United
      States


Securities
      and Exchange Commission


Washington,
      D.C. 20549


**____________________________________**





**FORM
      10-Q**




[X]
      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
      Act
      of 1934





For
      the
      Quarterly Period Ended **September 30, 2006**





OR





[ 
]
      Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
      Act
      of 1934





For
      the
      Transition Period From **________** to **________** .








**Commission
      file number** **0-10593**







**ICONIX
      BRAND GROUP, INC.**


(Exact
      name of registrant as specified in its charter)








Delaware
            11-2481903(State
                or other jurisdiction of  incorporation or
                organization)
            (I.R.S.
                Employer Identification No.)1450
                Broadway, New York, NY
            10018(Address
                of principal executive offices)
            (Zip
                Code)





(212)
      730-0030


(Registrant's
      telephone number, including area code)










(Former
      name, former address and former fiscal year, if changed since last
      report)





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








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




Large
      accelerated filer ___  Accelerated filer
      _X__  Non-accelerated filer ___





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





Indicate
      the number of shares outstanding of each of the issuer's classes of Common
      Stock, as of the latest practicable date.





Common
      Stock, $.001 Par Value - 40,685,005 shares as of November 1, 2006.














**INDEX**





**FORM
      10-Q**





**Iconix
      Brand Group, Inc. and Subsidiaries**








Part
                I.
            Financial
                Information
            Page
                No.Item
                1.
            Financial
                StatementsCondensed
                Consolidated Balance Sheets - September 30, 2006 and December 31,
                2005
            3Condensed
                Consolidated Income Statements - Three and Nine Months Ended September
                30,
                2006 and 2005
            4Condensed
                Consolidated Statement of Stockholders' Equity - Nine Months Ended
                September 30, 2006
            5Condensed
                Consolidated Statements of Cash Flows - Nine Months Ended September
                30,
                2006 and
              2005
            6Notes
                to Condensed Consolidated Financial Statements
            7Item
                2.
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            22Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            28Item
                4.
            Controls
                and Procedures
            28Part
                II.
            Other
                InformationItem
                1.
            Legal
                Proceedings
            29Item
                1A.
            Risk
                Factors
            29Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds.
            29Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            29Item
                6.
            Exhibits
            30Signatures
            
            31









2







Part
      I.
 Financial Information


Item
      1.
      FINANCIAL STATEMENTS





**Iconix
      Brand Group, Inc. and Subsidiaries**


Condensed
      Consolidated Balance Sheets


(in
      thousands, except par value)





September
                30,
            
            
            December
                31,2006
            
            
            2005**Assets**
            
            
            (Unaudited)Current
                Assets:Cash
                and cash equivalents (including restricted cash of $16,055 in 2006
                and
                $4,094 in 2005)
            
            $
            21,255
            
            $
            11,687Marketable
                securities
            
            
            -
            
            
            553Accounts
                receivable, net of reserve of $1,164 in 2006 and $260 in
                2005
            
            
            11,808
            
            
            3,532Due
                from affiliate
            
            
            244
            
            
            193Deferred
                income taxes
            
            
            6,691
            
            
            3,716Prepaid
                advertising and other
            
            
            1,854
            
            
            2,664Total
                Current Assets
            
            
            41,852
            
            
            22,345Property
                and equipment:Furniture,
                fixtures and equipment at cost
            
            
            2,585
            
            
            2,027Less:
                Accumulated depreciation and amortization
            
            
            (1,332
            )
            
            (1,175
            )1,253
            
            
            852Other
                Assets:Restricted
                cash
            
            
            10,575
            
            
            4,982Goodwill
            
            
            42,528
            
            
            32,835Trademarks
                and other intangibles, net
            
            
            267,938
            
            
            139,281Deferred
                financing costs, net
            
            
            3,547
            
            
            3,597Deferred
                income taxes
            
            
            12,597
            
            
            11,978Other
            
            
            3,274
            
            
            1,374340,459
            
            
            194,047Total
                Assets
            
            $
            383,564
            
            $
            217,244**Liabilities
                and Stockholders’ Equity**Current
                liabilities:Accounts
                payable and accrued expenses
            
            $
            5,391
            
            $
            3,360Promissory note payable
            
            
            750
            
            
            -Accounts
                payable, subject to litigation
            
            
            4,886
            
            
            4,886Deferred
                revenue
            
            
            3,152
            
            
            4,782Current
                portion of long-term debt
            
            
            25,549
            
            
            13,705Total
                current liabilities
            
            
            39,728
            
            
            26,733Deferred
                income taxes
            
            
            7,939
            
            
            4,201Long-term
                debt, less current maturities
            
            
            144,882
            
            
            85,414Total
                liabilities
            
            
            192,549
            
            
            116,348Contingencies
                and commitments
            
            
            -
            
            
            -Stockholders’
                Equity:Common
                stock, $.001 par value-shares authorized 75,000;shares
                issued 40,521 and 35,540 respectively
            
            
            41
            
            
            36Additional
                paid-in capital
            
            
            203,153
            
            
            136,842Accumulated
                other comprehensive income
            
            
            155
            
            
            -Retained
                deficit
            
            
            (11,667
            )
            
            (35,315
            )Treasury
                stock - 198 shares at cost
            
            
            (667
            )
            
            (667
            )Total
                stockholders’ equity
            
            
            191,015
            
            
            100,896Total
                Liabilities and Stockholders’ Equity
            
            $
            383,564
            
            $
            217,244





See
      Notes
      to Condensed Consolidated Financial Statements.





3


**Iconix
      Brand Group, Inc. and Subsidiaries**





Condensed
      Consolidated Income Statements - (Unaudited)


(in
      thousands, except earnings per share data)





Three
                Months Ended Sept 30,
            
            Nine
                Months Ended Sept 30,2006
            
            
            2005
            
            
            2006
            
            
            2005Licensing
                and commission revenue
            
            $
            22,113
            
            $
            9,205
            
            $
            53,791
            
            $
            17,792Selling,
                general and administrative expenses (net ofrecovery
                in 2005 pursuant to an agreement. See Note I)
            
            
            6,072
            
            
            3,868
            
            
            17,572
            
            
            9,385Special
                charges
            
            
            632
            
            
            289
            
            
            1,900
            
            
            996Operating
                income
            
            
            15,409
            
            
            5,048
            
            
            34,319
            
            
            7,411Other
                expenses:Interest
                expense
            
            
            3,441
            
            
            1,343
            
            
            8,620
            
            
            2,223Interest
                income
            
            
            (277
            )
            
            (54
            )
            
            (629
            )
            
            (89
            )Interest
                expense - net
            
            
            3,164
            
            
            1,289
            
            
            7,991
            
            
            2,134Income
                before income taxes
            
            
            12,245
            
            
            3,759
            
            
            26,328
            
            
            5,277Income
                taxes (benefits)
            
            
            4,299
            
            
            (1,400
            )
            
            2,680
            
            
            (3,180
            )Net
                income
            
            $
            7,946
            
            $
            5,159
            
            $
            23,648
            
            $
            8,457Earnings
                per share:Basic
            
            $
            0.20
            
            $
            0.16
            
            $
            0.62
            
            $
            0.28Diluted
            
            $
            0.18
            
            $
            0.14
            
            $
            0.54
            
            $
            0.26Weighted
                average number of common shares outstanding:Basic
            
            
            39,782
            
            
            32,501
            
            
            38,075
            
            
            29,859Diluted
            
            
            44,818
            
            
            36,654
            
            
            43,469
            
            
            33,071





See
      Notes
      to Condensed Consolidated Financial Statements.





4





**Iconix
      Brand Group, Inc. and Subsidiaries**





Condensed
      Consolidated Statement of Stockholders’ Equity


(Unaudited)





Nine
      Months Ended September 30, 2006


***(in
      thousands)***




AccumulatedAdditional
            
            
            
            
            
            
            
            
            OtherCommon
                Stock
            
            
            Paid
                - in
            
            
            Retained
            
            
            Treasury
            
            ComprehensiveShares
            
            
            Amount
            
            
            Capital
            
            
            Deficit
            
            
            Stock
            
            
            Income
            
            
            TotalBalance
                at January 1, 2006
            
            
            35,540
            
            $
            36
            
            $
            136,842
            
            $
            (35,315
            )
            $
            (667
            )
            $
            -
            
            $
            100,896Issuance
                of common stock related to acquisition of Mudd®
            
            
            3,269
            
            
            3
            
            
            47,859
            
            
            -
            
            
            -
            
            
            -
            
            
            47,862Issuance
                of common stock related to acquisition of London Fog
            
            
            482
            
            
            1
            
            
            7,106
            
            
            
            
            
            
            
            
            
            
            
            7,107Warrants
                granted to non-employees related to acquisition of Mudd ®
            
            
            -
            
            
            -
            
            
            4,596
            
            
            -
            
            
            -
            
            
            -
            
            
            4,596Exercise
                of stock options andwarrants
            
            
            1,202
            
            
            1
            
            
            4,230
            
            
            -
            
            
            -
            
            
            -
            
            
            4,231Option
                compensation expense
            
            
            -
            
            
            -
            
            
            140
            
            
            -
            
            
            -
            
            
            -
            
            
            140Release
                of valuation allowance from Net Operating Loss (“NOL”) related to options
                exercised previously
            
            
            -
            
            
            -
            
            
            2,380
            
            
            -
            
            
            -
            
            
            -
            
            
            2,380Unrealized
                gain on marketable securities (net of tax)
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            155
            
            
            155Issuance
                of restricted stock to
              employees,
                net of forfeitures
            
            
            28
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            23,648
            
            
            -
            
            
            -
            
            
            23,648Balance
                at September 30, 2006
            
            
            40,521
            
            $
            41
            
            $
            203,153
            
            $
            (11,667
            )
            $
            (667
            )
            $
            155
            
            $
            191,015

















See
      Notes
      to Condensed Consolidated Financial Statements.




5





**Iconix
      Brand Group, Inc. and Subsidiaries**





Condensed
      Consolidated Statements of Cash Flows


(Unaudited)








(000's
                omitted)
            
            Nine
                Months Ended September 30,2006
            
            
            2005Net
                cash provided by operating activities
            
            $
            18,770
            
            $
            5,627Cash
                flows used in investing activities:Purchases
                of fixed assets
            
            
            (558
            )
            
            (26
            )Purchase
                of marketable securities
            
            
            (78
            )
            
            -Acquisition
                of Mudd & London Fog
            
            
            (76,522
            )
            
            -Acquisition
                of Joe Boxer and Rampage
            
            
            -
            
            
            (65,950
            )Purchase
                of trademarks
            
            
            (1,269
            )
            
            (247
            )Net
                cash used in investing activities
            
            
            (78,427
            )
            
            (66,223
            )Cash
                flows (used in) provided by financing activities:Proceeds
                from long-term debt
            
            
            78,000
            
            
            85,489Increase
                in debt to be repaid with restricted-use cash
            
            
            
            
            
            (12,000
            )Repayment
                of loans from related parties
            
            
            -
            
            
            (2,465
            )Proceeds
                from exercise of stock options and warrants
            
            
            4,231
            
            
            1,289Payment
                of long-term debt
            
            
            (6,863
            )
            
            (1,430
            )Deferred
                financing costs
            
            
            (550
            )
            
            (1,968
            )Restricted
                cash - Current
            
            
            (11,961
            )
            
            (1,710
            )Restricted
                cash - Non Current
            
            
            (5,593
            )
            
            -Net
                cash provided by financing activities
            
            
            57,264
            
            
            67,205Net
                (decrease) increase in cash and cash equivalents
            
            
            (2,393
            )
            
            6,609Cash
                and cash equivalents, beginning of period
            
            
            7,593
            
            
            798Cash
                and cash equivalents, end of period
            
            $
            5,200
            
            $
            7,407Balance
                of restricted cash - Current
            
            
            16,055
            
            
            4,094Total
                cash and cash equivalents including current restricted cash, end
                of
                period
            
            $
            21,255
            
            $
            11,687





**Supplemental
      disclosure of cash flow information:**


Nine
                Months Ended September 30,2006
            
            
            2005Cash
                paid during the year:Interest
            
            $
            7,150
            
            $
            1,219Taxes
            
            $
            -
            
            $
            -





**Supplemental
      disclosures of non-cash investing and financing
      activities:**





Nine
                Months Ended September 30,2006
            
            
            2005Acquisitions:Common
                stock issued
            
            $
            54,969
            
            $
            56,386Warrants
                issued - acquisition cost
            
            $
            4,596
            
            $
            -Assumption
                of Kmart Loan
            
            $
            -
            
            $
            10,798Issuance
                of promissory note
            
            $
            750
            
            $
            -





See
      Notes
      to Condensed Consolidated Financial Statements.




6





**Iconix
      Brand Group, Inc. and Subsidiaries**





Notes
      to
      Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2006





NOTE
      A  BASIS OF
      PRESENTATION




The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with generally accepted accounting principles for interim
      financial information and with the instructions to Form 10-Q and Article 10
      of
      Regulation S-X. Accordingly, they do not include all the information and
      footnotes required by generally accepted accounting principles for complete
      financial statements. In the opinion of management, all adjustments (consisting
      primarily of normal recurring accruals) considered necessary for a fair
      presentation have been included. Operating results for the three months
      (“Current Quarter”) and the nine months (“Current Nine Months”) ended September
      30, 2006 are not necessarily indicative of the results that may be expected
      for
      a full fiscal year.





