**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**







**FORM
      10-KSB**





(MARK
                    ONE)**x**
                **ANNUAL
                    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                    ACT OF
                    1934****For
                    the fiscal year ended December 31,
                    2006****OR****o**
                **TRANSITION
                    REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                    ACT OF
                    1934****For
                    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 jurisdictionofincorporation
                  or organization)
              (IRS
                  EmployerIdentification
                  No.)
   **6310
                  San Vicente Blvd., #275****Los
                  Angeles, California**
              **90048-5499**(Address
                  of principal executive offices)
              (Zip
                  Code)
  **(323)
          939-3031**
 (Issuer’s
          telephone number)





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





**Title
                of Each Class**
            
            **Name
                  of Each Exchange on Which
                  Registered**None
            
            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, 2006 were
      $9,391,326.





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 $4,284,000 as of
      the
      close of March 1, 2007.





As
      of
      March 1, 2007, 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 2006 FORM 10-KSB ANNUAL REPORT**





**INDEX**





**Page****PART
                I**Item1.
            Description
                of Business
            3Item 2.
            Description
                of Property
            16Item 3.
            Legal
                Proceedings
            16Item 4.
            Submission
                of Matters to a Vote of Security
                Holders
            17**PARTII**Item 5.
            Market
                for Common Equity and Related Stockholder
                Matters
            18Item 6.
            Management’s
                Discussion and Analysis or Plan of
                Operation
            20Item 7.
            Financial
                Statements
            27Item 8.
            Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure
            28Item 8/A.
            Controls
                and Procedures
            28Item 8/ B.
            Other
                Information
            28**PART
                III**Item 9.
            Directors,
                Executive Officers, Promoters and Control
                Persons; Compliance with Section 16(a) of the Exchange
                Act
            29Item 10.
            Executive
                Compensation
            33Item 11.
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters
            35Item 12.
            Certain
                Relationships and Related Transactions and Director
                Independence
            36Item 13.
            Exhibits
            38Item 14.
            Principal
                  Accountants Fees and
                  Services
            39Signatures
            40










2
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          of Contents


**PART
      I**





**Item1.** ***Description
      of 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.





**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 has been
      designing, developing and marketing 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 include 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 sell over 100 different styles of designer footwear through
      independent retailers, specialty retailers and department stores. Our products
      appear 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 also sell 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.


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          of Contents





Our
      wholly-owned subsidiary, The Fashion House, Inc., was organized in Delaware
      on
      April 11, 2002. Our corporate office is located at 6310 San Vicente Blvd.,
      #275 , Los
      Angeles, California 90048-5499. 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 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.”





On
      March
      31, 2000, Kimbell — deCar Corporation and YGCD Assets, Inc., a Colorado
      corporation, entered into a Share Exchange Agreement. As a result of the share
      exchange, effective as of April 20, 2000, Kimbell — deCar Corporation acquired
      100% of the issued and outstanding shares of YGCD Assets, Inc. in exchange
      for
      approximately 12,113,489 shares of Kimbell — deCar Corporation’s common stock,
      and the cancellation of 2,400,000 shares. The shares of Kimbell — deCar
      Corporation’s common stock acquired by the shareholders of YGCD Assets, Inc.
      represented approximately 96% of Kimbell — deCar Corporation’s common stock
      issued and outstanding after the consummation of the exchange. On April 20,
      2000, Kimbell — deCar Corporation changed its name to TangibleData, Inc. Its
      purpose was to develop and provide services that help businesses publish,
      archive and distribute data on recordable compact discs.





TangibleData,
      Inc. entered into a Purchase and Sale Agreement of the assets of TangibleData,
      Inc., dated September 5, 2002, with Willette Acquisition Corp. d/b/a “Allied
      Vaughn,” a Minnesota corporation, its executive officers and certain
      shareholders. On October 22, 2002, TangibleData, Inc. completed the sale of
      all
      of the assets related to its business of duplicating optical disks and the
      development of the related technology, which constituted substantially all
      of
      the assets of TangibleData, Inc., pursuant to the terms of the Purchase
      Agreement. TangibleData, Inc. changed its name to TDI Holding Corporation on
      October 24, 2002. As a result of the sale of substantially all of its assets
      in
      October 2002, TDI Holding Corporation became inactive and stated that it may
      seek out and pursue a business combination transaction with an existing private
      business enterprise that might have a desire to take advantage of its status
      as
      a public corporation. At that time, TDI Holding 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. For consistency and clarity,
      all share references hereinafter assume the reverse-stock-split has taken
      place.





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.





**INDUSTRY
      OVERVIEW**





According
      to Shoe Stats 2005, a compilation prepared by the American Apparel and Footwear
      Association, U.S. footwear consumption in 2004 surpassed 2.2 billion pairs
      for
      the first time ever. Based on the U.S. Census Bureau’s 2004 population estimate
      of 293,655,404 people, 7.4 pairs of shoes were purchased by every man, woman
      and
      child in the United States in 2004. In 2004, imports accounted for 98.4% of
      the
      market, or 2.1 billion pairs, and U.S. production amounted to 1.6%, or only
      35.2
      million pairs. Importation is well established. In 1968, imports represented
      21.4% of the total market. By 1995, the share of imports had increased to 86.5%.
      According to the same study, it took 25 years for U.S. shoe consumption to
      increase from 1 billion to 2 billion pairs.


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          of Contents




Footwear
      composition is generally categorized as non-rubber and rubber. U.S. consumption
      of non-rubber shoes in 2004 totaled 1.78 billion pairs, or 83.5% of all footwear
      purchases. Total sales of rubber shoes represented 320.3 million pairs, or
      14.8%
      of new purchases. In the non-rubber category, where we are positioned, the
      1.84
      billion pairs purchased in 2004 are broken down as follows: Men’s (232.6
      million); Men’s Work (36.6 million); Women’s (819.0 million); Juveniles’ (260.0
      million); Athletic (361.9 million); Slippers (127.6 million); and Others (9.8
      million). Of all shoes purchased in the United States in 2004, according to
      the
      American Apparel and Footwear Association, 82.1%, or 1.8 billion pairs, were
      manufactured in China.





The
      ratio
      of purchases of women’s non-rubber shoes to men’s non-rubber shoes is
      approximately 3.52 to 1.0 or 819.0 million pairs versus 232.6 million pairs.
      And, according to figures from Mediamark Research Inc., a New York City-based
      market research firm, nearly 8 in 10 women (79%) say they are the principal
      shopper in their household.





According
      to the leading consumer and retail information company, The NPD Group, women’s
      total footwear sales in 2005 topped $20 billion for an increase of 8% over
      2004.
      The total fashion footwear segment posted an 11% increase in dollar sales in
      2005. The dress casual shoe was a hot growth category for both men and women
      in
      the fashion footwear segment (source: The NPD Group).





The
      Bureau of Economic Analysis also estimates that in 2003, footwear accounted
      for
      0.65% of personal consumption expenditures, 2.30% of non-durable goods
      purchases, and 16.50% of wardrobe (clothing and shoe) purchases. Footwear retail
      prices fell 6.6% between 1998 and 2003, while overall retail prices rose 12.9%
      during the same period. This trend is even more evident when viewing a longer
      span of time. The Consumer Price Index (CPI) registered 184.0 in 2003, versus
      a
      base of 100.0 for 1982-1984. By comparison, the Footwear Price Index registered
      only 119.3 in 2004.





Consumers
      buy apparel and footwear from a variety of retail outlets. In 2002, discount
      stores accounted for 31% of apparel sales; specialty stores, 25%; department
      stores, 19%; and national chains, 16%, according to data from NDP Group. The
      remaining 9% was sold through mail order, the Internet, factory outlets, and
      other means.





The
      women’s dress footwear market is comprised of various categories, based upon
      retail price points. The categories are: 1) “Couture” or “Collection,” which is
      the top of the line and retails for $300 or more; 2)”Bridge,” which has a
      designer look but is less expensive, from $99 to $139; 3) “Moderate,” in the
      price range of $69 to $89; and 4) “Mass Merchant,” which retails for under $69.
      Most of the large department stores have centralized purchasing for couture,
      salon, bridge and moderate lines, and a different buyer oversees each distinct
      category. Away from the larger stores, shoe lines are often classified as
“couture,” and “bridge,” which includes both bridge and moderate.





**FASHION
      TRENDS**





Footwear
      companies must continually introduce new products. According to Chris M. Abess,
      Deloitte Consulting LLP, in an article entitled “The Footwear Industry: Stepping
      into the Future,” the footwear industry is experiencing an accelerating trend
      toward the fragmentation and specialization of offerings. In the recent past,
      a
      consumer owned a few pairs of shoes, some for exercising and others for work
      or
      fashion. But today’s consumer demands specialized options for footwear. For
      most, workplace attire has shifted from the predictable to the eclectic,
      requiring more footwear. There are more opportunities to wear variety and
      consumers are buying footwear for specific events and to make shorter-lived
      pop
      culture statements.





According
      to the same article, consumers will demand newer, fresher, more innovative
      and
      option-rich footwear in greater numbers. Innovation is a ticket to entry for
      competing in the footwear market. Putting together a creative combination of
      elements that establish image, quality, variety and pricing makes the difference
      between brands that succeed and fail. Successful companies integrate innovation
      into the cores of their businesses. In the footwear industry, being quick to
      market, staying relevant and executing well are three key
      challenges.





Our
      design committee performs extensive market research on fashion and footwear
      trends before designing shoe lines for the next season. Our designers feel
      that
      there is a domestic apparel trend under way in which women’s fashion is becoming
      less conservative and more influenced by the “gypsy” look and feel. In addition,
      there is a trend toward flats and lower heels, and away from higher heels.
      We
      believe these apparel and footwear trends will continue over the near to
      intermediate term, and that integral to these trends are material types,
      patterns and colors. This season will be dominated by beige, red, yellow and
      green.





**BRAND
      LICENSING PRACTICES**





As
      of
      December 31, 2005, we entered into exclusive licensing agreements with designer
      brands Richard Tyler Couture, tyler, Richard Tyler,
      Oscar by Oscar de la Renta, and O Oscar by Oscar de la Renta. In the first
      quarter of 2006, we signed an exclusive worldwide licensing agreement with
      Bill
      Blass Limited for the brands Bill Blass Couture and Blass by Bill Blass and
      we
      signed an exclusive licensing agreement with designer Isaac Mizrahi for the
      currently available brand Isaac Isaac Mizrahi brand and a new couture brand.
      Each of our brand managers is responsible for the product development,
      marketing, sales growth and profitability of his or her brand. The licenses
      generally provide for payment of royalties based upon
      sales.


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**Oscar
      License**





Our
      license agreement with Oscar de la Renta, Ltd. was entered into as of January
      24, 2005, and grants us certain exclusive licensing rights in the O Oscar and
      Oscar by Oscar de la Renta trademark logos. The Oscar license grants us an
      exclusive license to use designs, patterns, sketches, colors, materials,
      fabrics, quality and packaging, and the construction/manufacturing standards
      embodied therein, with respect to women’s footwear of all kinds and either
      furnished or approved by Oscar de la Renta, Ltd., bearing the Oscar trademarks.
      The Oscar license also grants us an exclusive license to use the Oscar
      trademarks for the manufacturing, sourcing, advertising, promotion, sale and
      distribution of women’s footwear of all kinds (as approved by Oscar de la Renta,
      Ltd.). The Oscar License is limited to the United States (excluding duty-free
      or
      tax-free shops, diplomatic or consular sales, airline supplies, or ship’s
      stores). The license expires on June 30, 2010, with two renewal terms of 3
      years
      each subject to not-defaulting on the agreement and satisfying certain minimum
      net sales requirements. The Oscar license also grants us certain rights of
      first
      refusal with respect to use of the Oscar trademarks on women’s footwear of all
      kinds outside of the United States. In exchange, we have certain obligations
      to
      market and sell women’s footwear bearing the Oscar trademarks. We are required
      to pay royalties equal to 8% of net sales, with minimum required royalty
      payments starting at $180,000 and increasing each year up to $1,000,000
      annually.





**Tyler
      License**





We
      entered into two separate license agreements with Tyler Trafficante Inc., each
      as of November 27, 2002, which grant us certain exclusive licensing rights
      in
      the trademarks “tyler.” and “Richard Tyler Couture”. The Tyler licenses grant us
      an exclusive license to place the Tyler trademarks on women’s shoes and boots,
      including fashion sports shoes (but not athletic shoes). The Tyler licenses
      also
      grant us an exclusive license to use the Tyler trademarks in the broadest sense
      of publication, that is any visual and aural form which to the average person
      would indicate that the women’s shoes and boots are associated with the Tyler
      trademarks, including but not limited to, print media, labels, tags, point
      of
      sale and showroom displays, signage, packaging, stationery, business cards
      and
      forms, and electronic media. The Tyler licenses are exclusive worldwide, except
      for Japan which is currently non-exclusive. The licenses expire on November
      26,
      2007, with a two-year renewal option. We have certain obligations to exploit
      the
      Tyler trademarks on women’s shoes and boots and to achieve certain minimum net
      sales volumes each year. We are required to pay royalties equal to 7% of net
      sales (or 3% with respect to close-out sales), with minimum required royalty
      payments starting at $87,500 and increasing each year up to $534,000
      annually.





