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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-KSB
 (Mark one)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005
 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.
  COLORADO(State of Incorporation)
    
    33-1079781(I.R.S. Employer ID. No.)6310 San Vicente Blvd., #275,Los Angeles, California
    
    90048-5499(Address of Principal Executive Offices)
    
    (Zip Code)
 (Issuers Telephone Number, Including Area Code)
 Securities registered under Section 12(g) of the Exchange Act:
 Name of Each ExchangeTitle of Each Class
    
    on Which RegisteredNone
    
    N/A
 þ o
 o
 o þ
    DOCUMENTS INCORPORATED BY REFERENCE
  o þ




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##### 



The Fashion House Holdings, Inc.
FISCAL YEAR 2005 FORM 10-KSB ANNUAL REPORT
 INDEX
 PagePART IItem 1. Description of Business
    
    3Item 2. Description of Property
    
    16Item 3. Legal Proceedings
    
    16Item 4. Submission of Matters to a Vote of Security Holders
    
    17Item 5. Market for Common Equity and Related Stockholder Matters
    
    17Item 6. Managements Discussion and Analysis
    
    18Item 7. Financial Statements
    
    25Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    25Item 8/A. Controls and Procedures
    
    25Item 8/B. Other Information
    
    25Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act
    
    26Item 10. Executive Compensation
    
    29Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    30Item 12. Certain Relationships and Related Transactions
    
    30Item 13. Exhibits
    
    31Item 14. Principal Accountants Fees and Services
    
    31Signatures
    
    34Exhibit 10.1Exhibit 10.2Exhibit 10.3Exhibit 10.4Exhibit 10.5Exhibit 10.6Exhibit 10.7Exhibit 10.8Exhibit 10.9Exhibit 10.10Exhibit 10.18Exhibit 10.19Exhibit 21.1Exhibit 31.1Exhibit 31.2Exhibit 32.1
  2




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##### Table of Contents



PART I
 
 Item 1. Description of Business
 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 forward-looking statements seek anticipate believe estimate expect intend plan budget project may be may continue may
likely result
 
    
    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.
 SEC
 OUR COMPANY
  ,
 3




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History and Development of the Company
      OUR BUSINESS
  4




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INDUSTRY OVERVIEW
       FASHION TRENDS
  5




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BRAND LICENSING PRACTICES
  Oscar License
  Tyler License
  Blass License
  6




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The WWD Book of Lists
 Isaac Mizrahi License
  Product Lines
  Designers
    7




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The WWD Book of Lists
  Couture Lines
  Bridge Lines
  Moderate / Better
  Other Licenses
  Product Design and Development
  .
  8




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MANUFACTURING
       PRODUCT SALES CYCLE
  SALES AND DISTRIBUTION
   9




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COMPETITION
     MARKETING AND ADVERTISING
  GOVERNMENT REGULATION AND PROBABILITY OF AFFECTING BUSINESS
  10




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EMPLOYEES
  Item 1A. RISK FACTORS
  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.
  WE HAVE AN ACCUMULATED DEFICIT OF $8,272,454 AS OF DECEMBER 31, 2005 AND HAVE RECEIVED AN OPINION
FROM OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM REGARDING OUR ABILITY TO CONTINUE AS A GOING
CONCERN, AND WE MAY NEVER ACHIEVE PROFITABILITY
   WE MAY REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND WITHOUT IT WE MAY NOT BE ABLE TO
CONTINUE OPERATIONS.
  11