The
      Candie's and Bongo trademarks had previously been amortized on a straight-line
      basis over their estimated useful lives of approximately 20 years. Effective
      July 1, 2005, the Company changed the estimated useful lives of the Candie's
      and
      Bongo trademarks to be an indefinite life. Accordingly, the recorded value
      of
      these trademarks are no longer amortized, but instead are tested for impairment
      on an annual basis. Amortization expenses recorded for Candies and Bongo
      trademarks in the quarter (“Prior Year Quarter”) and the nine months (“Prior
      Year Nine Months”) ended September 30, 2005, prior to this change in estimate,
      were $0 and $593,000, respectively.




Impairment
      losses are recognized for long-lived assets, including certain intangibles,
      used
      in operations when indicators of impairment are present and the undiscounted
      cash flows estimated to be generated by those assets are not sufficient to
      recover the assets' carrying amount. Impairment losses are measured by comparing
      the fair value of the assets to their carrying amount.





Effective
      July 1, 2005, the Company changed its corporate name to Iconix Brand Group,
      Inc.
      and its NASDAQ symbol to ICON.





For
      further information, refer to the consolidated financial statements and
      footnotes thereto included in the Company's annual report on Form 10-K/A for
      the
      year ended December 31, 2005.





NOTE
      B -
      MARKETABLE SECURITIES





Marketable
      securities consist of common stock of Mossimo Inc. (“Mossimo”), acquired by the
      Company. These equity shares will be cancelled upon the closing of the merger
      with Mossimo as previously announced by the Company. These securities are
      carried at fair value, with unrealized gains and losses, net of any tax effect,
      reported in stockholders' equity as accumulated other comprehensive income.
      The
      values of these securities may fluctuate as a result of changes in market price
      of Mossimo's stock. At September 30, 2006, the marketable securities of
      approximately $900,000 are included in other non current assets. See Note
      Q.





NOTE
      C  ACQUISITION OF JOE BOXER





On
      July
      22, 2005, the Company acquired the Joe Boxer brand from Joe Boxer Company,
      LLC
      and its affiliates. Joe Boxer is a leading lifestyle brand of apparel, apparel
      accessories and home goods for men, women, teens and children. The Joe Boxer
      brand is currently licensed exclusively to Kmart in the United States and
      internationally to manufacturers in Canada, Mexico and Scandinavia.


7





The
      aggregate purchase price paid was $88.9 million as detailed in the table below.
      Based on the Company's assessment of the fair value of the assets acquired,
      approximately $79.8 million has been assigned to the Joe Boxer trademark. Under
      the purchase method of accounting, tangible and identifiable intangible assets
      acquired and liabilities assumed are recorded at their estimated fair values.
      The estimated fair values and useful lives of intangible assets acquired have
      been supported by a third party valuation based on a discounted cash flow
      analysis. The Joe Boxer trademark has been determined to have an indefinite
      useful life and accordingly, consistent with FAS 142, no amortization will
      be
      recorded in the Company's consolidated statements of operations. Instead, the
      related intangible asset will be tested for impairment at least annually, using
      discounted cash flow analysis and estimates of future sales proceeds with any
      related impairment charge recorded to the statement of operations at the time
      of
      determining such impairment.





Total
      purchase price was comprised as follows (in thousands except per share
      amounts):




Cash
                paid for acquisition
            
            $
            40,755Fair
                value of 4,350,000 restricted shares of common stock at $8.33 per
                share
            
            
            36,236Value
                of warrants issued as a cost of the acquisition
            
            
            788Total
                equity consideration
            
            $
            37,024Assumption
                of Kmart loan, including $3,509 due within 12 months
            
            
            10,798Accrued
                interest, Kmart loan
            
            
            309Total
                cost of acquisition
            
            $
            88,886





The
      purchase price was allocated to the estimated fair value of the assets acquired
      as follows (in thousands):




Accounts
                receivable
            
            $
            3,121Deferred
                tax asset
            
            
            2,700Licensing
                contracts
            
            
            1,333Joe
                Boxer trademark
            
            
            79,800Goodwill
            
            
            1,932Total
                allocated purchase price
            
            $
            88,886





The
      $1.3
      million of licensing contracts is being amortized on a straight-line basis
      over
      the remaining contractual period of approximately 29 months. The goodwill of
      $1.9 million is not being amortized but instead is subject to a test for
      impairment on at least an annual basis.





As
      part
      of this acquisition, the Company entered into an employment agreement with
      Mr.
      William Sweedler (“Sweedler”) as Executive Vice President of the Company and
      President of the Joe Boxer division. As part of his compensation, on July 22,
      2005, he was granted 1,425,000 stock options of which 225,000 vested
      immediately, and 1,200,000 would vest contingent upon achievement by the Joe
      Boxer division of certain revenues levels. On June 8, 2006, the Company and
      Sweedler entered into an agreement (the “Sweedler Agreement”), which provides
      for the termination of the employment agreement between the Company and Sweedler
      dated July 22, 2005, the resignation of Sweedler as Executive Vice President
      of
      the Company, President of its Joe Boxer Division and a member of the Company's
      Board of Directors, and the termination of the approximately 1,200,000 unvested
      options previously issued to Sweedler in connection with the employment
      agreement. On September 18, 2006, the Company entered into a consulting
      agreement with Sweedler whereby he will perform services for the Company with
      respect to finding, negotiating, financing or otherwise advising the Company
      regarding potential acquisition opportunities (the “Consulting Agreement”).
      Under the Consulting Agreement, the Company will issue to Sweedler ten-year
      warrants, with certain registration rights, to purchase 400,000 shares of the
      Company's common stock at an exercise price of $8.81 per share (the “Sweedler
      Warrants”), vesting at the rate of one-third, one-third, one-third upon the
      closing of each of the first three Qualified Company Acquisitions (as defined
      in
      the Consulting Agreement) and pay him a fee of approximately $333,333 upon
      the
      closing of each of such Qualified Company Acquisitions. The Sweedler Warrants
      will be issued pursuant to an exemption from registration under Section 4(2)
      of
      the Securities Act of 1933 (the “Act”).





The
      Company obtained $40 million in cash to pay a portion of the purchase price
      for
      the Joe Boxer assets through the debt issuance by IP Holdings, LLC ("IPH")
      a
      subsidiary of the Company, of a $63 million Asset-Backed Note.
      Approximately $17.5 million of the proceeds of the Asset-Backed Note were used
      to refinance previously existing Asset-Backed Notes, as described in Note G,
      $40.0 million was paid to the sellers, approximately $1.0 million was used
      to
      pay costs associated with the debt issuance, $310,000 was deposited in a reserve
      account as required by the holder of the Asset-Backed Note, and approximately
      $4.0 million was available to the Company for working capital purposes. Costs
      associated with the debt issuance of approximately $1.0 million have been
      deferred and are being amortized over the 7-year life of the refinanced
      debt.




8





UCC
      Capital Corporation (“UCC”) acted as a financial advisor to IPH in connection
      with the Joe Boxer and the Rampage brand acquisitions. See Note D. On
      June 7, 2005, the Company entered into a financial advisory agreement with
      UCC
      to issue UCC a ten-year warrant ("Warrant") to purchase an aggregate of
      1,000,000 shares of the Company's common stock ("Warrant Shares") at a price
      of
      $5.98 per share, subject to anti-dilution adjustments under certain conditions,
      with one third of the Warrant Shares vesting upon consummation of each
      acquisition, for a total of three acquisitions. On July 22, 2005, 333,334 of
      the
      Warrants Shares vested, with a fair value of $788,000, upon consummation of
      the
      acquisition of Joe Boxer.





Pursuant
      to this financial advisory agreement, UCC acted as the Company's exclusive
      advisor in connection with providing various advisory services relating to
      the
      Company's acquisitions. On June 2, 2006, the Company and UCC agreed to terminate
      the existing exclusive financial advisory agreement and effect a new
      non-exclusive arrangement for advisory services rendered by UCC in connection
      with the Company's previously announced agreement to acquire Mossimo (the
“Mossimo Acquisition”) (the “Non-Exclusive Agreement”). See Note Q.




The
      Non-Exclusive Agreement provides for the Company to pay to UCC, upon the closing
      of the Mossimo Acquisition, a one-time $2.5 million fee (the “UCC Fee”) and to
      issue to its designees ten-year non-transferable warrants to purchase an
      aggregate of 250,000 shares of the Company's common stock, at a price of $15.93
      per share (the “UCC Warrants”) in consideration of the advisory services
      rendered by UCC in connection with the Mossimo Acquisition. The Company may
      defer payment up to $500,000 of the UCC Fee through the issuance of a promissory
      note, which would mature and become payable, together with interest accruing
      at
      the rate of 6% per annum, on October 31, 2006. The UCC Warrants, which were
      issued pursuant to an exemption from registration under Section 4(2) of the
      Act
      on June 2, 2006, contain certain registration rights and will vest upon the
      consummation of the Mossimo Acquisition.





On
      September 19, 2005, the Company filed with the SEC a registration statement
      covering the resale of certain of the shares of common stock issued in
      connection with the acquisition of Joe Boxer and the resale of the Warrant
      Shares. The registration statement was declared effective by the SEC on October
      12, 2005.





NOTE
      D  ACQUISITION OF RAMPAGE





On
      September 16, 2005, the Company acquired the Rampage brand from Rampage
      Licensing, LLC, a California limited liability company.





The
      purchase price for the acquisition was $48.1 million as detailed in the table
      below. Based on the Company's preliminary assessment of the fair value of the
      assets acquired, approximately $41.1 million has been assigned to the Rampage
      trademark. Under the purchase method of accounting, tangible and identifiable
      intangible assets acquired and liabilities assumed are recorded at their
      estimated fair values. The estimated fair values and useful lives of the
      intangible assets acquired have been supported by third party valuation. The
      Rampage trademark has been determined to have an indefinite useful life, and
      accordingly, consistent with FAS 142, no amortization will be recorded in the
      Company's consolidated statements of operations. Instead, the related intangible
      asset will be tested for impairment at least annually, with any related
      impairment charge recorded to the statement of operations at the time of
      determining such impairment.





Total
      purchase price was determined as follows (in thousands except per share
      amounts):




Cash
                paid for acquisition
            
            $
            26,159Fair
                value of 2,171,336 restricted shares of common stock at $9.28 per
                share
            
            
            20,150Value
                of warrants issued as a cost of the acquisition
            
            
            1,653Total
                equity consideration
            
            
            21,803Other
                estimated costs of acquisition
            
            
            150Total
                cost of acquisition
            
            $
            48,112





The
      purchase price was allocated to the estimated fair value of the assets acquired
      as follows (in thousands):





Rampage
                licensing contract
            
            $
            550Rampage
                domain name
            
            
            230Rampage
                non-compete agreement
            
            
            600Rampage
                trademark
            
            
            41,070Goodwill
            
            
            5,662Total
                allocated purchase price
            
            $
            48,112





The
      licensing contracts are to be amortized on a straight-line basis over the
      remaining contractual period of approximately 3 years, the Rampage domain name
      is to be amortized on a straight-line basis over 5 years, and the value of
      the
      non-compete agreement is to be amortized on a straight-line basis over 2 years.
      A net adjustment of $669,000 resulted from the finalization of the purchase
      price allocations was made in prior year to increase the amounts assigned to
      goodwill previously. The goodwill of approximately $5.7 million is subject
      to a
      test for impairment on an annual basis.


9





The
      Company obtained $25.8 million in cash to pay a portion of the purchase price
      of
      the Rampage assets through the debt issuance by IPH of $103 million of
      Asset-Backed Notes. Approximately $63 million of the proceeds of the
      Asset-Backed Notes were used to refinance the previously issued Asset-Backed
      Note described in Note C, $25.8 million was paid to the sellers of the Rampage
      brand, approximately $774,000 was used to pay costs associated with the debt
      issuance, $1.4 million was deposited in a liquidity reserve account, and $12
      million was deposited in an escrow account for the benefit of the holders of
      the
      Asset-Backed Notes, to be used by IPH only for the purchase of additional
      intellectual property assets. The purchase did not occur prior to November
      15,
      2005 so IPH redeemed $12 million principal amount of the Asset-Backed Notes
      in
      November 2005 with no penalty. Costs associated with the debt issuance have
      been
      deferred and are being amortized over the 7-year life of the Asset-Backed
      Notes.





In
      accordance with the agreement with UCC (See Note C), an additional 333,333
      of
      the Warrants Shares vested on September 16, 2005 with a fair value of
      approximately $1.7 million upon consummation of the Rampage acquisition, for
      which UCC acted as a financial advisor to IPH





On
      October 17, 2005, the Company filed with the SEC a registration statement
      covering the resale of the shares of common stock issued in connection with
      the
      acquisition of Rampage. The registration statement was declared effective by
      the
      SEC on October 27, 2005.





NOTE
      E -
      ACQUISITION OF MUDD





In
      April
      2006, the Company acquired certain assets of Mudd (USA) LLC related to the
      Mudd
      brand, including trademarks, intellectual property and related names worldwide,
      excluding China, Hong Kong, Macau and Taiwan. In consideration for the purchase
      of the assets, the Company paid the seller $45 million in cash and issued to
      the
      seller 3,269,231 restricted shares of the Company common stock. In connection
      with this acquisition, IPH entered into a license agreement with Mudd (USA)
      giving Mudd (USA) the exclusive right to use the Mudd trademark in connection
      with the design, manufacture, sale and distribution of women's and children's
      jeanswear and related products in the United States, in return for which Mudd
      (USA) has guaranteed IPH a minimum amount of revenues with respect to the
      royalties due to IPH under its license and royalties due to IPH from all other
      license agreements assumed by IPH with respect to the Mudd brand for a period
      of
      two years. Mudd (USA)'s obligations to IPH under the guarantee and to the
      Company under other agreements are secured by its pledge of a portion of the
      cash and shares issued by the Company as consideration in the acquisition.
      The
      Company agreed to file a registration statement to allow the seller to publicly
      sell the shares issued to it in connection with the acquisition and the seller
      agreed to certain contractual restrictions on the sale of the shares by
      it.