**Blass
      License**





We
      entered into two worldwide (other than Japan) licensing agreements with Bill
      Blass Limited to design, manufacture and distribute women’s footwear under the
      brand names Blass by Bill Blass and Bill Blass Couture. The Bill Blass Couture
      will retail at price points starting at $500 and target upscale women who invest
      in their wardrobes. Blass by Bill Blass will be a secondary collection and
      be
      targeted at a broader audience. Both the Bill Blass Couture and the Blass by
      Bill Blass brands were launched in February 2006 at the World Shoe Association
      show in Las Vegas. In 2005, Bill Blass was listed in the top 10 of *The
      WWD Book of Lists* “The
      Names They Know” which recognizes consumer awareness of designers. The licenses
      expire on March 31, 2011, with a five-year renewal option. The Company is
      required to pay royalties and fees equal to 7% of net sales annually, with
      certain annual minimum guaranteed royalty and fees starting at $70,000 and
      increasing each year up to $210,000 annually in the sixth through tenth
      year.





**Isaac
      Mizrahi License**





In
      March
      of 2006, we signed a licensing agreement with Isaac Mizrahi to design,
      manufacture and distribute two branded labels in the United States. The brands
      include the currently available Isaac Isaac Mizrahi line and a new couture
      brand. He will take over the license for the existing Isaac Isaac Mizrahi bridge
      collection. The line is currently available at retailers including Saks Fifth
      Avenue, Bergdorf Goodman, Neiman Marcus Catalogue and Internet portal zappos.com
      and sells at prices between $200 and $300 retail. Our first Isaac Isaac Mizrahi
      collection will debut to the trade at the Fashion Footwear Association of New
      York (FFANY) show in June, 2006. The Isaac Mizrahi footwear collection will
      be a
      new couture line targeted at premiere upscale stores and will start at $500
      retail and is scheduled to launch in 2007. The licenses expire on March 31,
      2011, with a five-year renewal option. The Company is required to pay royalties
      and fees equal to 8% of net sales annually, with certain annual minimum
      guaranteed royalty and fee payments starting at $170,000 and increasing each
      year up to $450,000 annually.


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**Product
      Lines**





Our
      products span the moderate-to-premium-priced categories of the women’s footwear
      market, with suggested retail pricing from $60 to $700. Our top of the line
      “couture” shoes can retail for $400 and up, our “salon” line will sell for $300
      to $600, our bridge line retails for $88 to $125, and our moderate line carries
      suggested retail prices in the range of $60 to $99. These styles include dress
      boots, dress comfort shoes, dress flats, dress sandals, dress casuals, dress
      shoes and pumps.





**Designers**





According
      to the Oscar de la Renta web site, the designer is most famous for dressing
      such
      nobles as the Duchess of Windsor and Jacqueline Kennedy Onassis. Oscar de la
      Renta has also made a name for himself by dressing many First Ladies, including
      Nancy Reagan, Hillary Clinton and Laura Bush. His name is on everything from
      perfumes to Barbie dolls to fine china. Although he is famous for evening wear
      and lavish coats, de la Renta’s collections are popular with youthful socialites
      and celebrities. His trademark looks are rich, spicy colors (like deep red),
      exotic flourishes (such as embroidery, fringes or sequins), ruffles, fur and
      tactile interest (nubby sweaters, silks, roughing and lace). In 2004, Oscar
      de
      la Renta was ranked number 10 by Women’s Wear Daily on the list of top designers
      by consumer awareness. O Oscar is created from the romance inherent in the
      Oscar
      de la Renta collection and captures the designer’s love of color and luxurious
      design. This brand is for women who love the look of couture but only seek
      out
      fashion that is affordable and does not compromise quality. This dress casual
      line appeals more to younger women who are price conscious. Oscar by Oscar
      de la
      Renta is a line of designer footwear for the modern woman’s lifestyle, energy
      and level of sophistication. It is distinguished by luxury and signature flare
      at more affordable prices. The consumer of Oscar is a woman, 18 to 60 years
      old,
      who is looking for well-known brands at affordable prices.





Richard
      Tyler is an Australian-born and Los-Angeles based fashion designer who is
      renowned for his elegant gowns and evening wear. Tyler garnered three
      consecutive CFDA awards, the fashion industry’s highest accolade, in 1993, 1994
      and 1995. Tyler’s couture designs have been worn by celebrities, such as Halle
      Berry, Sandra Bullock, Cindy Crawford, Jamie Lee Curtis, Marcia Cross, Felicity
      Huffman, Rachael Griffiths, Catherine Zeta Jones, Sarah Jessica Parker, Heather
      Locklear, Faith Hill, Britney Spears, Demi Moore and Julia Roberts, among
      others. He also received the Michelangelo Shoe Award for his debut footwear
      collection.





Richard
      Tyler Couture is a collection of stylized shoe designs that completes a
      sophisticated and tailored head to toe look, for which the designer is known.
      The current Richard Tyler’s women’s line focuses on impeccable tailoring,
      attention to detail and flawless style. A master tailor, Richard continues
      to
      emphasize quality, construction, and fit melding the best of American design
      and
      the European couture tradition. Richard Tyler Couture is our top line and it
      incorporates high fashion, fantasy and celebrity allure with an everyday
      elegance. These shoes appeal to fashion savvy women who shop exclusively within
      designer collections. The casual line appeals more to younger women who are
      price conscious. tyler. is a shoe line in which a more trend-setting, irreverent
      and edgy perspective is offered. These affordable, higher fashion and fun shoes
      demand attention as they use fresh materials and eye-catching designs. tyler.
      is
      for the hip, directional woman who is on the cutting edge of fashion and is
      seeking affordable designer labels.


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Bill
      Blass Limited was founded by William Ralph Blass in 1970. Known for clothes
      that
      are sophisticated and tailored, Bill Blass defines the American flair that
      bridges the difference between stylishly refined and conventionally pretty.
      Over
      the years the company has expanded its product lines to include casual and
      men’s
      apparel, accessories and home furnishings. In 2005, Bill Blass was listed in
      the
      top 10 of *The
      WWD Book of Lists* “The
      Names They Know” which recognizes consumer awareness of designers.





Mizrahi
      established his first clothing business in 1987 and has since received three
      CFDA Designer of the Year awards. In 2003, he launched a collection of women’s
      sportswear and accessories at Target stores while simultaneously debuting a
      couture line exclusively for Bergdorf Goodman. Isaac Mizrahi, an
      internationally-known designer, is famous not only for his classic yet playful
      designs, but also for his work in movies and television. A household name,
      he
      currently has his own television show on The Style Network and co-hosts red
      carpet events on E!.





**Couture
      Lines**





The
      couture lines include Bill Blass Couture manufactured in Italy and priced at
      $500 and up and Richard Tyler Couture made in Brazil and priced at $250 to
      $700.





**Bridge
      Lines**





Oscar
      by
      Oscar by Oscar de la Renta is manufactured in Brazil and priced at $150 to
      $275.
      Isaac Isaac Mizrahi is made in Italy and priced at $88 to $125.





**Moderate
      / Better**





O
      Oscar
      is priced at $85 to $120 and is made in China. Blass Bill Blass is priced at
      $60
      to $95 and manufactured in China. The tyler, Richard Tyler brand is manufactured
      in China and is priced at $120 to $150.





**Other
      Licenses**





We
      also
      own the licenses for two additional Bill Blass lines, Blassport and Bill Blass
      Collection. We intend to launch these two lines in 2007.





**Product
      Design and Development**





We
      employ
      separate design and development teams for each of our product lines. We believe
      this approach results in a more responsive design and product development
      process that minimizes new product introduction lead times. Our sales management
      and marketing departments will actively participate in the design and product
      development process by collaborating on opportunities related to new styles,
      patterns, design improvements and the incorporation of new materials. We
      incurred design and product development costs of approximately $1,686,000 in
      2006 and $440,000 in 2005 and such amounts have been included in selling,
      general and administrative expenses.





Through
      product design, innovation, quality and fit, our brands have built a high degree
      of consumer and retailer loyalty. We believe the portfolio approach of offering
      several lines across moderate- to premium- priced categories reduces business
      risk. Our designers skillfully collaborate on creating shoes that combine high
      fashion appeal with the finest European materials and traditions of
      craftsmanship. Our senior designers have a total of over 50 years in fashion
      footwear design and have worked for design houses including Cole Haan,
      Aerosoles, 9 West, Ellen Tracy, and Calvin Klein .





Our
      design process begins with two-dimensional sketches of different shoe
      constructions, including wedge, high heel, pointy, flats and sandals. There
      are
      usually twenty or so constructions per shoe line. The sketches then progress
      to
      five to seven styles per construction and several themes. For instance, a
      moccasin can be open or closed, short, rubber bottomed, and for day or evening
      wear. Flats can be for day or evening wear, casual or dressy, or evening casual
      (flirtatious, chic or conservative). Our team then assembles a material board
      comprised of various fabrics in different colors, textures and patterns that
      it
      selects in conjunction with the latest trends. After our design committee
      chooses optimal styles and materials, we build prototypes which we use to
      demonstrate the lines to industry buyers.


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**MANUFACTURING**





We
      source
      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. This shift is based
      almost entirely on the lower cost of production, including materials and labor,
      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 some currency risk in Brazil. There were
      no
      significant gains or losses related to the fluctuations during the years ended
      December 31, 2006 and 2005.





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 are 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 are 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.





**PRODUCT
      SALES CYCLE**





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





**SALES
      AND DISTRIBUTION**





We
      employ
      eight full-time sales people and a National Vice President of Sales who are
      situated strategically in the market place. We sell our shoe lines to many
      major
      department stores, mail order companies, and specialty footwear and apparel
      retailers. In 2006, our largest customers, in order of sales volume, were T
      J
      Maxx, Town Shoes Limited, Saks Fifth Avenue, Bloomingdales, Zappos.com,
      Loehmann’s, DSW Inc., and specialty clothing and shoe stores. We avoid granting
      restricted or exclusive product sale arrangements because we feel that
      profitability across product lines requires the greatest number of
      outlets.





We
      employ
      a well-defined segmented market strategy in order to achieve favorable publicity
      and luxury positioning for our high fashion designer brands, while also
      delivering the excitement of fashion footwear to a broader, more price-sensitive
      consumer population. Our premium-priced couture lines are distributed through
      high-end retail outlets and provide a platform to generate celebrity interest,
      media coverage, and “buzz” in the market place. The moderately priced,
“ready-to-wear” lines deliver high quality footwear and celebrity style to
      mass-market shoppers. We believe this tiered approach is an effective strategy
      for maximizing the economic value of designer brands while avoiding dilution
      of
      existing brand equity.





**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 on 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 believe we are well positioned to compete in
      the women’s footwear and apparel industry by emphasizing traditional style,
      quality and fit, attractive prices and designer branding; these product aspects
      maintain consumer loyalty and should serve to buffer us from fluctuations due
      to
      changing fashions and customer preferences.


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Competition
      varies across product lines. At the higher end, Richard Tyler Couture footwear
      primarily competes with Chanel, Manolo Blahnik, Jimmy Choo, Dolce & Gabbana,
      Dior, Prada and YSL brands. Oscar by Oscar de la Renta competes directly with
      Ralph Lauren, Donna Karan, Calvin Klein and others. In the more moderately
      priced area, tyler. Richard Tyler competes with Marc Jacobs, Michael Kors and
      Coach, and O Oscar by Oscar de la Renta competes with Nine West and Circa Joan
      and David, among others.





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 Vitton
      (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 must our footwear products compete with the footwear products of other
      designers, we must 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 can benefit from our expertise
      in
      footwear design.





**MARKETING
      AND ADVERTISING**





We
      conduct no marketing or advertising for ourself 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
      have also enjoyed considerable 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
      embargoes 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
      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 might 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**





We
      have
      31 full-time employees. None of our employees is represented by a collective
      bargaining agreement, and we have never experienced any work stoppage. We
      consider our relationships with our employees to be good.








**Item1A.
*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.


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**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
      HAVE AN ACCUMULATED DEFICIT OF $22,747,667 AS OF DECEMBER 31, 2006 AND
      HAVE**  **RECEIVED
      A “GOING CONCERN REPORT” FROM OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM**  **AND
      WE MAY NEVER ACHIEVE**  **PROFITABILITY** .