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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.
  OUR BUSINESS COULD SUFFER IF WE NEED TO ADD OR REPLACE MANUFACTURERS.
 two
 OUR BUSINESS COULD SUFFER FROM THE FINANCIAL INSTABILITY OF OUR CUSTOMERS.
  IF OUR COMPETITORS MISAPPROPRIATE OUR PROPRIETARY KNOW-HOW AND TRADE SECRETS, IT COULD HAVE A
MATERIAL 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.
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OUR BUSINESS AND THE SUCCESS OF OUR PRODUCTS COULD BE HARMED IF WE ARE UNABLE TO MAINTAIN THEIR
BRAND IMAGE
  OUR BUSINESS COULD BE HARMED IF WE FAIL TO MAINTAIN PROPER INVENTORY LEVELS.
  COMPETITION IN THE FOOTWEAR INDUSTRY IS FIERCE.
  OUR OPERATING RESULTS COULD BE NEGATIVELY IMPACTED BY OUR SALES CONCENTRATION IN ANY ONE BRAND.
  13




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WE MAY LOSE OUR EXCLUSIVE LICENSES IF WE DO NOT HAVE SUFFICIENT FUNDS TO PAY THE
MINIMUM REQUIRED ROYALTIES.
  OUR BUSINESS MODEL IS DEPENDENT ON OUR ABILITY TO SECURE AND MAINTAIN LICENSES FROM MAJOR,
WELL-KNOWN DESIGNERS.
  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.
  
    
    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.
   OUR BUSINESS COULD BE HARMED IF OUR CONTRACT MANUFACTURERS OR SUPPLIERS VIOLATE LABOR OR OTHER
LAWS.
 14




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FOREIGN CURRENCY FLUCTUATIONS COULD ADVERSELY AFFECT OUR PROFITABILITY.
  WE EXPERIENCE SEASONAL AND QUARTERLY FLUCTUATIONS IN DEMAND FOR OUR PRODUCTS.
  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.
  WE DO
NOT ANTICIPATE PAYING ANY CASH DIVIDENDS IN THE FORESEEABLE FUTURE,
WHICH MAY REDUCE ANY RETURN ON AN INVESTMENT IN OUR COMMON STOCK.
  SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS OUR STOCK PRICE.
  15




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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.
  WE ARE SUBJECT TO THE PENNY STOCK RULES. THESE RULES MAY ADVERSELY AFFECT TRADING IN OUR COMMON
STOCK
   
 Item 2. Description of Property
  
 Item 3 Legal Proceedings
 Willam Bradhan and Richard Traweek v. The Fashion House, Inc., John Hanna
  16




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Item 4. Submission of Matters to a Vote of Security Holders
  PART II
 
 Item 5. Market for Common Equity and Related Stockholder Matters
 Market Information
  High
    
    LowFiscal Year 2005*Third Quarter**
    
    $
    1.45
    
    
    $
    0.70Fourth Quarter
    
    $
    1.25
    
    
    $
    0.70
 
 *
    
    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.   Dividends
  Recent Sales of Unregistered Securities
   17




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
    
    A warrant to purchase 550,000 shares of our common stock at an exercise
price of $0.80 per share, on a post-reverse-split basis, in consideration of a bridge loan
made to Fashion House in the amount of $550,000.
    
    At the conclusion of the Private Placement, we will issue a warrant to the
Managing Dealer to purchase the number of shares of our common stock equal to
15% of the number of shares sold in the Private Placement, at an exercise price of $1.00
per share. As of March 31, 2006, our obligation to issue the Managing Dealer a
warrant is equal to a warrant to purchase 959,210 shares of the Registrants common stock,
on a post-reverse-split basis.
 
    
    A warrant to purchase 400,000 shares of our common stock at an exercise
price of $1.00 per share was issued in consideration for participation in the $800,000
Bridge Loan of January 2006.
    
    A warrant to purchase 62,500 shares of our common stock at an exercise
price of $1.00 per share was issued in consideration for participation in a $125,000
Bridge Loan of January 2006.
 In each case, we relied upon Section 4(2) of the Securities Act for the offer
and sale. We believed that Section 4(2) was available because the offer and sale did not
involve a public offering and there was not general solicitation or general advertising
involved in the offer or sale.
 
