Inc.
became a wholly-owned subsidiary of TDI Holding, the management of The Fashion
House, Inc. took over control of TDI Holding and TDI Holding changed its name to
The Fashion House Holdings, Inc. Under the Exchange Agreement, TDI Holding
Corporation would implement a reverse-stock-split on a 21.8 to 1 basis such that
one share would equal 1/21.8 shares of common stock. On August 19, 2005, and in
connection with the Exchange Agreement, TDI Holding Corporation amended its
Articles of Incorporation implementing the foregoing reverse-stock-split with an
effective date of August 29, 2005. For consistency and clarity, all share
references hereinafter assume the reverse-stock-split has taken
place.





The
reverse merger allowed The Fashion House, Inc to become a wholly-owned
subsidiary of TDI Holding Corporation, a publicly held shell company, without
having to pursue the traditional registration process. From and after the
closing of the reorganization and merger, our principal asset became, and
continued to be, The Fashion House, Inc.




The
Company entered into an agreement in June of 2005 with Brookstreet Securities
Corporation (“BSC”), a NASD member investment banker based in Irvine,
California, as its placement agent and financial consultant to sell newly issued
common stock at $1.00 per share for a total offering from a minimum of 2,500,000
shares to a maximum of 8,500,000 shares (the “PPM”), as amended, in order to
raise minimum capital of $2,175,000 to maximum capital of $7,395,000, net of
expenses. In addition, investors received warrants, which immediately vested, to
purchase shares of the Company’s common stock at an exercise price of $1.25 per
share in an amount equal to 50% of the number of shares purchased. The Company
agreed to pay BSC an 8% retail sales commission, a 2% non-accountable marketing
allowance and a 3% non-accountable expense allowance and warrants to purchase an
amount of the Company’s common stock equal to 15% of the common stock sold in
the PPM. All warrants issued to the Managing Dealer carry an exercise price of
$1.00, with cashless exercise provisions.




The
Company completed the private placement in June of 2006 with the total sale of
8,014,732 shares of common stock for proceeds of $6,819,253, net of commissions,
fees, and expenses aggregating $1,520,479.





Overview




We plan
to design, develop, and market a diversified selection of women’s dress and
casual fashion footwear with an emphasis on celebrity appeal, style, quality,
and fit. We target moderate to premium priced categories of the women’s fashion
footwear market. Our business centers on the licensing of recognized brand
names. The practice of licensing, or the leasing of trademarked or copyrighted
entity, including name, likeness, logo, graphic, saying, signature or character,
has become an increasingly common practice among apparel and footwear companies,
and the licensee typically pays royalties based upon product sales. We have sold
over 100 different styles of designer footwear through independent retailers,
specialty retailers and better department stores.





As a
result of our continued cash flow deficits, most of our license agreements have
either been terminated for non-payment of royalties (Isaac and Oscar), or have
expired on their original termination date and have not been renewed
(Tyler).  Due to a continuing decline in the demand for Blass
footware, this license agreement was mutually terminated. At this time, we do
not have any active license agreements in place. We are presently in discussions
with several haute couture designers to license their brands. However, there can
be no assurances that we will be successful in obtaining additional
licenses.





The
footwear sales cycle is well entrenched and most of the industry’s
infrastructure centers around four distinct selling seasons: Spring 1, Spring 2,
Fall 1 and Fall 2. Spring 1 occurs in June and products are debuted at trade
shows—such as the Fashion Footwear Association of New York—for introduction to
retail stores in November. Spring 2 occurs in August and coincides with the
industry’s largest trade show event—the World Shoe Association show in Las
Vegas. Lines that debut in this venue appear on retail shelves and counters the
following February and March. Fall 1 is a December event and translates to
retail introductions in April and May. Fall 2 occurs in February and shoes
ordered by buyers in this period are introduced to retail stores in July and
August.




16
 Table of Contents





Reduction
of Operations, Chapter 11 Filing and Planned Operations





On
January 15, 2008, the Company terminated a substantial portion of its operations
because of its continuing cash flow deficits.  Prior to this date, on
December 15, 2007, in order to reduce its monthly rent obligation, the Company
established a new corporate office by leasing space on a month to month basis at
the office location of Westrec Capital Partners, LLC (“Westrec”). On January 15,
2008, concurrent with the reduction of its business operations, the Company
surrendered its San Vicente office space.  Westrec is considered a
control stockholder of the Company and the Company’s Interim Chief Financial
Officer is a part-time and temporary employee of an affiliate of
Westrec.





On April
16, 2008, the Company and its wholly owned subsidiary filed voluntary
petitions under Chapter 11 of the US Bankruptcy Code with the United States
Bankruptcy Court, Central District of California, file numbers
1:08-BK-12363-KT and 1:08-BK-12359-KT, respectively.




Our
current operations include sales at our retail outlet opened on March 31,
2008, located at 607 West Knoll, West Hollywood California. This store
operates under the name Shoe Bliss and occupies 1,500 square feet
of retail space.   At Shoe Bliss, we sell well known
designer brands at a discount between 50 to 75% of the retail prices. Our shoes
sell in our retail store for $39 to $120, while similar shoes retail in the
market place from $140 to $300.  This retail division allows us
to reduce warehousing expenses, produce current income, and keep
our brand names in the market, thus preserving our goodwill.




We are
also currently indentifying and negotiating new designer licenses to actively
resume our women’s wholesale business, which was curtailed in January 2008 as
part of our business reorganization plans.




We plan
to emerge from Chapter 11 proceedings operating two divisions, wholesale and
retail.  Our reorganization plan includes resuming our historical
wholesale business model of licensing, designing, manufacturing and
marketing designer brand women’s footwear.  We are presently in
discussions with several haute couture designers to license their brands.
We will retain our successful pattern of building high end
footwear for these licensed brands and selling the product in domestic and
international markets.  We will also introduce diffusion lines for the same
brands at more affordable price points of $79 to $ 150.  The Company
will continue to limit business to designer brands that highlight design
aspects in order to capitalize on brand recognition.




We plan
to expand our retail division by opening Shoe Bliss stores in the
State of California and ultimately across the United States.





The
Company remains in default under an approximately $8.5 million line of credit
initially provided to it by Comerica Bank which was subsequently assigned to
Michael M. Sachs, the majority owner of Westrec. The Company is also in default
on amounts owed to Westrec of approximately $3.2 Million.





Results
of Operations





Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006





Net sales
for the year ended December 31, 2007 were $6,579,335, a decrease of $2,811,991
or 29.9%, from 2006 net sales of $9,391,326. The decreased net sales of
$2,811,991 were mostly attributable to late product deliveries from the
Company’s overseas factories. These late deliveries resulted in the cancellation
of some of the Company’s sales. The late deliveries were caused by late payment
to the factories due to the Company’s continuing negative cash flow
issues.





Gross
loss for 2007 was $1,092,239 or (16.6%) of net sales, compared to a gross profit
of $1,920,066 or 20.4% of net sales during 2006. The negative gross margin in
2007 of (16.6%) was caused primarily by late deliveries of product from our
overseas suppliers, which forced us to significantly discount wholesale prices
to our customers and the need to air freight some of the shipments to the US.
The low gross margin in 2006 of 20.4% was also affected by late deliveries from
overseas factories, but not nearly to the same degree as 2007.




17
 Table of Contents





Operating
expenses include all costs associated with design, development, sales,
marketing, distribution, purchasing, and corporate functions. Operating expenses
decreased to $7,519,130 in the year ended December 31, 2007 from $9,558,216 in
2006, for a decrease of $2,039,086. The decrease in operating expenses is
primarily attributable to a decrease in selling, general and administrative
expenses of $2,645,736. This decrease in selling, general and administrative
expenses was generally due to a decrease in professional fees of $823,123,
investor relations of $200,177, cost of samples of $408,502, and trade show and
travel expenses of $258,725 as the Company attempted to preserve its cash
resources.  Payroll costs increased to $2,760,108, an increase of
$105,706 from 2006 as the result of building a sales staff and additional
administrative staffing. Royalty fees increased to $1,248,060 from $747,155 on
the prior year. This increase of $500,905 in royalty fees is attributable to the
contractual increase in guaranteed minimum payment in 2007 over
2006.





The net
loss for the year ended December 30, 2007 is $11,204,662, compared to a net loss
of $14,691,213 for the same period in 2006 for a decreased loss of $3,486,551,
primarily as a result of accounting for derivatives. The loss from operations
was $8,611,369 during the year ended December 31, 2007 compared to a loss
from operations of $7,638,150 for the year ended December 31, 2006. The increase
in the loss from operations of $973,219 was primarily due to the gross loss for
the year ended December 31 2007 compared to the gross profit for the same period
in 2006. The Company recorded in other expenses for the year ended December 31,
2007 charges totaling $2,592,493. These charges included $9,240,200
of expense to record the fair value of warrants issued as guarantees,
$9,240,200 income to record the change in the fair value of derivative
liabilities that were deemed worthless as a result of the Chapter 11 filing, and
interest expense of $1,819,554. Interest expense was $7,052,263 for the year
ended December 31, 2006 and included $5,363,854 due to the amortization of the
fair value of the warrants associated with certain notes payable.





Liquidity
and Capital Resources





As
reported in the Report of Independent Registered Public Accounting Firm on our
December 31, 2007 and 2006 financial statements, the Company has suffered
recurring losses from operations, and has a working capital deficit that raises
substantial doubt about our ability to continue as a going concern.




During
the year ended December 31, 2007, Company’s net cash position decreased by
$125,517 to $6,390. During 2007, as a result of the Artful Minds lawsuit, a lien
was placed on $136,847 of the Company’s cash and is classified as restricted
cash as of December 31, 2007. The Company’s senior secured lender has filed a
lawsuit to block the payment of these funds to Artful Minds.





The
Company’s financing activity provided net cash of $7,220,990 for the year ended
December 31, 2007, primarily through borrowings from the Company’s senior
secured lender of $7,751,568.  These borrowings are classified as
advances from related parties at December 31, 2007. Advances from the
factors during the year were $7,600,614 and payments to the factors were
$8,101,262.





Net cash
used in operating activities for the year ended December 31, 2007 was
$7,270,198, a decrease of $1,344,989 from the $8,615,187 used in operating
activities in the prior year period. The net loss of $11,204,662 was the major
contributor to the use of cash in the year ended December 31, 2007.




The
Company had cash used for investing activities of $76,309 relating to the
disposal of property and equipment of $60,538 and restricted cash of $136,847
for the year ended December 31, 2007.  In the 2006 period, the net
cash used was $251,375.





Future
Liquidity




Our
principal sources of liquidity consist of existing cash balances. We believe the
key factors to our liquidity in 2008 will be our ability to successfully emerge
from Chapter 11 proceedings and execute on our plans to become profitable. There
is no assurance that the Company will be able to achieve profitability. Our cash
requirements will also depend on numerous other variable factors, including the
rate of growth of sales, the timing and levels of products purchased, payment
terms and credit limits from manufacturers, and the timing and level of accounts
receivable collections.




We will
require additional financing in the next twelve months. We cannot assure you
that additional financing (public or private) will be available on acceptable
terms or at all. If we issue additional equity securities to raise funds, the
ownership percentage of our existing stockholders would be reduced. New
investors may demand rights, preferences or privileges senior to those of
existing holders of common stock. If we cannot raise any needed funds, we might
be forced to make further substantial reductions in our operating expenses,
which could adversely affect our ability to implement our current business plan
and ultimately our viability as a company.




18
 Table of Contents




Financing
Activities




We were
financing our operations primarily with borrowings from our senior secured
lender. With the exception of the year ended December 31, 2004, when we sold the
Nicole Miller License resulting in a gain for the year, we have incurred net
losses as a result of sales, design, and administrative staffing expenses in
support of our operations.





On
February 27, 2007, we amended our Master Revolving Note (the “Note”) dated
September 18, 2006, to increase the borrowing base from an aggregate of $5.0
million to $6.5 million, payable in whole or in part upon demand at a per annum
rate equal to the Lender’s prime rate plus 1% per annum secured by deposits with
the Lender. The note replaces previously issued notes by the bank. Upon default,
we are required to pay an additional 3% interest per annum.





On April
10, 2007, the Company amended its Note (the “April Amendment”) to increase the
borrowing base from an aggregate of $6.5 million to $8.5 million.  In
connection with the April Amendment, the Company entered into an amendment of
the Credit Enhancement Agreement with Westrec pursuant to which each of the
Guarantors agreed to guarantee additional advances under the Comerica Loan of up
to an aggregate of $2,000,000, which advances are drawn no later than August 3,
2007, provided that at the time of each advance certain representations,
warranties, and conditions are all satisfied. This additional $2,000,000 was
fully drawn by the Company as of July 12, 2007.





On July
9, 2007, Westrec and the Company entered into a Letter Agreement to amend the
Amended and Restated Credit Enhancement Agreement dated as of December 20,
2006, as amended (the “Agreement”). The
purpose of the Letter Agreement was to amend the Agreement to allow for direct
loans to the Company in addition to the credit enchantment facility with
Comerica Bank. Each direct loan shall be shall be due and payable on demand
and shall bear interest at a rate equal to the greater of (i) twenty percent
(20%) per annum, or (ii) the sum of (A) the prime rate, plus (B) 11.75% per
annum.While there
is no obligation to continue these loans, as of December 31, 2007, $3,143,000 of
advances had been made under this amended Agreement.




On July
17, 2007, the Company entered into an agreement with Ashford Finance, LLC
(“Ashford”), whereby Ashford will provide up to $5,000,000 of purchase order
financing relating to the Company’s purchases of its products from foreign
manufacturers. Ashford willl finance an amount up to 90% of the Company’s end
buyer’s purchase orders relating to the Company’s purchase orders placed with
the foreign manufacturer. The Company is charged an Account Management Fee equal
to 1.5% per month for Letters of Credit opened by Ashford on behalf of the
Company when the amount equals up to 75% of the Company’s related customer
purchase orders. The Account Management Fee will increase to 2.5% for Letters of
Credit when the amount is in excess of 75% of the related customer purchase
order, but in no event will the Letter of Credit amount be greater than 90% of
the related customer purchase orders. All loans will also bear interest at the
rate of 2% per annum above the Prime Rate as published time to time by the Wall
Street Journal. The agreement requires minimum usage during the first twelve
months of $3,000,000. If the Company cancels the agreement or fails to open
letters of credit that equal the minimum usage, the Company is required to pay
all fees under the agreement for the full minimum amount. The loans are secured
by virtually all of the Company’s assets. Transactions financed under this
agreement are guaranteed by two of the Company’s directors and shareholders, but
only in the event that fraud may have occurred.





On July
25, 2007, the Company entered into a new accounts receivable factoring agreement
with Ultimate Financial Solutions, LLC (“Ultimate”). The Company agreed to sell
and assign to Ultimate all accounts arising from the sale of inventory. At the
Company’s request, Ultimate may advance funds to the Company at up to 80% of the
factor risk accounts. The Company is charged a factoring fee of .85% on gross
invoice amounts. Interest is charged based on the daily debit balances in the
funds in use account for the month, at a rate equal to 1.5% above the Prime Rate
as published from time to time in the Wall Street Journal. In connection with
this agreement, on July 30, 2007, Ultimate paid CIT for the outstanding balance
of funds in use by the Company on that day. As a result, the Company’s liability
for this amount was effectively transferred from CIT to Ultimate and the CIT
agreement was terminated.  The loans under this agreement are secured by
substantially all of the Company’s assets. The loans are personally guaranteed
by the principal member of Westrec and a director and shareholder of the
Company.




In
connection with the July 25, 2007 agreement with Ultimate and the July 17, 2007
agreement with Ashford, Intercreditor Agreements were also entered into by and
between Westrec, Comerica, Ultimate and Ashford to establish a priority for
security interests in the Company’s assets. In these agreements, Comerica
subordinated its security interest to Ultimate in accounts factored by Ultimate.
Comerica also subordinated its security interest in all assets to Ashford.
Ultimate subordinated its security interest in purchase orders financed by
Ashford. Westrec subordinated its security interest to Ultimate in accounts
factored by Ultimate.  Westrec subordinated its security interest in
receivables, as defined, to Ashford. Westrec subordinated to Ashford its
security interest in inventory financed by Ashford. With regard to inventory
other than inventory financed by Ashford, security interests of Ashford and
Westrec rank pari passu with one another. Ashford’s lien and security interest
in all other assets and collateral is subordinate to Westrec’s security interest
(other than receivables or inventory).





In
November 2007, the Master Revolving Note was assigned by Comerica Bank to
Michael M. Sachs, the principal owner of Westrec Capital Partners,
LLC.




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Licenses




For the
rights to use trademarks, the Company has entered into licensing agreements with
various licensors. The agreements enable the Company to sell products using the
name of the licensors in return for a licensing fee based upon sales of the
products using the licensors’ names.




As of
December 31, 2007, the Company had rights to use eight trademarks as evidenced
by licensing agreements entered into with Oscar by Oscar de la Renta, O Oscar by
Oscar de la Renta, Blass by Bill Blass, Bill Blass Couture, Blassport and Bill
Blass Collection, Isaac Mizrahi and a new couture brand which expire through
March 2011. Under these licensing agreements, the Company agreed to pay the
greater of between 3% and 8% of net sales of the licensed products or guaranteed
minimums ranging from $70,000 to $1,000,000 per annum, per contract. The
licensors may terminate the licensing agreements in the event of default, as
defined.