We
      have
      incurred significant net losses for the past few years, including a net loss
      of
      $14,691,213 in 2006. As of December 31, 2006, we had an accumulated deficit
      of
      $22,747,667. These 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.
      We
      anticipate that we will continue to incur substantial operating losses based
      on
      projected sales revenues less manufacturing, general and administrative and
      other operating costs for an indefinite period of time. We expect that our
      revenues will not be sufficient to sustain our operations for the foreseeable
      future, notwithstanding any anticipated revenues we may receive when our
      products are introduced to markets, due to the significant costs associated
      with
      the development and marketing of our products. No assurances can be given when
      we will ever be profitable.





Our
      independent registered public accounting firm has added an explanatory paragraph
      to their report issued in connection with the financial statements for each
      of
      the years ended December 31, 2006, and 2005 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
      MAY REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND WITHOUT IT
      WE**  **MAY
      NOT BE ABLE TO CONTINUE OPERATIONS.**





At
      December 31, 2006, we had cash on hand of $131,907 and we used cash in
      operations of $8,615,187 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 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
      expansion, 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.


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





Although
      we design and market our products, we outsource manufacturing to third party
      manufacturers. Outsourcing the manufacturing component of our business is common
      in the footwear industry and we compete 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 currently outsource 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 currently use, 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, Oscar Valencia, our Vice-President of Sales, and Christopher
      Wyatt, our Director of Marketing 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.







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**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.





**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 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.





**WE
      MAY LOSE OUR EXCLUSIVE LICENSES IF WE DO NOT HAVE SUFFICIENT FUNDS TO
      PAY**  **THE
      MINIMUM REQUIRED ROYALTIES.**





Our
      exclusive license agreements for the Richard Tyler and Oscar de la Renta, Bill
      Blass and Issac Mizrahi trademarks each require certain minimum royalty
      payments. Failure to make such payments would be a default under the license
      agreements, allowing the designer to terminate the license. If we are unable
      to
      generate sufficient funds from operations, or otherwise raise adequate capital
      to make such payments, we could lose these licenses which would have a material
      adverse affect on our business.





**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 maintain our existing
      licenses, or obtain additional licenses, our business plan would be
      significantly impaired.




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**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 2006 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, including our military presence in Iraq;


·
            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.




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.


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**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
      YOUR 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.





**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.





**SUBSTANTIAL
      FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY
      DEPRESS**  **OUR
      STOCK PRICE.**





As
      of
      March 31, 2007, we have 24,887,063 shares of common stock outstanding. We are
      obligated to file a registration statement covering shares issued in a private
      placement as well as other shares and upon effectiveness of that pending
      registration statement at least 9,500,000 shares will be freely tradable without
      restriction or further registration under the federal securities laws, subject
      in some cases to volume and other limitations.


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If
      our
      stockholders sell substantial amounts of common stock in the public market,
      or
      the market perceives that such sales may occur, the market price of our common
      stock could fall. The sale of a large number of shares could impair our ability
      to raise needed capital by depressing the price at which we could sell our
      common stock.





**WE
      ARE CONTROLLED BY OUR PRINCIPAL STOCKHOLDERS, EXECUTIVE OFFICERS
      AND**  **DIRECTORS,
      AND AS A RESULT, THE TRADING PRICE FOR OUR SHARES MAY BE
      DEPRESSED**  **AND
      THESE STOCKHOLDERS CAN TAKE ACTIONS THAT MAY BE ADVERSE TO YOUR
      INTERESTS.**





Two
      of
      our officers and directors, John Hanna and Christopher Wyatt in the aggregate,
      beneficially own approximately 48% of our common stock. These stockholders,
      acting together, 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
      affect 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 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.





**Item2.** ***Description
      of Property***





Our
      corporate office is located in approximately 1,872 square feet of leased office
      space in Los Angeles, California. This lease will expire in June 2010. We expect
      that this property will be adequate for our needs for the lease
      term.





**Item3** . ***Legal
      Proceedings***





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





This
      matter was filed October 26, 2005 in Los Angeles County Superior Court as Case
      No. BC341968. Plaintiffs William Bradham and Richard Traweek have filed a
      complaint seeking damages for breach of contract and fraud against defendants
      regarding oral arrangements with the Company’s subsidiary. The complaint
      indicates that damages, including prejudgment interest, punitive damages and
      costs of suit, are to be determined. In March of 2007, a judgment against the
      Company was made but not entered in the amount of $400,000. The Company is
      in
      the process of negotiating a reduced settlement and expects that the matter
      can
      be resolved. If an agreeable settlement can not be reached, the Company will
      consider appealing the judgment. At December 31, 2006, the Company has accrued
      $300,000 related to this matter.


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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.





Artful
      Mind Complaint





On
      March
      6, 2007, The Fashion House Holdings, Inc. (the “Company”) was served with a
      complaint, which Artful Mind Industrial Ltd. (“Artful Mind”) filed on March 1,
      2007 in the Supreme Court of the State of New York County of New York, 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. Pursuant to the Settlement Agreement
      regarding late delivery of product, the Company agreed to pay Artful Mind a
      total sum of $739,000 for the procurement and manufacturing of shoes. The
      Company was to pay the $739,000 as follows: (i) $148,000 on execution of the
      agreement; (ii) $148,000 on October 30, 2006; $148,000 on November 30, 2006;
      $148,000 on December 30, 2006; and $148,000 on January 30, 2007. Based on the
      event of a default, of not timely paying the final two payments, which was
      not
      cured within 14 days of the date payment was due, 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. The Company has
      included the $295,000 due as accounts payable and accrued expenses in the
      accompanying consolidated balance sheet.




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, 2006, we were
      not
      a party to any material litigation, claim or suit whose outcome we believe
      have
      a material effect on our financial statements, other than the cases discussed
      above.





**Item4.** ***Submission
      of 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, 2006.





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**PART
      II**





**Item5.** ***Market
      for 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, adjusted to reflect
      the reverse split on a 21.8 to one basis such that each old share represent
      1
      /21.8 of a new share effected August 29, 2005. These quotations reflect
      inter-dealer prices, without retail mark-up, mark-down or commission and may
      not
      represent actual transactions. Prior to our reverse merger, our common shares
      were quoted on the OTCBB under the symbol “TDIH.”





**High**
            
            **Low*****Fiscal
                Year 2005****Third
                Quarter**
            
            $
            1.45
            
            $
            0.70Fourth
                Quarter
            
            $
            1.25
            
            $
            0.70





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





* Trading
      in TDIH, our predecessor, was limited prior to August 29, 2005 and therefore
      has
      not been included.


**
      From
      August 29, 2005, the first trading date after completion of the
      merger.




As
      of
      December 31, 2006, 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.


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**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.





During
      the three months 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.




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**Item6.** ***Management’s
      Discussion 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.





In
      this
      document, the words “we,” “our,” “ours,” and “us” refer to The Fashion House
      Holdings, Inc. and our wholly-owned subsidiary The Fashion House, Inc., a
      Delaware corporation. 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
      March
      31, 2000, Kimbell - deCar Corporation and YGCD Assets, Inc., a Colorado
      corporation, entered into a Share Exchange Agreement (the “Exchange Agreement”).
      As a result of the share exchange, effective as of April 20, 2000, Kimbell
      -
      deCar Corporation acquired 100% of the issued and outstanding shares of YGCD
      Assets, Inc. in exchange for approximately 12,113,489 shares of Kimbell - deCar
      Corporation’s common stock, and the cancellation of 2,400,000 shares. The shares
      of Kimbell - deCar Corporation’s common stock acquired by the shareholders of
      YGCD Assets, Inc. represented approximately 96% of Kimbell - deCar Corporation’s
      common stock issued and outstanding after the consummation of the exchange.
      On
      April 20, 2000, Kimbell - deCar Corporation changed its name to TangibleData,
      Inc. Its purpose was to develop and provide services that help businesses
      publish, archive and distribute data on recordable compact discs.


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TangibleData,
      Inc. entered into a Purchase and Sale Agreement of the assets of TangibleData,
      Inc., dated September 5, 2002, (the “Purchase Agreement”) with Willette
      Acquisition Corp. d/b/a “Allied Vaughn,” a Minnesota corporation, its executive
      officers and certain shareholders. On October 22, 2002, TangibleData, Inc.
      completed the sale of all of the assets related to its business of duplicating
      optical disks and the development of the related technology, which constituted
      substantially all of the assets of TangibleData, Inc., pursuant to the terms
      of
      the Purchase Agreement. TangibleData, Inc. changed its name to TDI Holding
      Corporation on October 24, 2002. As a result of the sale of substantially all
      of
      its assets in October 2002, TDI Holding Corporation became inactive and stated
      that it may seek out and pursue a business combination transaction with an
      existing private business enterprise that might have a desire to take advantage
      of its status as a public corporation. At that time, TDI Holding 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 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. 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.





As
      reported in the Report of Independent Registered Public Accounting Firm on
      our
      December 31, 2006 and 2005 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.





**Overview**




We
      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 sell over
      100
      different styles of designer footwear through independent retailers, specialty
      retailers and better department stores. Our licensed brands in 2005 included
      Richard Tyler Couture, tyler Richard Tyler. Oscar by Oscar de la Renta and
      O
      Oscar by Oscar de la Renta licenses were signed in 2005, but sales of the Brand
      began in 2006.




In
      January 2006 and March 2006, the Company acquired rights to use four
      trademarks as evidenced by a licensing agreement entered into with Bill Blass
      Limited to design, manufacture and distribute women’s footwear under the brand
      names Blass by Bill Blass, Bill Blass Couture, Blassport and Bill Blass
      Collection. Both the Bill Blass Couture and the Blass by Bill Blass brands
      were
      launched in February 2006 at the World Shoe Association show in Las Vegas.
      The agreements expire in March 2011, with an automatic extension through
      2016.




In
      March 2006, the Company acquired rights to use two trademarks as evidenced
      by a licensing agreement entered into with Isaac Mizrahi to design, manufacture
      and distribute women’s footwear under the brand names Isaac Isaac Mizrahi and a
      new couture brand. We will take over the license for the existing Isaac Isaac
      Mizrahi bridge collection. The line is currently available at specialty
      retailers, major department stores and on the internet. The agreement expires
      in
      March 2011, with an automatic extension through 2016.


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The
      Company issues letters of credit in favor of the manufacturers. The Company
      imports goods and pays the related costs of import and delivery, and forwards
      the goods to a public warehouse where the merchandise is held for shipment
      to
      customers.




On
      November 13, 2006, the Company entered into an amended and restated factoring
      agreement with CIT Commercial Services. 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 may advance funds to the
      Company at up to 80% of the factor risk accounts. The advance request form
      must
      be fully executed by the Company and Westrec Capital Partners, LLC. Interest
      is
      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.





Management
      is actively seeking additional financing by issuing equity or a combination
      of
      equity and debt financing from new shareholders and/or lenders in 2007. If
      the
      planned financings are obtained, the Company believes it will generate adequate
      cash to sustain operations at current levels until it begins to operate
      profitably. There can be no assurance that funding will be available on
      acceptable terms, if at all, or that such funds, if raised, would enable the
      Company to reach and sustain profitable operations.





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.





**Results
      of Operations**





*Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005*





Net
      sales
      for the year ended December 31, 2006 were $9,391,326, an increase of $7,746,852
      or 471%, from 2005 net sales of $1,644,474. The increased net sales of
      $7,746,852 was partially attributable to the launching of 5 new brands in 2006
      contributing the following net sales; O Oscar by Oscar de la Renta $2,112,541,
      Isaac Isaac Mizrahi $1,896,816, Blass by Bill Blass $1,146,290, Oscar by Oscar
      de la Renta $482,900, Bill Blass Couture $20,931. Additionally, tyler Richard
      Tyler brand contributed $2,483,444 to the increased net sales, with net sales
      of
      $3,508,865 in 2006 compared to net sales of $1,045,864 in 2005. And a new
      Private Label business contributed $222,983 in 2006. The 2005 net sales included
      $598,610 for the liquidation of the Nicole Miller remaining inventory after
      the
      sale of the license





Gross
      profit for 2006 was $1,920,066 or 20.4% of net sales, compared to a gross profit
      of $256,154 or 15.6% of net sales in the same period last year. The low gross
      profit margin in 2006 of 20.4% was caused primarily by late deliveries of
      product from our Chinese 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 profit in 2005 was caused by the liquidation
      of the Nicole Miller remaining inventory.





Operating
      expenses include all costs associated with design, development, sales,
      marketing, distribution, purchasing, and corporate functions. Operating expenses
      increased to $9,558,216 in the year ended December 31, 2006 from $5,337,989
      in
      2005, for an increase of $4,220,227. The increase in operating expenses is
      attributable primarily to an increase in payroll costs of $1,439,798 as the
      result of building a sales staff and additional administrative staffing. Cost
      of
      samples increased by $653,126 and design expense increased by $583,093 in
      support of the additional brands. Travel expense increased by $399,093,
      warehouse and shipping increased by $214,835 which is associated with the
      increased sales. Royalty fees increased to $747,115 in the year ended December
      31, 2006 from $432,500 incurred in 2005, for an increase of $314,615 or 72.7%.
      The increase in royalty fees is attributable to the additional licensed brand
      sales in 2006.