The
      financing for the purchase of the Mudd brand was accomplished through the
      private placement on April 11, 2006 by IPH of approximately $136 million
      principal amount of Asset-Backed Notes. The issuance of the Asset-Backed Notes
      raised $49 million in new financing for IPH (before giving effect to the payment
      of expenses in connection with the issuance of the Asset-Backed Notes and
      required deposits to reserve accounts), and approximately $87 million principal
      amount of the Asset-Backed Notes was exchanged for notes previously issued
      by
      IPH. The Asset-Backed Notes are secured by the intellectual property assets
      owned by IPH, including those related to the Mudd brand.





The
      portion of the Asset-Backed Notes representing new financing were used as
      follows: $45.0 million was paid to the sellers of the Mudd brand, approximately
      $490,000 was used to pay costs associated with the financing, approximately
      $2.45 million was placed in a liquidity reserve account, approximately $785,000
      was used to pay professional fees associated with the acquisition and
      approximately $275,000 of which was available for working capital purposes.
      The
      costs relating to the $49 million in new financing of approximately $490,000
      have been deferred and are being amortized over the 5 year life of the financed
      debt.





Total
      purchase price was determined as follows (in thousands except per share
      amounts):




Cash
                paid for acquisition
            
            $
            45,000Fair
                value of 3,269,231 shares of $.001 par value common stock at $14.64
                fair
                market value per share
            
            
            47,862Value
                of 408,334 warrants ($5.98 exercise price for 333,334 and $8.58 exercise
                price for 75,000) issued as a cost of the acquisition
            
            
            4,596Total
                equity consideration
            
            
            52,458Other
                estimated costs of acquisition, including $990 to be paid after
                closing
            
            
            1,775Total
                cost of acquisition
            
            $
            99,233





The
      purchase price was allocated to the estimated fair value of the assets acquired
      as follows (in thousands):


10





Mudd
                Trademarks
            
            $
            87,100Mudd
                domain name
            
            
            340Mudd
                license agreements
            
            
            700Mudd
                non-compete agreement
            
            
            1,400Goodwill
            
            
            9,693Total
                allocated purchase price
            
            $
            99,233





The
      licensing contracts are being amortized on a straight-line basis over the
      remaining contractual period of approximately 2 years, the Mudd domain name
      is
      being amortized on a straight-line basis over 5 years, and the value of the
      non-compete agreement is being amortized on a straight-line basis over 4 years.
      The goodwill of approximately $9.7 million is subject to a test for impairment
      on an annual basis. Any adjustments resulting from the finalization of the
      purchase price allocations will affect the amounts assigned to
      goodwill.





In
      accordance with the agreement with UCC (See Note C), an additional 408,334
      of
      the Warrants Shares vested on April 11, 2006 with a fair value of $4.6 million
      upon consummation of the Mudd acquisition, for which UCC acted as a financial
      advisor to IPH.





The
      following unaudited pro-forma information presents a summary of the Company's
      consolidated results of operations as if the Joe Boxer, Rampage, and
      Mudd acquisitions and their related financing had occurred on January
      1, 2005. These pro forma results have been prepared for comparative purposes
      only and do not purport to be indicative of the results of operations which
      actually would have resulted had the acquisition occurred on January 1, 2005,
      or
      which may result in the future.




Three
                Months Ended September 30,
            Nine
                Months Ended September 30,2006
            
            
            2005*
            
            
            2006
            
            
            2005(000's
                omitted, except per share)Licensing
                revenues
            
            $
            22,113
            
            $
            13,917
            
            $
            58,398
            
            $
            45,891Operating
                income
            
            $
            15,409
            
            $
            8,844
            
            $
            35,602
            
            $
            26,839Net
                Income
            
            $
            7,946
            
            $
            6,921
            
            $
            23,752
            
            $
            17,507Basic
                earnings per common share
            
            $
            0.20
            
            $
            0.19
            
            $
            0.60
            
            $
            0.44Diluted
                earnings per common share
            
            $
            0.18
            
            $
            0.19
            
            $
            0.53
            
            $
            0.41





*
      The
      financial results related to Joe Boxer and Rampage for the three months ended
      September 30, 2005 was not available and therefore was not included in the
      pro
      forma information for the three months ended September 30, 2005.




NOTE
      F -
      PURCHASE OF LONDON FOG TRADEMARKS





On
      August
      28, 2006, the Company completed the purchase of the London Fog trademarks and
      certain related intellectual property assets from London Fog Group Inc. In
      consideration for the purchase of these assets, the Company paid the seller
      $30.5 million in cash and issued to the seller 482,423 shares of the Company
      common stock.





The
      financing for this acquisition was accomplished through the private placement
      on
      August 28, 2006 by IPH of its Asset-Backed Notes, secured by the intellectual
      property assets owned by IPH (including the London Fog trademarks), together
      with approximately $3.1 million of the Company’s cash. The issuance of the
      Asset-Backed Notes raised $29 million in new financing for IPH (before giving
      effect to the payment of expenses related to their issuance and required
      deposits to reserve accounts), and approximately $130.9 million principal amount
      of the Asset-Backed Notes were exchanged for all of the outstanding Asset-Backed
      Notes previously issued by IPH. The $29 million principal amount of Asset-Backed
      Notes representing the new financing portion of the private placement were
      used
      as follows: $27.5 million was paid to the seller of the London Fog trademarks,
      approximately $52,500 was used to pay professional fees associated with the
      trademark purchased, and $1.35 million was deposited in a liquidity reserve
      account as required by the holder of the Asset-Backed Notes. The costs relating
      to the $29 million in new financing of approximately $60,000 have been deferred
      and are being amortized over the 5 year life of the financed debt.





Total
      purchase price was determined as follows (in thousands except per share
      amounts):




Cash
                paid for acquisition
            
            $
            30,500Fair
                value of 482,423 shares of $.001 par value common stock at $14.73
                fair
                market value per share
            
            
            7,106Total
                equity consideration
            
            
            37,606Other
                estimated costs of acquisition
            
            
            480Total
                cost of acquisition
            
            $
            38,086





The
      total
      cost of this asset purchase was accounted for as the London Fog trademark.





11





NOTE
      G  FINANCING AGREEMENTS




*Asset-Backed
      Notes*





In
      August
      2002, IPH, a subsidiary of the Company, issued in a private placement $20
      million of Asset-Backed Notes secured by intellectual property assets (trade
      names, trademarks, license agreements and payments and proceeds with respect
      thereto) of IPH (such notes and all other notes issued by IPH, the “Asset-Backed
      Notes”). The Asset-Backed Notes had a 7-year term with a fixed interest rate of
      7.93% with quarterly principal and interest payments of approximately $859,000.
      After funding a liquidity reserve account in the amount of $2.9 million, the
      net
      proceeds of the Asset-Backed Notes ($16.2 million) were used by the Company
      to
      reduce amounts due by the Company under its then-existing revolving credit
      facilities. In April 2004, IPH issued an additional $3.6 million in subordinated
      Asset-Backed Notes secured by its intellectual property assets. The additional
      borrowing had a maturity date of August 2009, with a floating interest rate
      of
      LIBOR + 4.45% and quarterly principal and interest payments and $500,000 of
      interest prepaid at closing. The net proceeds of $2.9 million were used for
      general working capital purposes. As of July 22, 2005, the total principal
      on
      these notes was approximately $17.5 million, which were refinanced in connection
      with the Joe Boxer acquisition described below.





In
      the
      fiscal quarter ended September 30, 2005, the Company, through IPH, acquired
      the
      Joe Boxer brand from Joe Boxer Company, LLC and its affiliates, and the Rampage
      brand from Rampage Licensing, LLC. See Notes C and D. The financing for the
      acquisitions was accomplished through two private placements by IPH of
      Asset-Backed Notes, secured by the intellectual property assets owned by IPH.
      The combined proceeds of the Asset-Backed Notes, totaling $103 million, were
      used as follows: approximately $17.5 million was used to refinance previously
      issued Asset-Backed Notes, $40.0 million was paid to the sellers of the Joe
      Boxer brand, approximately $25.8 million was paid to the sellers of the Rampage
      brand, $1.7 million was placed in a liquidity reserve account as required by
      the
      holder of the Asset-Backed Notes, approximately $1.8 million was used to pay
      costs associated with the debt issuance, approximately $200,000 was paid to
      legal professionals associated with the acquisitions, approximately $4.0 million
      was available for working capital purposes, and $12 million was deposited in
      an
      escrow account for the benefit of the holder of the Asset-Backed Notes, to
      be
      used by IPH solely for the purchase of certain intellectual property assets.
      IPH
      redeemed $12 million of the Asset-Backed Notes without penalty as the purchase
      of these intellectual property assets did not occur. Costs associated with
      the
      debt issuances of approximately $1.8 million have been deferred and are being
      amortized using the interest method over the 7 year life of the Asset-Backed
      Notes.


In
          April
          2006, the Company, through IPH, acquired certain assets of Mudd (USA) LLC
          (“Mudd
          (USA)”) related to the Mudd brand, including trademarks, intellectual property
          and related names worldwide, excluding China, Hong Kong, Macau and Taiwan.
          The
          financing for the acquisition was accomplished through the private placement
          on
          April 11, 2006 by IPH of approximately $136 million principal amount of
          Asset-Backed Notes. The issuance of the Asset-Backed Notes raised $49 million
          in
          new financing for IPH (before giving effect to the payment of expenses
          in
          connection with the issuance of the Asset-Backed Notes and required deposits
          to
          reserve funds), and approximately $87 million principal amount of the
          Asset-Backed Notes was exchanged for Asset Backed Notes previously issued
          by
          IPH. The Asset-Backed Notes are secured by the acquired assets, as well
          as by
          other intellectual property assets owned by IPH. The payment of the principal
          and interest on the Asset-Backed Notes has been made from amounts received
          by
          IPH under license agreements with various licensees of the acquired assets
          and
          IPH's other intellectual property assets.
 The
          portion of the Asset-Backed Notes representing new financing were used
          as
          follows: $45.0 million was paid to the sellers of the Mudd brand, approximately
          $490,000 was used to pay costs associated with the financing, approximately
          $2.45 million was placed in a liquidity reserve account, approximately
          $785,000
          was used to pay professional fees associated with the acquisition and
          approximately $275,000 of which was available for working capital purposes.
          The
          costs relating to the $49 million in new financing of approximately $490,000
          have been deferred and are being amortized over the 5 year life of the
          financed
          debt.
  
 12





On
      August
      28, 2006, the Company completed the acquisition of the London Fog trademarks
      and
      certain related intellectual property assets from London Fog Group Inc. The
      financing for this acquisition was accomplished through the private placement
      on
      August 28, 2006 by IPH of its Asset-Backed Notes, secured by the intellectual
      property assets owned by IPH (including the acquired assets), together with
      approximately $3.1 million of the Company's funds. The issuance of the
      Asset-Backed Notes raised $29 million in new financing for IPH (before giving
      effect to the payment of expenses related to their issuance and required
      deposits to reserve accounts), and approximately $130.9 million principal amount
      of the Asset-Backed Notes were exchanged for all of the outstanding Asset-Backed
      Notes previously issued by IPH. The $29 million principal amount of Asset-Backed
      Notes representing the new financing portion of the private placement were
      used
      as follows: $27.5 million was paid to the seller of the London Fog assets,
      approximately $112,500 was used to pay costs associated with the issuance of
      such notes and $1.35 million was deposited in a liquidity reserve account as
      required by the holder of the Asset-Backed Notes.





Subject
      to terms of the Asset-Backed Notes, if by April 1, 2006, IPH had not entered
      into or renewed certain licensing agreement(s) with respect to the Joe Boxer
      brand that guaranteed certain royalty thresholds, IPH was required to deposit,
      from revenues generated from the Joe Boxer brand, to a renewal reserve account
      $3.75 million for each quarter beginning in April 2006. IPH made two deposits
      of
      $3.75 million in April 2006, and July 2006. On September 28, 2006, IPH entered
      into a new agreement with Kmart, which among other things, extended the term
      of
      Kmart's license with the Company. This agreement satisfied the criteria
      specified in the terms of the Asset-Backed Notes, and as such, the Company
      is
      not required to make any additional deposits to the renewal reserve. On October
      24, 2006, the $7.5 million, which is included in current restricted cash as
      of
      September 30, 2006, was returned to the Company, and is no longer
      restricted.





Cash
      on
      hand in the bank account of IPH is restricted at any point in time up to the
      amount of the next debt principal and interest payment required under the
      Asset-Backed Notes. Accordingly, $16.1 million and $4.1 million as of September
      30, 2006 and December 31, 2005, respectively, have been disclosed as restricted
      cash within the Company's current assets. Further, in connection with IPH's
      issuance of Asset Backed Notes, a reserve account has been established and
      the
      funds on deposit in such account will be applied to the last principal payment
      with respect to the Asset Backed Notes. Accordingly, $10.6 million and $5.0
      million as of September 30, 2006 and December 31, 2005, respectively, have
      been
      disclosed as restricted cash within the Company's other assets.