Minimum
annual guaranteed royalty payments are as follows:




Years
      ending December 31,2008
            
            $
            1,083,0002009
            
            
            1,401,0002010
            
            
            1,625,0002011
            
            
            1,748,000$
            5,857,000







On
November 26, 2007, the Tyler licenses ended in accordance with the contract
termination date. While a two year renewal was available in the agreement, the
renewal option was not exercised.





The Company hadexperienced a declining
market for its Blass footwear. As a result,during the fourth quarter
of 2007,the Company and Bill Blass began negotiations to terminate the
Blass license. While the Company and Blass had mutually agreed that the Company
would discontinue the design, manufacture and sale of Blass footwear, a payment
of $90,000 by the Company to Blass was to be made to relieve the Company’s
obligations under the license agreement for all future minimum payments. This
payment has not been made as of the date of this filing.





On January 10, 2008, Oscar
de la Renta issued a written notice of default for failure to pay minimum
royalties under the Company’s licensing agreement with it.On February
19, 2008, a complaint was filed in New York by Oscar De La Renta Ltd. against
the Company for breach of contract, unfair competition, and trademark
infringement relating to failure to make royalty payments in connection with the
Company’s license agreement with Oscar De La Renta, Ltd. The plaintiff seeks
damages totaling $1,786,015. The matter is currently pending. As of January, 31,
2007 the Company has accrued all minimum royalties due under all license
agreements.





On
January 27, 2008 Isaac Mizrahi requested termination of the Company’s licensing
agreement with it.





As of
December 31, 2007, the Company has accrued all minimum royalties due under all
license agreements.




CRITICAL
ACCOUNTING POLICIES




In
preparing our financial statements, we make estimates, assumptions and judgments
that can have a significant effect on our revenues, income/loss from operations,
and net income/loss, as well as on the value of certain assets on our
consolidated balance sheet. We believe that there are several accounting
policies that are critical to an understanding of our historical and future
performance as these policies affect the reported amounts of revenues, expenses,
and significant estimates and judgments applied by management. While there are a
number of accounting policies, methods and estimates affecting our consolidated
financial statements, areas that are particularly significant include revenue
recognition and stock-based compensation. In addition, please refer to Note 1 to
the accompanying consolidated financial statements for further discussion of our
significant accounting policies.




20
 Table of Contents






Revenue
Recognition




Securities
and Exchange Commission Staff Accounting Bulletin (“SAB”) 101, Revenue  Recognition , as amended by
SAB 104, outlines the basic criteria that must be met to recognize revenue and
provide guidance for presentation of revenue and for disclosure related to
revenue recognition policies in financial statements filed with the Securities
and Exchange Commission. Management believes that our revenue recognition policy
conforms to SAB 104.




We
evaluate the criteria of the FASB Emerging Issues Task Force (“EITF”) 99-19,
Reporting Revenue Gross as a
Principal Versus Net as an Agent, in determining whether it is
appropriate to record the gross amount of revenue and related costs or the net
amount earned as commissions. As the primary obligor, we are subject to
inventory risk  have latitude in establishing prices and selecting
suppliers, can establish product specifications, and also have the risk of loss
as it relates to cargo losses. Accordingly, our revenue is recorded on a gross
basis.




We issue
letters of credit in favor of the manufacturers in accordance with the
information provided by us and the manufacturer. We import the goods and pay the
import and delivery costs and forwards the goods to a public warehouse. Goods
are held by us at a public warehouse until the customers requested ship date. We
arrange and maintain the goods while in our warehouse at our expense. The
Company has title to the goods when shipped from the manufacturer and in the
public warehouse.





Revenue
is recognized upon shipment of goods from the public warehouse to the customers,
which is when title transfers to the customers. The Factor approves credit to
the customers on the factored sales and charges us .85% of sales.





Shipping
and handling costs billed to the customers are recorded in sales. Shipping and
handling costs as incurred by us for the imported goods are recorded in cost of
sales.





Derivative
Financial Instruments





In
connection with the issuance of warrants with certain notes payable the Company
was required to file a registration statement in November 2005 and have such
registration statement declared effective no later than 180 days following the
Merger (the “Effectiveness Deadline”) and to maintain the effectiveness of such
registration. In addition, the Company was required to issue certain holders of
convertible warrants for each subsequent 30-day period that such registration
statement had not been filed and issue? additional warrants for each 30-day
period following the Effectiveness Deadline, in which the registration statement
was not declared effective. On July 26, 2006, the Company filed the required
registration statement. The Company’s registration statement became effective on
January 23, 2007. The Company determined that the registration rights are an
embedded derivative instrument pursuant to SFAS No. 133, Accounting for
Derivative  Instruments and Hedging
Activities , as amended. Under the provisions of Emerging Issues Task
Force (“ EITF ”) Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in a Company’s Own Stock
and View A of EITF No. 05-4, The Effect of a Liquidated Damages
Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock, the accounting treatment of these
derivative financial instruments required that the Company record the
derivatives at their fair values as of the inception date of the note agreements
and at fair value as of each subsequent balance sheet date. Any change in fair
value was recorded as non-operating, non-cash income or expense at each balance
sheet date. If the fair value of the derivatives was higher at the subsequent
balance sheet date, the Company recorded a non-operating, non-cash expense. If
the fair value of the derivatives was lower at the subsequent balance sheet
date, the Company recorded non-operating, non-cash income.





In
December 2006, the FASB issued Staff Position EITF 00-19-2, Accounting for
Registration Payment Arrangements (“ FSP EITF 00-19-2” ). FSP EITF 00-19-2
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
FASB Statement No. 5, Accounting for Contingencies.
FSP EITF 00-19-2 further clarifies that a financial instrument subject to a
registration payment arrangement should be accounted for in accordance with
applicable generally accepted accounting principles without regard to the
contingent obligation to transfer consideration pursuant to the registration
payment arrangement.





In
accordance with the provisions of FSP EITF 00-19-2, the Company elected early
adoption of this statement. As of January 1, 2006, the Company recorded the
warrant liability to equity since the only provision which caused the warrants
issued to be accounted for as a derivative liability was the liquidated damages
provision in the registration rights agreement. However, as retrospective
application of FSP EITF 00-19-2 is prohibited, the Company has not restated the
amounts presented as of December 31, 2007.




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As a
result of unsuccessful fund raising efforts, the Company modified an existing
warrant (the “Modification”) and therefore did not have a sufficient number of
authorized shares to settle outstanding and exercisable options, warrants and
convertible instruments. Therefore, under the provisions of Emerging Issues Task
Force ("EITF") Issue No. 00-19, Accounting For Derivative Financial
Instruments Indexed To, And Potentially Settled In, A Company's Own
Stock, as a result of the Modification, the Company was required to
classify all warrants as derivative liabilities and apply the same accounting
treatment as noted above until the Company has a sufficient number of authorized
shares.





Beneficial
Conversion Feature





The
convertible feature of certain convertible notes payable provides for a rate of
conversion that is below market value. Such feature is normally characterized as
a “beneficial conversion feature” (“BCF”). Pursuant to EITF Issue No. 98-5
(“EITF 98-5”), Accounting For
Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratioand EITF Issue No. 00-27, Application of EITF Issue No. 98-5
To Certain Convertible Instruments,the fair values
of the BCFs have been recorded as a discount from the face amount of the
respective debt instrument. We are amortizing the discounts using the effective
interest method through maturity of such instruments. We will record the
corresponding unamortized debt discounts related to the BCFs and warrants as
interest expense when the related instrument is converted into our common
stock.





Going
Concern





The financial
statements have been prepared on a going concern basis which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company incurred a net loss of $11,204,662 for the year
ended December 31, 2007, and has a working capital deficit of $15,481,970 and a
stockholders’ deficit of $16,104,628 at December 31, 2007. These factors
raise substantial doubt about the Company’s ability to continue as a going
concern. The ability of the Company to continue as a going concern is dependent
on achieving profitable operations and obtaining sufficient debt or equity
financing in the future. These financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.




Our
business and results of operations are affected by a wide variety of factors, as
we discuss in Item 1A. “Risk Factors” of our Annual Report on Form 10-KSB filed
with the U.S. Securities and Exchange Commission, which could materially and
adversely affect us and our actual results. As a result of these factors, we may
experience material fluctuations in future operating results on a quarterly or
annual basis, which could materially and adversely affect our business,
financial condition, operating results and stock price.





The
Company will require financing to repay its existing obligations and resume
operating activities. There can be no assurance that additional funding will be
adequate or will enable the Company to achieve or sustain profitable
operations.





On April
16, 2008, the Company and its wholly owned subsidiary filed voluntary
petitions under Chapter 11 of the US Bankruptcy Code with the United States
Bankruptcy Court, Central District of California, file numbers
1:08-BK-12363-KT and 1:08-BK-12359-KT, respectively.







We plan
to emerge from Chapter 11 proceedings operating two divisions, wholesale and
retail.  Our reorganization plan includes resuming our historical
wholesale business model of licensing, designing, manufacturing and
marketing designer brand women’s footwear.  We are presently in
discussions with several haute couture designers to license their brands.
We will retain our successful pattern of building high end
footwear for these licensed brands and selling the product in domestic and
international markets.  We will also introduce diffusion lines for the same
brands at more affordable price points of $79 to $ 150.  The company
will continue to limit business to designer brands that highlight design
aspects in order to capitalize on brand recognition.




22
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Item 7.FinancialStatements





Our
Consolidated Financial Statements, including the Notes thereto, together with
the reports of independent registered public accounting firms thereon are
presented as a separate section of this Form 10-KSB, and the following are
attached hereto beginning on Page F-1:





Consolidated
Financial Statements:





Reports
of Independent Registered Public Accounting Firms


Consolidated
Balance Sheet as of December 31, 2007


Consolidated
Statements of Operations for years ended December 31, 2007 and 2006


Consolidated
Statements of Stockholders’ Deficit for years ended December 31, 2007 and
2006


Consolidated
Statements of Cash Flows for years ended December 31, 2007 and 2006


Notes to
Consolidated Financial Statements







Item 8.Changesin and Disagreements with Accountants on Accounting and
Financial Disclosure





On
February 25, 2008, KMJ Corbin & Company (“Corbin”) resigned as the
registered public accounting firm of Fashion House Holdings, Inc. (the
“Company”).  The resignation was the result of the Company’s decision
to consider filing for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. The resignation was accepted by the Company’s Board of Directors on
February 25, 2008.  The reports of Corbin dated April 3, 2007 and
March 31, 2006 on our balance sheets as of December 31, 2006 and 2005, and the
related consolidated statements of operations, stockholders’ equity and cash
flows for the years ended December 31, 2006 and 2005, did not contain an adverse
opinion or disclaimer of opinion, or qualification or modification as to
uncertainty, audit scope or accounting principles.  However, the audit
report of Corbin included an explanatory paragraph in which it indicated there
was substantial doubt about the Company’s ability to continue as a going
concern.





During
the two most recent fiscal years ended December 31, 2006 and 2005, and through
February 25, 2008, there were no disagreements with Corbin on any matters of
accounting principles or practices, financial statement disclosure or auditing
scope and procedures which, if not resolved to its satisfaction would have
caused them to make reference to the matter in its reports on the Company’s
consolidated financial statements for such years.





On
February 27, 2008, Grobstein, Horwath & Company LLP (“GH”) was engaged by
the Company as its independent registered public accounting firm.





During
the fiscal years ended December 31, 2006 and 2005, neither the Company nor
anyone on its behalf consulted with GH regarding either (i) the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on our financial statements,
nor has GH provided a written report or oral advice regarding such principles or
audit opinion or (ii) any matter that was the subject of a disagreement or
reportable events set forth in Item 304(a)(iv) and (v), respectively, of
Regulation S-B.





Item
8/A.
Controlsand Procedures




Evaluation of Disclosure and
Procedures





The
Company, under the supervision and with the participation of the Company's
management, including the Company's principal executive officer and principal
financial officer, has evaluated the effectiveness of the design and operation
of the Company's "disclosure controls and procedures," as such term is defined
in Rules 13a-15e promulgated under the Exchange Act as of this report. Based
upon that evaluation, the principal executive officer and principal financial
officer have concluded that the Company's disclosure controls and procedures
were effective as of the end of the period covered by this report to provide
reasonable assurance that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.




23
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Limitations on the
Effectiveness of Controls




The
Company's management, including the CEO and Interim CFO, does not expect that
our disclosure controls and procedures or our internal control over financial
reporting will necessarily prevent all fraud and material error. An internal
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of the control system must reflect the fact that
there are resource constraints, and the benefits of controls must be 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 breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the internal 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, control may
become inadequate because of changes in conditions, and/or the degree of
compliance with the policies or procedures may deteriorate.





Changes in Internal
Controls





As
discussed in detail in our annual report on Forms 10-KSB for the year ended
December 31, 2006, and subsequent quarterly reports on Forms 10-QSB, during the
second and third quarter of 2007 we undertook certain improvements to remediate
material weaknesses related to our internal control over financial reporting
that originally affected our year-end and quarterly filings for the period ended
December 31, 2006. To remediate these material weaknesses, we made the following
improvements:





During
the year ended December 31, 2007, the Company retained qualified internal
accounting personnel and actively engaged qualified external accounting
professionals to provide the Company with up to date current guidance with
respect to financial reporting and complex accounting issues affecting debt and
equity-based transactions.





There
were no other changes to the internal controls during the fourth quarter ended
December 31, 2007 that have materially affected or that are reasonably likely to
affect the internal controls.




Item 8/A. Controlsand
Procedures
  As ofDecember 31, 2007,
we carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and our Chief Financial
Officer, of the design and operation of our
disclosure controls and procedures to ensure that information  required to
be disclosed in the reports we file under the Exchange Act were recorded,
processed, summarized and reported, within the time periods specified in the
Commission's rules and forms and to ensure that information required to be
disclosed was accumulated and communicated to our management as appropriate to
allow timely decisions regarding required disclosure. As a result of this
evaluation, weconcluded that our disclosure controls and procedures
were not effective  to ensure that information required to be disclosed in
the reports we file under the Exchange Act were recorded, processed, summarized
and reported, within the time periods specifiedin the
Commission's rules and forms and that such disclosure controls and procedures
were not effective to ensure that information required to be disclosed was
accumulated and communicated to our management as appropriate to allow timely
decisions regarding required disclosure.
  During the quarter endedDecember 31, 2007,
there were no changes to our internal controls over financial reporting that
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.




Item
8/B.
OtherInformation





None.






24
 Table of Contents





PART
III





Item 9.Directors, Executive officers, Promoters and control Persons;
Compliance with Section 16(a) of the Exchange Act.





MANAGEMENT





The
following table identifies our executive officers and directors, their
respective offices and positions, and their respective dates of election or
appointment and significant employees of the Company as of December 31,
2007:





Name
            
            Age
            
            Position
      Held
            
            Initial
      Election or Appointment DateJohn
      Hanna
            
            50
            
            Chairman,
      President, and Chief Executive Officer
            
            August
      19, 2005Christopher
      Wyatt
            
            44
            
            Director
            
            August
      19, 2005Alan
      F. Broidy
            
            52
            
            Director
            
            August
      19, 2005Joseph
      J. McCann, Jr.
            
            67
            
            Director
            
            August
      19, 2005Michael
      P. Robbins
            
            51
            
            Interim
      Chief Financial Officer
            
            June
      1, 2007Oscar
      Valencia
            
            54
            
            Group
      President, Sales
            
            NA





There are
no family relationships between any two or more of our directors or executive
officers. Our executive officers are appointed by our board of directors and
serve at the board’s discretion. There is no arrangement or understanding
between any of our directors or executive officers and any other person pursuant
to which any director or officer was or is to be selected as a director or
officer, and there is no arrangement, plan or understanding as to whether
non-management stockholders will exercise their voting rights to continue to
elect the current board of directors. There are also no arrangements, agreements
or understandings to our knowledge between non-management stockholders that may
directly or indirectly participate in or influence the management of our
affairs.





None of
our directors or executive officers has, during the past five
years,





·
            had
      any bankruptcy petition filed by or against any business of which such
      person was a general partner or executive officer, either at the time of
      the bankruptcy or within two years prior to that
  time,





·
            been
      convicted in a criminal proceeding and none of our directors or executive
      officers is subject to a pending criminal
  proceeding,





·
            been
      subject to any order, judgment, or decree, not subsequently reversed,
      suspended or vacated, of any court of competent jurisdiction, permanently
      or temporarily enjoining, barring, suspending or otherwise limiting his
      involvement in any type of business, securities, futures, commodities or
      banking activities, or





·
            been
      found by a court of competent jurisdiction (in a civil action), the
      Securities and Exchange Commission or the Commodity Futures Trading
      Commission to have violated a federal or state securities or commodities
      law, and the judgment has not been reversed, suspended, or
      vacated.






25
 Table of Contents






BUSINESS
EXPERIENCE





JOHN
HANNA. John Hanna has served as our President, Chief Executive Officer and
Chairman of the Board since our exchange reorganization and merger, effective as
of August 19, 2005. Mr. Hanna founded our wholly-owned subsidiary, The Fashion
House, Inc., in April 2002, and has served on its Board of Directors since
inception. Mr. Hanna was Chief Executive Officer of Bertie of London Shoe
Company, a licensee of Bertie of London England from 1983 to 1988. During
his tenure, Mr. Hanna grew the company in retail and wholesale sales. In 1988,
Mr. Hanna founded First Billisimo, Inc. and served as its President and Chief
Executive Officer. During his 11 year tenure with First Billisimo, Inc., Mr.
Hanna designed and manufactured footwear under his own Billisimo label and
developed the couture label Phillip Alexander. Following his involvement with
First Billisimo, Inc., from 1999 until forming The Fashion House, Inc. in 2002,
and Mr. Hanna acted as a footwear consultant for various labels and companies
including Jazz, XOXO, and Bisou/Bisou.