Interest
      expense was $7,052,263 for the year ended December 31, 2006 compared to
      $1,688,409 for the year ended December 31, 2005. The increase in 2006 of
      $5,363,854 is due to the amortization of the fair value of the warrants
      associated with certain notes payable.




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**Derivative
      Financial Instruments**





In
      connection with the issuance of warrants with certain notes payable, we were
      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”). In addition, we will be required to issue
      certain holders of convertible notes a number of warrants equal to 130,000
      for
      each subsequent 30-day period that such registration statement has not been
      filed. Also, we will be required to issue the holders of convertible notes
      a
      number of warrants equal to 130,000 for each 30-day period following the
      Effectiveness Deadline. We did not file the required registration statement
      until July 28, 2006. In addition, we were required to include the warrants
      issued to the placement agent for the private placement in such registration
      statement. We determined that the registration rights were an embedded
      derivative instrument pursuant to SFAS No. 133, *Accounting
      for Derivative*  *Instruments
      and Hedging Activities* ,
      as
      amended. Under the provisions of 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
      we
      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 to be 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, we would record a non-operating,
      non-cash charge. If the fair value of the derivatives is lower at the subsequent
      balance sheet date, we would record 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,
      we
      have elected early adoption and have reclassified our warrant liability to
      equity. Accordingly, there was no current year income/expense associated with
      such warrants.




The
      net
      loss of $14,691,213 in the year ended December 31, 2006 compared to net loss
      of
      $6,987,044 for the year ended in 2005 was primarily due to operating expenses
      of
      $9,558,216, interest expense of $7,058,312, and the low gross margin of
      $1,920,066 or 20.4%.





**Liquidity
      and Capital Resources**





During
      the year ended December 31, 2006, our net cash position increased by $55,227
      to
      $131,907. We used $8,615,187 in operating activities, and used $251,375 in
      investing activities. Our financing activity provided cash of
      $8,921,789.





Net
      cash
      used in operating activities for the year ended December 31, 2006 of $8,615,187
      was an increase of $4,213,057 from the $4,402,130 used in operating activities
      in the year ended December 31, 2005. The increase in the funds used in 2006
      was
      primarily due to the net operating loss of $14,691,213 incurred, and increase
      in
      accounts receivable and inventory because of the increased sales.





Our
      investing activities consisted mainly of the purchase of property and equipment
      for the 2006 period for a net use of $251,375. In the 2006 period, the net
      cash
      provided by financing activities was $8,921,789 primarily from the issuance
      of
      common stock in the private placement of $4,187,762, borrowing on the line
      of
      credit of $3,973,424, and net advances from factor of $1,245,789.





**Financing
      Activities**





On
      September 18, 2006, the Company entered into a Master Revolving Note (the
“Note”) with a Bank to borrow 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 previous borrowings during 2006.
      Upon default, the Company is required to pay an additional 3% interest per
      annum. 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
      Borrower’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 theLender’s
      prime rate plus 11.75% 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.Any
      payments that are deemed late are subject to an additional fee of 5% of each
      such late payment.


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Effective
      December 20, 2006, we entered into an amended credit enhancement agreement
      with
      Westrec, in which, among other things, Westrec agreed to extend its guarantee
      on
      our behalf to amounts owed to a bank and include its guarantee on amounts owed
      to CIT, our factor (see Note 2). In exchange for the additional concessions,
      we
      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. No
      previously unvested warrant shares will vest after the termination of the Credit
      Enhancement Agreement. Furthermore, the maximum number of warrant shares vested
      will not exceed an amount equal to the product of (A) the highest amount of
      aggregate principal owed under the Note previously outstanding *and* (B)
      the
      aggregate percentage of Warrant shares vested, it being the intention that
      the
      maximum number of Warrant shares that can vest will be the lesser of 9,000,000
      or the number equal to the number of dollars in the highest draw amount under
      the Note. Based on management’s best estimate, the holder will vest in all
      9,000,000 shares.





In
      addition, if the termination of the Credit Enhancement Agreement does not occur
      on the dates below, then the number of shares underlying the Warrant 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 vested on the
      180 th day
      following the closing of the Note, plus (ii) an additional number of shares
      equal to 5% of the shares vested on the 210 th day
      following the closing of the Note is not terminated, plus (iii) an additional
      number of shares equal to 10% of the shares vested under the on the
      270 th day
      following the closing of the Note plus on each 30 days thereafter until the
      termination of the Credit Enhancement Agreement occurs. If we issue 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.





On
      February 27, 2007, we amended our Master Revolving Note (the “Note”) dated
      September 18, 2006, to increase our borrowing 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. At
      February 28, 2007, we owed approximately $5,680,000 under the note, and had
      approximately $820,000 of available borrowings.





In
      May
      18, 2006 we entered into a factoring agreement with CIT Commercial Services
      which is a notification, collected funds, non-borrowing factoring arrangement
      that has a commission rate of 1% up to $10 million and 0.9% in excess of $10
      million. The term is for 2 years with 60 days prior notification.




On
      November 13, 2006, we entered into an amended and restated factoring agreement
      with CIT Commercial Services. We 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 our request, and at
      CIT’s sole discretion, CIT may advance funds to us at up to 80% of the factor
      risk accounts. The advance request form must be fully executed by us and Westrec
      Capital Partners, LLC. Interest is 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.





Based
      on
      our current operating plan and our available cash and cash equivalents, we
      expect that we will need to obtain additional financing in the very near future
      through the sale of equity securities, private placements, and loans to fund
      our
      cash needs and continue our presently planned operations. Additional financing,
      whether through public or private equity or debt financing, arrangements with
      stockholders or other sources to fund operations, may not be available, or
      if
      available, may be on terms unacceptable to us.





Our
      ability to maintain sufficient liquidity is dependent on our ability to raise
      additional capital. 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 our common stock. Debt incurred by us would be senior to
      equity in the ability of debt holders to make claims on our assets. The terms
      of
      any debt issued could impose restrictions on our operations. If adequate funds
      are not available to satisfy either short or long-term capital requirements,
      our
      operations and liquidity could be materially adversely affected and we could
      be
      forced to cease operations.




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**Licenses**





In
      the
      first quarter of 2006, we acquired rights to use four trademarks as evidenced
      by
      a licensing agreement entered into with Bill Blass Limited to design,
      manufacture and distribute women’s footwear under the brand names Blass by Bill
      Blass, Bill Blass Couture, Blassport and Bill Blass Collection. The agreements
      expire in March 2011, with an automatic extension through 2016. Under the
      licensing agreement, we agreed to pay the greater of 7% of net sales of the
      licensed products or guaranteed minimums ranging from $105,000 to $397,500
      per
      annum. The licensor may terminate the licensing agreement upon event of default,
      as defined.





In
      March
      2006, we acquired rights to use two trademarks as evidenced by a licensing
      agreement entered into with Isaac Mizrahi to design, manufacture and distribute
      women’s footwear under the brand names Isaac Isaac Mizrahi and a new couture
      brand. The agreement expires in March 2011, with an automatic extension through
      2016. Under the licensing agreement, we agreed to pay the greater of 8% of
      net
      sales of the licensed products or guaranteed minimums ranging from $88,750
      to
      $350,000 per annum. The licensor may terminate the licensing agreement upon
      event of default, as defined.




As
      of
      December 31, 2006, the Company has rights to use ten trademarks as evidenced
      by
      licensing agreements entered into with Richard Tyler, Tyler, 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 event
      of
      default, as defined.




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





**Years
                ending December 31,**2007
            
            $
            1,200,0002008
            
            
            1,510,0002009
            
            
            1,935,0002010
            
            
            1,625,0002011
            
            
            1,748,000$
            8,018,000




During
      2006, the Company incurred expense approximating $747,000 on the above
      licenses.





**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.





**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.




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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. We are 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 the ultimate collection of accounts receivable and 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 1% 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.





**Stock-Based
      Compensation**





As
      of
      December 31, 2006, we have not issued any share based payments to our
      employees.





In
      December 2004, FASB issued SFAS No. 123 (revised 2004 *),
      Share-Based Payment* (“SFAS
      No. 123(R)”), which is a revision of SFAS No. 123. SFAS 123(R) supersedes APB 25
      and amends SFAS No. 95, *Statement
      of Cash Flows* .
      SFAS
      No. 123(R) requires all share-based payments to employees, including grants
      of
      employee stock options, to be recognized in the income statement based on their
      fair values. Pro forma disclosure is no longer an alternative. The provisions
      of
      this statement are effective for us as of January 1, 2006.





SFAS
      No.
      123(R) requires companies to recognize in the statement of operations the
      grant-date fair value of stock options and other equity-based compensation
      issued to employees. SFAS No. 123(R) also establishes accounting requirements
      for measuring, recognizing and reporting share-based compensation, including
      income tax considerations. We will adopt SFAS 123(R) using the modified
      prospective application in January 2006. Under the modified prospective
      application, the cost of new awards and awards modified, repurchased or
      cancelled after the required effective date and the portion of awards for which
      the requisite service has not been rendered (unvested awards) that are
      outstanding as of the required effective date will be recognized as the
      requisite service is rendered on or after the required effective date. The
      compensation cost for that portion of awards shall be based on the grant-date
      fair value of those awards as calculated for either recognition or pro forma
      disclosures under SFAS No. 123.





The
      adoption of SFAS No. 123(R)’s fair value method will have a negative impact on
      our results of operations if we grant share-based payments to our employees
      in
      the future, although it will have no impact on our overall financial position.
      The impact of adopting SFAS No. 123(R) cannot be predicted at this time because
      it will depend on levels of share-based payments granted in the future. SFAS
      No.
      123(R) also requires the benefits of tax deductions in excess of recognized
      compensation cost to be reported as a financing cash flow, rather than as an
      operating cash flow as required under current accounting literature. The
      requirement will reduce net operating cash flows and increase net financing
      cash
      flows in periods of adoption.


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 Table
            of Contents




**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”). In addition, the Company will be required
      to issue certain holders of notes warrants for each subsequent 30-day period
      that such registration statement has not been filed. Also, the Company was
      required to issue the holders of certain notes a number of warrants for each
      30-day period following the Effectiveness Deadline. On July 26, 2006, the
      Company filed the required registration statement. The Company’s registration
      statement became Effective on January 17, 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 is
      higher at the subsequent balance sheet date, the Company recorded a
      non-operating, non-cash charge. If the fair value of the derivatives is 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 00-19-2specifies 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 00-19-2further
      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,
      we have
      elected early adoption and have reclassified our warrant liability to equity.
      Under FSP EITF 00-19-2, the warrants issued subject to a registration rights
      agreement are accounted for in accordance with applicable generally accepted
      accounting principles without regard to the contingent obligation to transfer
      consideration pursuant to the registration rights agreement. As of January
      1,
      2006, the Company reclassified 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 reclassification 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.





**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 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 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.





**Item7.*Financial Statements***





Our
      Consolidated Financial Statements, including the Notes thereto, together with
      the report of independent registered public accounting firm 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:





Report
      of
      Independent Registered Public Accounting Firm


Consolidated
      Balance Sheet as of December 31, 2006


Consolidated
      Statements of Operations for years ended December 31, 2006 and 2005


Consolidated
      Statements of Cash Flows for years ended December 31, 2006 and 2005


Consolidated
      Statements of Stockholders’ Deficit for years ended December 31, 2006 and
      2005


Notes
      to
      Consolidated Financial Statements


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**Item8.*Changes in and Disagreements with Accountants on
      Accounting and Financial Disclosure***





None.





**Item8/A*.
      Controls and Procedures***




Our
      independent registered public accounting firm has reported to our Board of
      Directors certain matters involving internal controls that they considered
      to be
      reportable conditions and material weaknesses, under standards established
      by
      the Public Company Accounting Oversight Board.




•
            The
                implementation of adequate controls over the financial closingand reporting process, including controls over disclosures, non-routine
                transactions and significant estimates. Specifically, these deficiencies
                were primarily attributable to (1) inability to ensure that the accounting
                for our debt and equity-based transactions is accurate and complete.
                In
                recent years, we have consummated a series of complex debt and equity
                transactions involving the application of highly specialized accounting
                principles, and (2) lack of comprehensive documentation of accounting
                policies and procedures.





We
      are
      evaluating certain corrective measures we may take including the possibility
      of
      hiring an outside consultant to provide us with the guidance we need at such
      times that we may engage in these complex transactions.




Changes
      in Internal Controls





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 not 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.




Given
      these reportable conditions and material weaknesses, management devoted
      additional resources to resolving questions that arose during the period covered
      by this report. As a result we are confident our consolidated financial
      statements as of December 31, 2006 and 2005 and for the years then ended fairly
      present in all material respects our financial condition and results of
      operations.




There
      were no other changes to the internal controls during the fourth quarter ended
      December 31, 2006 that have materially affected or that are reasonably likely
      to
      affect the internal controls.