Interest
      rates and terms on the outstanding principal amount of the Asset-Backed Notes
      as
      of September 30, 2006 are as follows: $56.7 million principal amount bears
      interest at a fixed interest rate of 8.45% with a 6-year term, $25.2 million
      principal amount bears interest at a fixed rate of 8.12% with a 6- year term,
      and $78 million principal amount bears interest at a fixed rate of 8.99% with
      a
      6 1⁄2 year term There are no principal payments required with respect to $49
      million in new financing in the first year.





Neither
      the Company nor any of its subsidiaries (other than IPH) is obligated to make
      any payment with respect to the Asset-Backed Notes, and the assets of the
      Company and its subsidiaries (other than IPH) are not available to IPH's
      creditors. The assets of IPH are not available to the creditors of the Company
      or its subsidiaries (other than IPH).





*The
      Kmart Note*





In
      connection with the acquisition of Joe Boxer in July, 2005, the Company assumed
      a promissory note, dated August 13, 2001 in the amount of $10.8 million that
      originated with the execution of the exclusive license with Kmart Stores, Inc.
      by the former owners of Joe Boxer (the “Kmart Note”).   The Kmart Note
      provides for interest at 5.12% and is payable in three (3) equal annual
      installments, on a self-liquidating basis, on the last day of each year
      commencing on December 31, 2005 and continuing through December 31, 2007. 
Payments due under the Kmart Note may be off-set against any royalties owed
      under the Kmart License.  As of September 30, 2006, the outstanding balance
      of the note was $7.4 million. The Kmart Note may be pre-paid without
      penalty.




The
      following is a summary of debt maturities for the periods indicated that existed
      as of September 30, 2006 (amounts in thousands):


13





Debt
                Maturities
            
            
            Total
            
            
            2006
            
            
            2007
                -2008
            
            
            2009-2010
            
            
            After
                2010Kmart
                Note
            
            $
            7,377
            
            $
            3,596
            
            $
            3,781
            
            $
            -
            
            $
            -Sweet
                Note (See Notes H and I)
            
            
            3,112
            
            
            -
            
            
            -
            
            
            -
            
            
            3,112Asset-backed
                Notes
            
            
            159,942
            
            
            21,953
            
            
            41,736
            
            
            49,525
            
            
            46,728Total
                Debt Maturities
            
            $
            170,431
            
            $
            25,549
            
            $
            45,517
            
            $
            49,525
            
            $
            49,840





NOTE
      H  COMMITMENTS AND CONTINGENCIES





***Sweet
      Sportswear/Unzipped litigation***





On
      August
      5, 2004, the Company, along with its subsidiaries, Unzipped Apparel LLC
      (“Unzipped”), Michael Caruso & Co. Inc. and IPH (collectively referred to as
      the “plaintiffs”), commenced a lawsuit in the Superior Court of California, Los
      Angeles County, against Unzipped's former manager, former supplier and former
      distributor, Sweet Sportswear LLC (“Sweet”), Azteca Production International,
      Inc. (“Azteca”), and Apparel Distribution Services, LLC (“ADS”), respectively,
      and a principal of these entities and former member of the Company's board
      of
      directors, Hubert Guez (collectively referred to as the “defendants”).
      Plaintiffs amended their complaint on November 22, 2004. In the amended
      complaint, plaintiffs alleged that defendants fraudulently induced them to
      purchase Sweet's 50% interest in Unzipped for an inflated price, that Sweet
      and
      Azteca committed material breaches of the Unzipped management agreement and
      supply and distribution agreements, described below, and that Mr. Guez
      materially breached his fiduciary obligations to the Company while a member
      of
      its Board of Directors. Also, plaintiffs alleged that defendants have imported,
      distributed and sold goods bearing the Company's Bongo trademarks in violation
      of federal and California law. Plaintiffs sought damages in excess of $50
      million. Defendants filed a motion to dismiss certain of the claims asserted
      in
      the amended complaint, which was denied by the Court in its entirety on February
      7, 2005.


By
          order
          dated June 8, 2006, the Court entered summary judgment in defendants' favor
          with
          respect to plaintiffs' fraud claims asserted within plaintiffs' amended
          complaint.  However, by order dated July 19, 2006, the Court granted
          plaintiffs' request to assert new fraud claims via a second amended
          complaint.  Plaintiffs' second amended complaint also incorporates the
          non-fraud claims asserted within plaintiffs' amended complaint, and seeks
          damages in excess of $50 million.
  On
          March
          10, 2005, Sweet, Azteca and ADS (collectively referred to as the
“cross-complainants”), filed an answer to plaintiffs' amended complaint and a
          cross-complaint against plaintiffs and the Company's chief executive officer,
          Neil Cole (collectively referred to as the “cross-defendants”), seeking
          compensatory, punitive and exemplary damages and litigation costs, as well
          as
          the establishment of a constructive trust for their benefit. The
          cross-complainants alleged that some or all of the cross-defendants breached
          the
          Unzipped management agreement and supply and distribution agreements; that
          IPH
          and Mr. Cole interfered with Sweet's performance under the Unzipped management
          agreement; and that the Company, Caruso and Mr. Cole interfered with
          cross-complainants' relationships with Unzipped and caused Unzipped to
          breach
          its agreements with Azteca and ADS. Cross-complainants also alleged that
          some or
          all of the Company, Caruso and Mr. Cole fraudulently induced Sweet to sell
          its
          50% interest in Unzipped to the Company for a deflated price and accept
          the 8%
          senior subordinated note in the principal amount of $11 million that the
          Company
          issued to Sweet in connection therewith.
 
 14




The
      Company had previously entered into a management agreement with Sweet wherein
      Sweet guaranteed that the net income of Unzipped, as defined, would be no less
      than $1.7 million for each year during the term. In the event that this
      guaranteed amount of net income was not met, Sweet was obligated to pay the
      difference between the actual net income, as defined, and such guaranteed
      amount, referred to as the shortfall payment. The cross-complaint alleged that
      the Company breached its obligations to Sweet arising under the Company's 8%
      note to Sweet by, among other things, understating Unzipped's earnings for
      the
      fiscal year ended January 31, 2004 and the first three quarters of the fiscal
      year ended January 31, 2005 for the purpose of causing Unzipped to fall short
      of
      the guaranteed net income amount for these periods, and improperly offsetting
      the shortfall payment against the note. Lastly, the cross-complaint alleged
      that
      the understatements in Unzipped's earnings and offsets against the 8% note
      were
      incorporated into the Company's public filings for the periods identified above,
      causing it to overstate materially its earnings and understate its liabilities
      for such period with the effect of improperly inflating the public trading
      price
      of the Company's common stock.




Cross-defendants
      filed a motion to dismiss certain of the claims asserted in the cross-complaint,
      and, on June 28, 2005, the Court granted cross-defendants' motion in part.
      On
      July 22, 2005, cross-complainants amended their cross-complaint, omitting their
      previously asserted claim that some or all of the Company, Caruso and Mr. Cole
      fraudulently induced Sweet to sell its 50% interest in Unzipped for a deflated
      price and accept the 8% note. Although the amended cross-complaint no longer
      sought relief for this purported fraud, the substance of the allegations
      remained largely unchanged and cross-complainants' alleged that they were
      entitled to equivalent relief because cross-defendants' actions instead
      constituted a breach of fiduciary duty.




Cross-defendants
      filed a motion to dismiss certain of the claims asserted in the amended
      cross-complaint, and, on October 25, 2005, the Court granted cross-defendants'
      motion in part, dismissing all claims asserted against Mr. Cole along with
      the
      cross-complainants' sole remaining fraud claim. On March 24, 2006,
      cross-defendants filed a motion seeking the dismissal of cross-complainants'
      claim for breach of fiduciary duty, and on June 21, 2006, the Court dismissed
      this claim.





The
      remaining cross-defendants deny cross-complainants' allegations and intend
      to
      vigorously defend against the amended cross-complaint.





***Sweet/Cole
      litigation***





On
      May
      11, 2006, Sweet commenced a related lawsuit in the Superior Court of California,
      Los Angeles County, against Mr. Cole and the Company's independent registered
      public accountants. In this lawsuit, Sweet alleged that Mr. Cole and the
      Company's accountants induced the breach of and/or interfered with the Unzipped
      management agreement, the Company's 8% note to Sweet and an engagement agreement
      entered into between Sweet, on behalf of Unzipped, and the Company's accountants
      whereby they agreed to audit Unzipped's financial performance for the year
      ended
      January 31, 2004. Sweet alleged that Mr. Cole and the accountants agreed to
      inaccurately certify the value of Unzipped's inventory and thereby improperly
      enabled the Company to avoid payments required under the 8% note. P redicated
      upon a motion to dismiss filed by Mr. Cole, on October 24, 2006, Mr.
      Cole was dismissed from this lawsuit.


***Bader/Unzipped
          litigation***
  On
          November 5, 2004, Unzipped commenced a lawsuit in the Supreme Court of
          New York,
          New York County, against Unzipped's former president of sales, Gary Bader,
          alleging that Mr. Bader breached certain fiduciary duties owed to Unzipped
          as
          its president of sales, unfairly competed with Unzipped and tortuously
          interfered with Unzipped's contractual relationships with its employees.
          On
          October 5, 2005, Unzipped amended its complaint to assert identical claims
          against Bader's company, Sportswear Mercenaries, Ltd. On October 14, 2005,
          Bader
          and Sportswear Mercenaries filed an answer containing counterclaims to
          Unzipped's amended complaint, and a third-party complaint against the Company
          and Mr. Cole, seeking unspecified damages in excess of $4 million. On December
          2, 2005, The Company, together with Unzipped and Mr. Cole, filed motions
          seeking
          the dismissal of the majority of the claims asserted against them by Bader
          and
          Sportswear Mercenaries. By order dated June 9, 2006, the Court granted
          these
          motions in their entirety, thereby dismissing the Company and Mr. Cole
          from this
          litigation. Unzipped denies the one remaining claim asserted against it,
          a claim
          that it failed to pay Bader and Sportswear Mercenaries $72,000 in commissions
          and bonuses, and intends to vigorously defend against such
          claim.
 
 15





***Redwood
      Shoe litigation***





In
      January 2002, Redwood Shoe Corporation, one of the Company's former buying
      agents of footwear, filed a complaint in the U.S. District Court for the
      Southern District of New York, alleging that the Company breached various
      contractual obligations to Redwood and seeking to recover damages in excess
      of
      $20 million plus its litigation costs. The Company filed a motion to dismiss
      certain counts of the complaint based upon Redwood's failure to state a claim,
      in response to which Redwood has filed an amended complaint. The Company also
      moved to dismiss certain parts of the amended complaint. The magistrate assigned
      to the matter granted, in part, the Company's motion to dismiss. By Order dated
      November 28, 2005, the District Court adopted the Magistrate's ruling in its
      entirety dismissing approximately $20 million of Redwood's asserted claims.
      On
      December 14, 2005, the Company filed an answer asserting 13 counterclaims
      against Redwood and Redwood's affiliate, Mark Tucker, Inc., or MTI. On the
      same
      date, the Company filed a motion to have MTI joined with Redwood as a defendant
      in the action, and that motion was granted by the District Court. MTI filed
      a
      motion seeking to have all of the counterclaims asserted against it dismissed.
      Redwood has filed a motion seeking the dismissal of certain of these
      counterclaims. These motions are pending before the District Court.




The
      Company intends to vigorously defend the lawsuit, and to vigorously prosecute
      the claims it has asserted against Redwood and MTI. At September 30, 2006 and
      December 31, 2005, the payable to Redwood totaled approximately $1.8 million
      which is subject to any claims, offsets or other deductions the Company may
      assert against Redwood, and was reflected in the Company's consolidated
      financial statements under “Accounts payable, subject to
      litigation.”





***The
      Bongo Apparel, Inc. Litigation***





On or about June 12, 2006, one of the Company's licensees, Bongo Apparel, Inc.,
      or BAI, filed suit in the Supreme Court of the State of New York, County of
      New
      York, against the Company and its subsidiary, IPH.  In its
      amended complaint, BAI alleges that the Company and IPH engaged in
      conduct that damaged the Bongo apparel brand and/or BAI’s relationships with its
      customers.  BAI asserts various claims of breach of contract, breach of the
      covenant of good faith and fair dealing, fraudulent inducement, unfair
      competition, and violation of New York's General Business Law.  It seeks
      damages of at least $25 million, recovery of its litigation costs, and a
      declaratory judgment that the Company breached a license agreement
      between the parties, that BAI is not in breach of that agreement, and that
      BAI
      properly terminated that agreement.  The Company believes that,
      in addition to other defenses and counterclaims that it intends to assert,
      the claims in the lawsuit are the subject of a release and settlement agreement
      that was entered into by the parties in August 2005, and on or about August
      17,
      2006, the Company and IPH filed a motion to dismiss the amended
      complaint based on the release, among other reasons.  That motion is
      currently pending before the Court.  The Company has
      transitioned the Bongo jeans wear license to a new licensee.