 Item 6. MANAGEMENTS DISCUSSION AND ANALYSIS
  
    
    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.
  18




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Overview
        19




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Overview
     Results of Operations
 Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
    20




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Accounting for Derivative
Instruments and Hedging Activities, Derivative Financial Indexed to, and Potentially Settled in, a Companys Own Stock,
  Liquidity and Capital Resources
       21




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22




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CRITICAL ACCOUNTING POLICIES
  Revenue Recognition
 Revenue Recognition
 Reporting Revenue
Gross as a Principal Versus Net as an Agent,
     23




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Stock-Based Compensation
  ), Share-Based Payment Statement of Cash Flows
   Derivative Financial Instruments
 Accounting for Derivative Instruments and Hedging
Activities Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock,
 Beneficial Conversion Feature
 Accounting For Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion Ratio Application of EITF Issue No. 98-5 To Certain Convertible Instruments,
 24




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Item 7. Financial Statements
   
 
 Item 8.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
                 
 Items 8/A. Controls and Procedures
  Changes in Internal Controls
   
 Item 8/B. Other Information
  25




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


MANAGEMENT




Initial Election orName
    
    Age
    
    Position Held
    
    Appointment DateJohn Hanna
    
    
    49
    
    
    Chairman, President,
and Chief Executive
Officer
    
    August 19, 2005Michael McHugh
    
    
    60
    
    
    Chief Financial Officer
    
    NAChristopher Wyatt
    
    
    43
    
    
    Director
    
    August 19, 2005Joseph J. McCann, Jr.
    
    
    66
    
    
    Director
    
    August 19, 2005Eric Richardson
    
    
    39
    
    
    Director
    
    August 19, 2005Alan F. Broidy
    
    
    51
    
    
    Director
    
    September 20, 2005Thomas J. Anzsures
    
    
    58
    
    
    Exec. VP Sales
    
    NARichard Zech
    
    
    41
    
    
    VP Sales
    
    NAGladys Cutler
    
    
    57
    
    
    East Coast VP Sales
    
    NA
       BUSINESS EXPERIENCE
  26




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27




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Board Meetings and Committees
    DIRECTOR COMPENSATION
  28




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CODE OF ETHICS
  
 Item 10. Executive Compensation
 SUMMARY OF COMPENSATION
  SUMMARY COMPENSATION TABLE
 LONG TERMANNUAL COMPENSATION
    
    
    COMPENSATION AWARDSRESTRICTEDNAME AND PRINCIPAL
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    OTHER ANNUAL



    STOCKPOSITION
    
    YEAR
    
    SALARY ($)
    BONUS ($)
    
    COMPENSATION




    


AWARDSJohn Hanna, President and
    
    
    2005
    
    
    $
    180,000CEO (1)
    
    
    2004
    
    
    $
    180,000
    
    
    
    
    
    
    
    
    
    
    
    
    1,129,136Thomas Azures, EVP,
    
    
    2005
    
    
    $
    206,249Sales (2)
    
    
    2004
    
    
    $
    47,599Gladys Cutler, VP East (3)
    
    
    2005
    
    
    $
    135,000Coast Sales
    
    
    2004
    
    
    $
    30,375
 
 (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 and $0 in 2004; we owe Mr. Hanna $180,000 for 2004 services and $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, 2004 and December 31, 2005. We are not aware of any facts or circumstances
that may indicate otherwise.(2)
    
    Mr. Azures joined our predecessor in October 2004; therefore his 2004 compensation is
for a partial year.(3)
    
    Ms. Cutler joined us in late 2004 and is currently paid at the rate of $150,000 per
annum.(4)
    
    Mr. Hanna received 800 shares of restricted common stock
at a price per share of $1.00 in 2004, which upon consummation of the
reverse merger in August 2005 resulted in 1,129,136 shares of
common stock. OPTION GRANTS TO EXECUTIVE OFFICERS IN 2005
  EMPLOYMENT ARRANGEMENTS
  29




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Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
     NUMBER OF SHARES OFNAME OF DIRECTOR, OFFICER
    