CHRISTOPHER
THOMAS WYATT. Chris Wyatt has served as a member of our board of directors since
our exchange reorganization and merger on August 19, 2005; he is also our
Director of Marketing. Mr. Wyatt was a founding investor in our wholly-owned
subsidiary, The Fashion House, Inc., and has served on its Board of Directors
since July 2004. Mr. Wyatt has had a vast and diverse career with experience in
institutional equity, investment banking, venture capital, real estate
development and fine art. Mr. Wyatt began his career with Smith Barney Harris
Upham in 1985 before joining Bear Stearns and Co. in 1987 managing institutional
equity and debt accounts focusing on risk arbitrage strategies. Between 1991 and
1996 Mr. Wyatt worked with Lovett Underwood Neuhaus (subsequently Kemper
Securities) concentrating on emerging growth companies and private placement
transactions. In 1996 Mr. Wyatt pursued entrepreneurial endeavors, privately
financing several Internet marketing “start ups” while working as a dealer of
fine art. Mr. Wyatt remains active in real estate development with Prescient
Partners LLC and fine art investment. He received his Bachelor of Arts in
Political Science and English from St. Lawrence University in Canton, New
York.




JOSEPH J.
MCCANN, JR. Joseph J. McCann, Jr. has served as our director since our exchange
reorganization and merger, effective as of August 19, 2005. Mr. McCann has
worked as General Counsel for Keyes Fibre Company, Vice President and Associate
General Counsel for Rockwell International, Vice President and Associate General
Counsel for TRW, Inc., and an equity partner in the law firms of Crane &
McCann and, from 1997 — 2002 Musick, Peeler & Garrett, LLP. From 2002 to
2004 he was Executive Vice-President of Paycom Billing Services, Inc.
Thereafter, he was General Counsel and Vice Chairman of the Board of Advisors
for Paycom.net, LLC, until February 2005. Mr. McCann is a graduate of the
Stanford Business School Executive Program. After serving as a Lieutenant in the
U.S. Army during Vietnam, Mr. McCann has remained active on the Board of
Trustees for the Association of Graduates for his undergraduate alma mater, the
United States Military Academy.





ALAN F.
BROIDY. Mr. Broidy was appointed to our Board of Directors in November 2005. Mr.
Broidy is a lawyer who specializes in bankruptcy law; he has his own law firm,
Law Offices of Alan Broidy, for 15 years. Mr. Broidy is a member of the
California Bar Association.





MICHAEL
P. ROBBINS. Mr. Robbins was appointed Interim Chief Financial Officer on June 1,
2007. . Mr. Robbins, age 50, is currently employed by Westrec Financial, Inc.
(“WFI”) as a part-time and temporary employee while serving as Interim Chief
Financial Officer of the Company.   Westrec Capital Partners,
LLC, a subsidiary of WFI, currently holds beneficial ownership exceeding 80% of
Company’s common stock.  Mr. Robbins has served in various positions
with WFI since 1987, most recently as Chief Financial Officer of Pinpoint
Integrated Systems, LLC, a WFI affiliate that manufactures and sells high
technology products to US and foreign militaries. In addition, Mr. Robbins
served as Chief Financial Officer - Marina Operations for Westrec Marina
Management, Inc., an affiliate of WFI that owns, manages and develops marina
properties throughout the United States. From 1985 to 1987, Mr. Robbins was
employed as controller of US Hotel Properties, Inc., a nationwide hotel
chain.  From 1981 to 1985, Mr. Robbins practiced as a Certified Public
Accountant in the audit department of Pannell Kerr Forster, an international
accounting firm.  In 1981, Mr. Robbins received his Bachelor of
Science degree in Business Administration from California State University,
Northridge.





OSCAR
VALENCIA. Mr. Valencia joined the Company in January 2006 as Group President,
Sales. Prior to that, Mr. Valencia held various senior positions in sales and
sourcing in the shoe industry, including President of VIA International from
2001 to 2006. He was also Executive President of the Stride Rite Division of
Tommy Hilfiger, Inc. from 2000 to 2001. From 1984 to 2000, he was with Etienne
Aigner in various senior positions including Group President of the Wholesale
Division.  Mr. Valencia’s employment was terminated when the Company’s
operations were reduced on January 15, 2008.





Our board
of directors currently consists of four members. Our bylaws will provide that
our directors will be elected at each annual meeting of the stockholders. Their
term of office will run until the next annual meeting of the stockholders and
until their successors have been elected and qualified or until their earlier
death, resignation or removal.




26
 Table of Contents




Our
Corporate Governance Practices





We have
always believed in strong and effective corporate governance procedures and
practices. In that spirit, we have summarized several of our corporate
governance practices below.





Adopting
      Governance Guidelines
            
            Our
      board of directors plans to adopt a set of corporate governance guidelines
      to establish a framework within which we will conduct our business and to
      guide management in its running of the Company. The governance guidelines,
      once adopted, will be found on our website at www.thefashionhouseinc.com
      and are summarized below.Monitoring
      Board Effectiveness
            
            It
      is important that our board of directors and its committees are performing
      effectively and in the best interest of the Company and its stockholders.
      The board of directors and each committee are responsible for annually
      assessing their effectiveness in fulfilling their
    obligations.Conducting
      Formal Independent Director Sessions
            
            We
      are in the process of establishing a procedure in which the independent
      directors meet without our management or any non-independent
      directors.Hiring
      Outside Advisors
            
            The
      board and each of its committees may retain outside advisors and
      consultants of their choosing at our expense, without management’s
      consent.Avoiding
      Conflicts of Interest
            
            We
      expect our directors, executives and employees to conduct themselves with
      the highest degree of integrity, ethics and honesty. Our credibility and
      reputation depend upon the good judgment, ethical standards and personal
      integrity of each director, executive and employee. In order to provide
      assurances to us and our stockholders, we have implemented standards of
      business conduct which provide clear conflict of interest guidelines to
      its employees and directors, as well as an explanation of reporting and
      investigatory procedures.Providing
      Transparency
            
            We
      believe it is important that stockholders understand our governance
      practices. In order to help ensure transparency of our practices, we plan
      on posting information regarding our corporate governance procedures, once
      established, on our website at www.thefashionhouseinc.com.Communications
      with the Board of Directors
            
            Although
      we do not have a formal policy regarding communications with the board of
      directors, stockholders may communicate with the board of directors by
      writing to us at The Fashion House Holdings Attention: Investor Relations,
      16633 Ventura Blvd., 6th
      Floor, Encino, CA 91436. Stockholders who would like their submission
      directed to a member of the board may so specify, and the communication
      will be forwarded, as appropriate.Standards
      of Business Conduct
            
            The
      board of directors has not yet adopted a Code of Business Conduct and
      Ethics for all of our employees and directors, including the Company’s
      principal executive and senior financial officers. We hope to adopt such a
      code during 2008.Ensuring
      Auditor Independence
            
            We
      have taken a number of steps to ensure the continued independence of our
      independent registered public accounting firm. That firm reports directly
      to the Audit Committee, which also has the ability to pre-approve or
      reject any non-audit services proposed to be conducted by our independent
      registered public accounting firm.






27
 Table of Contents




REPORT
OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION





General





The
Compensation Committee of the Board of Directors is currently composed of two
independent directors - Messrs. Broidy and McCann who have no “interlocking
relationships” (as defined by the SEC).





We are
engaged in highly competitive businesses and compete nationally for personnel at
the executive and technical staff level. Outstanding candidates are aggressively
recruited, often at premium salaries. Highly qualified employees are essential
to our success. We are committed to providing competitive compensation that
helps attract, retain, and motivate the highly skilled people we require. We
strongly believe that a considerable portion of the compensation for the Chief
Executive Officer and other top executives must be tied to the achievement of
business objectives, completing acquisitions, and to business unit and overall
financial performance, both current and long-term.





Executive
Compensation





Our
executive compensation program is administered by the Compensation Committee.
The role of the Compensation Committee is to review and approve salaries and
other compensation of the executive officers of the Company, to administer a the
Long-Term Incentive Plan, and to review and approve stock option grants to all
employees including the executive officers of the Company, if any.





General Compensation
Philosophy





Our
compensation philosophy is that total cash compensation should vary with our
performance and any long-term incentive should be closely aligned with the
interest of the stockholders. Total cash compensation for the executive officers
consists of the following components:





·
            Base
      salary


·
            An
      executive officer bonus that is related to growth in our sales and
      operating earnings.





We
currently have no other long-term incentive plans for our officers and
employees.





Base Salary and Executive
Officer Bonus Target





Chief Executive Officer
Compensation





Current
base salaries for the executive officers were determined by arms’ length
negotiations with the Board of Directors. Mr. Hanna has an employment contract
with the Company which sets a base salary as the Chief Executive Officer of
$180,000 and, with respect to Mr. Hanna, for a bonus equal to 1% of net sales.
During 2007, 2006 and 2005, Mr. Hanna waived such bonus.





Stock
Options





The
Company has not granted any stock options as of December 31, 2007.




28
 Table of Contents





Item 10.Executive Compensation





SUMMARY
OF COMPENSATION





The
following table summarizes all compensation received by our officers for
services rendered to us (including payments made by our predecessor, Fashion
House, Inc.).





SUMMARY
COMPENSATION TABLE





ANNUAL
      COMPENSATION
            
            LONG
      TERM
              COMPENSATION
      AWARDSNAME
      AND PRINCIPAL POSITION
            
            YEAR
            
            SALARY
      ($)
            
            BONUS
      ($)
            
            OTHER 
      ANNUAL
              COMPENSATION
            
            RESTRICTED
      STOCK AWARDSJohn
      Hanna,
            
            
            2007
            
            $
            180,000
            
            
            -
            
            
            -
            
            
            -President
      and CEO (1)
            
            
            2006
            
            $
            180,000
            
            
            -
            
            
            -
            
            
            -Daniel
      Amado
            
            
            2007
            
            $
            112,500
            
            
            -
            
            
            -
            
            
            -Group
      President, Creative  (2)
            
            
            2006
            
            $
            283,000
            
            
            -
            
            
            -
            
            
            -Oscar
      Valencia (3)
            
            
            2007
            
            $
            256,250
            
            
            -
            
            
            -
            
            
            -Group
      President, Sales
            
            
            2006
            
            $
            175,000
            
            
            -
            
            
            -
            
            
            -Michael
      McHugh (4)
            
            
            2007
            
            $
            80,000
            
            
            -
            
            
            -
            
            
            -Chief
      Financial Officer
            
            
            2006
            
            $
            154,168
            
            
            -
            
            
            -
            
            
            -Michael
      P. Robbins (5)
            
            
            2007
            
            $
            N/A
            
            
            -
            
            
            -
            
            
            -Interim
      Chief Financial Officer
            
            
            2006
            
            $
            N/A
            
            
            -
            
            
            -
            
            
            -


____________




(1)
              Mr.
      Hanna was appointed President and Chief Executive Officer on August 19,
      2005, but previously served in this role in our predecessor
      company.
 (2)
                Mr.
      Amado joined us in November 2005 and resigned in April
      2007
 (3)
                  Mr.
      Valencia joined us in January 2006 and was terminated when operations were
      curtailed in January 2008.
 (4)
                    Mr.
      McHugh joined us in November 2005 and left the Company in June
      2007
 (5)
                      Mr.
      Robbins joined us in June 2007 as Interim Chief Financial Officer. Mr.
      Robbins is a part-time and temporary employee of an affiliate of Westrec
      Capital Partners, LLC and is not compensated by the Company. The Company
      has accrued but not paid a $4,000 monthly fee to Westrec Capital Partners,
      LLC for Mr. Robbins services as Interim Chief Financial
      Officer.


29
 Table of Contents






NARRATIVE
DISCLOSURE TO SUMMARY COMPENSATION TABLE





We
compensate our executive officers through a combination of a base salary and a
potential cash bonus. In addition, in the future, we may provide other
perquisites to some of our executive officers.





All
agreements with our named executive officers that provide for payments to such
named executive officers at, following or in connection with the resignation,
retirement or other termination of such named executive officers, or a change in
control of our company or a change in the responsibilities of such named
executive officers following a change in control are set forth in the following
description of their respective employment agreements.




OPTION
GRANTS TO EXECUTIVE OFFICERS IN 2007





The
Company does not have a stock option plan.  Accordingly, the Named
Executive Officers did not receive any option grants during the fiscal year
ended December 31, 2007.





EMPLOYMENT
ARRANGEMENTS





We have
entered into an Employment Agreement with our Chief Executive Officer, John
Hanna. The agreement is dated as of December 1, 2002. In consideration of his
services to us, we have agreed to pay him a base salary of $180,000 per year
plus a bonus equal to 1% of gross sales. Mr. Hanna has waived his bonus
provision for each of the years ended December 31, 2007, 2006 and 2005. The
agreement is terminable at will by either party, provided that the salary and
bonus shall continue for a period of one year following the date of
termination.





DIRECTOR
COMPENSATION





The
following table presents information regarding compensation paid to our
non-employee directors for our fiscal year ended December 31, 2007.








Name
            
            Fees
      Earned or Paid in Cash
              ($)
            
            Stock
      Awards
              ($)
            
            Option
      Awards
              ($)
            
            Non-Equity
      Incentive Plan Compensation
              ($)
            
            Change
      in Pension Value and Nonqualified Deferred Compensation
      Earnings
              ($)
            
            All
      Other Compensation
              ($)
            
            Total
              ($)Alan
      F. Broidy
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Joseph
      McCann
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -




NARRATIVE
DISCLOSURE TO DIRECTOR COMPENSATION TABLE





Members
of our board of directors receive no cash compensation for services as a
director or for attendance at or participation in meetings. Directors are
reimbursed for out-of-pocket expenses incurred by them in connection with
attending meetings.




30
 Table of Contents




COMMITTEES
OF THE BOARD AND AUDIT COMMITTEE FINANCIAL EXPERT





The Board
of Directors has an Audit Committee and a Compensation Committee.





AUDIT
COMMITTEE. The Audit Committee of the Board of Directors (the "Audit Committee")
monitors the integrity of the Company's financial statements, the independence
and qualifications of the independent registered public accounting firm, the
performance of the Company's independent registered public accounting firm and
the effectiveness of the Company's disclosure controls and procedures and
internal controls. It is also responsible for retaining, evaluating, and, if
appropriate, recommending the termination of the Company's independent
registered public accounting firm. The Audit Committee has been established
under a charter approved by the Board. Our Audit Committee consists of Messrs.
McCann, and Broidy. Mr. McCann serves as Chairman. While the Audit Committee did
not meet in a dedicated session in 2007, relevant Audit Committee issues were
addressed by the Committee during general Board of Director meetings during the
year. The Audit Committee met one time during 2006. In December 2006, Mr.
McCann replaced Mr. Richardson on the Audit Committee as Chairman. We do not
have an audit committee financial expert as defined by Item 401(e) of Regulation
S-B of the Exchange Act at this time because we believe that we are not in a
position to attract suitable candidates due to insufficient capital resources.
In addition, we are not required by the OCTBB to have an audit committee
financial expert.





COMPENSATION
COMMITTEE. The Compensation Committee of the Board of Directors (the
"Compensation Committee") administers the benefits, incentives and compensation
of the Company's executive officers, reviews the performance of the Company's
executive officers, reviews and approves executive compensation policy and
objectives, concludes whether Company executives are compensated according to
such standards, makes recommendations to the Board of Directors with respect to
compensation, and carries out the Board's responsibilities relating to all forms
of executive compensation. Our Compensation Committee consists of Messrs.
McCann, Broidy, and Hanna. Mr. McCann serves as Chairman. While the Compensation
Committee did not meet in a dedicated session in 2007, relevant Compensation
Committee issues were discussed during general Board of Director meetings during
the year.  The Compensation Committee met one time during 2006. The
Compensation Committee includes one member of executive management, Mr. Hanna.
Mr. Hanna recuses himself from votes and discussions on his own compensation. We
are not required by the OTCBB to have a compensation committee comprised
entirely of independent directors.





Item
11.
SecurityOwnership of Certain Beneficial Owners and Management
and Related
Stockholder Matters





The
following tables set forth certain information regarding beneficial ownership of
our common stock as of March 31, 2008 by (i) each person who is known by us
to own beneficially more than five percent (5%) of the outstanding shares of
common stock, (ii) each of our directors and executive officers, and
(iii) all of our directors and executive officers as a group. Unless
otherwise stated, their address is c/o The Fashion House Holdings, Inc., 16633
Ventura Blvd., 6th Floor,
Encino, CA 91436.





We have
determined beneficial ownership in accordance with the rules of the Securities
and Exchange Commission. Except as otherwise indicated, we believe that the
beneficial owners listed below, based on the information furnished by these
owners, have sole investment and voting power with respect to the securities
indicated as beneficially owned by them, subject to applicable community
property laws. As of December 31, 2007, there were 24,887,063 shares of common
stock issued and outstanding.