***The
      Litigation Against Bongo Apparel, Inc. and TKO Apparel,
      Inc.***





Additionally, on or about October 6, 2006, the Company and its subsidiary,
      IPH,
      filed suit in the United States District Court for the Southern District of
      New
      York against BAI and its guarantor, TKO Apparel, Inc.  This suit asserts
      various contract, tort and trademark claims that it asserts arise as a result
      of
      the failures of BAI with regard to the Bongo men's jeans wear business and
      its
      wrongful conduct with regard to the Bongo women's jeans wear business following
      its entry into the aforementioned release and settlement agreement in
      August 2005.  Additionally, it concerns TKO Apparel, Inc.'s refusal
      to guarantee BAI’s payment and performance in accordance with its
      guarantee. The Company and IPH are seeking monetary damages in an amount to
      be
      determined at trial and a permanent injuction with respect to the use of the
      Bongo trademark.





***Other***





From
      time
      to time, the Company is also made a party to litigation incurred in the normal
      course of business. While any litigation has an element of uncertainty, the
      Company believes that the final outcome of any of these routine matters will
      not
      have a material effect on its financial position or future liquidity. Except
      as
      set forth herein, the Company knows of no material legal proceedings, pending
      or
      threatened, or judgments entered, against any of its directors or officers
      in
      their capacity as such.





16





NOTE
      I  UNZIPPED
      APPAREL, LLC





**Equity
      Investment:**





On
      October 7, 1998, the Company formed Unzipped with joint venture partner Sweet,
      the purpose of which was to market and distribute apparel under the BONGO label.
      The Company and Sweet each had a 50% interest in Unzipped. Pursuant to the
      terms
      of the joint venture, the Company licensed the BONGO trademark to Unzipped
      for
      use in the design, manufacture and sale of certain designated apparel
      products.





**Acquisition:**





On
      April
      23, 2002, the Company acquired the remaining 50% interest in Unzipped from
      Sweet
      for a purchase price of three million shares of the Company's common stock
      and
      $11 million in debt evidenced by the Sweet Note. In connection with the
      acquisition of Unzipped, the Company filed a registration statement with the
      SEC
      for the three million shares of the Company's common stock issued to Sweet,
      which was declared effective by the SEC on July 29, 2003.





**Related
      Party Transactions:**





Prior
      to
      August 5, 2004, Unzipped was managed by Sweet pursuant to the Management
      Agreement, pursuant to which Sweet was obligated to manage the operations of
      Unzipped in return for, commencing in the fiscal year ended January 31, 2004
      (“Fiscal 2004”), a management fee based upon certain specified percentages of
      net income that Unzipped would achieve during the three-year term. In addition,
      Sweet entered into a Guarantee that the net income, as defined, of Unzipped
      commencing in Fiscal 2004 would be no less than $1.7 million for each year
      during the term. In the event that the Guarantee was not met, under the
      Management Agreement, Sweet was obligated to pay to the Company the difference
      between the actual net income of Unzipped, as defined, and the Guarantee. The
      Shortfall Payment could be offset against the amounts due under the Sweet Note
      at the option of either Sweet or the Company.





Unzipped's
      operation has been discontinued since January 31, 2005. For the Current Nine
      Months, Unzipped had no operations, as compared to a net loss (as defined for
      the purpose of determining if the Guarantee had been met) of $296,000 in the
      quarter ended March 31, 2005. Consequently for the Current Nine Months there
      was
      no Shortfall Payment, as compared to a Shortfall Payment of $438,000 in the
      Prior Year Nine Months. The adjusted Shortfall Payment had been recorded in
      the
      consolidated income statements as a reduction of Unzipped's SG&A and on the
      balance sheet as a reduction of the Sweet Note based upon the right to offset
      in
      the Management Agreement. After adjusting for the Shortfall Payment in Prior
      Year Nine Months, Unzipped reported a net loss of $37,500 on sales of $448,000.
      Due to the immaterial nature of the related amounts, the net loss of $37,500
      from Unzipped was included in the selling, general and administrative expense
      in
      the Company's Condensed Consolidated Income Statements for the Prior Year Nine
      Months.





On
      August
      5, 2004, Unzipped terminated the Management Agreement with Sweet, the supply
      agreement with Azteca and the distribution agreement with ADS and commenced
      a
      lawsuit against Sweet, Azteca, ADS and Mr. Guez. See Note H.





At
      September 30, 2006, the Company included in “accounts payable, subject to
      litigation” amounts due to Azteca and ADS of $847,000 and $2.3 million
      respectively, the same as reported as of December 31, 2005. See Note
      H.





In
      a
      separate transaction concerning Unzipped with BAI, BAI is the licensee of the
      BONGO jeans wear business formerly managed by Sweet. Prior to August 26, 2005,
      BAI managed the operations of Unzipped following the termination of Sweet as
      the
      manager on August 5, 2004. In connection with BAI's license and this transition,
      the designees of TKO Apparel (an affiliate of BAI) purchased one million shares
      of the common stock of the Company at a price of $2.20 per share. In a separate
      transaction, TKO Apparel agreed to lend Unzipped $2.5 million, which the Company
      repaid in 2005. See Note H.





NOTE
      J  INCOME
      TAXES




The
      Company accounts for income taxes in accordance with Statement of Financial
      Accounting Standards No. 109, (“SFAS 109”) “Accounting for Income Taxes.” Under
      SFAS No. 109, deferred tax assets and liabilities are determined based on
      differences between the financial reporting and tax basis of assets and
      liabilities and are measured using the enacted tax rates and laws that will
      be
      in effect when the differences are expected to reverse. A valuation allowance
      is
      established when necessary to reduce deferred tax assets to the amount expected
      to be realized. In determining the need for a valuation allowance, management
      reviews both positive and negative evidence pursuant to the requirements of
      SFAS
      No. 109, including current and historical results of operations, the annual
      limitation on utilization of net operating loss carry forwards pursuant to
      Internal Revenue Code section 382, future income projections and the overall
      prospects of the Company's business. Based upon management's assessment of
      all
      available evidence, including the Company's completed transition into a
      licensing business, estimates of future profitability based on projected royalty
      revenues from its licensees, and the overall prospects of the Company's
      business, management is of the opinion that the Company will be able to utilize
      the deferred tax assets in the foreseeable future, and as such do not anticipate
      requiring a further valuation allowance. Based on current estimates of pre-tax
      income for the year ending December 31, 2006, the management anticipates a
      net
      income tax expense for this year.




17
 
  NOTE
          K  EARNINGS
          PER SHARE
 
 Basic
          earnings per share includes no dilution and is computed by dividing earnings
          attributable to common shareholders by the weighted average number of common
          shares outstanding for the period. Diluted earnings per share reflects,
          in
          periods in which they have a dilutive effect, the effect of common shares
          issuable upon exercise of stock options and warrants. As a result of the
          Company's decision to accelerate the vesting of options granted as of December
          31, 2005, all options except certain options based on performance became
          exercisable immediately and were included in the calculation of dilution.
          At
          September 30, 2006, 7.8 million options/warrants were
          outstanding.


The
      following is a reconciliation of the shares used in calculating basic and
      diluted earnings per share:





Three
                months ended Sep 30,
            
            
            Nine
                months ended Sep 30,2006
            
            
            2005
            
            
            2006
            
            
            2005Basic
            
            
            39,782
            
            
            32,501
            
            
            38,075
            
            
            29,859Effect
                of assumed conversions of stock options and warrants
            
            
            5,036
            
            
            4,153
            
            
            5,394
            
            
            3,212Diluted
            
            
            44,818
            
            
            36,654
            
            
            43,469
            
            
            33,071





NOTE
      L **** STOCK
      OPTIONS/WARRANTS





Under
      the
      Company's various stock options plans, options to purchase common stock of
      the
      Company may be granted to any person, including, but not limited to, employees,
      directors, independent agents, consultants, attorneys and advisors of the
      Company by the Board of Directors or by the Company's Governance Committee.
      The
      term of options/warrants range from five to ten years with a vesting period
      up
      to five years. The exercise price for options/warrants is the trading price
      of
      the common shares of the Company on the NASDAQ Global Market on the day of
      the
      grant.





Effective
      January 1, 2006, the Company adopted Statement No. 123(R), “Accounting for
      Share-Based Payment” (“SFAS 123(R)”), which requires companies to measure and
      recognize compensation expense for all stock-based payments at fair value.
      Under
      SFAS 123(R), using the modified prospective method, compensation expense is
      recognized for all share-based payments granted prior to, but not yet vested
      as
      of, January 1, 2006.


In
          December 2005, the Company's Board of Directors approved the accelerated
          vesting
          of all employee service-based stock options previously granted under the
          Company's various non-qualified stock option plans, which would have been
          unvested as of December 31, 2005. As a result, all options granted as of
          December 31, 2005, except certain options based on performance became
          exercisable immediately. The number of shares, exercise prices and other
          terms
          of the options subject to the acceleration remain unchanged. The acceleration
          of
          such option vesting resulted in an additional $446,000 of compensation
          expense
          reflected in pro-forma net income for the prior year, an amount that would
          have
          otherwise been recorded as compensation expense in the years ending December
          31,
          2006 and 2007, but had no impact on compensation recognition in 2005 as
          the
          options would have been otherwise vested.
  
 18




As
      of
      September 30, 2006, 7.8 million stock options/warrants were outstanding. The
      following table includes summary information for stock options/warrants for
      employees and non-employee directors and consultants for the nine months ended
      September 30, 2006:




Weighted-Average
            
            Aggregate
                IntrinsicShares
            
            
            
            Exercise
                Price
            
            
            ValueOutstanding
                at December 31, 2005
            
            
            9,573,292
            
            
            $
            5.09Granted
            
            
            1,102,443
            *
            
            
            10.84Canceled
            
            
            (1,217,750
            )
            
            
            8.71Exercised
            
            
            (1,647,110
            )
            
            
            6.20Expired
            
            
            -
            
            
            
            -Outstanding
                at September 30, 2006
            
            
            7,810,875
            **
            
            $
            4.96
            
            $
            87,030,006Exercisable
                at September 30, 2006
            
            
            6,889,097
            
            
            $
            4.21
            
            $
            82,479,357





*
      Includes 40,000 options granted to its employees at the market price and
      1,062,443 warrants granted to non-employee consultants in connection with
      acquisitions. See Notes E and F.





**
      Includes 850,000 warrants outstanding at prices ranging from $8.72 to $15.93,
      and a weighted average exercise price of $10.88 per share, subject to adjustment
      in certain circumstances. Of these warrants, warrants to purchase 600,000 shares
      of common stock were immediately exercisable as of September 30, 2006. The
      warrants expire on dates ranging from August 26, 2012 to June 2,
      2016.





The
      intrinsic value of options exercised during the nine months ended September
      30,
      2006 was based on the closing prices of the Company's common stock on the dates
      of exercise. The aggregate intrinsic value for options outstanding and
      exercisable at September 30, 2006 was based on the closing price of the
      Company's common stock at September 30, 2006, which was $16.10.





Options/warrants
      outstanding and exercisable at September 30, 2006 were as follows:




Options/Warrants
                Outstanding
            Options/Warrants
                ExercisableWeighted
                Average
            Weighted
            
            WeightedRange
                of
            Number
            Average
            Average
            Number
            AverageExercise
                Prices
            Outstanding
            Contractual
                Life
            Exercise
                Price
            Exercisable
            Exercise
                Price$0.24-1.14
            426,625
            4.00
            $1.07
            426,625
            $1.07$1.15-1.50
            370,500
            4.38
            $1.25
            370,500
            $1.25$1.51-2.50
            981,000
            6.53
            $1.99
            981,000
            $1.99$2.51-3.50
            2,404,750
            4.17
            $3.14
            2,404,750
            $3.14$3.51-5.00
            1,292,750
            8.46
            $4.62
            1,191,082
            $4.63$5.01-10.19
            2,335,250
            9.26
            $9.56
            1,515,140
            $8.617,810,875
            6.70
            $4.96
            6,889,097
            $4.21





In
      the
      Current Quarter and Current Nine Months, the Company recorded a $50,000 and
      $140,000 expense respectively, with an estimated forfeiture rate of 3%, for
      options granted with a vesting term from the dates of grants through May 2010.
      The fair value for these options was estimated at the date of grant using a
      Black-Scholes option-pricing model. The key assumptions used in determining
      the
      fair value of the stock options awarded were: expected life for employees
      ranging from 3-5 years, expected life for non-employees ranging from 3-5 years,
      risk-free interest rate from 3.0-5.0%, expected volatility from 30-55%, and
      expected dividend yield of 0%. The Company considers the following factors
      when
      estimating the expected lives of options: vesting period of the award, expected
      volatility of the underlying stock, employees' historical exercise behavior
      and
      external data. The risk-free interest rate reflects the interest rate on
      zero-coupon U.S. government bonds available at the time each option was granted
      having a remaining life approximately equal to the option's expected life.
      When
      making assumptions on the expected volatilities, the Company considered the
      historical volatilities of the Company's common stock, the volatilities of
      its
      peers' stocks, as well as the judgment of the Company's management. Based on
      these assumptions, the weighted-average fair value of each stock option granted
      was $2.63 for 2005 and $10.84 for the nine months ending September 30,
      2006.





19





The
      Company has awarded restricted shares of common stock to certain employees.
      The
      awards have restriction periods tied to employment and vest over a period of
      three years. The cost of the restricted stock awards, which is the fair market
      value on the date of grant net of estimated forfeitures, is expensed ratably
      over the vesting period. On September 22, 2006, the Company awarded 27,691
      restricted shares with a vesting period of 3 years and a fair market value
      of
      approximately $450,000.