    COMMON STOCK BENEFICIALLY
    
    PERCENTAGE OF OUTSTANDINGAND BENEFICIAL OWNER
    
    OWNED
    
    SHARES OF COMMON STOCKJohn Hanna
    
    
    6,015, 958
    
    
    
    29.3
    %Christopher Wyatt
    
    
    6,015, 958
    
    
    
    29.3
    %Alan F. Broidy
    
    
    250,000
    
    
    
    *All Officers & Directors
    
    
    12,281,916
    
    
    
    51
    %as a Group ( 9 persons)
 
 *
    
    Less than one percent beneficially owned. CHANGE OF CONTROL
  
 Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  30




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LOAN FROM DIRECTORS
   
 Item 13. Exhibits
    
 Item 14. Principal Accountants Fees and Services
  December 31, 2005
    
    December 31, 2004 (1)(i)
    
    Audit Fees
    
    $
    61,500
    
    
    $
    20,000(ii)
    
    Audit Related Fees
    
    $
    0
    
    
    $
    (iii)
    
    Tax Fees
    
    $
    0
    
    
    $
    (iv)
    
    All Other Fees
    
    $
    5,600
    
    
    $
    
    31




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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
    
    Certificate of incorporation of the registrant, as currently in Effect (2)3.2
    
    Bylaws of the registrant, as currently in effect (3)
 4.1
    
    Warrant dated August 19, 2005 issued to The Elevation Fund, LLC (4)4.2
    
    Warrant dated July 21, 2005 issued to American Microcap Investment Fund 1, LLC(4)4.3
    
    Warrant dated January 2006 issued to American Microcap Investment Fund 1, LLC(4)4.4
    
    Warrant dated December 13, 2005 issued to Diaz Management, Inc. (4)4.5
    
    Warrant dated February 2006 issued to Diaz Management, Inc. (4)4.6
    
    Warrant dated February 2006 issued to Battersea Capital, Inc. (4)4.7
    
    Warrant dated February 2006 issued to Trilogy Capital Partners, Inc. (4)4.8
    
    Warrant dated March 2006 to investor group(4)
 10.1
    
    Employment Agreement dated as of January 1, 2004 between John Hanna and Fashion House, Inc. (FHI)10.2
    
    License Agreement dated February 2006 between FHI and IM Ready Made, LLC10.3
    
    License Agreement dated November 2005 between FHI and Bill Blass International LLC10.4
    
    License Agreement dated November 2005 between FHI and Bill Blass International LLC10.5
    
    License Agreement dated April 1, 2006 between FHI and Bill Blass International LLC10.6
    
    License Agreement dated April 1, 2006 between FHI and Bill Blass International LLC10.7
    
    License Agreement dated January 24, 2005 between FHI and Oscar De La Renta, Ltd.10.8
    
    Trademark License Agreement dated as of November 27, 2002 between FHI and Tyler Trafficante Inc. (Tyler)10.9
    
    Trademark License Agreement dated as of November 27, 2002 between FHI and Tyler Trafficante Inc.
(Richard Tyler)10.10
    
    Wyatt Loan Agreement dated as of December 31, 2005. NOT EDGARIZED10.11
    
    Loan Agreement dated April 1, 2005 from the The Elevation Fund, LLC10.12
    
    Loan Extension dated July 18, 2005 from The Elevation Fund, LLC(4)10.13
    
    Loan Agreement dated July 21, 2005 from American Microcap Investment Fund 1, LLC(4)10.14
    
    Loan Extension dated January, 2006 from American Microcap Investment Fund 1, LLC(4)10.15
    
    Loan Agreement dated December 13, 2005 from Diaz Management, Inc. (4)10.16
    
    Loan Extension dated February 2006 from Diaz Management, Inc. (4)10.17
    
    Loan Agreement dated February 2006 from Battersea Capital, Inc. (4)10.18
    
    Consignment Agreement dated November 28, 2004 between FHI and Itochu International, Inc.10.19
    
    Trade Finance Agreement dated November 28, 2004 between FHI and Itochu International, Inc.21.1
    