31
 Table of Contents





In
computing the number of shares of common stock beneficially owned by a person
and the percent ownership of that person, we deemed outstanding shares of common
stock subject to warrants or options held by that person that are currently
exercisable or exercisable within 60 days of December 31, 2007. We did not
deem these shares outstanding for purposes of computing the percent ownership of
any other person.





Number
      of Shares
            
            Percentage
      ofof
      Common Stock
            
            Outstanding
      Shares ofName
      of Beneficial Owner
            
            Beneficially
      Owned
            
            Common
      Stock5%
      or more Shareholders:Westrec
      Capital Partners, LLC (1)
            
            
            106,537,243
            
            
            
            427.7
            %American
      Microcap Investment Fund 1, LLC (2)
            
            
            2,640,000
            
            
            
            10.6
            %Lazarus
      Investment Partners LLP (3)
            
            
            1,800,000
            
            
            
            7.2
            %DIRECTORS AND
      OFFICERSJohn
      Hanna (4)
            
            
            6,015,958
            
            
            
            24.2
            %Christopher
      Wyatt
            
            
            6,015,958
            
            
            
            24.2
            %Alan
      F. Broidy
            
            
            250,000
            
            
            
            1.0
            %Joseph
      J. McCann
            
            
            -Michael
      Robbins
            
            
            -Oscar
      Valencia
            
            
            -All
      directors, executives and significant employees as a group (3
      persons)
            
            
            12,281,916
            
            
            
            49.4
            %




(1)
            
            Consists
      of warrants to purchase the following shares of common stock: (i) 20,302
      shares at an exercise price of $1.16 per share; (ii) 59,369 shares at an
      exercise price of $0.62 per share; (iii) 18,097 shares at an exercise
      price of $0.56 per share; and (iv) 106,439,475 shares at an exercise price
      of $0.05. Westrec’s address is 16633 Ventura Blvd., Sixth Floor, Encino,
      CA 91436.(2)
            
            Represents
      (i) a warrant to purchase 550,000 shares of our common stock at an
      exercise price of $0.80 per share, (ii) warrants to purchase 1,595,000
      shares of our common stock at an exercise price of $1.00 per share and
      (iii) 495,000 additional warrants with an exercise price of $1.25 per
      share that are currently exercisable. American Microcap Investment Fund’s
      address is 733 Park Avenue, 18th
      Floor, New York, NY 10021.(3)
            
            Includes
      a warrant to purchase 600,000 shares of our common stock at an exercise
      price of $1.25 per share. Lazarus Investment Partner’s address is 2401
      East 2nd Avenue, # 400, Denver, CO 80206.(4)
            
            John
      Hanna has granted a security interest and pledge to the Company’s senior
      secured lender of all shares of the Company’s common stock, options,
      warrants and other equity securities held by him.




32
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Securities
Authorized for Issuance Under Equity Compensation Plans





The
following provides information, as of December 31, 2007, concerning compensation
plans (including individual compensation arrangements) under which equity
securities of the Company are authorized for issuance.





(a)
            
            (b)
            
            (c)Plan
      Category
            
            Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
            
            Weighed-average
      exercise price of outstanding options, warrants
              and
      rights
            
            Number
      of securities remaining available for future issuances under equity
      compensation plans (excluding securities reflected in
              column
      (a))Equity
      compensation plans approved by security holders
            
            -
            
            $
            -
            
            -Equity
      compensation plans not approved by security holders
            
            -
            
            $
            -
            
            -Total
            
            -
            
            $
            -
            
            -




For a
complete description of our equity compensation, please refer to Note 8 of our
consolidated financial statements as of December 31, 2007.





CHANGE
OF CONTROL





During
2007, the Company failed to raise $4,000,000 of net proceeds from the sale of
equity securities by August 3, 2007, as required by the amended Westrec warrant
agreement. Accordingly, the exercise price of the warrant was reduced to $0.05
per share and the number of shares of common stock to be purchased was increased
to 80,277,472.





During
the three months ending December 31, 2007, the company issued an additional
22,267,055 warrants to purchase common stock to Westrec under the amended
Westrec warrant agreement.





The
warrants granted to Westrec during 2007 gave Westrec beneficial control of the
Company.  For further information, please refer to the discussion in
Item 5 on warrants.





Item 12.CertainRelationships and Related Transactions
and DirectorIndependence





Review
and Approval of Related Person Transactions.





In the
future, the Audit Committee will review all relationships and transactions in
which the Company and our directors and executive officers or their immediate
family members are participants to determine whether such persons have a direct
or indirect material interest. The Company’s legal consultant is primarily
responsible for the development and implementation of processes and controls to
obtain information from the directors and executive officers with respect to
related person transactions and for then determining, based on the facts and
circumstances, whether the Company or a related person has a direct or indirect
material interest in the transaction. As required under SEC rules, transactions
that are determined to be directly or indirectly material to the Company or a
related person are disclosed in the Company’s proxy statement. In addition, the
Audit Committee reviews and approves or ratifies any related person transaction
that is required to be disclosed. As set forth in the Audit Committee’s key
practices, in the course of its review and approval or ratification of a
disclosable related party transaction, the committee considers:


·
              the
      nature of the related person’s interest in the
      transaction;
 ·
              the
      material terms of the transaction, including, without limitation, the
      amount and type of
transaction;
 ·
              the
      importance of the transaction to the related
  person;
 ·
              the
      importance of the transaction to the
  Company;
 ·
              whether
      the transaction would impair the judgment of a director or executive
      officer to act in the best interest of the Company;
    and
 ·
              any
      other matters the committee deems
  appropriate.




33
 Table of Contents




Any
member of the Audit Committee who is a related person with respect to a
transaction under review may not participate in the deliberations or vote
respecting approval or ratification of the transaction, provided, however, that
such director may be counted in determining the presence of a quorum at a
meeting of the committee that considers the transaction.





Described
below are certain transactions or series of transactions since January 1, 2005
between us and our executive officers, directors and the beneficial owners of 5%
or more of our common stock and certain persons affiliated with or related to
these persons, including family members, in which they had or will have a direct
or indirect material interest in an amount that exceeds $60,000 other than
compensation arrangements that are otherwise required to be described under
“Executive Compensation.”





LOAN
FROM DIRECTORS





We
currently owe a director and officer, Christopher Wyatt, $973,000 plus interest
of $196,021. The loan is unsecured and accrues interest at a rate of 8% per
annum and is due 13 months following demand. No demand for payment has been made
as of December 31, 2007. Interest expense incurred totaled $79,388 and $78,480
for the years ended December 31, 2007 and 2006, respectively.





In June
2005, Alan Broidy, one of our directors, loaned the Company an aggregate
$190,000, which was non-interest bearing. This amount owed to Mr. Broidy was
converted into 237,500 shares of our common stock at a price per share of $0.80.
On December 30, 2005, our director Alan Broidy advanced us $25,000 in exchange
for a demand note, which was non-interest bearing. We paid this note on March
14, 2006.





Board of DirectorIndependence





The
standards relied upon by the Board of Directors in affirmatively determining
whether a director is “independent” are those of the NASDAQ, which include the
following objective standards:





(a) a
director who is an employee, or whose immediate family member (defined as a
spouse, parent, child, sibling, father- and mother-in-law, son- and
daughter-in-law and anyone, other than a domestic employee, sharing the
director’s home) is an executive officer of the Company, would not be
independent for a period of three years after termination of such
relationship;





(b) a
director who receives, or whose immediate family member receives, payments of
more than $60,000 during any period of twelve months from the Company, except
for certain permitted payments, would not be independent for a period of three
years after ceasing to receive such amount;





(c) a
director who is or who has an immediate family member who is, a current partner
of the Company’s outside auditor or who was, or who has an immediate family
member who was, a partner or employee of the Company’s outside auditor who
worked on the Company’s audit at any time during any of the past three years
would not be independent until a period of three years after the termination of
such relationship;





(d) a
director who is, or whose immediate family member is, employed as an executive
officer of another company where any of the Company’s present executive officers
serve on the other company’s compensation committee would not be independent for
a period of three years after the end of such relationship; and





(e) a
director who is, or who has an immediate family member who is, a partner in, or
a controlling shareholder or an executive officer of any organization that makes
payments to, or receives payments from, the Company for property or services in
an amount that, in any single fiscal year, exceeds the greater of $200,000, or
5% of such other company’s consolidated gross revenues, would not be independent
until a period of three years after falling below such threshold.. In addition,
no director will qualify as “independent” unless the Board affirmatively
determines that the director has no material relationship with the Company (,
directly or as a partner, shareholder or officer of an organization that has a
relationship with the Company).





The Board
of Directors, in applying the above-referenced standards, has affirmatively
determined that the Company’s current “independent” directors are: Joseph J.
McCann and Alan F. Broidy.




34
 Table of Contents




Item 13.
Exhibits




2.1
            Reverse
      Share Exchange Agreement by and among the registrant, The Fashion House,
      Inc., a Delaware corporation, and shareholders of Fashion House, Inc.,
      dated as of August 19, 2005 (1)3.1
            Articles
      of Incorporation dated June 23, 1986 and Articles of Amendment dated
      April 20, 2000 of the registrant (2)3.1(a)
            Articles
      of Amendment dated October 22, 2002 (3)3.1(b)
            Articles
      of Amendment and Statement of Correction (4)3.2
            Bylaws
      of the registrant, as currently in effect (5)4.1
            Warrant
      dated June 30, 2006 issued to The Elevation Fund,
  LLC+4.2
            Warrant
      dated July 21, 2005 issued to American Microcap Investment Fund 1,
      LLC(6)4.3
            Warrant
      dated January 2006 issued to American Microcap Investment Fund 1,
      LLC(6)4.4
            Warrant
      dated December 13, 2005 issued to Diaz Management, Inc.
      (6)4.5
            Warrant
      dated February 2006 issued to Diaz Management, Inc.
    (6)4.6
            Warrant
      dated February 2006 issued to Battersea Capital, Inc.
    (6)4.7
            Warrant
      dated July 2006 issued to Battersea Capital, Inc.+4.8
            Warrant
      dated as of March 2006 to investor group(6)4.9
            Form
      of Warrant dated as of May 2006 issued to Brookstreet Securities
      Corporation and its assignees+4.10
            Form
      of Warrant issued to Westrec Capital Partners, LLC pursuant to letter
      agreement dated July 25, 2006+4.10(a)
            Schedule
      of Warrants issued to Westrec Capital Partners, LLC pursuant to letter
      agreement dated July 25, 2006+4.11
            Amended
      and Restated Warrant dated December 20, 2006 issued to Westrec
      Capital Partners, LLC4.12
            Amended
      and Restated Credit Enhancement Agreement dated December 20, 2006
      between FHI and Westrec Capital Partners, LLC10.1
            Employment
      Agreement dated as of January 1, 2004 between John Hanna and Fashion
      House, Inc. (“FHI”) (7)10.2
            License
      Agreement dated February 2006 between FHI and IM Ready Made, LLC
      (7)10.3
            License
      Agreement dated November 2005 between FHI and Bill Blass
      International LLC (7)10.4
            License
      Agreement dated November 2005 between FHI and Bill Blass
      International LLC (7)10.5
            License
      Agreement dated April 1, 2006 between FHI and Bill Blass
      International LLC (7)10.6
            License
      Agreement dated April 1, 2006 between FHI and Bill Blass
      International LLC (7)10.7
            License
      Agreement dated January 24, 2005 between FHI and Oscar De La Renta,
      Ltd. (7)10.8
            Trademark
      License Agreement dated as of November 27, 2002 between FHI and Tyler
      Trafficante Inc. (Tyler) (7)10.9
            Trademark
      License Agreement dated as of November 27, 2002 between FHI and Tyler
      Trafficante Inc. (Richard Tyler) (7)10.10
            Wyatt
      Loan Agreement dated as of December 31, 2005 (7)10.11
            Loan
      Agreement dated April 1, 2005 from The Elevation Fund,
      LLC+10.12
            Loan
      Extension dated July 18, 2005 from The Elevation Fund, LLC
      (7)10.13
            Loan
      Agreement dated July 21, 2005 from American Microcap Investment Fund
      1, LLC (7)






35
 Table of Contents





10.14
            Loan
      Extension dated January, 2006 from American Microcap Investment Fund 1,
      LLC (7)10.15
            Loan
      Agreement dated December 13, 2005 from Diaz Management, Inc.
      (7)10.16
            Loan
      Extension dated February 2006 from Diaz Management, Inc.
      (7)10.17
            Loan
      Agreement dated July 2006 from Battersea Capital,
    Inc.+10.18
            Agreement
      between FHI and LMU & Company dated March 16,
    2005+10.19
            Letter
      Agreement dated July 25, 2006 with Westrec Capital Partners, LLC
      (8)10.20
            Factoring
      Agreement dated May 18, 2006 with CIT Commercial Services
      (8)10.21
            Summary
      of agreement dated June 30, 2006 regarding warrants issued to The
      Elevation Fund LLC (8)10.22
            Master
      Revolving Note dated September 18, 2006 payable to Comerica
      Bank+10.23
            Credit
      Enhancement Agreement dated as of September 15, 2006 among the
      registrant, The Fashion House, Inc. and Westrec Capital partners,
      LLC+10.23(a)
            Security
      Agreement dated as of September 15, 2006 among the Registrant,
      Westrec Capital Partners, LLC and Michael M. Sachs+10.23(b)
            Guaranty
      of John Hanna dated September 15, 2006+10.23(c)
            Pledge
      and Security Agreement dated as of September 15, 2006 made by John
      Hannah in favor of Westrec Capital Partners, LLC and Michael M.
      Sachs+21.1
            List
      of subsidiaries24.1
            Power
      of Attorney (see signature page)+31.1
            Certification
      of Chief Executive Officer31.2
            Certification
      of Chief Financial Officer32.1
            Section
      1350 Certifications of Chief Executive Officer and Chief Financial
      Officer32.2
            Certification
      Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of
      The Sarbanes-Oxley Act of 2002.




(1)
            
            Incorporated
      by reference to Registrant’s Form 8-K filed with the SEC on
      August 22, 2005.(2)
            
            Incorporated
      by reference to Registrant’s Report on Form 10-KSB for the year ended
      March 31, 2001(3)
            
            Incorporated
      by reference to Registrant’s Report on Form 10-KSB for the year ended
      March 31, 2003(4)
            
            Incorporated
      by reference to Form 8-K filed with the SEC on August 24,
      2005.(5)
            
            Incorporated
      by reference to Registrant’s Report on Form 10-KSB for the year ended
      March 31, 2001.(6)
            
            Incorporated
      by reference to Registrant’s Form 8-K filed with the SEC on April 4,
      2006.(7)
            
            Incorporated
      by reference to Registrant’s Form 10-KSB filed with the SEC on
      April 14, 2006.(8)
            
            Incorporated
      by reference to Registrant’s Form 10-QSB for the period ended
      June 30, 2006.(9)
            
            Incorporated
      by reference to Registrant’s Form 10-QSB for the period ended September
      30, 2006.(10)
            
            Incorporated
      by reference to Registrant’s Form 10-KSB filed with the SEC on
      April 12, 2007.(11)
            
            Incorporated
      by reference to Registrant’s Form 10-QSB for the period ended
      March 31, 2007.(12)
            
            Incorporated
      by reference to Registrant’s Form 10-QSB for the period ended
      June 30, 2007.(13)
            
            Incorporated
      by reference to Form 8-K filed with the SEC on June 13,
      2007.(14)
            
            Incorporated
      by reference to Form 8-K filed with the SEC on August 13,
      2007.(15)
            
            Incorporated
      by reference to Registrant’s Form 10-QSB for the period ended
      September 30, 2007.(16)
            
            Incorporated
      by reference to Form 8-K filed with the SEC on February 28,
      2008.(17)
            
            Incorporated
      by reference to Form 8-K filed with the SEC on April 22,
    2008.+
            
            Previously
      filed.**
            
            To
      be filed by amendment




36
 Table of Contents






Item 14.PrincipalAccountants Fees and Services





The
following table sets forth fees billed to The Fashion House Holdings, Inc. by
our auditors during the fiscal years ended December 31, 2007 and 2006 for: (i)
services rendered for the audit of our annual financial statements and the
review of our quarterly financial statements, (ii) services by our auditor that
are reasonably related to the performance of the audit or review of our
financial statements and that are not reported as Audit Fees, (iii) services
rendered in connection with tax compliance, tax advice and tax planning, and
(iv) all other fees for services rendered.




December
      31, 2007
            
            
            December 31, 2006(i)
            Audit
      Fees
            
            $
            122,470
            
            
            $
            130,000(ii)
            Audit
      Related Fees
            
            $
            -
            
            
            $
            -(iii)
            Tax
      Fees
            
            $
            -
            
            
            $
            -(iv)
            All
      Other Fees
            
            $
            -
            
            
            $
            -





(i) The
Company has included fees paid to its registered public accounting firm related
to the annual audit of financial statements, quarterly reviews, consents issued
in connection with the filings of Form SB-2 and review of various SEC comment
letters.














37
 Table of Contents






SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, on May 14, 2008.








The
      Fashion House Holdings, Inc.By:
            /s/ 
      John
      HannaJohn
      HannaPresident
      and Chief Executive Officer





POWER
OF ATTORNEY





KNOW ALL PERSONS BY THESE
PRESENTS, that each person whose signature appears below constitutes and
appoints John Hanna and Michael Robbins, and each or any one of them, as his
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-KSB,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming that all said
attorneys-in-fact and agents, or any of them or their or his substitute or
substituted, may lawfully do or cause to be done by virtue hereof.