Unearned
      compensation expense related to restricted stock grants at September 22, 2006
      was $450,000. The expense is expected to be recognized evenly over a period
      of
      approximately 3 years.





Prior
      to
      the adoption of SFAS 123(R), the Company accounted for its stock-based
      compensation plans under the recognition and measurement principles of
      Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued
      to Employees”, and related interpretations. Accordingly, the compensation cost
      for stock options had been measured as the excess, if any, of the quoted market
      price of the Company's stock at the date of the grant over the amount the
      employee must pay to acquire the stock. In accordance with the modified
      prospective transition method, the consolidated financial statements have not
      been restated to reflect the impact of SFAS 123(R). The following table
      illustrates the effect on net income and earnings per share if the Company
      had
      applied the fair value recognition provisions of SFAS 123 to options granted
      under the Company's stock option plans for the three months and nine months
      ended September 30, 2005.





(in
                thousands except per share data)
            
            
            Three
                months ended
              Sept
                30, 2005
            
            
            Nine
                months ended
              Sept
                30, 2005Net
                income - as reported
            
            $
            5,159
            
            $
            8,457Add:
                Stock-based employee compensation included in reported net
                income
            
            
            -
            
            
            -Deduct:
                Stock-based employee compensation determined under the fair value
                based
                method
            
            
            (1,209
            )
            
            (3,649
            )Pro
                forma net income
            
            $
            3,950
            
            $
            4,808Basic
                earnings per share:As
                reported
            
            $
            0.16
            
            $
            0.28Pro
                forma
            
            $
            0.12
            
            $
            0.16Diluted
                earnings per share:As
                reported
            
            $
            0.14
            
            $
            0.26Pro
                forma
            
            $
            0.11
            
            $
            0.15




NOTE
      M  SPECIAL
      CHARGES





During
      the Current Quarter and Current Nine Months, the Company recorded $632,000
      and
      $1.9 million of special charges in connection with its litigation related to
      Unzipped, compared to $289,000 and $996,000 in the Prior Year Quarter and Prior
      Year Nine Months, respectively. See Note H.





NOTE
      N -
      COMPREHENSIVE INCOME




Comprehensive
      income for the Current Nine Months was $23,803,000. Included in comprehensive
      income is $155,000 of other comprehensive income, net of taxes, representing
      unrealized gain on marketable securities (common stock of Mossimo). See Note
      B.





NOTE
      O  RECENT
      ACCOUNTING STANDARDS





In
      February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
      Financial Instruments -an amendment of FASB Statements No. 133 and 140," which
      simplifies accounting for certain hybrid financial instruments by permitting
      fair value remeasurement for any hybrid instrument that contains an embedded
      derivative that otherwise would require bifurcation and eliminates a restriction
      on the passive derivative instruments that a qualifying special-purpose entity
      may hold. SFAS No. 155 is effective for all financial instruments acquired,
      issued or subject to a remeasurement (new basis) event occurring after the
      beginning of an entity's first fiscal year that begins after September 15,
      2006.
      The adoption of SFAS No. 155 is not expected to have an impact on the Company's
      results of operations or its financial position.





In
      March
      2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial
      Assets - an amendment of FASB Statement No. 140," which establishes, among
      other
      things, the accounting for all separately recognized servicing assets and
      servicing liabilities by requiring that all separately recognized servicing
      assets and servicing liabilities be initially measured at fair value, if
      practicable. SFAS No. 156 is effective as of the beginning of an entity's first
      fiscal year that begins after September 15, 2006. The adoption of SFAS No.
      156
      is not expected to have an impact on the Company's results of operations or
      its
      financial position.




20


In
      June
      2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for
      Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,"
      which establishes that the financial statement effects of a tax position taken
      or expected to be taken in a tax return are to be recognized in the financial
      statements when it is more likely than not, based on the technical merits,
      that
      the position will be sustained upon examination. FIN 48 is effective for fiscal
      years beginning after December 15, 2006. The adoption of FIN 48 is not expected
      to have a material impact on the Company's results of operations or its
      financial position.





In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which
      establishes a framework for measuring fair value in generally accepted
      accounting principles and expands disclosures about fair value measurements.
      SFAS No. 157 defines fair value as the price that would be received to sell
      an
      asset or paid to transfer a liability in an orderly transaction between market
      participants at the measurement date. 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 adoption of SFAS No. 157 is
      not
      expected to have a material impact on our results of operations or our financial
      position.





In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
      Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
      Statements No. 87, 88, 106, and 132(R)," which requires a business entity to
      recognize the overfunded or underfunded status of a single-employer defined
      benefit postretirement plan as an asset or liability in its statement of
      financial position and to recognize changes in that funded status in
      comprehensive income in the year in which the changes occur. SFAS No. 158 also
      requires a business entity to measure the funded status of a plan as of the
      date
      of its year-end statement of financial position, with limited exceptions. An
      employer with publicly traded equity securities is required to initially
      recognize the funded status of a defined benefit postretirement plan and to
      provide the required disclosures as of the end of the fiscal year ending after
      December 15, 2006. As our defined benefit pension plans are currently
      underfunded and benefits are either frozen or increase only though interest
      credits, the adoption of SFAS No. 158 will not have a material impact on our
      results of operations or our financial position .





NOTE
      P  OTHER





In
      June
      2006, the Company agreed to purchase all of the rights, title and interest
      of
      certain parties, relating to a 5% interest in the Badgley Mischka trademark
      (the
“Rights”) under the Letter Agreement dated October 29, 2004 between the Company
      and UCC Funding Corporation (“UCCF”) which UCCF subsequently assigned to certain
      third parties. The Company purchased from these parties the Rights under the
      Letter Agreement for $1.5 million, of which $750,000 was paid in cash upon
      execution of the agreement and the remaining $750,000 was evidenced by the
      Company's issuance of promissory notes, which accrue interest at the rate of
      6%
      per annum and mature and become payable on October 31, 2006.  The Company
      allocated approximately $1.35 million of the purchase price to the purchase
      of
      the parties' rights under the Letter Agreement to receive a cash payment
      calculated under a formula based on the sales price should the Company sell
      all
      or substantially all of the acquired Badgley Mischka assets. In addition, the
      Company allocated the balance of approximately $150,000 relating to its purchase
      of the parties' rights under the Letter Agreement to receive a fee of 5% of
      the
      gross revenues that the Company derives from the Badgley Mischka trademark
      and
      all derivative trademarks.





NOTE
      Q  SUBSEQUENT EVENTS - MERGER WITH MOSSIMO INC & ACQUISITION OF OCEAN
      PACIFIC





On
      April
      3, 2006, the Company announced that it had entered into a definitive agreement
      (the “Merger Agreement”) to acquire Mossimo, Inc. (“Mossimo”), a public company
      in the business of licensing the MOSSIMO brand. The Merger Agreement provided
      for the Company to acquire all of the outstanding shares of Mossimo through
      a merger (the “Merger”) in consideration for cash and common stock of the
      Company worth $7.50 per Mossimo share, totaling approximately 15.9 million
      Mossimo shares as of March 31, 2006, provided, however that if the Company's
      common stock does not close at or above $18.71 during the twelve months
      following the Merger, the Company will issue additional shares of the Company's
      common stock such that the total value of the cash and common stock of the
      Company issued to the Mossimo shareholders in connection with the Merger will
      be
      worth $8.50 per Mossimo share.





On
      April
      27, 2006, Mossimo received an unsolicited proposal from Cherokee, Inc.
      (“Cherokee”) to acquire all of the outstanding shares of Mossimo. While unable
      to conclude that Cherokee's proposal was, in fact, a superior proposal within
      the meaning of the merger agreement, Mossimo's board agreed to provide
      information to Cherokee pursuant to a confidentiality agreement as restrictive
      as the one executed between Mossimo and Iconix. Cherokee and Iconix subsequently
      entered into a termination and settlement agreement pursuant to which Cherokee
      agreed to withdraw its proposal (and not to reinstate or make any new offer)
      to
      acquire all or substantially all of the capital stock of Mossimo and to
      terminate, simultaneously with the merger, a finders agreement between Mossimo
      and Cherokee in respect of Mossimo's royalties from Target Stores in exchange
      for Iconix's agreement to pay Cherokee $33 million upon the closing of the
      merger.





On
      June
      30, 2006, the Company filed a registration statement with the SEC, covering
      the
      issuance by the Company of its shares of common stock to the holders of Mossimo
      common stock in the Merger and the resale of certain of the shares by certain
      of
      the Mossimo stockholders. The registration statement was declared effective
      by
      the SEC on October 11, 2006. On October 31, 2006, Mossimo shareholders voted
      and
      approved the merger and the merger closed on October 31, 2006.





In
      connection with the Mossimo merger, the Company's wholly owned
      subsidiary, Mossimo Holdings, which was formed for such purpose and whose
      activities are limited to acquiring the intellectual property assets of Mossimo,
      exploiting and maintaining such assets and borrowing funds in connection with
      those activities, obtained a loan from Merrill Lynch Mortgage Capital Inc.
      in
      the amount of $90.0 million, secured by the Mossimo trademarks, license
      agreements, including the proceeds therefrom, and related intellectual property
      assets, which the Company simultaneously sold to Mossimo Holdings upon
      the closing of the merger. The note evidencing this loan bears interest at
      the
      variable rate of LIBOR + 5.125% and matures on December 18, 2008, with
      quarterly principal payments in the first year totalling $10.5 million
      and in the second year totalling  $10.8 million and the balance
      due at the maturity date of the loan.





On
      November 6, 2006,  we also acquired certain of the assets of Ocean Pacific
      Apparel Corp., a subsidiary of Warnaco Group, Inc., related to the Ocean Pacific
      brand, associated trademarks, intellectual property and related names worldwide.
      In consideration for these assets, we paid the seller $10.0 million in cash
      and
      issued the seller a note in the principal amount of $44.0 million. The note,
      which is secured by the acquired assets, matures on December 31, 2006 (subject
      to extension at our option until January 31, 2007 under certain circumstances)
      and is payable in, at our option, cash or a combination of cash and shares
      of
      our common stock.. In connection with this acquisition, we assumed 30 licenses,
      including 15 international licenses.




21





**Item
      2.**  **MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**





*Safe
      Harbor Statement under the Private Securities Litigation Reform Act of
      1995* .
      The
      statements that are not historical facts contained in this report are forward
      looking statements that involve a number of known and unknown risks,
      uncertainties and other factors, all of which are difficult or impossible to
      predict and many of which are beyond the control of the Company, which may
      cause
      the actual results, performance or achievements of the Company to be materially
      different from any future results, performance or achievements expressed or
      implied by such forward looking statements. These risks are detailed in the
      Company's Form 10-K/A for the fiscal year ended December 31, 2005 and other
      SEC
      filings. The words "believe", "anticipate," "expect", "confident", "project",
      provide "guidance" and similar expressions identify forward-looking statements.
      Readers are cautioned not to place undue reliance on these forward looking
      statements, which speak only as of the date the statement was made.





*Executive
      Summary.* The
      Company is in the business of owning, licensing and marketing a growing and
      diversified portfolio of consumer brands that are sold across every major
      segment of retail distribution from the luxury market to the mass market. As
      of
      September 30, 2006, the Company owned seven iconic consumer brands, CANDIE'S®,
      BONGO®, BADGLEY MISCHKA®, JOE BOXER®, RAMPAGE®, MUDD® and LONDON FOG®.
      Subsequent to the end of the third quarter, the Company acquired the MOSSIMO®
and OCEAN PACIFIC® brands, bringing the total number of highly recognizable
      brands in our portfolio to nine. See Note Q to the Condensed Consolidated
      Financial Statements. The Company licenses its brands to retailers and
      wholesalers worldwide for use in connection with a broad variety of consumer
      products including apparel, footwear, accessories, fragrance and beauty products
      and home accessories. The Company's business model is designed to allow the
      Company to focus on its core competency of marketing and managing brands without
      the risk, complexity and investment inherent under the traditional operating
      model. The Company has long term contracts with minimum guaranteed royalties,
      and therefore has greater revenue predictability than traditional operating
      businesses.





The
      Company's growth strategy is focused on increasing licensing revenue from its
      existing portfolio of brands, continuing to acquire new brands that further
      diversify the Company's portfolio and licensing its brands to a growing network
      of retailers and wholesalers internationally.





***Results
      of Operations***




*For
      the three months ended September 30, 2006*




*Revenue.* Revenue
      for the Current Quarter increased to $22.1 million, from $9.2 million in the
      Prior Year Quarter. This revenue growth of $12.9 million was due to the growth
      in revenue generated from brands that were owned in the Prior Year Quarter,
      notably the Company's Candie's brand, that is licensed to Kohl's Department
      Stores, in addition to new revenues associated with the two brands acquired in
      the third quarter of last year, Joe Boxer and Rampage, and the Mudd acquisition
      completed in the second quarter of 2006.




*Operating
      Expenses.* Selling,
      general and administrative ( **“** SG&A”)
      expenses totaled $6.1 million in the Current Quarter compared to $3.9 million
      in
      the Prior Year Quarter, an increase of $2.2 million. The increase in SG&A
      expense was primarily related to increased advertising obligations relating
      to the growth in licensing revenue and additional operating expenses relating
      to
      new acquisitions not included in the Prior Year Quarter. Further, in the Current
      Quarter the Company recorded an additional $279,000 reserve against its accounts
      receivables, compared to no reserve recorded in the Prior Year Quarter. For
      the
      Current Quarter and Prior Year Quarter, the Company's special charges included
      $632,000 and $289,000 respectively, incurred by the Company relating to
      litigation involving Unzipped. See Note I of Notes to Condensed Consolidated
      Financial Statements.