    List of subsidiaries
 32




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31.1
    
    Certification of Chief Executive Officer31.2
    
    Certification of Chief Financial Officer32.1
    
    Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer(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, and
Form 8-K filed with the SEC on August 24, 2005.(3)
    
    Incorporated by reference to Registrants Report on Form 10-KSB for the year ended March 31, 2001.(4)
    
    Incorporated by reference to Registrants Form 8-K filed with the SEC on April 4, 2006.
 33




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SIGNATURES
  The Fashion House Holdings, Inc.By:
    
    /s/ John HannaJohn HannaPresident and Chief Executive Officer
 POWER OF ATTORNEY
 KNOW ALL PERSONS BY THESE PRESENTS
  Signatures
    
    Title
    
    Date/s/ JOHN HANNAJOHN HANNA
    
    President, Chief Executive
Officer and Director
(Principal Executive Officer)
    
    April 13, 2006/s/ Michael McHugh
Michael McHugh
    
    Chief Financial Officer (Principal
Financial and Accounting Officer)
    
    April 13, 2006/s/ CHRISTOPHER THOMAS WYATT

CHRISTOPHER THOMAS WYATT
    
    Director
    
    April 13, 2006/s/ ERIC W. RICHARDSON
ERIC W. RICHARDSON
    
    Director
    
    April 13, 2006/s/ ALAN F. BROIDY
ALAN F. BROIDY
    
    Director
    
    April 13, 2006/s/ JOSEPH J. MCCANN, JR.JOSEPH J. MCCANN, JR.
    
    Director
    
    April 13, 2006
 34




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THE FASHION HOUSE HOLDINGS, INC.
 CONTENTS
 PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    F-2CONSOLIDATED FINANCIAL STATEMENTSConsolidated Balance Sheet
    
    
    F-3Consolidated Statements of Operations
    
    
    F-4Consolidated Statements of Stockholders Deficit
    
    
    F-5Consolidated Statements of Cash Flows
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-8
 F-1




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Report of Independent Registered Public Accounting Firm
 
     /s/ Corbin & Company, LLPCorbin & Company, LLPIrvine, CaliforniaMarch 31, 2006
 F-2




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THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 2005
 ASSETSCurrent assets:Cash
    
    $
    76,680Accounts receivable, net of allowance of $15,353
    
    
    468,017Prepaid expenses
    
    
    168,818Total current assets
    
    
    713,515Property and equipment, net
    
    
    350,350Deposits
    
    
    73,873TOTAL ASSETS
    
    $
    1,137,738LIABILITIES AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable and accrued expenses
    
    $
    550,366Accrued payroll and related
    
    
    292,403Due to factor
    
    
    321,488Accrued interest
    
    
    172,079Convertible note payable, net of discount of $45,833
    
    
    504,167Note payable, net of discount of $66,500
    
    
    58,500Current portion of notes payable to stockholders
    
    
    25,000Total current liabilities
    
    
    1,924,003Long-term liabilities:Notes payable to stockholders, net of current portion
    
    
    981,000Warrant liabilities
    
    
    904,000Total liabilities
    
    
    3,809,003Commitments and contingenciesStockholders deficit:Common stock, no par value;100,000,000 shares authorized;20,003,581 shares issued and outstanding
    
    
    5,601,189Accumulated deficit
    
    
    (8,272,454
    )Total stockholders deficit
    
    
    (2,671,265
    )TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
    
    $
    1,137,738
  F-3




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THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
 Years Ended December 31,2005
    
    
    2004Net sales
    
    $
    1,644,474
    
    
    $
    4,676,528Cost of Sales
    
    
    1,388,320
    
    
    
    2,710,165Gross profit
    
    
    256,154
    
    
    
    1,966,363Operating expenses:Selling, general and administrative
    
    
    3,690,885
    
    
    
    2,140,602Payroll and related
    
    
    1,214,604
    
    
    
    416,570Royalties
    
    
    432,500
    
    
    