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





Signatures
            
            Title
            
            Date/s/ JOHN
      HANNA
            
            President,
      Chief Executive
            
            May
      14, 2008JOHN
      HANNA
            
            Officer
      and Director(Principal
      Executive Officer)/s/ MICHAEL
      ROBBINS
            
            Interim
      Chief Financial Officer
            
            May
      14, 2008MICHAEL
      ROBBINS
            
            (Principal
      Interim Financial andAccounting
      Officer)/s/ CHRISTOPHER THOMAS
      WYATT
            
            Director
            
            May
      14, 2008CHRISTOPHER
      THOMAS WYATT/s/ ALAN F.
      BROIDY
            
            Director
            
            May
      14, 2008ALAN
      F. BROIDY/s/ JOSEPH J. MCCANN,
      JR.
            
            Director
            
            May
      14, 2008JOSEPH
      J. MCCANN, JR.








38
 Table of Contents





Report
of Independent Registered Public Accounting Firm





To The
Board of Directors


THE
FASHION HOUSE HOLDINGS, INC.





We have
audited the accompanying consolidated balance sheet of The Fashion House
Holdings, Inc. and subsidiary (the “Company”) as of December 31, 2007, and the
related consolidated statements of operations, stockholders’ deficit, and cash
flows for  the year then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.





We
conducted our audit in accordance with 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 the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Fashion
House Holdings, Inc. and subsidiary as of December 31, 2007, and the results of
their operations and their cash flows for  the year then ended in
conformity with accounting principles generally accepted in the United States of
America.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred recurring net losses
and has a working capital deficit of $15,481,970 and total capital deficit of
$16,104,628 as of December 31, 2007.  On April 16, 2008, the
Company and its wholly owned subsidiary filed voluntary petitions under
Chapter 11 of the US Bankruptcy Code with the United States Bankruptcy
Court.  These factors, among others, raise substantial doubt about the
Company’s ability to continue as a going concern. Management’s plans in regard
to these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.








/s/Grobstein, Horwath &
CompanyLLP








Sherman,
Oaks, California


May 13,
2008







F-1
 Table of Contents





Report
of Independent Registered Public Accounting Firm





To The
Board of Directors


THE
FASHION HOUSE HOLDINGS, INC.





We have
audited the accompanying consolidated statements of operations, stockholders’
deficit and cash flows of The Fashion House Holdings, Inc. and subsidiary (the
“Company”) for the year ended December 31, 2006, These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.





We
conducted our audit in accordance with 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 the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit on its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated results of the Company’s operations
and their cash flows for the year ended December 31, 2006 in conformity with
accounting principles generally accepted in the United States of
America.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred recurring losses and
has a working capital deficit of $5,187,040 as of December 31, 2006 . These
factors, among others, raise substantial doubt about the Company’s ability to
continue as a going concern. Management’s plans in regard to these matters are
also described in Note 1. The consolidated financial statements do not include
any adjustments relating to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.





As
described in Note 1 to the consolidated financial statements, effective January
1, 2006, the Company changed its method of accounting for registration payment
arrangements to adopt Financial Accounting Standards Board Staff Position
No. EITF 00-19-2, Accounting for Registration Payment
Arrangements.








/s/ KMJ Corbin & Company
LLP





Irvine,
California


April 3,
2007








F-2
 Table of Contents








THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY


CONSOLIDATED
BALANCE SHEET


December
31, 2007





ASSETSCurrent
      assets:Cash
            
            $
            6,390Accounts
      receivable, net of allowance of $244,524
            
            
            1,230,969Inventory,
      net of reserve of $664,521
            
            
            480,374Prepaid
      expenses
            
            
            109,164Total
      current assets
            
            
            1,826,897Property
      and equipment, net
            
            
            262,574Restricted
      cash
            
            
            136,847Deposits
            
            
            68,021TOTAL
      ASSETS
            
            $
            2,294,339LIABILITIES
      AND STOCKHOLDERS’ DEFICITCurrent
      liabilities:Due
      to related parties
            
            $
            11,724,991Accounts
      payable and accrued expenses
            
            
            3,153,672Accrued
      payroll and related expenses
            
            
            239,377Due
      to factor
            
            
            1,066,630Accrued
      interest
            
            
            843,904Note
      payable
            
            
            280,293Total
      current liabilities
            
            
            17,308,867Long-term
      liabilities:Notes
      payable to stockholder
            
            
            1,090,100Total
      liabilities
            
            
            18,398,967Commitments
      and contingenciesStockholders’
      deficit:Common
      stock, no par value;100,000,000
      shares authorized;24,887,063
      shares issued and outstanding
            
            
            17,847,701Accumulated
      deficit
            
            
            (33,952,329
            )Total
      stockholders’ deficit
            
            
            (16,104,628
            )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIT
            
            $
            2,294,339





See
report of independent registered public accounting firm and notes to
consolidated financial statements.







F-3
 Table of Contents





THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF OPERATIONS





Years
      Ended December 31,2007
            
            
            2006Net
      sales
            
            $
            6,579,335
            
            
            $
            9,391,326Cost
      of Sales
            
            
            7,671,574
            
            
            
            7,471,260Gross
      profit (loss)
            
            
            (1,092,239
            )
            
            
            1,920,066Operating
      expenses:Selling,
      general and administrative
            
            
            3,510,962
            
            
            
            6,156,699Payroll
      and related
            
            
            2,760,108
            
            
            
            2,654,402Royalties
            
            
            1,248,060
            
            
            
            747,115Total
      operating expenses
            
            
            7,519,130
            
            
            
            9,558,216Loss
      from operations
            
            
            (8,611,369
            )
            
            
            (7,638,150
            )Other
      income (expense):Interest
      expense, net of interest income
            
            
            (11,832,693
            )
            
            
            (7,052,263
            )Change
      in fair value of derivative liabilities
            
            
            9,240,200
            
            
            
            -Loss
      before income taxes
            
            
            (11,203,862
            )
            
            
            (14,690,413
            )Income
      taxes
            
            
            800
            
            
            
            800Net
      loss
            
            $
            (11,204,662
            )
            
            $
            (14,691,213
            )Basic
      and diluted net loss per share
            
            $
            (0.45
            )
            
            $
            (0.62
            )Weighted
      average shares outstanding — basic and diluted
            
            
            24,887,063
            
            
            
            23,697,292





See
report of independent registered public accounting firm and notes to
consolidated financial statements.







F-4
 Table of Contents





THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT


YEARS
ENDED DECEMBER 31, 2007 AND 2006





Common StockShares
            
            
            Amount
            
            
            Accumulated
      Deficit
            
            
            TotalBalance
      at January 1, 2006
            
            
            20,003,581
            
            $
            5,601,189
            
            $
            (8,272,454
            )
            $
            (2,671,265
            )Change
      in accounting principle
            
            
            -
            
            
            688,000
            
            
            216,000
            
            
            904,000Estimated
      fair value of common stock issued for services
            
            
            -
            
            
            83,000
            
            
            -
            
            
            83,000Issuance
      of common stock for consulting
            
            
            21,000
            
            
            36,750
            
            
            -
            
            
            36,750Estimated
      relative fair value of warrants issued with a note
      payable
            
            
            -
            
            
            909,000
            
            
            -
            
            
            909,000Estimated
      fair value of warrants issued for penalties
            
            
            -
            
            
            2,145,000
            
            
            -
            
            
            2,145,000Estimated
      fair value of warrants issued for a guarantee
            
            
            -
            
            
            2,012,000
            
            
            -
            
            
            2,012,000Estimated
      fair value of warrant modification
            
            
            -
            
            
            1,408,000
            
            
            -
            
            
            1,408,000Issuance
      of common stock in private placement, net of issuance
      costs
            
            
            4,862,482
            
            
            4,187,762
            
            
            -
            
            
            4,187,762Net
      loss
            
            
            -
            
            
            -
            
            
            (14,691,213
            )
            
            (14,691,213
            )Balance
      at December 31, 2006
            
            
            24,887,063
            
            $
            17,070,701
            
            $
            (22,747,667
            )
            $
            (5,676,966
            )Estimated
      fair value of warrants issued for penalties, net
            
            
            -
            
            
            777,000
            
            
            -
            
            
            777,000Initial
      value of derivative liability
            
            
            
            
            
            9,240,200
            
            
            
            
            
            9,240,000Change
      in fair value of derivative liabilities
            
            
            -
            
            
            (9,240,200
            )
            
            -
            
            
            (9,240,200
            )Net
      loss
            
            
            -
            
            
            -
            
            
            (11,204,662
            )
            
            (11,204,662
            )Balance
      at December 31, 2007
            
            
            24,887,063
            
            $
            17,847,701
            
            $
            (33,952,329
            )
            $
            (16,104,628
            )








See
report of independent registered public accounting firm and notes to
consolidated financial statements.








F-5
 Table of Contents




THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


YEARS
ENDED DECEMBER 31, 2007 AND 2006





2007
            
            
            2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (11,204,662
            )
            
            $
            (14,691,213
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            140,248
            
            
            
            151,481Allowance
      for doubtful accounts
            
            
            112,025
            
            
            
            132,499Estimated
      fair value of stock issued for services
            
            
            -
            
            
            
            36,750Amortization
      of estimated fair value of warrants and BCF
            
            
            -
            
            
            
            6,669,333Estimated
      fair value of warrants, net
            
            
            777,000
            
            
            
            -Change
      in operating assets and liabilities:Accounts
      receivable
            
            
            1,073,838
            
            
            
            (2,081,314
            )Inventories
            
            
            1,104,828
            
            
            
            (1,585,202
            )Prepaid
      royalties and expenses
            
            
            115,137
            
            
            
            (55,483
            )Deposits
            
            
            (40,000
            )
            
            
            45,852Accounts
      payable and accrued expenses
            
            
            36,842
            
            
            
            2,636,757Accrued
      payroll and related expenses
            
            
            39,021
            
            
            
            29,053Accrued
      interest
            
            
            575,525
            
            
            
            96,300Net
      cash used in operating activities
            
            
            (7,270,198
            )
            
            
            (8,615,187
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
            
            
            (8,612
            )
            
            
            (251,375
            )Disposals
      of property and equipment
            
            
            69,150
            
            
            
            -Restricted
      cash
            
            
            (136,847
            )
            
            
            -Net
      cash used in investing activities
            
            
            (76,309
            )
            
            
            (251,375
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Repayments
      of notes payable to stockholder
            
            
            (4,000
            )
            
            
            (33,000
            )Proceeds
      from issuance of common stock, net of issuance costs
            
            
            -
            
            
            
            4,187,762Advances
      from related parties
            
            
            7,751,568
            
            
            
            3,973,424Proceeds
      from notes payable
            
            
            -
            
            
            
            1,225,000Repayments
      of notes payable
            
            
            (15,000
            )
            
            
            (1,675,000
            )Repayments
      of capital lease
            
            
            (10,930
            )
            
            
            (2,186
            )Advances
      from factor
            
            
            7,600,614
            
            
            
            5,137,277Payments
      to factor
            
            
            (8,101,262
            )
            
            
            (3,891,488
            )Net
      cash provided by financing activities
            
            
            7,220,990
            
            
            
            8,921,789Net
      change in cash
            
            
            (125,517
            )
            
            
            55,227Cash,
      beginning year
            
            
            131,907
            
            
            
            76,680Cash,
      end of year
            
            $
            6,390
            
            
            $
            131,907





See
report of independent registered public accounting firm and notes to
consolidated financial statements.





F-6
 Table of Contents





THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


YEARS
ENDED DECEMBER 31, 2007 AND 2006





Supplemental Disclosure of Cash Flow
Information:





2007
            
            
            2006Cash
      paid during the year for interest
            
            $
            1,244,029
            
            
            $
            299,171Cash
      paid during the year for income taxes
            
            $
            800
            
            
            $
            800Supplemental
      Schedule of Noncash Investing and Financing
    Activities:Initial
      value of derivative liabilities
            
            $
            9,240,200
            
            
            $
            -Change
      in fair value of derivative liabilities
            
            $
            (9,240,200
            )
            
            $
            -Accrued
      liabilities converted to notes payable
            
            $
            191,393
            
            
            $
            -Change
      in accounting principle
            
            $
            -
            
            
            $
            904,000Purchase
      of property and equipment under capital lease
            
            $
            -
            
            
            $
            13,116





See
report of independent registered public accounting firm and notes to
consolidated financial statements.








F-7
 Table of Contents





THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


December
31, 2007




NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Organization
and Nature of Operations





On August
19, 2005, TDI Holding Corporation (“TDI”) entered into an agreement of Plan of
Reorganization (“Merger”) with The Fashion House, Inc. (“TFH”) in a tax free
share exchange under Section 368(a)(1)(B) of the Internal Revenue Code of 1986,
as amended. Immediately after the Merger, the officers and directors of TDI
resigned and the management of TFH controlled such positions; therefore,
effecting a change of control. As a result, the transaction was recorded as a
“reverse merger” whereby TFH was considered to be the accounting acquirer as it
retained control of TDI after the Merger. Simultaneously with the Merger, TDI
changed its name to The Fashion House Holdings, Inc.




TFH was
incorporated under the laws of the State of Delaware on April 11, 2002 and
commenced operations on January 1, 2003. TFH designs, develops and markets
women’s dress footwear with an emphasis on celebrity appeal, style, quality and
fit. The Company targets the moderate to premium-priced categories of the
women’s footwear industry and implements its business model by licensing
recognized brand names.





On April
16, 2008, the Company and its wholly owned subsidiary filed voluntary
petitions under Chapter 11 of the US Bankruptcy Code with the United States
Bankruptcy Court, Central District of California.




Principles
of Consolidation




These
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiary. All material intercompany accounts have been eliminated
in consolidation.




Use
of Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
periods. Significant estimates made by management include, among others, the
realizability of receivables and inventories; recoverability of long-lived
assets; valuation of common stock, derivative liabilities and warrants to
purchase common stock; and deferred tax assets. Actual results may differ from
these estimates under different assumptions or conditions.




Going
Concern




The
consolidated financial statements have been prepared on a going concern basis
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. The Company incurred net losses each year from
2004 through 2007, and as of December 31, 2007 the Company has a working
capital deficit of $15,481,970 and a stockholders’ deficit of
$16,104,628. These factors, among others, raise substantial doubt about the
Company’s ability to continue as a going concern. These consolidated financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.





The
Company’s ability to continue in existence and achieve success in operations is
dependent upon numerous items, among which are the growth of revenues from its
products, its ability to obtain new customers in order to achieve levels of
revenues adequate to support the Company’s current and future cost structure,
and its ability to obtain financing for operations, for which there is no
assurance. Unanticipated problems, expenses and delays are frequently
encountered in establishing and maintaining profitable operations. These
include, but are not limited to, competition, the need to develop customer
support capabilities and market expertise, setbacks in product development,
technical difficulties, market acceptance and sales and marketing. The failure
of the Company to meet any of these conditions could have a materially adverse
effect on the Company.. No assurance can be given that the Company can achieve
or maintain profitable operations.





The
Company will require financing to repay its existing obligations and resume
operating activities. There can be no assurance that additional funding will be
adequate or will enable the Company to achieve or sustain profitable
operations.




F-8
 Table of Contents
  THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007





On April
16, 2008, the Company and its wholly owned subsidiary filed voluntary
petitions under Chapter 11 of the US Bankruptcy Code with the United States
Bankruptcy Court, Central District of California, file numbers
1:08-BK-12363-KT and 1:08-BK-12359-KT, respectively.




We plan
to emerge from Chapter 11 proceedings operating two divisions, wholesale and
retail.  Our reorganization plan includes resuming our historical
wholesale business model of licensing, designing, manufacturing and
marketing designer brand women’s footwear.  We are presently in
discussions with several haute couture designers to license their brands.
We will retain our successful pattern of building high end
footwear for these licensed brands and selling the product in domestic and
international markets.  We will also introduce diffusion lines for the same
brands at more affordable price points of $79 to $ 150.  The company
will continue to limit business to designer brands that highlight design
aspects in order to capitalize on brand recognition.




We plan
to expand our retail division by opening Shoe Bliss stores in the
State of California and ultimately across the United States.





Risks
and Uncertainties




Credit
Risk




The
Company maintains its cash accounts in financial institutions. Accounts at these
institutions are insured by the Federal Deposit Insurance Corporation up to
$100,000.




Two and
three customers accounted for 44% and 42% of sales during the years ended
December 31, 2007 and 2006, respectively.




The
Company assigns the majority of its trade accounts receivable to a factor (see
Note 2). The Company also makes sales to customers not approved by its factor at
its own risk and monitors the outstanding receivable balance. At December 31,
2007, the Company established an allowance for doubtful accounts of
$244,524.





Two
customers accounted for 80% of accounts receivable as of December 31, 2007,
while one account was 15% of the accounts receivable balance at December 31,
2006.




The
Company operates in an industry that is subject to intense competition. The
Company’s operations are subject to significant risks and uncertainties
including financial, operational, technological, regulatory and other risks
associated with an operating business, including the potential risk of business
failure.