Limitations
      on the Effectiveness of Controls





The
      Company's management, including the CEO and 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.




**Item
      8/B*. Other Information***





None.




28
 Table
          of Contents


**PART
      III**





**Item9.*Directors, Executive officers, Promoters and control
      Persons; Compliance with Section 16(a) of the Exchange
      Act.***





**MANAGEMENT**





The
      following table identifies our current 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,
      2006:





**Name**
            
            **Age**
            
            **Position
                Held**
            
            **Initial
                Election or****Appointment
                Date**John
                Hanna
            
            49
            
            Chairman,
                President, and Chief Executive Officer
            
            August
                19, 2005Michael
                McHugh
            
            60
            
            Chief
                Financial Officer
            
            NAChristopher
                Wyatt
            
            43
            
            Director
            
            August
                19, 2005Alan
                F. Broidy
            
            51
            
            Director
            
            August
                19, 2005Joseph
                J. McCann, Jr.
            
            66
            
            Director
            
            August
                19, 2005Oscar
                Valencia
            
            53
            
            Group
                President, Sales
            
            NADaniel
                Amado
            
            54
            
            Group
                President, Creative
            
            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.


29
 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. MCHUGH. Mr. McHugh was appointed Chief Financial Officer in November 2005.
      Mr. McHugh has served as a Chief Financial Officer for over 20 years. He served
      as Chief Financial Officer for Royal Household Products from May 2005 to
      November 2005. From May 2004 to May 2005, he was the CFO of Bergamo. And from
      January 2002 to May 2004, he was the President and owner of the Beverly Hills
      Food Company. From 1998 to 2002, he was the CFO of Authentic Fitness and from
      1986 to 1998 the CFO of J Crew Group Inc. Mr. McHugh is a graduate of St. John’s
      University in NYC.





DANIEL
      AMADO. Mr. Amado joined the Company in November 2005 as Group President,
      Creative. Prior to joining us, Mr. Amado was Senior Vice President Product
      Development for Aerosoles, Inc. from 2000 to 2005. From 1990 to 2000, he served
      as senior Vice President of New Brands Division of the Brown Shoe Company.
      From
      1985 to 1999, Mr. Amado was with Nine West Group were he held various senior
      positions in design and product development including Group President of the
      Selby Division.





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.





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.




30
 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 atwww.thefashionhouseinc.comand 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 atwww.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,
                6310 San Vicente, Suite 275, Los Angeles, CA 90048. 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 2007.**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.




31




**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 2006 and 2005, Mr. Hanna waived such bonus.





Stock
      Options





The
      Company has not granted any stock options as of December 31, 2006.


32
 Table
            of Contents


**Item10.
*Executive
      Compensation***





**SUMMARY
      OF COMPENSATION**





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





**SUMMARY
      COMPENSATION TABLE**





**ANNUAL
                COMPENSATION**
            
            **LONG
                TERM**
              **COMPENSATION
                AWARDS****NAME
                  AND PRINCIPAL POSITION**
            
            **YEAR**
            
            **SALARY
                ($)**
            
            **BONUS
                ($)**
            
            **OTHER 
                  ANNUAL**
                **COMPENSATION**
            
            **RESTRICTED
                    STOCK AWARDS**John
                Hanna,
            
            
            2006
            
            $
            180,000President
                and CEO (1)
            
            
            2005
            
            $
            180,000Daniel
                Amado
            
            
            2006
            
            $
            283,000Group
                President, Creative
            
            
            2005
            
            $
            18,000Oscar
                Valencia
            
            
            2006
            
            $
            175,000Group
                President, Sales
            
            
            2005
            
            $
            -Michael
                McHugh
            
            
            2006
            
            $
            154,168Chief
                Financial Officer
            
            
            2005
            
            $
            15,974


____________





(1) Mr.
      Hanna
      was appointed President and Chief Executive Officer on August 19, 2005, but
      previously served in this role in our predecessor company. Mr. Hanna was paid
      $105,000 in 2005; we owe Mr. Hanna $75,000 for 2005 services. His predecessor,
      Mr. Blair Zykan, an unaffiliated party, served as Chief Executive Officer of
      our
      predecessor from April 20, 2000 until the reverse merger became effective on
      August 19, 2005. As reported in previous filings, Mr. Zykan did not receive
      any
      compensation for his services as Chief Executive Officer for the fiscal year
      ended December 31, 2005. We are not aware of any facts or circumstances that
      may
      indicate otherwise.





(2) Mr.
      Amado
      joined us in November 2005




(3) Mr.
      Valencia
      joined us in January 2006.




**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 2005**





The
      Named
      Executive Officers did not receive any option grants during the fiscal year
      ended December 31, 2006.


33
 Table
            of Contents


**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, 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, 2006.








**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.




**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.
      During 2006 the Audit Committee met one time. 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. During 2006 the
      Compensation Committee met one time in March 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.


34
 Table
            of Contents





**Item11*.
      Security Ownership 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, 2007 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., 6310
      San Vicente Blvd., #275, Los Angeles, California 90048-5499.





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, 2006, there were 24,887,063 shares of common
      stock issued and outstanding.





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, 2006. We did not
      deem these shares outstanding for purposes of computing the percent ownership
      of
      any other person.





**Number
                of Shares**
            
            **Percentage
                of****of
                Common Stock**
            
            **Outstanding
                Shares of****Name
                of Beneficial Owner**
            
            **Beneficially
                Owned**
            
            **Common
                Stock****5%
                or more Shareholders:**Westrec
                Capital Partners, LLC (1)
            
            
            7,843,190
            
            
            
            31.5
            %American
                Microcap Investment Fund 1, LLC (2)
            
            
            2,640,000
            
            
            
            10.6
            %Lazarus
                Investment Partners LLP (3)
            
            
            1,800,000
            
            
            
            7.2
            %**DIRECTORS
                AND OFFICERS**
              John
                Hanna
            
            
            6,015,958
            
            
            
            24.2
            %Christopher
                Wyatt
            
            
            6,015,958
            
            
            
            24.2
            %Alan
                F. Broidy
            
            
            250,000
            
            
            
            1.0
            %Joseph
                J. McCann
            
            
            -Michael
                McHugh
            
            
            -Daniel
                Amada
            
            
            -Oscar
              Valencia
            
            
            -All
              directors, executives and significant employees as a group (7
              persons)
            
            
            12,281,916
            
            
            
            49.4
            %


35
 Table
            of Contents




(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) the lesser of a maximum of 9,000,000
                shares or the “Highest Aggregate Principal Owed” at an exercise price of
                $0.40 per share based on a vesting schedule. At March 31, 2007, the
                Highest Aggregate Principal Owed was $7,745,422 and the warrant shares
                vested are 7,745,422. Westrec is the beneficial owner of 7,843,190
                vested
                warrant shares at March 31, 2007. 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, 18thFloor, 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.




***Securities
      Authorized for Issuance Under Equity Compensation
      Plans***





The
      following provides information, as of December 31, 2006, 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 plansapproved
                  by security holders
            
            -
            
            $
            -
            
            -Equity
                  compensation plans notapproved
                  by security holders
            
            18,922,344
            
            $
            0.74
            
            -Total
            
            18,922,344
            
            $
            0.74
            
            -




For
      a
      complete description of our equity compensation, please refer to Note 9 of
      our
      consolidated financial statements as of December 31, 2006.





**CHANGE
      OF CONTROL**





To
      the
      knowledge of management, there are no present arrangements or pledges of
      securities of our company that may result in a change in control of the company.




**Item12.*Certain Relationships and Related Transactions
      and Director Indenpendence***





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:


36
 Table
            of Contents




•
            
            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.




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, 2006. Interest expense incurred totaled $78,480 and $53,500
      for the years ended December 31, 2006 and 2005, respectively.





In
      June
      2005, Alan Broidy, one of our directors, loaned us 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 Director Independence**





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 0months 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.




37
 Table
          of Contents


**Item13*.
      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)


38
 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 Hannah 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.+
            
            Previously
                filed.**
            
            To
                be filed by amendment




**Item14.
*Principal
      Accountants 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, 2006 and 2005 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,
                2006**
            
            **December
                31,
                2005**(i)Audit
              Fees
            
            $
            130,000
            
            $
            67,100(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.


39
 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 the April 12, 2007.








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 McHugh, 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
              
              April
                  12, 2007JOHN
                  HANNA
              
              Officer
                  and Director(Principal
                  Executive Officer)/s/
                  MICHAEL
                  MCHUGH
              
              Chief
                  Financial Officer
              
              April 12,
                  2007MICHAEL
                  MCHUGH
              
              (Principal
                  Financial andAccounting
                  Officer)/s/
                  CHRISTOPHER THOMAS WYATT
              
              Director
              
              April
                  12, 2007CHRISTOPHER
                  THOMAS WYATT/s/
                  ALAN F.
                  BROIDY
              
              Director
              
              April
                  12, 2007ALAN
                  F. BROIDY/s/
                  JOSEPH J. MCCANN,
                  JR.
              
              Director
              
              April
                  12, 2007JOSEPH
                  J. MCCANN, JR.







40
 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, 2006, and the
      related consolidated statements of operations, stockholders’ deficit, and cash
      flows for each of the years in the two-year period 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 audits.





We
      conducted our audits 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 audits provide a reasonable basis for our
      opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of The Fashion House Holdings,
      Inc. and subsidiary as of December 31, 2006, and the results of their operations
      and their cash flows for each of the years in the two-year period 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 losses
      and
      has a working capital deficit of $5,187,040. 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


**KMJ
      Corbin & Company LLP**





Irvine,
      California


April
      3,
      2007


41
 Table
          of Contents


**THE
      FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY**


**CONSOLIDATED
      BALANCE SHEET**


**December
      31, 2006**





**ASSETS**Current
                assets:Cash
            
            $
            131,907Accounts
                   receivable, net of allowance of $132,499
            
            
            2,416,832Inventory,
                net of reserve of $109,000
            
            
            1,585,202Prepaid
                expenses
            
            
            224,301Total
                current assets
            
            
            4,358,242Property
                and equipment, net
            
            
            463,360Deposits
            
            
            28,021TOTAL
                ASSETS
            
            $
            4,849,623**LIABILITIES
                AND STOCKHOLDERS’ DEFICIT**Current
                liabilities:Line
                of credit borrowings
            
            $
            3,973,424Accounts
                payable and accrued expenses
            
            
            3,187,123Accrued
                payroll and related
            
            
            321,456Due
                to factor
            
            
            1,567,277Accrued
                interest
            
            
            268,379Note
                payable
            
            
            225,000Current
                portion of capital lease obligations
            
            
            2,623Total
                current liabilities
            
            
            9,545,282Long-term
                liabilities:Notes
                payable to stockholder
            
            
            973,000Capital
                lease obligation, net of current portion
            
            
            8,307Total
                liabilities
            
            
            10,526,589Commitments
                and contingenciesStockholders’
                deficit:Common
                stock, no par value;1,000,000,000
                shares authorized;24,887,063
                shares issued and outstanding
            
            
            17,070,701Accumulated
                deficit
            
            
            (22,747,667
            )Total
                stockholders’ deficit
            
            
            (5,676,966
            )TOTAL
                LIABILITIES AND STOCKHOLDERS’ DEFICIT
            
            $
            4,849,623





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


F-1
 Table
          of Contents


THEFASHIONHOUSE
      HOLDINGS, INC. AND SUBSIDIARY


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**Years
                Ended December 31,****2006**
            
            
            **2005**Net
                sales
            
            $
            9,391,326
            
            $
            1,644,474Cost
                of Sales
            
            
            7,471,260
            
            
            1,388,320Gross
                profit
            
            
            1,920,066
            
            
            256,154Operating
                expenses:Selling,
                general and administrative
            
            
            6,156,699
            
            
            3,690,885Payroll
                and related
            
            
            2,654,402
            
            
            1,214,604Royalties
            
            
            747,115
            
            
            432,500Total
                operating expenses
            
            
            9,558,216
            
            
            5,337,989Loss
                from operations
            
            
            (7,638,150
            )
            
            (5,081,835
            )Other
                income (expense):Interest
                expense, net of interest income
            
            
            (7,052,263
            )
            
            (1,688,409
            )Change
                in fair value of derivative liabilities
            
            
            -
            
            
            (216,000
            )Loss
                before income taxes
            
            
            (14,690,413
            )
            
            (6,986,244
            )Income
                taxes
            
            
            800
            
            
            800Net
                loss
            
            $
            (14,691,213
            )
            $
            (6,987,044
            )Basic
                and diluted net loss per share
            
            $
            (0.62
            )
            $
            (0.43
            )Weighted
                average shares outstanding — basic and diluted
            