    367,014Total operating expenses
    
    
    5,337,989
    
    
    
    2,924,186Loss from operations
    
    
    (5,081,835
    )
    
    
    (957,823
    )Other income (expense):Gain on sale of license
    
    
    
    
    
    
    1,350,000Interest expense, net of interest income
    
    
    (1,688,409
    )
    
    
    (84,406
    )Change in fair value of derivative liabilities
    
    
    (216,000
    )
    
    
    Total other income (expense), net
    
    
    (1,904,409
    )
    
    
    1,265,594(Loss) income before income taxes
    
    
    (6,986,244
    )
    
    
    307,771Income taxes
    
    
    800
    
    
    
    800Net (loss) income
    
    $
    (6,987,044
    )
    
    $
    306,971Basic and diluted net (loss) income per share
    
    $
    (0.43
    )
    
    $
    0.02Weighted average shares
outstanding  basic and diluted
    
    
    16,194,174
    
    
    
    13,185,674
  F-4




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THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
YEARS ENDED DECEMBER 31, 2005 AND 2004
 Common Stock
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Deficit
    
    
    TotalBalance at January 1, 2004
    
    
    12,985,064
    
    
    $
    500,000
    
    
    $
    (1,592,381
    )
    
    $
    (1,092,381
    )Issuance of common stock for services
    
    
    1,129,136
    
    
    
    800
    
    
    
    
    
    
    
    800Net income
    
    
    
    
    
    
    
    
    
    
    306,971
    
    
    
    306,971Balance at December 31, 2004
    
    
    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
    )
  F-5




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##### Table of Contents



THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 AND 2004
 2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
    
    $
    (6,987,044
    )
    
    $
    306,971Adjustments to reconcile net (loss) income to net
cash used in operating activities:Depreciation and amortization
    
    
    55,991
    
    
    
    32,892Allowance for doubtful accounts
    
    
    93,558
    
    
    
    Gain on sale of license
    
    
    
    
    
    
    (1,350,000
    )Amortization of estimated fair value of beneficial
conversion features
    
    
    765,583
    
    
    
    Estimated fair value of stock issued for services
    
    
    1,006,344
    
    
    
    800Amortization of estimated fair value of warrants
    
    
    527,084
    
    
    
    Estimated
fair value of warrants issued as penalties
    
    
    166,000
    
    
    
    Change in fair value of derivative warrant liability
    
    
    216,000
    
    
    
    Change in operating assets and liabilities:Accounts receivable
    
    
    (357,683
    )
    
    
    (203,892
    )Prepaid royalties and expenses
    
    
    (145,654
    )
    
    
    (23,164
    )Deposits
    
    
    (60,521
    )
    
    
    (12,602
    )Accounts payable and accrued expenses
    
    
    341,433
    
    
    
    91,020Accrued payroll and related
    
    
    9,442
    
    
    
    62,808Settlement payable
    
    
    (135,000
    )
    
    
    135,000Accrued interest
    
    
    102,337
    
    
    
    74,296Net cash used in operating activities
    
    
    (4,402,130
    )
    
    
    (885,871
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (258,192
    )
    
    
    (129,446
    )Proceed from sale
of license
    
    
    
    
    
    
    1,350,000Net cash (used in) provided by investing activities
    
    
    (258,192
    )
    
    
    1,220,554CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from notes payable to stockholders
    
    
    625,000
    
    
    
    100,000Repayments of notes payable to stockholders
    
    
    (161,000
    )
    
    
    (243,000
    )Proceeds from issuance of common stock, net of
issuance costs of $520,759
    
    
    2,631,491
    
    
    
    Proceeds from convertible notes payable
    
    
    1,750,000
    
    
    
    Repayments of convertible notes payable
    
    
    (625,000
    )
    
    
    Proceeds from note payable
    
    
    125,000
    
    
    
    Advances from factor
    
    
    1,443,833
    
    
    