Merchandise
Risk




The
Company’s success is largely dependent upon its ability to gauge the market
trends and the tastes of its targeted consumers and provide merchandise that
satisfies consumer demand. Any inability to provide appropriate merchandise in
sufficient quantities in a timely manner could have a material adverse effect on
the Company’s business, operating results and financial condition.




In 2006
and 2007, the Company purchased substantially its entire inventory from three
vendors. The loss of one of these vendors could have a material adverse effect
on the Company’s cash flow and financial position.





F-9
 Table of Contents




THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007




Inventories





Inventories
consist almost entirely of footwear and are valued at the lower of cost or
market. Cost is determined on a first-in, first-out basis. The Company
periodically reviews its inventory quantities on hand and adjusts for excess and
obsolete inventory based primarily on its estimated forecast of product demand.
Actual demand may differ from the Company's estimates. Once established,
write-downs of inventory are considered permanent adjustments to the basis of
the excess or obsolete inventory.




Property
and Equipment




Property
and equipment are stated at cost. Depreciation of equipment is provided for by
using the straight-line method over the estimated useful lives of the related
assets, which are five years for machinery and equipment, seven years for
furniture and fixtures, and the shorter of lease terms or estimated useful lives
for leasehold improvements. Expenditures for maintenance and repairs are charged
to expense as incurred; additions, renewals and betterments are capitalized.
When property and equipment are retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the respective accounts, and
any gain or loss is included in operations.




Long-Lived
Assets




In
accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, the Company evaluates
the carrying value of long-lived assets for impairment whenever events or change
in circumstances indicate that such carrying values may not be recoverable. The
Company estimates the future undiscounted cash flows derived from an asset to
assess whether or not a potential impairment exists when events or circumstances
indicate the carrying value of a long-lived asset may not be recoverable. An
impairment loss is recognized when the discounted future cash flows are less
than its carrying amount. If assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount exceeds the fair value of the assets. At December 31, 2007, the Company’s
management believes there is no impairment of its long-lived
assets.




Fair
Value of Financial Instruments




The
Company’s financial instruments consist of cash, accounts receivable, accounts
payable and accrued expenses, accrued payroll and related, due to factor,
accrued interest, note payable stockholder and notes payable. The carrying value
for all such instruments approximates fair value at December 31, 2007 due to
their short maturities.




Revenue
Recognition




SEC Staff
Accounting Bulletin (“SAB”) 101, Revenue Recognition , as
amended by SAB 104, outlines the basic criteria that must be met to recognize
revenue and provide guidance for presentation of revenue and for disclosure
related to revenue recognition policies in financial statements filed with the
Securities and Exchange Commission. Management believes that the Company’s
revenue recognition policy conforms to SAB 104.




The
Company evaluates the criteria of Financial Accounting Standards Board (“FASB”)
Emerging Issues Task Force (“EITF”) Issue No. 99-19, Reporting Revenue Gross as a
Principal Versus Net as an Agent, in determining whether it is
appropriate to record the gross amount of revenue and related costs or the net
amount earned as commissions. The Company is the primary obligor, is subject to
inventory risk, has latitude in establishing prices and selecting suppliers,
establishes product specifications, and has the risk of loss as it relates to
cargo losses. Accordingly, the Company’s revenue is recorded on a gross
basis.




F-10
 Table of Contents




THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007




The
Company issues letters of credit in favor of the manufacturers in accordance
with the information provided by the Company and the manufacturer. The Company
imports the goods and pays the import and delivery costs and forwards the goods
to a public warehouse. The goods are held by the Company at a public warehouse
until the customers requested ship date. The Company arranges and maintains the
goods while in its warehouse at its expense. The Company has title to the goods
when shipped from the manufacturer and in the public warehouse.




Revenue
is recognized upon shipment of goods from the public warehouse to the customers,
which is when title transfers to the customers. The trading company approves
credit to the customers and factors the sale. The trading company charges the
Company 1% of the sales which are factored. For sales that are not factor
approved, the Company will ask the customer to prepay before shipment. In some
instances, the Company will retain the accounts receivable.




Shipping
and handling costs billed to the customers are recorded in sales. Shipping and
handling costs as incurred by the Company are recorded in cost of
sales.




Advertising





The
Company expenses advertising costs, consisting primarily of design and printing
costs of sales materials, when incurred. Advertising expense for the years ended
December 31, 2007 and 2006 amounted to $11,560 and $78,678,
respectively.





Income
Taxes





The
Company determines its income taxes under the asset and liability method in
accordance with the SFAS No. 109, Accounting for Income Taxes.
Under the asset and liability approach, deferred income tax assets and
liabilities are calculated and recorded based upon the future tax consequences
of temporary differences by applying enacted statutory tax rates applicable to
future periods for differences between the financial statement carrying amounts
and the tax basis of existing assets and liabilities. Generally, deferred income
taxes are classified as current or non-current in accordance with the
classification of the related asset or liability. Those not related to an asset
or liability are classified as current or non-current depending on the periods
in which the temporary differences are expected to reverse. Valuation allowances
are provided for significant deferred income tax assets when it is more likely
than not that some or all of the deferred tax assets will not be
realized.





In July
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes--an interpretation of FASB Statement No. 109 (“FIN 48”), which
clarifies the accounting and disclosure for uncertainty in tax positions, as
defined. FIN 48 seeks to reduce the diversity in practice associated with
certain aspects of the recognition and measurement related to accounting for
income taxes. The Company is subject to the provisions of FIN 48 as of January
1, 2007. The Company believes that its income tax filing positions and
deductions will be sustained on audit and does not anticipate any adjustments
that will result in a material change to its financial position. Therefore, no
reserves for uncertain income tax positions have been recorded pursuant to FIN
48. The cumulative effect, if any, of applying FIN 48 is to be reported as an
adjustment to the opening balance of retained earnings in the year of adoption.
The Company did not record a cumulative effect adjustment related to the
adoption of FIN 48. Tax years since 1992 remain subject to examination by the
major tax jurisdictions in which the Company is subject to tax. The Company's
policy for recording interest and penalties associated with income-based tax
audits is to record such items as a component of income taxes.





Loss
Per Share





Basic
loss per share is computed by dividing loss available to common stockholders by
the weighted average number of common shares assumed to be outstanding during
the period of computation. Diluted loss per share is computed similar to basic
loss per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
shares had been issued and if the additional common shares were dilutive. All
potentially dilutive shares, 106,439,476 and approximately 6,396,000 at December
31, 2007 and 2006, respectively, have been excluded from diluted loss per share,
as their effect would be anti-dilutive for the periods then ended.




F-11
 Table of Contents


THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007




Stock-Based
Compensation




As of
December 31, 2007, the Company had no stock-based compensation plans and has not
issued any share-based payments to its employees.





Issuance
of Stock for Non-cash Consideration





All
issuances of the Company’s common stock for non-cash consideration have been
assigned a dollar amount equaling either the market value of the shares issued
or the value of consideration received whichever is more readily determinable.
The majority of the non-cash consideration received pertains to services
rendered by consultants and others and has been valued at the market value of
the shares issued.





The
Company’s accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of EITF Issue
No. 96-18, Accounting for
Equity Instruments That are Issued to Other  Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services and EITF Issue No. 00-18,
Accounting Recognition for
Certain Transactions  Involving Equity Instruments Granted
to Other Than Employees. The measurement date for the fair value of the
equity instruments issued is determined at the earlier of (i) the date at which
a commitment for performance by the consultant or vendor is reached or (ii) the
date at which the consultant or vendor’s performance is complete. In the case of
equity instruments issued to consultants, the fair value of the equity
instrument is recognized over the term of the consulting agreement.




Derivative
Financial Instruments





In
connection with the issuance of warrants with certain notes payable (see Note
5), the Company was required to file a registration statement in November 2005
and have such registration statement declared effective no later than 180 days
following the Merger (the “Effectiveness Deadline”) and to maintain the
effectiveness of such registration. In addition, the Company was required to
issue certain holders of convertible warrants for each subsequent 30-day period
that such registration statement had not been filed and additional warrants for
each 30-day period following the Effectiveness Deadline, in which the
registration statement was not declared effective. On July 26, 2006, the Company
filed the required registration statement. The Company’s registration statement
became effective on January 23, 2007. The Company determined that the
registration rights are an embedded derivative instrument pursuant to SFAS No.
133, Accounting for
Derivative  Instruments and Hedging
Activities , as amended. Under the provisions of Emerging Issues Task
Force (“ EITF ”) Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in a Company’s Own Stock
and View A of EITF No. 05-4, The Effect of a Liquidated Damages
Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock, the accounting treatment of these
derivative financial instruments required that the Company record the
derivatives at their fair values as of the inception date of the note agreements
and at fair value as of each subsequent balance sheet date. Any change in fair
value was recorded as non-operating, non-cash income or expense at each balance
sheet date. If the fair value of the derivatives was higher at the subsequent
balance sheet date, the Company recorded a non-operating, non-cash charge. If
the fair value of the derivatives was lower at the subsequent balance sheet
date, the Company recorded non-operating, non-cash income.




In
December 2006, the FASB issued Staff Position EITF 00-19-2, Accounting for
Registration Payment Arrangements (“ FSP EITF 00-19-2” ). FSP EITF 00-19-2
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
FASB Statement No. 5, Accounting for Contingencies
.. FSP EITF 00-19-2 further clarifies that a financial instrument subject to a
registration payment arrangement should be accounted for in accordance with
applicable generally accepted accounting principles without regard to the
contingent obligation to transfer consideration pursuant to the registration
payment arrangement.





In
accordance with the provisions of FSP EITF 00-19-2, the Company elected early
adoption of this statement. As of January 1, 2006, the Company recorded the
warrant liability of $904,000 to equity since the only provision which caused
the warrants issued to be accounted for as a derivative liability was the
liquidated damages provision in the registration rights agreement. In recording
the entry, the Company credited $688,000 to common stock which represents the
estimated fair value of these warrants on the date of issuance and a credit to
accumulated deficit of $216,000 which represents the difference between the
estimated fair value of these warrants at the date of issuance and the estimated
fair value as of December 31, 2005. However, as retrospective application of FSP
EITF 00-19-2 is prohibited, the Company has not restated the amounts presented
as of December 31, 2007.




F-12
 Table of Contents




THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007




As a
result of unsuccessful fund raising efforts, the Company modified an existing
warrant (the “Modification”) and therefore did not have a sufficient number of
authorized shares to settle outstanding and exercisable options, warrants and
convertible instruments (see Note 7). Therefore, under the provisions of
Emerging Issues Task Force ("EITF") Issue No. 00-19, Accounting For Derivative Financial
Instruments Indexed To, And Potentially Settled In, A Company's Own
Stock, as a result of the Modification, the Company was required to
classify all non-employee options and warrants as derivative liabilities,
totaling $9,147,000 as of the Modification date, and record them at their fair
values at such date. Any change in fair value is required to be recorded as
non-operating, non-cash income or expense at each subsequent balance sheet date
until the Company has a sufficient number of authorized shares to settle its
convertible instruments and non-employee options and warrants. If the fair value
of the derivatives is higher at the subsequent balance sheet date, the Company
will record a non-operating, non-cash charge. If the fair value of the
derivatives is lower at the subsequent balance sheet date, the Company will
record non-operating, non-cash income. The Company recorded an additional
$93,200 for the fair value of warrants issued during the fourth quarter of 2007.
As a result of the Modification, the Company reclassified the fair value of
non-employee options and warrants of $9,240,200 from additional paid-in capital
to derivative liability. During the year ended December 31, 2007, the Company
recognized other income of $9,240,200 related to recording the derivative
liability at fair value. At December 31, 2007, the warrants are deemed to be
worthless, and therefore the derivative liability balance is zero.




Warrant-related
derivatives were valued using the Black-Scholes Option Pricing Model during the
period ended December 31, 2007. The following assumptions were used during the
fourth quarter of 2007: dividend yield of 0%; annual volatility of 224.2%; and
risk free interest rate of 3.07%.




The
following is a summary of the changes to the derivative liability during the
year ended December 31, 2007:





Derivative
      liability, January 1, 2007
            
            $
            -Derivative
      liability added during 2007
            
            
            9,240,200Change
      in fair value
            
            
            (9,240,200
            )Derivative
      liability, December 31, 2007
            
            $
            -





Beneficial
Conversion Feature




The
convertible features of certain convertible notes payable (see Note 7) provide
for a rate of conversion that is below market value. Such feature is normally
characterized as a “beneficial conversion feature” (“BCF”). Pursuant to EITF
Issue No. 98-5, Accounting For Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratio and EITF Issue No. 00-27, Application of EITF Issue
No. 98-5 To Certain Convertible Instruments, the fair values of the
BCFs have been recorded as a discounts from the face amount of the respective
debt instrument. The Company is amortizing the discounts using the effective
interest method through maturity of such instruments. The Company records the
corresponding unamortized debt discounts related to the BCFs and warrants as
interest expense when the related instrument is converted into the Company’s
common stock.





Recent
Accounting Standards





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurement. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
GAAP and expands disclosures about fair value measurements. The Statement does
not require any new fair value measurements but could change the current
practices in measuring current fair value measurements. The Statement is
effective for fiscal years beginning after November 15, 2007. Management is
currently evaluating the impact of the adoption of this statement; however, it
is not expected to have a material impact on our consolidated financial
position, results of operation or cash flows.





In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial
Assets and Financial Liabilities – including an amendment of FASB Statement No.
115, which permits entities to choose to measure many financial
instruments and certain other items at fair value. Most of the provisions of
this Statement apply only to entities that elect the fair value option. However,
the amendment to SFAS No. 115,Accounting for Certain Investments
in Debt and Equity Securities, applies to all entities with
available-for-sale and trading securities. SFAS No. 159 is effective as of
the beginning of an entity’s first fiscal year that begins after November 15,
2007. Management does not believe that the adoption of SFAS No. 159 will have a
material effect on the Company’s financial statements.




F-13
 Table of Contents




THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007


In
December 2007, the FASB issued SFAS No. 141(revised 2007), Business Combinations, and
SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements.  SFAS No. 141R
improves reporting by creating greater consistency in the accounting and
financial reporting of business combinations, resulting in more complete,
comparable, and relevant information for investors and other users of financial
statements. SFAS No. 141R requires the acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities
assumed in the transaction; establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed; and
requires the acquirer to disclose to investors and other users all of the
information they need to evaluate and understand the nature and financial effect
of the business combination.  SFAF No. 160 improves the relevance,
comparability, and transparency of financial information provided to investors
by requiring all entities to report noncontrolling (minority) interests in
subsidiaries in the same way—as equity in the consolidated financial statements.
Moreover, SFAS No. 160 eliminates the diversity that currently exists in
accounting for transactions between an entity and noncontrolling interests by
requiring they be treated as equity transactions.  The two statements
are effective for fiscal years beginning after December 15, 2008. Management
does not believe that the adoption of these statements will have a material
effect on the Company’s financial statements.





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133.SFAS No. 161 changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations, (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows and (d) encourages, but does not
require, comparative disclosures for earlier periods at initial
adoption.  SFAS No. 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged.  Management does not believe that the
adoption of this statements will have a material effect on the Company’s
financial




NOTE
2 — ACCOUNTS RECEIVABLE FACTORING AND PURCHASE ORDER FINANCING




On May 3,
2006, the Company entered into a factoring agreement with CIT Commercial
Services (“CIT”), as amended, which was terminated in July 2007 (see below). The
Company was charged a factoring fee of 1% on gross invoice amounts. The Company
agreed to sell and assign to CIT all accounts arising from the sale of
inventory, including those under any trade name, through any divisions, and
through any selling agent.




At the
Company’s request and at CIT’s sole discretion, CIT advanced funds to the
Company at up to 80% of the factor risk accounts. The advance request form was
required to be fully executed by the Company and Westrec Capital Partners, LLC
(see Note 8). Interest was charged based on the daily debit balances in the
funds in use account for the month, at a rate equal to the greater of the sum of
2% plus the J P Morgan Rate, or 6% per annum.




On July 25,
2007, the Company entered into a new accounts receivable factoring agreement
with Ultimate Financial Solutions, LLC (“Ultimate”). The Company agreed to sell
and assign to Ultimate all accounts arising from the sale of inventory. At the
Company’s request, Ultimate may advance funds to the Company at up to 80% of the
factor risk accounts. The Company is charged a factoring fee of .85% on gross
invoice amounts. Interest is charged based on the daily debit balances in the
funds in use account for the month, at a rate equal to 1.5% above the Prime Rate
as published from time to time in the Wall Street Journal. In connection with
this agreement, on July 30, 2007, Ultimate paid CIT for the outstanding balance
of funds in use by the Company on that day. As a result, the Company’s liability
for this amount was effectively transferred from CIT to Ultimate and the CIT
agreement was terminated.  The obligations under this agreement are secured
by substantially all of the Company’s assets. The loans are personally
guaranteed by the principal member of Westrec and a director and shareholder of
the Company.





At
December 31, 2007, the following summarizes the Company’s accounts receivable
and related balances:




Trade
      receivables assigned to factor
              
              $
              1,378,631Advances
      from factors
              
              
              (1,066,630
              )Amounts
      due from factors
              
              
              312,001Unfactored
      trade accounts receivable
              
              
              31,477Non
      trade receivables
              
              
              65,385Allowance
      for bad debts
              
              
              (244,524
              )Net
      receivable
              
              $
              164,339





During
the year ended December 31, 2007 and 2006, factoring fees incurred totaled
$93,791 and $65,806 respectively.