Operating
      Income for the Current Quarter increased to $15.4 million, or approximately
      70%
      of total revenue compared to $5.0 million or approximately 55% of total revenue
      in the Prior Year Quarter.





*Net
      Interest Expense* .
      Net
      Interest expense increased by $1.9 million in the Current Quarter to $3.2
      million, compared to $1.3 million in the Prior Year Quarter. This increase
      was
      due primarily to an increase in the Company's debt through financing
      arrangements in connection with the acquisitions of Joe Boxer, Rampage, Mudd
      and
      London Fog. See Notes C, D, E and F of Notes to Condensed Consolidated
      Financial Statements. Included in the interest expense was $172,000 amortization
      expense of deferred financing cost, compared to $113,000 amortization expense
      reclassified from SG&A in the Prior Year Quarter. A total of $277,000 in
      interest income for the Current Quarter partially offset the increase in
      interest expense, compared to $54,000 offset in the Prior Year
      Quarter.


22





*Provision
      (Benefit) for Income Taxes.* The
      Company accounts for income taxes in accordance with Statement of Financial
      Accounting Standards No. 109, (“SFAS 109”) “Accounting for Income Taxes.” Under
      SFAS No. 109, deferred tax assets and liabilities are determined based on
      differences between the financial reporting and tax basis of assets and
      liabilities and are measured using the enacted tax rates and laws that will
      be
      in effect when the differences are expected to reverse. A valuation allowance
      is
      established when necessary to reduce deferred tax assets to the amount expected
      to be realized. In determining the need for a valuation allowance, management
      reviews both positive and negative evidence pursuant to the requirements of
      SFAS
      No. 109, including current and historical results of operations, the annual
      limitation on utilization of net operating loss carry forwards pursuant to
      Internal Revenue Code section 382, future income projections and the overall
      prospects of the Company's business. Based upon management's assessment of
      information that became available in the Current Quarter, it concluded that
      it is more likely than not that a portion of previously unrecognized deferred
      income tax benefits will be realized The
      effective income tax rate for the Current Quarter is approximately 35% resulting
      in the $4.3 million income tax expense as compared to the $1.4 million income
      tax benefit for the Prior Quarter due primarily from a reduction in the Company’s
      valuation allowance.
      There
      was no comparable reduction of the Company’s valuation allowance in the Current
      Quarter. We anticipate providing for income taxes at an effective rate of 35%
      for the upcoming fourth quarter of this fiscal year, as was reflected for the
      third quarter 2006. See
      Note
      J of Notes to Condensed Consolidated Financial Statements.





*Net
      income* .
      The
      Company's net income was $7.9 million in the Current Quarter, compared to net
      income of $5.2 million in the Prior Year Quarter, as a result of the factors
      discussed above.





*For
      the nine months ended September 30, 2006*




*Revenue.* Revenue
      for the Current Nine Months increased to $53.8 million, from $17.8 million
      in
      the Prior Year Nine Months. This revenue growth of $36.0 million was generated
      by expansion of brands the Company owned in the Prior Year Nine Months, notably
      the Company's Candie's brand, that is licensed to Kohl's Department
      Stores, and new revenue associated with the two acquisitions completed in the
      third quarter of last year, Joe Boxer and Rampage, and the acquisition of Mudd
      completed in April 2006.




*Operating
      Expenses.* SG&A
      expenses totaled $17.6 million in the Current Nine Months compared to $9.4
      million in the Prior Year Nine Months, an increase of $8.2 million which was
      primarily driven by the increased advertising obligations connected to the
      growth in licensing revenue and the additional operating expenses relating
      to
      new acquisitions not included in the Prior Year Nine Months. Included in the
      Prior Year Nine Months SG&A expense was $37,500 for Unzipped's net loss
      which was related to the Company's transfer of the Bongo jeanswear business
      to a
      third party licensee. For the Current Nine Months and Prior Year Nine Months,
      the Company's special charges included $1.9 million and $996,000 respectively,
      incurred by the Company relating to litigation involving Unzipped. See
      Note I of Notes to the condensed consolidated financial
      statements.





Operating
      Income for the Current Nine Months increased to $34.3 million, or approximately
      64% of total revenue compared to $7.4 million or 42% of total revenue in the
      Prior Year Nine Months.





*Net
      Interest Expense* .
      Net
      Interest expense increased by approximately $5.9 million in the Current Nine
      Months to $8.0 million, compared to approximately $2.1 million in the Prior
      Year
      Nine Months. This increase was due primarily to an increase in the Company's
      debt through financing arrangements in connection with the acquisitions of
      Joe
      Boxer and Rampage in the third quarter of 2005, the acquisition of Mudd in
      April
      2006, and the purchase of London Fog trademarks and certain related intellectual
      property assets in August 2006. See Notes C, D, E and F of Notes to
      Condensed Consolidated Financial Statements. Included in the interest expense
      in
      the Current Nine Months was $466,000 amortization expense of deferred financing
      cost, compared to $322,000 amortization expense reclassified from SG&A in
      the Prior Year Nine Months. A total of $629,000 in interest income for the
      Current Nine Months partially offset the increase in interest expense, compared
      to $89,000 offset in the Prior Year Nine Months.





*Provision
      (Benefit) for Income Taxes.* The
      Company accounts for income taxes in accordance with Statement of Financial
      Accounting Standards No. 109, (“SFAS 109”) “Accounting for Income Taxes.” Under
      SFAS No. 109, deferred tax assets and liabilities are determined based on
      differences between the financial reporting and tax basis of assets and
      liabilities and are measured using the enacted tax rates and laws that will
      be
      in effect when the differences are expected to reverse. A valuation allowance
      is
      established when necessary to reduce deferred tax assets to the amount expected
      to be realized. In determining the need for a valuation allowance, management
      reviews both positive and negative evidence pursuant to the requirements of
      SFAS
      No. 109, including current and historical results of operations, the annual
      limitation on utilization of net operating loss carry forwards pursuant to
      Internal Revenue Code section 382, future income projections and the overall
      prospects of the Company's business. Based upon management's assessment of
      information which became available in the Current Nine Months management
      concluded that it is more likely than not that a portion of previously
      unrecognized deferred income tax benefits will be realized. Accordingly, the
      Company reduced the balance of the related valuation allowance which resulted
      in
      a $2.7 million tax expense for the Current Nine Months. Approximately $2.4
      million was recorded in the three months ended June 30, 2006 as a credit to
      additional paid in capital for realization of deferred tax assets generated
      from
      exercise of stock options in prior years. Provision for income taxes consisted of income tax expense of $2.7 million
      and
      income tax benefit of $3.2 million for the nine month period ended September
      30,
      2006 and 2005, respectively. We
      anticipate providing for income taxes at an effective rate of 35% for the
      upcoming fourth quarter of this fiscal year, as was reflected for the third
      quarter 2006. See Note J of Notes to Condensed Consolidated Financial
      Statements.


23





*Net
      income* .
      The
      Company's net income was $23.7 million in the Current Nine Months, compared
      to
      net income of $8.5 million in the Prior Year Nine Months, as a result of the
      factors discussed above.





***Liquidity
      and Capital Resources***





*Liquidity*





The
      Company's primary source, respectively, of cash is from operations. As of
      September 30, 2006 and December 31, 2005 the Company's cash and cash equivalents
      totaled $21.3 million and $11.7 million, respectively, including $16.1
      million and $4.1 million restricted cash, respectively. The increase resulted
      from the timing of receipt of certain royalty payments at the end of the Current
      Nine Months as well as two additional quarterly payments totalling $7.5 million
      deposited in the renewal reserve account that were classified as short-term
      restricted cash. See Note G of Notes to Condensed Consolidated Financial
      Statements.





The
      Company's cash requirements to support working capital needs, including
      operating expenses, interest payments and its minimal capital expenditures,
      are
      met from its existing cash and cash provided from its operations. Based on
      the
      Company's current internal estimates, the Company believes that its existing
      cash and cash provided from future operations will be sufficient to meet its
      cash requirements over the next twelve months.





*Changes
      in Working Capital*





At
      September 30, 2006 and December 31, 2005 the working capital ratio (current
      assets to current liabilities) was 1.1 to 1 and 0.84 to 1 respectively. The
      reasons for this improvement in the ratio were the increase in cash and cash
      equivalents on hand which increased from $11.7 million at December 31, 2005
      to
      $21.3 million at September 30, 2006 as a result of revenues attributable to
      increases in both existing business and new acquisitions, in addition to the
      increase in accounts receivable from $3.5 million at December 31, 2005, to
      $11.8
      million at September 30, 2006, which also was a direct result of the new
      acquisitions. This was offset by the increase in the current portion of long
      term debt from $13.7 million at December 31, 2005, to $25.5 million at September
      30, 2006, which was a result of the additional financing necessary to complete
      the new acquisitions. See Notes E & F of Notes to Condensed Consolidated
      Financial Statements.





*Operating
      Activities*





Net
      cash
      provided by operating activities totaled $18.8 million in the Current Nine
      Months, as compared to $5.6 million of net cash provided by operations in the
      Prior Year Nine Months. Cash provided by operating activities in the Current
      Nine Months was increased primarily due to net income of $23.6 million, offset
      by primary uses of cash from an increase of $9.2 million in accounts receivable
      and a decrease of $1.6 million in deferred revenues. The Company continues
      to
      rely upon cash generated from licensing and commission operations to finance
      its
      operations. Further, the Company believes that such cash from operations will
      be
      sufficient to satisfy its anticipated working capital requirements for the
      foreseeable future.





*Investing
      Activities*





Net
      cash
      used in investing activities in the Current Nine Months totaled $78.4 million,
      as compared to $66.2 million in the Prior Year Nine Months. In the Current
      Nine
      Months, the Company paid $45.0 million in cash for certain assets relating
      to
      the Mudd brand and $30.5 million in cash for the London Fog trademarks and
      certain related intellectual property assets. The Company also paid
      approximately $1.1 million in additional costs related to these acquisitions.
      See Notes E & F of Notes to Condensed Consolidated Financial Statements. In
      June 2006, the Company acquired UCC's right to receive a cash payment upon
      the
      Company's sale of all or substantially all of the Badgley Mischka assets for
      approximately $600,000 in cash and $750,000 in a promissory note (See Note
      P of
      Notes to Condensed Consolidated Financial Statements). Capital expenditures
      in
      the Current Nine Months were $558,000, compared to $26,000 in capital
      expenditures in the Prior Year Nine Months. Capital expenditures in the Nine
      months ended September 30, 2006 were primarily attributable to the acquisition
      of office equipment and leasehold improvements relating to the Company's
      relocation of its headquarters and the construction of new showrooms in New
      York
      City. The Company also spent $1.3 million in connection with the acquisition
      of
      the Badgley Mischka right, and the registration and maintenance of its
      trademarks.





*Financing
      Activities*





Net
      cash
      provided by financing activities was $57.3 million in the Current Nine Months,
      compared with $67.2 million net cash provided by financing activities in the
      Prior Year Nine Month. Of the $57.3 million in net cash provided by financing
      activities, $78.0 million was provided from the net proceeds of the issuance
      of
      long-term asset - backed notes, and $4.2 million from proceeds in connection
      with the exercise of stock options. This was offset by $6.9 million used for
      principal payments related to the Asset-Backed Notes, $5.6 million in cash
      placed in a non-current reserve account, $12.0 million in cash placed in a
      current reserve account (both reserve accounts are required by the lender in
      connection to the Asset-Backed Notes, including two additional quarterly
      payments of $3.75 million deposited in the renewal reserve account, that
      were released back to the Company on October 24, 2006) (See Note G of Notes
      to
      Condensed Consolidated Financial Statements), and $550,000 used to pay the
      costs
      associated with the issuance of the additional long term debt (see Asset-Backed
      Notes below). In the Prior Year Nine Months, approximately $1.4 million was
      used
      for principal payments related to Asset-Backed Notes. The Company also repaid
      $2.5 million for a loan from TKO Apparel, which during the Prior Year Nine
      Months was a related party.


24





*Asset-Backed
      Notes*





In
      August
      2002, IPH, a subsidiary of the Company, issued in a private placement $20
      million of Asset-Backed Notes secured by intellectual property assets (trade
      names, trademarks, license agreements and payments and proceeds with respect
      thereto) of IPH. The Asset-Backed Notes had a 7-year term with a fixed interest
      rate of 7.93% with quarterly principal and interest payments of approximately
      $859,000. After funding a liquidity reserve account in the amount of $2.9
      million, the net proceeds of the Asset-Backed Notes ($16.2 million) were used
      by
      the Company to reduce amounts due by the Company under its then-existing
      revolving credit facilities. In April 2004, IPH issued an additional $3.6
      million in subordinated Asset-Backed Notes secured by its intellectual property
      assets. The additional borrowing had a maturity date of August 2009, with a
      floating interest rate of LIBOR + 4.45% and quarterly principal and interest
      payments and $500,000 of interest prepaid at closing. The net proceeds of $2.9
      million were used for general working capital purposes. As of July 22, 2005,
      the
      total principal on these notes was approximately $17.5 million, which were
      refinanced in connection with the Joe Boxer acquisition described
      below.