    1,124,631Payments to factor
    
    
    (1,224,171
    )
    
    
    (1,155,104
    )Net cash provided by (used in) financing activities
    
    
    4,565,153
    
    
    
    (173,473
    )Net (decrease) increase in cash
    
    
    (95,169
    )
    
    
    161,210Cash, beginning year
    
    
    171,849
    
    
    
    10,639Cash, end of year
    
    $
    76,680
    
    
    $
    171,849
  F-6




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##### Table of Contents



THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 AND 2004
 Supplemental Disclosure of Cashflow Information:
 2005
    
    
    2004Cash paid during the year for interest
    
    $
    37,392
    
    
    $
    10,110Cash paid during the year for income taxes
    
    $
    800
    
    
    $
    800Supplemental Schedule of Noncash Investing and Financing Activities:Issuance of common stock on conversion of debt and accrued
interest
    
    $
    579,554
    
    
    $
    Estimated fair value of beneficial conversion features of certain
convertible notes payable
    
    $
    788,000
    
    
    $
    Estimated fair value of warrants issued in connection with certain
convertible notes payable
    
    $
    522,000
    
    
    $
    Estimated fair value of warrant issued in connection with note
payable
    
    $
    95,000
    
    
    $
    
  F-7




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##### Table of Contents



THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Organization and Nature of Operations
    Principles of Consolidation
  Use of Estimates
  Going Concern
  F-8




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##### Table of Contents



THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
    Risks and Uncertainties
 Credit Risk
     Merchandise Risk
  F-9




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##### Table of Contents



THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
  Inventories
  Property and Equipment
  Long-Lived Assets
 Accounting for the
Impairment or Disposal of Long-Lived Assets,
 Fair Value of Financial Instruments
  Revenue Recognition
 Revenue Recognition
 F-10




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##### Table of Contents



THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 Reporting Revenue Gross as a Principal Versus Net as an Agent,
      Advertising
  F-11




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##### Table of Contents



THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 Income Taxes
 Accounting for Income Taxes
 Earnings Per Share
 Earnings Per Share,
  Years Ended December 31,2005
    
    2004Per
    
    
    
    
    
    
    
    
    
    PerLoss
    
    Shares
    
    Share
    
    Income
    
    Shares
    
    Share(Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    AmountBasic EPS(Loss) income available to
common stockholders
    
    $
    (6,987,044
    )
    
    
    16,194,174
    
    
    $
    (0.43
    )
    
    $
    306,971
    
    
    
    13,185,674
    
    
    $
    0.02Effect of Dilutive SecuritiesNone
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted EPS(Loss) income available to
common stockholders
    
    $
    (6,987,044
    )
    
    
    16,194,174
    
    
    $
    (0.43
    )
    
    $
    306,971
    
    
    
    13,185,674
    
    
    $
    0.02
 F-12




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##### Table of Contents



THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 Stock-Based Compensation
  ), Share-Based Payment Statement of Cash Flows
   Issuance of Stock for Non-cash Consideration
  F-13




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##### Table of Contents



THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 Accounting for
Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services Accounting Recognition for Certain
Transactions Involving Equity Instruments Granted to Other Than Employees.
 Derivative Financial Instruments
 Accounting for Derivative Instruments and Hedging Activities Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Companys Own Stock,
   F-14




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##### Table of Contents



THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
 Beneficial Conversion Feature
 Accounting For Convertible Securities
with Beneficial Conversion Features or Contingently Adjustable Conversion Ratio Application of EITF Issue No. 98-5 To Certain Convertible Instruments,
 Recent Accounting Pronouncements
 Exchanges of Nonmonetary Assets, an amendment of
APB 29, Accounting for Nonmonetary Transactions
 Accounting Changes and Error Corrections Accounting Changes Reporting Accounting Changes in Interim
Financial Statements
 NOTE 2  ACCOUNTS RECEIVABLE FACTORING
   F-15