F-14
 Table of Contents




THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007


On July
17, 2007, the Company entered into an agreement with Ashford Finance, LLC
(“Ashford”), whereby Ashford will provide up to $5,000,000 of purchase order
financing relating to the Company’s purchases of its products from foreign
manufacturers. Ashford will finance an amount up to 90% of the Company’s end
buyer’s purchase orders relating to the Company’s purchase order placed with the
foreign manufacturer. The Company is charged an Account Management Fee equal to
1.5% per month for Letters of Credit opened by Ashford on behalf of the Company
when the amount equals up to 75% of the Company’s related customer purchase
orders. The Account Management Fee will increase to 2.5% for Letters of Credit
when the amount is in excess of 75% of the related customer purchase order, but
in no event will the Letter of Credit amount be greater than 90% of the related
customer purchase orders. All loans will also bear interest at the rate of 2%
per annum above the Prime Rate as published time to time by the Wall Street
Journal. The agreement requires minimum usage during the first twelve months of
$3,000,000. If the Company cancels the agreement or fails to open letter of
credit that equal the minimum usage, the Company is required to pay all fees
under the agreement for the full minimum amount. The loans are secured by
virtually all of the Company’s assets. Transactions financed under this
agreement are guaranteed by two of the Company’s directors and shareholders, but
only in the event that fraud may have occurred.





In
connection with the July 20, 2007 agreement with Ultimate and the July 17, 2007
agreement with Ashford, Intercreditor Agreements were also entered into by and
between Westrec, Comerica, Ultimate and Ashford to establish a priority for
security interests in the Company’s assets. In these agreements, Comerica
subordinated its security interest to Ultimate in accounts factored by Ultimate.
Comerica also subordinated its security interest in all assets to Ashford.
Ultimate subordinated its security interest in purchase orders financed by
Ashford. Westrec subordinated its security interest to Ultimate in accounts
factored by Ultimate.  Westrec subordinated its security interest in
receivables, as defined, to Ashford. Westrec subordinated to Ashford its
security interest in inventory financed by Ashford. With regard to inventory
other than inventory financed by Ashford, security interests of Ashford and
Westrec rank pari passu with one another. Ashford’s lien and security interest
in all other assets and collateral is subordinate to Westrec’s security interest
(other than receivables or inventory).








NOTE 3 — PROPERTY AND
EQUIPMENT





Property
and equipment consists of the following at December 31, 2007:





Office
      and computer equipment
            
            $
            163,865Furniture
      and fixtures
            
            
            365,557529,422Less
      accumulated depreciation and amortization
            
            
            (266,848
            )$
            262,574






F-15
 Table of Contents




THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 YEARS
ENDED DECEMBER 31, 2007 AND 2006


NOTE
4 — NOTES PAYABLE TO STOCKHOLDERS




The
Company borrowed funds from two founding stockholders for working capital
purposes, which bear interest at 8% per annum and are due 13 months from
the date of demand. As of December 31, 2007, outstanding borrowings totaled
$1,090,100, net of a $4,000 payment made during 2007, and accrued interest
totaled $293,363. As of April 15, 2008, no demand for repayment has been
made. Interest expense on the notes totaled $89,076 and $78,480 for the year
ended December 31, 2007 and 2006, respectively.  The balance above includes
a note payable issued during the year ended December 31, 2007 totaling $121,100
in connection with interest expense previously accrued.




NOTE
5 — COMMITMENTS AND CONTINGENCIES




Licensing
Agreements





For the
rights to use trademarks, the Company had entered into licensing agreements with
various licensors.





The
agreements enable the Company to sell products using the name of the licensors
in return for a licensing fee based upon sales of the products using the
licensors’ names.





As of
December 31, 2007, the Company had rights to use eight trademarks as evidenced
by licensing agreements entered into with Oscar by Oscar de la Renta, O Oscar by
Oscar de la Renta, Blass by Bill Blass, Bill Blass Couture, Blassport and Bill
Blass Collection, Isaac Isaac Mizrahi and a new couture brand which expire
through March 2011. Under these licensing agreements, the Company agreed to
pay the greater of between 3% and 8% of net sales of the licensed products or
guaranteed minimums ranging from $70,000 to $1,000,000 per annum, per contract.
The licensors may terminate the licensing agreements upon events of default, as
defined.





Minimum
annual guaranteed royalty payments on the above licenses are as
follows:




Years
      ending December 31,2008
              
              $
              1,083,0002009
              
              
              1,401,0002010
              
              
              1,625,0002011
              
              
              1,748,000$
              5,857,000





Royalty
expense was $1,248,060 and $747,115 for the years ended December 31, 2007 and
2006, respectively.





On
November 26, 2007, the Tyler licenses ended in accordance with the contract
termination date. While a two year renewal was available in the agreement, the
renewal option was not exercised.





The Company hadexperienced a declining
market for its Blass footwear. As a result,during the fourth quarter
of 2007,the Company and Bill Blass began negotiations to terminate the
Blass license. While the Company and Blass had mutually agreed that the Company
would discontinue the design, manufacture and sale of Blass footwear, a payment
of $90,000 by the Company to Blass was to be made to relieve the Company’s
obligations under the license agreement for all future minimum payments. This
payment has not been made as of the date of this filing.





On
January 10, 2008, Oscar de la Renta issued a written notice of default for
failure to pay minimum royalties under the Company’s licensing agreement with
it.





On
January 27, 2008 Isaac Mizrahi requested termination of the Company’s licensing
agreement with it.





As of
December 31, 2007, the Company has accrued all minimum royalties due under all
license agreements.




F-16
 Table of Contents




THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007


Indemnities
and Guarantees




The
Company and its subsidiary have made certain indemnities and guarantees, under
which it may be required to make payments to a guaranteed or indemnified party,
in relation to certain actions or transactions. The Company and its subsidiary
indemnifies its directors, officers, employees and agents, as permitted under
the laws of the States of Colorado and Delaware. In connection with its facility
lease, the Company has indemnified its lessors for certain claims arising from
the use of the facilities. Additionally, the Company indemnifies its factor and
licensors under the factoring and license agreements, respectively, against
certain claims as a result of the violation of any law. The duration of the
guarantees and indemnities varies, and is generally tied to the life of the
agreement. These guarantees and indemnities do not provide for any limitation of
the maximum potential future payments the Company could be obligated to make.
Historically, the Company has not been obligated nor incurred any payments for
these obligations and, therefore, no liabilities have been recorded for these
indemnities and guarantees in the accompanying consolidated balance
sheet.




Litigation




On April
16, 2008, the Company and its wholly owned subsidiary filed voluntary
petitions under Chapter 11 of the US Bankruptcy Code with the United States
Bankruptcy Court, Central District of California, file numbers
1:08-BK-12363-KT and 1:08-BK-12359-KT, respectively. Active litigation at the
time of this bankruptcy filing will be moved to the bankruptcy
court.







The
Company is, from time to time, involved in various legal and other proceedings
which arise in the ordinary course of operating its business. In the opinion of
management, the amount of ultimate liability, if any, with respect to these
actions will not materially affect the consolidated financial
position,  results of operations or cash flows of the Company except
as disclosed below.





William
Bradhan and Richard Traweek v. The Fashion House, Inc., John Hanna





This
matter was filed October 26, 2005, seeking damages for breach of contract and
fraud regarding oral arrangements with the Company’s subsidiary. On April 10,
2007, a Notice of Entry of Judgment was filed with the court for the amount of
$460,000, which includes interest at 10% per year.  No appeal was
filed. In connection with this judgment, the Company has accrued $300,000 in
accounts payable and accrued expenses in the accompanying condensed consolidated
balance sheet based on management’s best estimate of the ultimate settlement of
this matter.





Artful
Mind Industrial, Ltd.





On March
6, 2007, the Company was served with a complaint, which Artful Mind Industrial
Ltd. (“Artful Mind”) filed on March 1, 2007 alleging that the Company failed to
make payments owed under a Settlement Agreement (the “Agreement”) entered into
between Artful Mind, Go Moda Limited and the Company in September 27, 2006.
Artful Mind seeks judgment for the full amount of all payments due, which
approximates $295,000, together with interest at a rate of 9% per annum
beginning on January 14, 2007 and costs of collection, including reasonable
attorneys’ fees incurred. Based on the event of a default, of not timely paying
the final two payments, the entire balance of all payments due were accelerated
and became immediately due and interest on all unpaid amounts accrued at a rate
of 9% per annum. The complaint states that the Company is currently in default
on the final two payments. On October 2, 2007, a default judgment was entered
for $315,055, including interest and court costs. The Company has included this
amount as accounts payable and accrued expenses in the accompanying condensed
consolidated balance sheet. A restraining order on $136,847 of the Company’s
cash balances at Comerica Bank was obtained and is classified as restricted cash
at December 31, 2007. The Company’s senior secured lender filed a lawsuit
subsequent to December 31, 2007 to block payment of these funds to Artful Minds.
 The matter is currently pending.




F-17
 Table of Contents




THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007


TCK
Designs, LTD.





On May
11, 2007, a complaint was filed in New York by TCK Designs, LTD alleging breach
of contract for terminating a purported one year agreement without making
payment to the Plaintiff. The plaintiff sought damages in the amount of $37,500,
plus legal fees and interest. A default judgment was entered on September 24,
2007. On October 31, 2007, an Order to Show Cause with Temporary Restraints was
filed in New Jersey, barring the Company’s public warehouse in New Jersey from
moving goods stored at that location. On November 5, 2007, at the Company’s
request, the Court granted a partial release on the restraining order allowing
the Company to continue shipping goods from the public warehouse.  The
Company was required by the court to maintain $100,000 of goods at the warehouse
and a cash deposit of $40,000 in its attorney’s trust account. The Company had
the option of placing an additional $20,000 in the attorney trust account to
fully release all goods in the warehouse.  The Company’s senior
secured lender filed a lawsuit subsequent to December 31, 2007 to block payment
of these funds to Artful Minds.  The court denied this request and the
funds were remitted to the plaintiff.





Barry
K. Rothman





On
October 26, 2007, a complaint was filed in Los Angeles by Barry K. Rothman
against the Company, John Hanna, Westrec Capital Partners, LLC and a principal
of Westrec Capital Partners, LLC for breach of contract in the amount of
$141,733 and appointment of receiver.  The suit relates to failure to
pay for legal services. The matter is currently pending.





Bowne
of Los Angeles





On
December 21, 2007 a complaint was filed in Los Angeles by Bowne of Los Angeles,
Inc. for breach of contract in the approximate amount of $20,000. The matter is
currently pending.





6310
San Vicente Associate, LLC





On
February 15, 2008, a complaint was filed in Los Angeles against the Company by
6310 San Vicente Associates, Inc., the Company’s former landlord for breach of
contract for failure to pay rent in the approximate amount of $26,000. The
matter is currently pending.


.


Oscar
De La Renta, Ltd





On
February 19, 2008, a complaint was filed in New York by Oscar De La Renta Ltd.
against the Company for breach of contract, unfair competition, and trademark
infringement relating to failure to make royalty payments in connection with the
Company’s license agreement with Oscar De La Renta, Ltd. The plaintiff seeks
damages totaling $1,786,015. The matter is currently pending.





Nikki
DeLaTorre v. The Fashion House, Inc., John Hanna, Tom Anzures, DOES 1-10, was
settled for $25,000 in September 2006.





Isometric
Exhibit, Inc. v. The Fashion House, Inc. and DOES 1 to 10, was settled for
$17,500 in October 2006.




Employment
Agreements




The
Company has entered into employment agreements with certain of its management
for services to be provided in the normal course of business. These agreements
call for minimum salary levels and various payments upon termination of
employment, as defined. In the event of termination for any reason, the Company
is required to pay its CEO one year salary and bonus. The CEO’s salary for the
year ending December 31, 2007 is $180,000 and the bonus was waived for
2007, 2006, and 2005.




F-18
 Table of Contents




THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007


NOTE
6 — NOTES PAYABLE





In
July 2005, the Company issued a note payable totaling $550,000, bearing
interest at 11 percent per annum (the “July 11% Note”). The
July 11% Note and accrued interest were due in April 2006, as amended. In
connection with the issuance of the July 11% Note, the Company issued
warrants to purchase an aggregate of 1,100,000 shares of the Company’s common
stock. The warrants vested upon grant, have an exercise price of $1.00 per share
and expire in August 2008. In connection with the registration rights
issued with the July 11% Notes and related warrants (see Note 1), the Company
issued warrants to purchase an aggregate of 110,000 and 1,430,000 shares of the
Company’s common stock during the years ended December 31, 2007 and 2006,
respectively, as penalties for not registering the underlying shares timely, as
defined (see Note 7). The penalty warrants ceased in January 2007, as the
related registration statement was declared effective. The warrants issued
during the twelve months ended December 31, 2007 and 2006, for penalties, had
fair values totaling $58,000 and $1,048,000, respectively, and the Company
recorded such as interest expense upon grant. The warrants vested upon grant,
had an exercise price of $1.00 per share and expire in August 2015. The
July 11% Note and accrued interest were repaid in
March 2006.





On July
6, 2006, the Company issued a note payable totaling $300,000 with a maturity
date of August 20, 2006, and bearing interest at the prime rate plus 5% (the
“July Note”). In connection with the issuance of the July Note, the Company
issued a warrant to purchase 60,000 shares of the Company’s common stock. The
warrant is immediately exercisable, has an exercise price of $1.00 and expires
in July 2016. The warrant had a relative fair value of $33,000, and the Company
recorded such as debt discount. The Company amortized the debt discount to
interest expense during 2006. The Company repaid $75,000 on the note and the
maturity date was extended to August 20, 2007. On September 21, 2007, the
Company received a written demand for payment on this note. As of the date of
this filing, no payment has been made.





On
February 8, 2007, the Company issued a note payable totaling $70,293 in
connection with services rendered, which bears interest at 1.5% per month. The
Company is required to make monthly principal payments of $15,000 through
maturity in July 2007. Only one monthly payment has been made on this note since
its inception. As a result, the note is currently in default. At December 31,
2007, the outstanding balance was $55,293.




NOTE
7 – DUE TO RELATED PARTIES





On July
27, 2006, the Company and Westrec Capital Partners, LLC (“Westrec”) entered into
an agreement (the “Credit Enhancement Agreement”) whereby Westrec and its
managing partner (“Guarantors”) have provided credit guarantees to the lender
sufficient to enable the bank to make advances to the Company (see below). In
connection with each advance, the Company paid a fee of 5.0% of each draw to
Westrec.





On
September 18, 2006, the Company entered into a Master Revolving Note (the
“Note”) with  a bank (the “Lender”) to borrow funds from time to time,
at the Lender’s discretion, up to an aggregate of $5.0 million, payable in whole
or in part upon demand, at a per annum rate equal to the Lender’s prime rate
plus 1% per annum secured by deposits with the Lender. The note replaces
previously issued notes by the lender. Upon default, the Company is required to
pay an additional 3% interest per annum (the “Default Increase”). In connection
with entering into the Note, the Company entered into a Credit Enhancement
Agreement with Westrec pursuant to which each of the Guarantors agreed to
guarantee the Company’s obligations existing on or before the date that is the
earliest of (i) 180 days following the closing of the Note with the Lender, (ii)
the termination of Guarantor’s obligations, or (iii) the Company’s repayment in
full of the amounts outstanding under Note, as defined. Additionally, pursuant
to the terms of the Credit Enhancement Agreement, the Company has agreed to pay
the following fees: upon any issuance of a letter of credit by the Lender that
is guaranteed by a Guarantor, the Company will pay Westrec 2% of the face amount
of the letter of credit; as long as any amount is outstanding on the Note that
is guaranteed by a Guarantor, revolving line-of-credit based fees equal to the
difference between (a) the sum of 20%, plus (if applicable) the
Default Increase (as noted above), or (b) the sum of the Lender’s prime rate
plus11.75% per annum , plus (if applicable) the
Default Increase (as noted above). In addition, the Company pays a monthly
credit monitoring fee of $5,000 for each calendar month up to and including the
month of termination. Effective June 1, 2007, the monthly monitoring fee was
increased to $9,000 per month. The increase of $4,000 is being accrued and not
paid at this time.  Any payments that are deemed late are subject to
an additional fee of 5% of each such late payment.




F-19
 Table of Contents


THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007


The
Company also granted the Guarantors a security interest in all of the Company’s
tangible and intangible property and assets, for the duration of the Credit
Enhancement Agreement. In addition, the Chief Executive Officer of the Company
granted a security interest and pledge of all shares of the Company’s common
stock, options, warrants and other equity securities held by him. Furthermore,
each draw under the Note with the Lender is subject to the prior approval of the
Guarantors at their discretion. The Credit Enhancement Agreement terminates upon
repayment in cash of all amounts payable and the delivery of certain written
releases by the Lender and the Company.





During
the year ended December 31, 2006, in connection with the Credit Enhancement
Agreement, the Company granted a seven-year warrant to purchase a total of
9,000,000 shares of common stock at a purchase price of $0.40 per share that
expires in September 2013, as amended - see below. The warrant vested as
follows: (i) 20% immediately, (ii) an additional 20% vests, as amended, 60 days
after the date of the warrant, and on each succeeding 30th day thereafter such
that the entire warrant will vest on the 151st day after the date of the
warrant. The estimated fair value of the original warrant was $2,550,000 and the
Company was amortizing such amount to interest expense on a straight line basis
over the life of the guarantee, of which $1,710,000 was expensed during the year
ended December 31, 2007. However, the amount of interest expense recognized at
any date will be at least equal to the portion of the grant date fair value of
the vested amount.