            
            23,697,292
            
            
            16,194,174





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


F-2
 Table
          of Contents


**THE
      FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ DEFICIT**


**YEARS
      ENDED DECEMBER 31, 2006 AND 2005**





**Common
                Stock****Shares**
            
            
            **Amount**
            
            
            **Accumulated
                Deficit**
            
            
            **Total**Balance
                at January 1, 2005
            
            
            14,114,200
            
            $
            500,800
            
            $
            (1,285,410
            )
            $
            (784,610
            )Issuance
                of common stock in reverse merger
            
            
            1,006,344
            
            
            -
            
            
            -
            
            
            -Estimated
                fair value of common stock issued for services
            
            
            1,006,344
            
            
            1,006,344
            
            
            -
            
            
            1,006,344Estimated
                fair value of warrants issued with a note payable
            
            
            -
            
            
            95,000
            
            
            -
            
            
            95,000Estimated
                fair value of beneficial conversion feature on convertible notes
                payable
            
            
            -
            
            
            788,000
            
            
            -
            
            
            788,000Issuance
                of common stock in private placement, net of issuance
                costs
            
            
            3,152,250
            
            
            2,631,491
            
            
            -
            
            
            2,631,491Issuance
                of common stock upon conversion of notes payable and accrued
                interest
            
            
            724,443
            
            
            579,554
            
            
            -
            
            
            579,554Net
                loss
            
            
            -
            
            
            -
            
            
            (6,987,044
            )
            
            (6,987,044
            )Balance
                at December 31, 2005
            
            
            20,003,581
            
            $
            5,601,189
            
            $
            (8,272,454
            )
            $
            (2,671,265
            )Change
                in accounting principle
            
            
            
            
            
            688,000
            
            
            216,000
            
            
            904,000Issuance
                of common stock for consulting
            
            
            21,000
            
            
            36,750
            
            
            -
            
            
            36,750Estimated
                relative fair value of warrants issued with notes payable
            
            
            -
            
            
            909,000
            
            
            -
            
            
            909,000Estimated
                fair value of warrants issued for services
            
            
            -
            
            
            83,000
            
            
            -
            
            
            83,000Estimated
                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
            )





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 CASH FLOWS**


**YEARS
      ENDED DECEMBER 31, 2006 AND 2005**





**2006**
            
            
            **2005****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                loss
            
            $
            (14,691,213
            )
            $
            (6,987,044
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            151,481
            
            
            55,991Allowance
                for doubtful accounts
            
            
            132,499
            
            
            93,558Estimated
                fair value of stock issued for services
            
            
            36,750
            
            
            1,006,344Amortization
                of estimated fair value of warrants and BCF
            
            
            6,669,333
            
            
            1,458,667Change
                in fair value of derivative warrant liability
            
            
            -
            
            
            216,000Change
                in operating assets and liabilities:Accounts
                receivable
            
            
            (2,081,314
            )
            
            (357,683
            )Inventories
            
            
            (1,585,202
            )
            
            -Prepaid
                royalties and expenses
            
            
            (55,483
            )
            
            (145,654
            )Deposits
            
            
            45,852
            
            
            (60,521
            )Accounts
                payable and accrued expenses
            
            
            2,636,757
            
            
            341,433Accrued
                payroll and related
            
            
            29,053
            
            
            9,442Settlement
                payable
            
            
            -
            
            
            (135,000
            )Accrued
                interest
            
            
            96,300
            
            
            102,337Net
                cash used in operating activities
            
            
            (8,615,187
            )
            
            (4,402,130
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Purchases
                of property and equipment
            
            
            (251,375
            )
            
            (258,192
            )Net
                cash used in investing activities
            
            
            (251,375
            )
            
            (258,192
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Proceeds
                from notes payable to stockholder
            
            
            -
            
            
            625,000Repayments
                of notes payable to stockholder
            
            
            (33,000
            )
            
            (161,000
            )Proceeds
                from issuance of common stock, net of issuance costs
            
            
            4,187,762
            
            
            2,631,491Proceeds
                from line of credit, net
            
            
            3,973,424
            
            
            -Proceeds
                from notes payable
            
            
            1,225,000
            
            
            1,875,000Repayments
                of notes payable
            
            
            (1,675,000
            )
            
            (625,000
            )Repayments
                of capital lease
            
            
            (2,186
            )
            
            -Advances
                from factor
            
            
            5,137,277
            
            
            1,443,833Payments
                to factor
            
            
            (3,891,488
            )
            
            (1,224,171
            )Net
                cash provided by financing activities
            
            
            8,921,789
            
            
            4,565,153**Net
                change in cash**
            
            
            55,227
            
            
            (95,169
            )**Cash,
                beginning year**
            
            
            76,680
            
            
            171,849**Cash,
                end of year**
            
            $
            131,907
            
            $
            76,680





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 CASH FLOWS**


**YEARS
      ENDED DECEMBER 31, 2006 AND 2005**





**Supplemental
      Disclosure of Cash Flow Information:**





**2006**
            
            
            **2005**Cash
                paid during the year for interest
            $
            299,171
            
            $
            37,392Cash
                paid during the year for income taxes
            $
            800
            
            $
            800**Supplemental
                Schedule of Noncash Investing and Financing
                Activities:**
            $
            -
            
            $
            -Issuance
                of common stock on conversion of debt and accrued interest
            $
            -
            
            $
            579,554Estimated
                fair value of warrants and BCF in connection with the issuance of
                certain
                notes payable
            $
            -
            
            $
            1,405,000Change
                in accounting principle
            $
            904,000
            
            $
            -Purchase
                of property and equipment under capital lease
            $
            13,116
            
            $
            -





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**





**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**YEARS
      ENDED DECEMBER 31, 2006 AND 2005**




**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 prior to the Merger (after considering the stock split),
      TDI had 1,006,344 shares of common stock issued and outstanding and no preferred
      stock issued and outstanding. Pursuant to the Merger, all of the outstanding
      shares of TFH’s common stock were exchanged into 14,114,200 shares of TDI common
      stock. Immediately after the Merger, TDI had 15,120,544 shares of common stock
      issued and outstanding and no shares of preferred stock issued and outstanding.
      In addition, pursuant to the Merger, TFH paid $325,000 to TDI, which TFH
      expensed as acquisition costs, which is included in selling, general and
      administrative expenses in the accompanying consolidated statement of operations
      during the year ended December 31, 2005.





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. (hereafter referred to as the “Company”).





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.





**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,
      collectability of receivables, recoverability of long-lived assets, and
      valuation of 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 operating losses
      for
      the years ended December 31, 2006 and 2005, and has an accumulated deficit
      of
      $22,747,667 and a working capital deficit of $5,187,040 at December 31,
      2006.





The
      Company’s success is dependent upon numerous items, among which are the
      Company’s successful 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 and may force the Company to reduce
      or curtail operations. No assurance can be given that the Company can achieve
      or
      maintain profitable operations.




F-6
 Table
          of Contents


**THE
        FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**
 **YEARS
        ENDED DECEMBER 31, 2006 AND 2005**


**NOTE
      1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
      continued**




Until
      the
      Company has a history of maintaining revenue levels sufficient to support its
      operations and repay its working capital deficit, the Company will require
      additional financing. During 2006, the Company received net proceeds of
      approximately $4,187,762 from the issuance of its common stock (see Note 9).
      There can be no assurance that additional funding will be adequate or will
      enable the Company to achieve or sustain profitable operations.





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.





**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 (“FDIC”)
      up to $100,000. At December 31, 2006, the Company had approximately $123,000
      in
      these accounts in excess of the FDIC insurance limit.





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,
      2006, the Company established an allowance for doubtful accounts of
      $132,499.





Three
      customers accounted for approximately 42% of sales for the year ended December
      31, 2006 and five customers accounted for approximately 50% of sales for the
      year ended December 31, 2005. At December 31, 2006, one account was over 10%
      of
      the accounts receivable balance at 15%.





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.





The
      Company purchases substantially its entire inventory from seven vendors. The
      loss of any of these vendors could have a material adverse effect on the
      Company’s cash flow and financial position.





**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.


F-7
 Table
          of Contents




**THE
        FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**
 **YEARS
        ENDED DECEMBER 31, 2006 AND 2005**


**NOTE
      1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
      continued**




**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 undiscounted
      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, 2006,
      the Company’s management believes there is no impairment of its long-lived
      assets. There can be no assurance, however, that market conditions will not
      change or demand for the Company’s products or services will continue, which
      could result in future impairment of 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, capital lease obligations and notes payable. The carrying
      value for all such instruments approximates fair value at December 31, 2006
      due
      to their short maturities. The fair value of the notes payable to stockholders
      is not determinable as the borrowings are with related parties.





**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 the Company’s
      revenue recognition policy conforms to SAB 101 and 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.





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. 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 Factor approves credit
      to
      the customers on the factored sales and charges the Company 1% of
      sales.





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.




F-8
 Table
          of Contents




**THE
        FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**
 **YEARS
        ENDED DECEMBER 31, 2006 AND 2005**
  **NOTE
        1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
        continued**




**Advertising**





The
      Company expenses advertising costs, consisting primarily of placement in
      multiple publications, along with design and printing costs of sales materials,
      when incurred. Advertising expense for the years ended December 31, 2006 and
      2005 amounted to $78,678 and $63,072, 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.





**Earnings
      Per Share**





The
      Company uses SFAS No. 128, *Earnings
      Per Share,* for
      calculating the basic and diluted income (loss) per share. Basic income (loss)
      per share is computed by dividing net income (loss) by the weighted average
      number of common shares outstanding during the period. Diluted income (loss)
      per
      share is computed similar to basic income (loss) per share. All potentially
      dilutive shares, 6,396,000 and 371,500 shares as of December 31, 2006 and 2005,
      respectively, have been excluded from diluted loss per share, as their effect
      would be anti-dilutive for the year then ended.





Basic
      and
      diluted loss per common share is computed as follows:


**Years
                  Ended December 31,****2006**
              
              **2005****Loss**
                **(Numerator)**
              
              **Shares**
                **(Denominator)**
              
              **Per**
                **Share**
                **Amount**
              
              **Income**
                **(Numerator)**
              
              **Shares**
                **(Denominator)**
              
              **Per**
                **Share**
                **Amount****Basic
                  EPS**(Loss)
                  income available
                to
                  common
                stockholders
              
              $
              (14,691,213
              )
              
              23,697,292
              
              $
              (0.62
              )
              $
              (6,987,044
              )
              
              16,194,174
              
              $
              (0.43
              )Effect
                  of Dilutive
                Securities
                  None
              
              
              -
              
              
              -
              
              
              
              
              
              -
              
              
              -**Diluted
                  EPS**(Loss)
                  income available
                to
                  common
                stockholders
              
              $
              (14,691,213
              )
              
              23,697,292
              
              $
              (0.62
              )
              $
              (6,987,044
              )
              
              16,194,174
              
              $
              (0.43
              )


F-9
 Table
          of Contents




**THE
        FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**
 **YEARS
        ENDED DECEMBER 31, 2006 AND 2005**
  **NOTE
        1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
        continued**




**Stock-Based
      Compensation**





As
      of
      December 31, 2006, the Company has not issued any share-based payments to its
      employees.





In
      December 2004, the FASB issued SFAS No. 123 (revised 2004 *),
      Share-Based*  *Payment* (“SFAS
      No. 123(R)”), which is a revision of SFAS No. 123. SFAS No. 123(R) supersedes
      Accounting Principles Board (“APB”) No. 25 and amends SFAS No. 95, *Statement
      of Cash Flows* .
      SFAS
      No. 123(R) requires all share-based payments to employees, including grants
      of
      employee stock options, to be recognized in the income statement based on their
      fair values. Pro forma disclosure is no longer an alternative. The provisions
      of
      this statement are effective for the Company as of January 1, 2006.





SFAS
      No.
      123(R) requires companies to recognize in the statement of operations the
      grant-date fair value of stock options and other equity-based compensation
      issued to employees. SFAS No. 123(R) also establishes accounting requirements
      for measuring, recognizing and reporting share-based compensation, including
      income tax considerations. The Company adopted SFAS No. 123(R) using the
      modified prospective application in January 2006. Under the modified prospective
      application, the cost of new awards and awards modified, repurchased or
      cancelled after the required effective date and the portion of awards for which
      the requisite service has not been rendered (unvested awards) that are
      outstanding as of the required effective date are recognized as the requisite
      service is rendered on or after the required effective date. The compensation
      cost for that portion of awards is based on the grant-date fair value of those
      awards as calculated for either recognition or pro forma disclosures under
      SFAS
      No. 123.





The
      adoption of SFAS No. 123(R)’s fair value method will have a negative impact on
      the Company’s results of operations if the Company grants share-based payments
      to its employees in the future, although it will have no impact on its overall
      financial position. The impact of adopting SFAS No. 123(R) cannot be predicted
      at this time because it will depend on levels of share-based payments granted
      in
      the future. SFAS No. 123(R) also requires the benefits of tax deductions in
      excess of recognized compensation cost to be reported as a financing cash flow,
      rather than as an operating cash flow as required under current accounting
      literature. The requirement will reduce net operating cash flows and increase
      net financing cash flows in periods of adoption.