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##### Table of Contents



THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2  ACCOUNTS RECEIVABLE FACTORING, continued
   Receivables assigned to factor
    
    $
    464,960Advances from factor
    
    
    (321,488
    )Amounts due from factor
    
    
    143,472Unfactored accounts receivable
    
    
    18,410Allowance for returns
    
    
    (15,353
    )$
    146,529
 NOTE 3
 PROPERTY AND EQUIPMENT
  Office and computer equipment
    
    $
    114,044Leasehold improvements
    
    
    177,591Furniture and fixtures
    
    
    157,047448,682Less accumulated depreciation and amortization
    
    
    (98,332
    )$
    350,350
 NOTE 4
 COMMITMENTS AND CONTINGENCIES
 Licensing Agreements
   F-16




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##### Table of Contents



THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 4
 COMMITMENTS AND CONTINGENCIES CONTINUES, continued
    Years ending December 31,2006
    
    $
    593,0002007
    
    
    832,0002008
    
    
    1,007,0002009
    
    
    1,314,0002010
    
    
    940,000Thereafter
    
    
    500,000$
    5,186,000
 Leases
   Total2006
    
    $
    149,0002007
    
    
    154,0002008
    
    
    159,0002009
    
    
    163,0002010
    
    
    168,000Total
    
    $
    793,000
  F-17




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##### Table of Contents



THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 4  COMMITMENTS AND CONTINGENCIES, continued
 Indemnities and Guarantees
  Litigation
  Employment Agreements
  NOTE 5  INCOME TAXES
   2005
    
    
    2004Statutory federal income tax rate
    
    
    34.0
    %
    
    
    34.0
    %State income taxes, net of federal benefit
    
    
    
    
    
    
    0.2Change in valuation allowance
    
    
    (33.9
    )
    
    
    (34.5
    )Other
    
    
    (0.1
    )
    
    
    0.6Total
    
    
    
    
    
    
    0.3
  Net operating loss carryforwards
    
    $
    3,601,000Less valuation allowance
    
    
    (3,601,000
    )$
    
 F-18




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##### Table of Contents



THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 5  INCOME TAXES, continued
  NOTE 6  NOTES PAYABLE TO STOCKHOLDERS
   NOTE 7  NOTES PAYABLE
  F-19




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##### Table of Contents



THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 7  NOTES PAYABLE, continued
    NOTE 8  EQUITY TRANSACTIONS
 Common Stock
  F-20




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##### Table of Contents



THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 8  EQUITY TRANSACTIONS, continued
   Warrants
     F-21




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##### Table of Contents



THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 8  EQUITY TRANSACTIONS, continued
  Weighted AverageNumber
    
    
    Exercise Priceof Warrants
    
    
    Per ShareOutstanding at January 1, 2004
    
    
    19,271
    
    
    $
    10.22Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Expired/Forfeited
    
    
    
    
    
    
    Balance at December 31, 2004
    
    
    19,271
    
    
    
    10.22Granted
    
    
    2,095,338
    
    
    
    0.87Exercised
    
    
    
    
    
    
    Expired/Forfeited
    
    
    (1,720
    )
    
    
    43.60Balance at December 31, 2005
    
    
    2,112,889
    
    
    $
    0.92Weighted average fair value of warrants granted
2005
    
    $
    0.38
  Warrants Outstanding and ExercisableWeightedAverage
    
    WeightedNumber of
    
    Remaining
    
    AverageExercise
    
    Shares
    
    Contractual
    
    ExercisePrice
    
    Outstanding
    
    Life (Years)
    
    Price$0.80
    
    
    1,362,500
    
    
    
    6.8
    
    
    $
    0.80$1.00
    
    
    732,838
    
    
    
    5.4
    
    
    
    1.00$5.45-$8.72
    
    
    17,551
    
    
    
    1.0
    
    
    
    6.982,122,889
    
    
    
    
    
    
    $
    0.92
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##### Table of Contents



THE FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 9  SUBSEQUENT EVENTS
          F-23