Effective
December 20, 2006, the Company entered into an amended credit enhancement
agreement with Westrec, in which, among other things, Westrec agreed to extend
its guarantee on behalf of the Company to amounts owed to the Lender and include
its guarantee on amounts owed to CIT, the Company’s factor (see Note 2). In
exchange for the additional concessions, the Company modified the warrants
originally granted to Westrec to increase the number of warrants granted from
5,000,000 to 9,000,000 and decrease the exercise price from $0.65 to $0.40 and
extended the maturity date of the guarantee to September 2007. The estimated
fair value of the modification was $2,200,000, of which the Company amortized
$792,000 to interest expense in the accompanying statements of operations during
the year ended December 31, 2007 related to this warrant, which was fully vested
at March 31, 2007.





As the
termination of the Credit Enhancement Agreement did not occur on September 14,
2007, the number of shares underlying the Warrant was and will be increased in
the following amounts, which shares will be immediately vested: (i) an
additional number of shares equal to 3% of the shares based on the number of
warrants earned, as defined, on September 14, 2007, plus (ii) an additional
number of shares equal to 5% of the shares based on the number of warrants
earned, as defined, on October 14, 2007, plus (iii) an additional number of
shares equal to 8% of the shares based on the number of warrants earned, as
defined, on November 13, 2007, plus (iv) an additional number of shares equal to
10% of the shares based on the number of warrants earned, as defined, on
December 13, 2007, and (v) an additional number of shares equal to 10% of the
shares based on the number of warrants earned, as defined, every 30th day
thereafter until the Agreement Termination Date occurs.  If the
Company issues equity securities with a purchase price less than the current
exercise price of the Warrant, then the exercise price of the Warrant will be
reduced to such amount and the number of shares underlying the Warrant will be
increased accordingly.  There is no maximum number of warrants to be
issued under this agreement.  As of December 31, 2007, the Company
issued warrants to purchase an aggregate of 23,455,101 shares of the Company’s
common stock.  The warrants are exercisable at $0.05, vested upon
grant, were valued at $162,000 (based on the Black Scholes option pricing
model), expire through September 15, 2013 and were expensed as additional
interest expense during the year ended December 31, 2007.





On
February 27, 2007, the Company amended its Note to increase the borrowing base
from an aggregate of $5.0 million to $6.5 million.




On April
10, 2007, the Company amended its Note (the “April Amendment”) to increase the
borrowing base from an aggregate of $6.5 million to $8.5 million.  In
connection with the April Amendment, the Company entered into an amendment of
the Credit Enhancement Agreement with Westrec pursuant to which each of the
Guarantors agreed to guarantee additional advances under the Comerica Loan of up
to an aggregate of $2,000,000, which advances are drawn no later than August 3,
2007, provided that at the time of each advance certain representations,
warranties, and conditions are all satisfied.




In
consideration for this agreement, the Company issued to Westrec an amended
Warrant Agreement dated April 10, 2007, to purchase a total of 11,000,000 shares
of common stock at an exercise price of $0.40 per share. The Warrant vested upon
grant and expires on September 15, 2013. In connection with the warrant
modification, the Company recorded $320,000 of interest expense upon
grant.  The Company agreed to increase the number of warrants issued
under the April Amendment based on certain borrowing
thresholds.  During the year ended December 31, 2007, the Company
issued warrants to purchase an aggregate of 2,706,901 shares of common
stock.  The warrants vested upon grant, had an exercise price of $0.05
per share, expire through September 15, 2013 and had a value of $47,200 (based
on the Black Scholes option pricing model) and were recorded as additional
interest expense during the year ended December 31, 2007.





F-20
 Table of Contents




THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 YEARS
ENDED DECEMBER 31, 2007 AND 2006




On July
9, 2007, Westrec and the Company entered into a Letter Agreement to amend the
Amended and Restated Credit Enhancement Agreement dated as of December 20,
2006 (the “Agreement”). The
purpose of the Letter Agreement was to amend the Agreement to allow for direct
loans to the Company in addition to the credit enchantment facility with
Comerica Bank. Each Direct Loan shall be shall be due and payable on demand
and shall bear interest at a rate equal to the greater of (i) twenty percent
(20%) per annum, or (ii) the sum of (A) the prime rate, plus (B) 11.75% per
annum.While there
is no obligation to continue these loans, as of March 31, 2008, $3,134,000 of
advances had been made under this amended Agreement.




In
November 2007, the Master Revolving Note was assigned by Comerica Bank to
Michael M. Sachs, the principal owner of Westrec Capital Partners,
LLC.





During
the year ended December 31, 2007, the Company incurred total fees to Westrec of
approximately $1,213,199, paid $658,713 and owes $554,486, which is included in
accounts payable and accrued expenses in the
accompanying  consolidated balance sheet.




NOTE
8 — EQUITY TRANSACTIONS





Common
Stock




The
Company entered into an agreement with Brookstreet Securities Corporation
(“BSC”), a NASD member investment banker based in Irvine, California, as its
placement agent and financial consultant to sell newly issued common stock at
$1.00 per share for a total offering from a minimum of 2,500,000 shares to a
maximum of 8,500,000 shares (the “PPM”), as amended, in order to raise minimum
capital of $2,175,000 to maximum capital of $7,395,000, net of expenses. In
addition, investors receive warrants, which immediately vest, to purchase shares
of the Company’s common stock at an exercise price of $1.25 per share in an
amount equal to 50% of the number of shares purchased. The Company agreed to pay
BSC an 8% retail sales commission, a 2% non-accountable marketing allowance and
a 3% non-accountable expense allowance and warrants to purchase an amount of the
Company’s common stock equal to 15% of the common stock sold in the PPM (see
below).




On
May 1, 2006, the Company completed its PPM raising an aggregate of
$8,014,732 with the issuance and sale of 8,014,732 shares of its common stock
and warrants to purchase 4,007,366 shares of common stock at an exercise price
of $1.25 per share. BSC received an aggregate of $1,042,210, which consists of a
commission of 8% of the gross sales price of the shares sold, a non-accountable
marketing allowance of 2%, and a non-accountable expense allowance of 3%. The
Company also paid BSC’s expenses equaling an aggregate of $153,270, which
consists of legal fees and other expenses. Furthermore, the Company issued to
BSC warrants to purchase an aggregate of 1,202,210 shares of common stock. The
warrants are immediately exercisable, expire five years from the date of
issuance and have an exercise price of $1.00 per share, with a cashless exercise
provision.




During
2006, the Company issued 4,862,482 shares of its common stock for proceeds of
$4,187,762, net of issuance costs of $674,720.




The
Company issued 21,000 shares of restricted common stock in 2006 to a consultant
in connection with the performance of consulting services. The shares were
valued at $36,750 (based on the fair value of the common stock at the
measurement date) recorded such amount to expense during 2006.




Warrants




In
connection with the PPM, the Company issued warrants to investors to purchase an
aggregate of 4,007,366 shares of the Company’s common stock during 2006,
including warrants to purchase an aggregate of 1,576,125 shares of the Company’s
common stock in connection with the issuance of 3,152,250 shares of common stock
to investors in 2005. These warrants vested upon grant, have an exercise price
of $1.25 per share and expire through March 2007.




During
2006, the Company issued warrants to purchase an aggregate of 729,372 shares of
the Company’s common stock to BSC in connection with the Company’s PPM. These
warrants vested upon grant, have exercise prices of $1.00 per share and expire
through May 2011.




During
the year ended December 31, 2006, the Company issued warrants to purchase a
warrant to purchase 50,000 shares of restricted common stock to a consultant in
connection with the performance of consulting services. The warrant was valued
at $28,000 (based on the Black Scholes option pricing model), has an exercise
price of $1.00, vested upon grant and expires in December 2016. Such amount was
expensed in the accompanying statement of operations during the year ended
December 31, 2006.




F-21
 Table of Contents


THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 YEARS
ENDED DECEMBER 31, 2007 AND 2006




During
the years ended December 31, 2006, the Company issued warrants to purchase an
aggregate of 1,805,000 (net of 1,662,500 cancelled warrants) in connection with
the liquidated damages clauses of certain registration rights agreements. These
warrants were originally accounted for under the EITF No. 00-19, Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in a Company’s Own Stockand View A of EITF No. 05-4, The Effect of a Liquidated Damages
Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock. Due to certain factors and the
liquidated damage provision in the registration rights agreements issued in
connection with certain of our notes payable, we determined that the warrants
were derivative liabilities. We have elected early adoption of FSP EITF 00-19-2,
which supersedes the guidance under EITF 05-4.




During
the year ended December 31, 2007, the Company issued warrants to purchase
approximately 110,000 shares of the Company’s common stock (see Note 5) in
connection with liquidated damages clauses of certain registration rights
agreements.





The
Company failed to raise $4,000,000 of net proceeds from the sale of equity
securities by August 3, 2007, as required by the amended Westrec warrant
agreement. Accordingly, the exercise price of the warrant was reduced to $0.05
per share and the number of shares of common stock to be purchased was increased
to 80,277,472. In connection with the warrant modification, the Company
recognized as expense approximately $6,928,000 in August 2007. Based on the
number of shares of common stock issuable upon exercise of the warrant and other
potentially issuable shares, the Company determined that it does not have enough
authorized shares to settle all such obligations and that feature was an
embedded derivative instrument pursuant to SFAS No. 133. In addition, under the
provisions of EITF Issue No. 00-19, the Company classified all other
non-employee warrants as derivative liabilities and recorded them at their fair
values at each balance sheet date until such time as the Company increased its
authorized shares or it has enough authorized shares to settle the issuance of
its convertible debt, options and warrants.





During
the three months ended December 31, 2007, the Company issued an additional
22,267,055 warrants to purchase common stock to Westrec under the amended
Westrec warrant agreement and the Company recognized $93,200 as
expense.





Based on
the Company’s plans to file Chapter 11 bankruptcy, the warrants were deemed to
be worthless, and amount previously recorded on the balance sheet as a
derivative liability was reversed and recorded as income in the amount of
$9,240,200.





During
the year ended December 31, 2007, warrants to purchase a total of 97,341,708 of
common stock were granted to Westrec under the Amended and Restated Credit
Enhancement Agreement, as amended on July 9, 2007 (see Note 6). As of December
31, 2007, Westrec had been granted a total of 106,537,244 warrants.





The
following represents a summary of the warrants outstanding for the years ended
December 31, 2007 and 2006:




Number
      of Warrants
            
            
            Weighted
      Average Exercise Price Per ShareOutstanding
      at January 1, 2006
            
            
            2,112,889
            
            
            $
            0,92Granted
            
            
            23,489,506
            
            
            
            0.71Exercised
            
            
            -
            
            
            
            -Expired/Forfeited
            
            
            (6,680,051
            )
            
            
            0,71Balance
      at December 31, 2006
            
            
            18,922,344
            
            
            $
            0.74Granted
            
            
            117,549,475
            
            
            $
            0.08Exercised
            
            
            -
            
            
            
            -Expired/Forfeited/
      Cancelled
            
            
            (20,000,000
            )
            
            
            0.40Balance
      at December 31, 2007
            
            
            116,471,819
            
            
            $
            0.16






F-22
 Table of Contents




THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007





The
following summarizes information about warrants outstanding at December 31,
2007:





Warrants
      Outstanding
            
            
            Warrants
      ExercisableExercise
      Price
            
            
            Number
              of
      Shares
            
            
            Weighted
              Average
              Remaining
              Contractual
              Life
      (Years)
            
            
            Weighted
              Average
              Exercise
              Price
            
            
            Number
              of
      Shares
            
            
            Weighted
              Average
              Exercise
      Price$
            0.05
            
            
            
            106,439,475
            
            
            
            6.0
            
            
            $
            0.05
            
            
            
            106,439,475
            
            
            $
            0.05$
            0.56
      to $0.80
            
            
            
            2,092,466
            
            
            
            5.7
            
            
            $
            0.68
            
            
            
            2,092,466
            
            
            $
            0.68$
            1.00
      to $1.25
            
            
            
            7,939,878
            
            
            
            4.1
            
            
            $
            1.14
            
            
            
            7,939,878
            
            
            $
            1.14116,471,819
            
            
            
            
            
            
            $
            0.16
            
            
            
            116,471,819
            
            
            $
            0.16











NOTE9— INCOME
TAXES





Income
tax expense consisted of current state income tax expense of $800 for the years
ended December 31, 2007 and 2006.





A
reconciliation of the statutory federal income tax rate to the Company’s
effective tax rate is as follows:







2007
            
            
            2006Statutory
      federal income tax rate
            
            
            34.0
            %
            
            
            34.0
            %State
      income taxes, net of federal benefit
            
            
            6.0
            %
            
            
            -Change
      in valuation allowance
            
            
            (40.0
            %)
            
            
            (33.9
            %)Other
            
            
            -
            
            
            
            (0.1
            %)Total
            
            
            -
            
            
            
            -







The
following is a summary of the significant components of the Company’s deferred
income tax asset as of December 31, 2007:





Net
      operating loss carryforwards
            
            $
            20,209,000Less
      valuation allowance
            
            
            (20,209,000
            )$
            -







F-23
 Table of Contents




THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 December
31, 2007
  At
December 31, 2006, the Company had net operating loss carryforwards of
approximately $34,000,000 available to offset future federal and state income
taxes that will begin to expire in 2024 and 2014, respectively. SFAS No. 109
requires that the tax benefit of such net operating losses be recorded using
current tax rates as an asset to the extent management assesses the utilization
of such net operating losses to be more likely than not. Based upon the
Company’s short term historical operating performance, the Company provided a
full valuation allowance against the deferred tax asset in 2007 and 2006. Under
the Tax Reform Act of 1986, the amounts of and benefits from net operating
losses carried forward may be impaired or limited in certain circumstances.
Events which may cause limitations in the amount of net operating losses that
the Company may utilize in any one year include, but are not limited to, a
cumulative ownership change of more than 50% over a three-year period. At
December 31, 2007, the effect of such limitation, if imposed, has not been
determined.





In July
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes--an interpretation of FASB Statement No. 109 (“FIN 48”), which
clarifies the accounting and disclosure for uncertainty in tax positions, as
defined. FIN 48 seeks to reduce the diversity in practice associated with
certain aspects of the recognition and measurement related to accounting for
income taxes. The Company is subject to the provisions of FIN 48 as of January
1, 2007. The Company believes that its income tax filing positions and
deductions will be sustained on audit and does not anticipate any adjustments
that will result in a material change to its financial position. Therefore, no
reserves for uncertain income tax positions have been recorded pursuant to FIN
48. The cumulative effect, if any, of applying FIN 48 is to be reported as an
adjustment to the opening balance of retained earnings in the year of adoption.
The Company did not record a cumulative effect adjustment related to the
adoption of FIN 48. Tax years since 1992 remain subject to examination by the
major tax jurisdictions in which the Company is subject to tax. The Company's
policy for recording interest and penalties associated with income-based tax
audits is to record such items as a component of income taxes.







NOTE
10 — SUBSEQUENT EVENTS





On
January 15, 2008, the Company terminated a substantial portion of its operations
because of its continuing cash flow deficits.  Prior to this date, on
December 15, 2007, in order to reduce its monthly rent obligation, the Company
established a new corporate office by leasing space on a month to month basis at
the office location of Westrec Capital Partners, LLC (“Westrec”). On January 15,
2008, concurrent with the reduction of its business operations, the Company
surrendered its San Vicente office space.  Westrec is considered a
control stockholder of the Company and the Company’s Interim Chief Financial
Officer is a part-time and temporary employee of an affiliate of
Westrec.





On April
16, 2008, the Company and its wholly owned subsidiary filed voluntary
petitions under Chapter 11 of the US Bankruptcy Code with the United States
Bankruptcy Court, Central District of California, file numbers
1:08-BK-12363-KT and 1:08-BK-12359-KT, respectively.




The
Company remains in default under an approximately $8.5 million line of credit
initially provided to it by Comerica Bank which was subsequently assigned to
Westrec. The Company is also in default of additional amounts owed to Westrec of
approximately $3.2 Million.





On
January 10, 2008, Oscar de la Renta issued a written notice of default for
failure to pay minimum royalties under the Company’s licensing agreement with
it.





On
January 27, 2008 Isaac Mizrahi requested termination of the Company’s licensing
agreement with it.





On
February 15, 2008, a compliant was filed in Los Angeles against the Company by
6310 San Vicente Associates, Inc., the Company’s former landlord for breach of
contract for failure to pay rent in the approximate amount of $26,000. The
matter is currently pending.





On
February 19, 2008, a complaint was filed in New York by Oscar De La Renta Ltd.
against the Company for breach of contract, unfair competition, and trademark
infringement relating to failure to make royalty payments in connection with the
Company’s license agreement with Oscar De La Renta, Ltd. The plaintiff seeks
damages totaling $1,786,015. The matter is currently pending.





On March
31, 2008, the Company opened a retail store to sell its fashion shoes direct to
the public. The store is leased on a month to month basis for a monthly rental
payment of $5,000. The store location has 1,500 square feet of space at 607 West
Knoll Street, West Hollywood, CA.






F-24