**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. In certain issuances, the Company may discount the value
      assigned to the stock issued for illiquidity and restrictions on
      resale.


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.




F-10
 Table
          of Contents


**THE
      FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**


**YEARS
      ENDED DECEMBER 31, 2006 AND 2005**





**NOTE
      1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
      continued**




**Derivative
      Financial Instruments**


In
        connection with the issuance of warrants with certain notes payable (see
        Note 7)
        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 notes a number of warrants equal to
        130,000
        for each subsequent 30-day period that such registration statement had not
        been
        filed. Also, the Company was required to issue the holders of convertible
        notes
        a number of warrants equal to 110,000 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 17,
        2007. In addition, the Company was required to include the warrants issued to
        the
        placement agent for the private placement in such registration statement
        (see
        Note 9). 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.


At
      December 31, 2005, the Company had derivative liabilities valued at $904,000
      related to the warrants with registration rights. During the year ended December
      31, 2006, the Company recognized expense of $216,000 related to the increase
      in
      fair value of the derivative liabilities.





Warrant-related
      derivatives were valued using the Black-Scholes Option Pricing Model with the
      following assumptions during the year ended December 31, 2005: dividend yield
      of
      0%; average volatility of 89%; and risk free interest rate of 4.0%.





Warrant-related
      derivatives were valued using the Black-Scholes Option Pricing Model with the
      following assumptions during the year ended December 31, 2006: dividend yield
      of
      0%; average volatility of 260%; and risk free interest rate of
      4.8%.





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 has 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.


F-11
 Table
          of Contents




**THE
        FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**
 **YEARS
        ENDED DECEMBER 31, 2006 AND 2005**


**NOTE
      1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
      continued**




**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.





**Reclassifications**





Certain
      reclassifications have been made to the 2005 financial statement presentation
      to
      correspond to the 2006 format.




**Recent
      Accounting Pronouncements**





In
      July 2006, the Financial Accounting Standards Board (“FASB”) issued
      Interpretation No. 48, (“FIN 48”), *Accounting
      for Uncertainty in Income Taxes — an interpretation of FASB Statement
      No. 109* ,
      which
      defines the threshold for recognizing the benefits of tax return positions
      as
      well as provides guidance regarding the measurement of the resulting tax
      benefits. FIN 48 requires
      a company to recognize for financial statement purposes the impact of a tax
      position if that position is “more likely than not” to prevail (defined as a
      likelihood of more than fifty percent of being sustained upon audit, based
      on
      the technical merits of the tax position). FIN 48 will be effective as of the
      beginning of the Company’s fiscal year ending December 31, 2007, with the
      cumulative effect of the change in accounting principle recorded as an
      adjustment to retained earnings. The Company is currently evaluating the impact
      of adopting FIN 48 on its consolidated financial statements.





In
      September 2006, the SEC Staff issued SAB No. 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements,* to
      require registrants to quantify financial statement misstatements that have
      been
      accumulating in their financial statements for years and to correct them, if
      material, without restating. Under the provisions of SAB No. 108, financial
      statement misstatements are to be quantified and evaluated for materiality
      using
      both balance sheet and income statement approaches. SAB No. 108 is
      effective for fiscal years ending after November 15, 2006. The adoption of
      this
      pronouncement did not have a material impact on the Company’s consolidated
      results of operations or financial condition.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurement* ,
      to
      define fair value, establish a framework for measuring fair value and expand
      disclosures about fair value measurements. This statement provides guidance
      related to the definition of fair value, the methods used to measure fair value
      and disclosures about fair value measurements. SFAS No. 157 is effective
      for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. The
      Company is currently evaluating the impact of adopting SFAS No. 157 on its
      consolidated financial statements.





**NOTE
      2 — ACCOUNTS RECEIVABLE FACTORING**





In
      November 2004, the Company terminated its factoring activities with Madison
      Administrative Services, Inc. (“MAS”) and signed a conditional mutual release
      with MAS on April 6, 2005, whereby the Company agreed to pay MAS $135,000,
      of
      which $50,000 was paid upon signing and $85,000 was paid in July
      2005.





On
      November 14, 2004, the Company signed a factoring agreement with Itochu
      International, Inc. (“Itochu”), a New York corporation. Under the factoring
      agreement, the Company is charged a factoring fee of 2.5% of the gross invoice
      amount, with no minimum annual fee, and all invoices are subject to approval
      by
      Itochu. Itochu, to the extent of any financing provided, holds a security
      interest in all assets of the Company over the term of the factoring agreement.
      Either party may terminate the factoring agreement by providing 60 days written
      notice. In accordance with the agreement, Itochu will advance the invoice
      amount, but at no time will the outstanding balance of advances exceed $500,000.




On
      May 3,
      2006, the Company terminated its agreement with Itochu International and entered
      into a factoring agreement with CIT Commercial Services (“CIT”). The Company is
      charged a factoring fee of 1% on gross invoice amounts. On November 13, 2006,
      the Company entered into an amended and restated factoring agreement with CIT.
      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.


F-12
 Table
          of Contents




**THE
      FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY**




**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**
 **YEARS
      ENDED DECEMBER 31, 2006 AND 2005**


**NOTE
      2 — ACCOUNTS RECEIVABLE FACTORING, continued**




At
      the
      Company’s request, and at CIT’s sole discretion, CIT may advance funds to the
      Company at up to 80% of the factor risk accounts. The advance request form
      must
      be fully executed by the Company and Westrec Capital Partners, LLC (see Note
      8).
      Interest is 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.





During
      the year ended December 31, 2006 and 2005, factoring fees incurred totaled
      $65,806 and $41,260 respectively.





At
      December 31, 2006, the following summarizes the Company’s accounts receivable
      and related balances:





Receivables
                assigned to factor
            $
            2,250,639Advances
                from factor
            
            (1,567,277
            )Amounts
                due from factor
            
            683,362Unfactored
                accounts receivable
            
            298,692Allowance
                for returns
            
            (132,499
            )$
            849,555





**NOTE
      3 — PROPERTY AND EQUIPMENT**





Property
      and equipment consists of the following at December 31, 2006:





Office
                and computer equipment
            $
            161,126Leasehold
                improvements
            
            188,676Furniture
                and fixtures
            
            365,557715,359Less
                accumulated depreciation and amortization
            
            (251,999
            )$
            463,360




F-13
 Table
          of Contents


**THE
        FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**
 **YEARS
        ENDED DECEMBER 31, 2006 AND 2005**


**NOTE
      4 — COMMITMENTS AND CONTINGENCIES**





**Licensing
      Agreements**





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.





In
      2004,
      the Company sold the rights to use the Nicole Miller trademark under its
      licensing agreement through March 2009 to an unrelated third party for
      $1,350,000 and realized a gain of $1,350,000.





As
      of
      December 31, 2006, the Company has rights to use ten trademarks as evidenced
      by
      licensing agreements entered into with Richard Tyler, Tyler, 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 31,2007
            $
            1,200,0002008
            
            1,510,0002009
            
            1,935,0002010
            
            1,625,0002011
            
            1,748,000$
            8,018,000





During
      the years ended December 31, 2006 and 2005, the Company incurred expense
      approximating $747,000 and $433,000 in connection with the above
      licenses.





**Leases**





The
      Company leases its property under a non-cancelable operating lease agreement
      which expires in 2010 and provides for monthly lease payments ranging from
      $12,400 to $14,000. The Company also leases equipment under a capital lease
      which expires in December of 2010 and provides for monthly payments of
      approximately $210.





Future
      annual minimum payments under the operating lease are as follows:





**Total**2007
            $
            156,0002008
            
            161,0002009
            
            166,0002010
            
            129,000Total
            $
            612,000





Rent
      expense for the years ended December 31, 2006 and 2005 was $174,001 and
      $110,000, respectively.


F-14
 Table
            of Contents
  **THE
        FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**
 **YEARS
        ENDED DECEMBER 31, 2006 AND 2005**
  **NOTE
          4 — COMMITMENTS AND CONTINGENCIES, continued**


**Indemnities
      and Guarantees**





The
      Company has 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 indemnifies its directors,
      officers, employees and agents, as permitted under the laws of the State of
      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**





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 or
      consolidated results of operations of the Company except as disclosed
      below.





Willam
      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. In March of
      2007, a judgment against the Company was made but not entered in the amount
      of
      $400,000. The Company is in the process of negotiating a reduced settlement
      and
      expects that the matter can be resolved. If an agreeable settlement can not
      be
      reached, the Company will consider appealing the judgment. 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
 
 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. Pursuant to the Agreement regarding late delivery of
        product, the Company agreed to pay Artful Mind a total sum of $739,000 for
        the
        procurement and manufacturing of shoes. The Company was to pay the $739,000
        as
        follows: (i) $148,000 on execution of the agreement; (ii) $148,000 on October
        30, 2006; $148,000 on November 30, 2006; $148,000 on December 30, 2006; and
        $148,000 on January 30, 2007. Based on the event of a default, of not timely
        paying the final two payments, which was not cured within 14 days of the
        date
        payment was due, 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. The Company has included the $295,000 due as accounts
        payable and accrued expenses in the accompanying consolidated balance
        sheet.
  **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 ended December 31, 2006 and 2005 was $180,000 and the bonus was waived
          in
          each year.


F-15
 Table
          of Contents




**THE
      FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY**




**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**
 **YEARS
      ENDED DECEMBER 31, 2006 AND 2005**


**NOTE
          5 — INCOME TAXES**





Income
      tax expense consisted of current state income tax expense of $800 for the years
      ended December 31, 2006 and 2005.





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




**2006**
              ****
              **2005**Statutory
                  federal income tax rate
              
              
              34.0
              %
              
              34.0
              %State
                  income taxes, net of federal benefit
              
              
              7.0
              %
              
              -Change
                  in valuation allowance
              
              
              (37.0
              %)
              
              (33.9
              %)Other
              
              
              (4.0
              %)
              
              (0.1
              %)Total
              
              
              -
              
              
              -







The
      following is a summary of the significant components of the Company’s deferred
      income tax asset as of December 31, 2006:





Net
                operating loss carryforwards
            
            $
            9,005,000Less
                valuation allowance
            
            
            (9,005,000
            )$
            -





At
      December 31, 2006, the Company had net operating loss carryforwards of
      approximately $23,000,000 available to offset future federal and state income
      taxes and 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 2006 and 2005. 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, 2006, the effect of such limitation, if imposed, has not been
      determined.




F-16
 Table
          of Contents




**THE
        FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**
 **YEARS
        ENDED DECEMBER 31, 2006 AND 2005**


**NOTE
      6 — NOTES PAYABLE TO STOCKHOLDER**





From
      time
      to time, the Company borrows funds from a founding stockholder for working
      capital purposes, which bear interest at 8% per annum and principal borrowings
      are due 13 months from the date of demand with the related interest amounts
      due
      upon demand. As of December 31, 2006, outstanding borrowings totaled $973,000
      and accrued interest totaled $134,546. As of March 31, 2007, no demand for
      repayment has been made. Interest expense incurred totaled $78,480 and $53,500
      for the year ended December 31, 2006 and 2005, respectively.





**NOTE
      7 — NOTES PAYABLE**





In
      April
      and May 2005, the Company issued notes payable totaling $625,000, bearing
      interest at 11 percent per annum (the “11% Notes”). The 11% Notes and
      accrued interest were due through August 2005, as amended. During 2005 and
      in connection with the issuance of the 11% Notes, the Company issued warrants
      to
      purchase an aggregate of 687,500 shares of the Company’s common stock, including
      a warrant to purchase 62,500 shares of the Company’s common stock in connection
      with an extension of the maturity date. In August 2005, the Company repaid
      such amounts, including accrued interest of $35,392. In connection with the
      registration rights issued with the 11% Notes and related warrants (see Note
      1),
      the Company has issued warrants to purchase an aggregate of 825,000 and 150,000
      shares of the Company’s common stock during the year ended December 31, 2006 and
      2005, respectively, as penalties for not registering the underlying shares
      timely, as defined (see Note 6). The warrants issued during the years ended
      December 31, 2006 and 2005 had fair values totaling $1,097,000 and $337,000,
      respectively, as determined under SFAS No. 123 and recorded such as
      interest expense upon grant. The warrants vested upon grant, have exercise
      prices of $1.00 per share and expire in August 2015.





On
      June
      30, 2006, the Company and the holder of the 11% Note agreed to cancel all
      previously issued warrants totaling 1,662,500 and to waive the damages provision
      obligating the Company to issue additional warrants if a registration statement
      is not filed and becomes effective by certain dates in exchange for a warrant
      to
      purchase 1,212,500 shares of the Company’s common stock, which was valued at
      $740,000 as determined under SFAS No. 123. The warrants vested upon grant,
      have
      an exercise price of $0.60 and expire in August 2015. Based on the fair value
      of
      the original warrants of $1,016,000 at the modification date, the Company did
      not record any related expense related to the modification.





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 are due in April 2006, as amended.





In
      connection with the issuance of the July 11% Note, the Company issued a
      warrant to purchase an aggregate of 1,100,000 shares of the Company’s common
      stock, including a warrant to purchase 550,000 shares of the Company’s common
      stock issued in January 2006 in connection with an extension of the
      maturity date. The warrants issued during 2006 and 2005 had a fair values
      totaling $385,000 and $281,000, respectively, as determined under SFAS
      No. 123. The Company recorded the $385,000 to interest expense upon grant
      in 2006 and amortized $45,833 and $235,467 to interest expense during the years
      ended December 31, 2006 and 2005, respectively. 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 has issued warrants to purchase
      an
      aggregate of 1,430,000 and 110,000 shares of the Company’s common stock during
      the years ended December 31, 2006 and 2005, respectively, as penalties for
      not
      registering the underlying shares timely, as defined (see Note 6). The warrants
      issued during 2006 and 2005, for penalties, had fair values totaling $1,048,000
      and $70,000, respectively, as determined under SFAS No. 123 and 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.





In
      June
      and August 2005, the Company issued convertible notes payable totaling
      $575,000, bearing interest at 6 percent per annum (the “6% Notes”). The 6%
      Notes and accrued interest were due at the earlier of the initial closing of
      the
      Company’s private placement (see Note 8) or June 2006. In addition, the
      principal and accrued interest on the 6% Notes were convertible into shares
      of
      the Company’s common stock at a conversion price equal to $0.80 per share. The
      Company recorded a BCF of $143,750 in connection with the conversion feature
      of
      the 6% Notes for the year ended December 31, 2005 and amortized $143,750 to
      interest expense in the accompanying statement of operations during the year
      ended December 31, 2005. In conjunction with the initial closing of the
      Company’s PPM, as defined below, the entire balance of $575,000 of 6% Notes, and
      $4,554 of accrued interest, was converted into 724,443 shares of the Company’s
      common stock in accordance with the related agreements.


F-17
 Table
          of Contents




**THE
        FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**
 **YEARS
        ENDED DECEMBER 31, 2006 AND 2005**


**NOTE
      7 — NOTES PAYABLE, continued**




In
        December 2005, the Company issued a note payable totaling $125,000, bearing
        interest at the prime rate plus 5% (the “December Note”). In connection with the
        issuance of the December Note, the Company issued warrants to purchase an
        aggregate of 190,000 shares of the Company’s common stock, including a warrant
        to purchase 65,000 shares of the Company’s common stock issued in
        February 2006 in connection with an extension of the maturity date (see
        Note 7). The warrants issued during 2006 and 2005, had fair values totaling
        $108,000 and $95,000, respectively, as determined under SFAS No. 123. The
        Company recorded $95,000 as debt discount related to warrants in 2005 and
        amortized $66,500 and $28,500 to interest expense in the accompanying
        consolidated statements of operations during the years ended December 31,
        2006 and 2005, respectively. The warrant issued during the year ended
        December 31, 2006 had a fair value of $108,000, as determined under SFAS
        No. 123 and the Company recorded $108,000 as interest expense upon grant.
        The warrants vested upon grant, have an exercise price of $0.80 per share
        and
        expire in February 2016. The December Note and accrued interest were repaid
        in March 2006 and the Company amortized the related debt discount to
        interest expense upon repayment.





In
      January 2006, the Company issued a note payable totaling $800,000, bearing
      interest at 10.5%. In connection with the issuance of the note, the Company
      issued a warrant to purchase 400,000 shares of the Company’s common stock. The
      warrant had a relative fair value of $327,000, as determined under SFAS
      No. 123 and recorded such as debt discount. The warrant vested upon grant,
      has an exercise price of $1.00 per share and expires in January 2009. The note
      and accrued interest were repaid in March 2006. The debt discount of
      $327,000 was fully amortized to interest expense upon repayment.





In
      February 2006, the Company issued a note payable totaling $125,000, bearing
      interest at the prime rate plus 5% (the “February Note”). In connection with the
      issuance of the February Note, the Company issued a warrant to purchase 62,500
      shares of the Company’s common stock. The warrant had a relative fair value of
      $56,000, as determined under SFAS No. 123 and recorded such as debt
      discount. The warrant vested upon grant, has an exercise price of $0.80 per
      share and expires in January 2009. The February Note and accrued interest
      were repaid in May 2006 and the remaining debt discount was fully amortized
      to interest expense upon repayment.





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, as determined
      under SFAS No. 123 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.





**NOTE
      8 - LINE OF CREDIT**





On
      July
      27, 2006, the Company and Westrec Capital Partners, LLC (“Westrec”) entered into
      an agreement whereby Westrec and its managing partner (“Guarantors”) have
      provided credit guarantees to a bank 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 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 bank. 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 Borrower’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 plus 11.75% 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. Any
      payments that are deemed late are subject to an additional fee of 5% of each
      such late payment.




F-18
 Table
          of Contents




**THE
        FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**
 **YEARS
        ENDED DECEMBER 31, 2006 AND 2005**


**NOTE
      8 - LINE OF CREDIT, continued**




During
        the year ended December 31, 2006, the Company incurred fees of approximately
        $399,900, paid $334,800 and owes $55,038, which is included in accounts payable
        and accrued expenses in the accompanying balance sheet.
 
 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 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 and
      expires in September 2013, as amended - see below. The warrant vests as follows:
      (i) 20% immediately, (ii) an additional 20% vests, as amended, 60 days after
      the
      date of the warrant, and on each succeeding 30 th day
      thereafter such that the entire warrant will vest on the 151 st day
      after the date of the warrant. The estimated fair value of the original warrant
      was $2,550,000, as determined under SFAS 123 and the Company was amortizing
      such
      amount to interest expense on a straight line basis over the life of the
      guarantee. 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 a bank 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 to September 2007. During the period from the date of grant
      through December 31, 2006, the Company amortized $2,012,000 to interest expense
      in the accompanying statements of operations related to this warrant. In
      connection with the modification, the Company recorded additional expense of
      $1,408,000, which represented the excess of the fair value of the modified
      warrant over the fair value of the original warrant at the date of the
      modification. In addition, as a result of the modification, the Company will
      recognize an additional $792,000 over the life of the note. No previously
      unvested warrant shares will vest after the termination of the Credit
      Enhancement Agreement. Furthermore, the maximum number of warrant shares vested
      will not exceed an amount equal to the product of (A) the highest amount of
      aggregate principal owed under the Note previously outstanding and (B)
      the
      aggregate percentage of Warrant shares vested, it being the intention that
      the
      maximum number of Warrant shares that can vest will be the lesser of 9,000,000
      or the number equal to the number of dollars in the highest draw amount under
      the Note. Based on management’s best estimate, the holder will vest in all
      9,000,000 shares, of which 4,106,680 were vested at December 31,
      2006.





In
      addition, if the termination of the Credit Enhancement Agreement does not occur
      on the dates below, then the number of shares underlying the Warrant 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 vested on the
      180 th day
      following the closing of the Note, plus (ii) an additional number of shares
      equal to 5% of the shares vested on the 210 th day
      following the closing of the Note is not terminated, plus (iii) an additional
      number of shares equal to 10% of the shares vested under the on the
      270 th day
      following the closing of the Note plus on each 30 days thereafter until the
      termination of the Credit Enhancement Agreement occurs. If 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.
      However, Westrec cannot earn warrants to purchase more than an aggregate of
      9,000,000 shares in connection with the agreement, including all additional
      warrants earned under the aforementioned provisions.




F-19
 Table
          of Contents




**THE
        FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**
 **YEARS
        ENDED DECEMBER 31, 2006 AND 2005**


**NOTE
      9 — 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.




During
      the year ended December 31, 2005, the Company issued 3,152,250 shares of
      its common stock receiving proceeds of $2,631,491, net of commissions, fees
      and
      expenses of $520,759.




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.





During
      the year ended December 31, 2005, the Company issued 1,006,344 shares of
      common stock valued at $1.00 per share (estimated fair value on the date of
      grant) for consulting services provided.





*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 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.





During
      the years ended December 31, 2006 and 2005, the Company issued warrants to
      purchase an aggregate of 1,805,000 (net of 1,662,500 cancelled warrants) and
      260,000 shares, respectively, in connection with the liquidated damages clauses
      of certain registration rights agreements (see Note 7). 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 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* . 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 (see Notes 1 and 7).


F-20
 Table
          of Contents




**THE
        FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**
 **YEARS
        ENDED DECEMBER 31, 2006 AND 2005**
  **NOTE
        9 — EQUITY TRANSACTIONS, continued**




In
      July
      of 2006, the Company entered a formal agreement with Westrec to provide a credit
      guarantee to a bank sufficient to enable the bank to issue letters of credit
      on
      behalf of the Company. In connection with the issuance of each letter of credit
      the Company paid Westrec a fee of 2.5% and the bank 1.0% of the principal amount
      of the letters of credit. Westrec provided a credit guarantee for approximately
      $3.0 million of letters of credit issuances; and received warrants to purchase
      20,302 shares of the Company’s common stock at an exercise price of $1.16,
      warrants to purchase 59,369 shares of the Company’s common stock at an exercise
      price of $0.62, and warrants to purchase 18,097 shares of the Company’s common
      stock at an exercise price of $0.56. The warrants vested upon grant and expire
      on the five-year anniversary of issuance. The warrants had an aggregate fair
      value of $55,000, as determined under SFAS 123 and were recorded as interest
      expense upon grant. During the year ended December 31, 2006, in connection
      with
      the Credit Enhancement Agreement, the Company granted a seven-year warrant
      to
      purchase 9,000,000 shares of common stock at a purchase price of $0.40 per
      share
      and expires in September 2013, as amended (see Note 6).





During
      2006, in connection with the issuance of certain notes payable and related
      maturity extensions, the Company issued warrants to purchase an aggregate of
      1,137,500 shares of the Company’s common stock at exercise prices ranging from
      $0.80 to $1.00 (see Note 7). The warrants vested upon grant and expire through
      July 2016.





During
      the year ended December 31, 2005, the Company issued warrants to purchase an
      aggregate of 1,362,500 shares of the Company’s common stock in connection with
      the issuance of convertible notes payable (see Note 7), with fair values
      totaling $617,000 determined under SFAS No. 123 and recorded such as a debt
      discount. These warrants vested upon grant, have exercise prices of $0.80 and
      expire on various dates through December 2015. As of December 31, 2005,
      $504,667 has been amortized to interest expense, with the remainder amortized
      in
      2006.





During
      the year ended December 31, 2005, the Company issued warrants to purchase an
      aggregate of 472,838 shares of the Company’s common stock to BSC in connection
      with the Company’s private placement (see above). These warrants vested upon
      grant, have exercise prices of $1.00 and expire through September 2010.





The
      following represents a summary of the warrants outstanding for the years ended
      December 31, 2005 and 2006:




**Number****of
                Warrants**
            
            **Weighted
                Average****Exercise
                Price****Per
                Share**Outstanding
                at January 1, 2005
            
            19,271
            
            $
            10.22Granted
            
            2,095,338
            
            
            0.87Exercised
            
            -
            
            
            -Expired/Forfeited
            
            (1,720
            )
            
            43.60Balance
                at December 31, 2005
            
            2,112,889
            
            $
            0.92Granted
            
            23,489,506
            
            $
            0.71Exercised
            
            -
            
            
            -Expired/Forfeited/
                Cancelled
            
            (6,680,051
            )
            
            0.71Balance
                at December 31, 2006
            
            18,922,344
            
            $
            0.74





F-21
 Table
            of Contents


**THE
        FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED**
 **YEARS
        ENDED DECEMBER 31, 2006 AND 2005**


**NOTE
      9 — EQUITY TRANSACTIONS, continued**





The
      following summarizes information about warrants outstanding at December 31,
      2006:





**Warrants
                Outstanding**
            **Warrants
                Exercisable****Exercise
                Price**
            
            
            **Number**
              **of
                Shares**
            
            
            **Weighted**
              **Average**
              **Remaining**
              **Contractual**
              **Life
                (Years**)****
            
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            
            **Number**
              **of
                Shares**
            
            
            **Weighted**
              **Average**
              **Exercise****Price**$0.40
            
            
            9,000,000
            
            
            6.7
            
            $
            0.40
            
            
            4,106,680
            
            $
            0.40$0.56
                to $0.80
            
            
            2,092,466
            
            
            6.7
            
            $
            0.68
            
            
            2,092,466
            
            $
            0.68$1.00
                to $1.25
            
            
            7,829,878
            
            
            5.1
            
            $
            1.14
            
            
            7,829,024
            
            $
            1.1418,922,344
            
            
            
            
            $
            0.74
            
            
            14,029,024
            
            $
            0.86











**NOTE
      10 — SUBSEQUENT EVENTS**








On
      February 27, 2007, the Company amended their 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, the Company is required to pay an additional 3% interest per
      annum.







F-22