In
      the
      fiscal quarter ended September 30, 2005, the Company, through IPH, acquired
      the
      Joe Boxer brand from Joe Boxer Company, LLC and its affiliates, and the Rampage
      brand from Rampage Licensing, LLC. See Notes C and D of Notes to Condensed
      Consolidated Financial Statements. The financing for the acquisitions was
      accomplished through two private placements by IPH of Asset-Backed Notes,
      secured by the intellectual property assets owned by IPH. The combined proceeds
      of the Asset-Backed Notes, totaling $103 million, were used as follows:
      approximately $17.5 million was used to refinance previously issued Asset-Backed
      Notes, $40.0 million was paid to the sellers of the Joe Boxer brand,
      approximately $25.8 million was paid to the sellers of the Rampage brand, $1.7
      million was placed in a liquidity reserve account as required by the holder
      of
      the Asset-Backed Notes, approximately $1.8 million was used to pay costs
      associated with the debt issuance, approximately $200,000 was paid to legal
      professionals associated with the acquisitions, approximately $4.0 million
      was
      available to the Company for working capital purposes, and $12 million was
      deposited in an escrow account for the benefit of the holder of the Asset-Backed
      Notes, to be used by IPH solely for the purchase of certain intellectual
      property assets. IPH redeemed $12 million of the Asset-Backed Notes without
      penalty as the purchase of the assets did not occur. Costs associated with
      the
      debt issuances of approximately $1.8 million have been deferred and are being
      amortized using the interest method over the 7 year life of the Asset-Backed
      Notes.





In
      April
      2006, the Company, through IPH, acquired certain assets of Mudd (USA) related
      to
      the Mudd brand, including trademarks, intellectual property and related names
      worldwide, excluding China, Hong Kong, Macau and Taiwan. The financing for
      the
      acquisition was accomplished through the private placement on April 11, 2006
      by
      IPH of approximately $136 million principal amount of Asset-Backed Notes. The
      issuance of the Asset-Backed Notes raised $49 million in new financing for
      IPH
      (before giving effect to the payment of expenses in connection with the issuance
      of the Asset-Backed Notes and required deposits to reserve funds), and
      approximately $87 million principal amount of the Asset-Backed Notes was
      exchanged for Asset Backed Notes previously issued by IPH. The Asset-Backed
      Notes are secured by the acquired assets, as well as by other intellectual
      property assets owned by IPH. The payment of the principal of and interest
      on
      the Asset-Backed Notes will be made from amounts received by IPH under license
      agreements with various licensees of the acquired assets and IPH's other
      intellectual property assets.





The
      portion of the Asset-Backed Notes representing new financing were used as
      follows: $45.0 million was paid to the sellers of the Mudd brand, approximately
      $490,000 was used to pay costs associated with the financing, approximately
      $2.45 million was placed in a liquidity reserve account, approximately $785,000
      was used to pay professional fees associated with the acquisition and
      approximately $275,000 of which was available for working capital purposes.
      The
      costs relating to the $49 million in new financing of approximately $490,000
      have been deferred and are being amortized over the 5 year life of the financed
      debt.





25





On
      August
      28, 2006, the Company completed the purchase of the London Fog trademarks and
      certain related intellectual property assets from London Fog Group Inc. In
      consideration for the purchase of these assets, the Company paid the seller
      $30.5 million in cash and issued to the seller 482,423 shares of the Company
      common stock valued at $7.1 million.





The
      financing for this acquisition was accomplished through the private placement
      on
      August 28, 2006 by IPH of its Asset-Backed Notes, secured by the intellectual
      property assets owned by IPH (including the acquired assets), together with
      approximately $3.1 million of the Company’s cash. The issuance of the
      Asset-Backed Notes raised $29 million in new financing for IPH (before giving
      effect to the payment of expenses related to their issuance and required
      deposits to reserve accounts), and approximately $130.9 million principal amount
      of the Asset-Backed Notes were exchanged for all of the outstanding Asset-Backed
      Notes previously issued by IPH. The $29 million principal amount of Asset-Backed
      Notes representing the new financing portion of the private placement were
      used
      as follows: $27.5 million was paid to the seller of the London Fog assets,
      approximately $52,500 was used to pay professional fees associated with the
      acquisition, and $1.35 million was deposited in a liquidity reserve account
      as
      required by the holder of the Asset-Backed Notes. The costs relating to the
      $29
      million in new financing of approximately $60,000 have been deferred and are
      being amortized over the 61⁄2 year life
      of the
      financed debt.





Cash
      on
      hand in the bank account of IPH is restricted at any point in time up to the
      amount of the next debt payment required under the Asset-Backed Notes.
      Accordingly, $16.1 million and $4.1 million as of September 30, 2006 and
      December 31, 2005, respectively, have been disclosed as restricted cash within
      the Company's current assets. Further, in connection with IPH's issuance of
      Asset Backed Notes, a reserve account has been established and the funds on
      deposit in such account will be applied to the last principal payment with
      respect to the Asset-Backed Notes. Accordingly, $10.6 million and $5.0 million
      as of September 30, 2006 and December 31, 2005, respectively, have been
      disclosed as restricted cash within the Company's other assets.





Interest
      rates and terms on the outstanding principal amount of the Asset-Backed Notes
      are as follows: $56.7 million principal amount bears interest at a fixed
      interest rate of 8.45% with a 6-year term, $25.2 million principal amount bears
      interest at a fixed rate of 8.12% with a 6- year term, and $78 million principal
      amount bears interest at a fixed rate of 8.99%. There are no principal payments
      required in the first year with respect to $49 million principal amount of
      these Asset-Backed Notes.





Neither
      the Company nor any of its subsidiaries (other than IPH) is obligated to make
      any payment with respect to the Asset-Backed Notes, and the assets of the
      Company and its subsidiaries (other than IPH) are not available to IPH's
      creditors. The assets of IPH are not available to the creditors of the Company
      or its subsidiaries (other than IPH).





Subsequent
      to September 30, 2006, the Company completed the merger with Mossimo and the
      OP
      Brand. See Note Q to the Condensed Consolidated Financial
      Statements.





*Matters
      Pertaining to Unzipped* .





See
      Notes
      H and I of Notes to Condensed Consolidated Financial Statements.





For
      the
      Current Nine Months, Unzipped had no operations, as compared to a net loss
      (as
      defined for the purpose of determining if the Guarantee had been met) of
      $296,000 in the Prior Year Nine Months. Consequently for the Current Nine Months
      there was no Shortfall Payment, as compared to a Shortfall Payment of $438,000
      in the Prior Year Nine Months. The adjusted Shortfall Payment had been recorded
      in the Condensed Consolidated Income Statements as a reduction of Unzipped's
      SG&A (since the majority of Unzipped's operations were with entities under
      common ownership with Sweet, including its exclusive supplier/ supply agent)
      and
      on the balance sheet as a reduction of the Sweet Note based upon the right
      to
      offset in the Management Agreement. After adjusting for the Shortfall Payment
      in
      Prior Year Nine Months, Unzipped reported a net loss of $37,500 on sales of
      $448,000. Due to the immaterial nature of the related amounts, the net loss
      of
      $37,500 from Unzipped was included in the SG&A in the Company's Condensed
      Consolidated Income Statements for the Prior Year Nine Months.





***Other
      Matters***





*Summary
      of Critical Accounting Policies.*





The
      condensed consolidated financial statements include the accounts of the Company
      and its wholly-owned subsidiaries. All significant intercompany transactions
      and
      items have been eliminated in consolidation. The Company acquired the Joe Boxer
      brand on July 22, 2005, the Rampage brand on September 16, 2005, and the Mudd
      brand on April 11, 2006. All acquisitions have been or will be accounted for
      using purchase price accounting. The purchase method of accounting requires
      that
      the total purchase price of an acquisition be allocated to the assets acquired
      and liabilities assumed based on their fair values on the date of the business
      acquisition. Any excess of the purchase price over the estimated fair values
      of
      the net assets acquired is recorded as goodwill. See Notes C, D, E and F of
      Notes to Condensed Consolidated Financial Statements.





The
      preparation of the condensed consolidated financial statements in conformity
      with accounting principles generally accepted in the United States requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and disclosure of contingent assets and liabilities
      at
      the date of the financial statements and the reported amounts of revenues and
      expenses during the reporting period. The Company reviews all significant
      estimates affecting the financial statements on a recurring basis and records
      the effect of any adjustments when necessary.





In
      June
      2001, the FASB issued Statement of Financial Accounting Standards No. 142 (SFAS
      No. 142), “Goodwill and Other Intangible Assets,” which changes the accounting
      for goodwill and other intangible assets without determinable lives from an
      amortization method to an impairment-only approach. The Candie's and Bongo
      trademarks had previously been amortized on a straight-line basis over their
      estimated useful lives of approximately 20 years. Effective July 1, 2005 the
      Company had a change in estimate of the useful lives of both the Candie's and
      Bongo trademarks to indefinite life. The impact of this change in estimate
      for
      the Current Quarter and Current Nine Months were a reduction in amortization
      expense relating to the Candie's and Bongo trademarks totaling $296,000 and
      $593,000, respectively. As of September 30, 2006, the net book value of the
      Candie's and Bongo trademarks totaled $14.3 million. Impairment losses are
      recognized for long-lived assets, including certain intangibles, used in
      operations when indicators of impairment are present and the undiscounted cash
      flows estimated to be generated by those assets are not sufficient to recover
      the assets' carrying amount. Impairment losses are measured by comparing the
      fair value of the assets to their carrying amount.


26





The
      Company has entered into various trade name license agreements that provide
      revenues based on minimum royalties and additional revenues based on a
      percentage of defined sales. Minimum royalty revenue is recognized on a
      straight-line basis over each period, as defined, in each license agreement.
      Royalties exceeding the defined minimum amounts are recognized as income during
      the period corresponding to the licensee's sales. Beginning January 2005, the
      Company changed its business practices with respect to Bright Star Footwear,
      Inc
      (“Bright Star”), a subsidiary of the Company, which resulted in a change in
      revenue recognition from prior year. Bright Star now acts as an agent, therefore
      only net commission revenue is recognized commencing January 1,
      2005.





Effective
      January 1, 2006, the Company adopted Statement No. 123(R), “Accounting for
      Share-Based Payment” (“SFAS 123(R)”), which requires companies to measure and
      recognize compensation expense for all stock-based payments at fair value.
      Under
      SFAS 123(R), using the modified prospective method, compensation expense is
      recognized for all share-based payments granted prior to, but not yet vested
      as
      of, January 1, 2006. In December 2005, the Company's Board of Directors approved
      the accelerated vesting of all employee service-based stock options previously
      granted under the Company's various non-qualified stock option plans, which
      would have been unvested as of December 31, 2005. As a result, all options
      granted as of December 31, 2005, except certain options based on performance
      became exercisable immediately. The number of shares, exercise prices and other
      terms of the options subject to the acceleration remain unchanged. The
      acceleration of such option vesting resulted in an additional $446,000 of
      compensation expense reflected in pro forma net income for the year ended
      December 31, 2005, an amount that would have otherwise been recorded as
      compensation expense in the years ending December 31, 2006 and 2007, but had
      no
      impact on compensation recognition in 2005 as the options would have otherwise
      vested. Prior to the adoption of SFAS 123(R), the Company accounted for its
      stock-based compensation plans under the recognition and measurement principles
      of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock
      Issued to Employees”, and related interpretations. Accordingly, the compensation
      cost for stock options had been measured as the excess, if any, of the quoted
      market price of the Company's stock at the date of the grant over the amount
      the
      employee must pay to acquire the stock. In accordance with the modified
      prospective transition method, the consolidated financial statements have not
      been restated to reflect the impact of SFAS 123(R). The impact on the Company's
      financial condition and results of operations of adopting FAS No. 123(R) will
      depend on the number and terms of stock options granted in future years under
      the modified prospective method, the amount of which can not currently be
      estimated by management.





On
      July
      1, 2005, the Company changed its corporate name to Iconix Brand Group, Inc.
      and
      its NASDAQ symbol to ICON.





*Seasonal
      and Quarterly Fluctuations* .





The
      Company's results may fluctuate quarter to quarter as a result of its licensees'
      sales and business generally, which can be impacted by holidays, weather, the
      timing of product shipments, market acceptance of the applicable branded
      product, the mix, pricing and presentation of the product and general economic
      conditions beyond the Company's control. 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.





*Other
      Factors*





The
      Company continues to seek to expand and diversify the types of licensed products
      being produced under its various brands, as well as diversify the distribution
      channels within which licensed products are sold, in an effort to reduce
      dependence on any particular retailer, consumer or market sector. The success
      of
      the Company, however, will still largely remain dependent on its ability to
      contract with and retain key licensees, its licensee's ability to predict
      accurately upcoming fashion trends among its customer base, to build and
      maintain brand awareness and to fulfill the product requirements of the retail
      channel within a global marketplace. Unanticipated changes in consumer fashion
      preferences, slowdowns in the United States economy, changes in the prices
      of
      supplies, gasoline, consolidation of retail establishments, among other factors
      noted herein and the Company's other filing with the SEC, could adversely affect
      the Company's licensees' from meeting and/or exceeding their contractual
      commitments to the Company and thereby adversely impact the Company's future
      operating results.





27





*Effects
      of Inflation.* The
      Company does not believe that the relatively moderate rates of inflation
      experienced over the past few years in the United States, where it primarily
      competes, have had a significant effect on its revenues or
      profitability.





**Item
      3.**  **Quantitative
      and Qualitative Disclosures about Market Risk**





As
      a
      result to our financing activities, we were exposed to the risk of rising
      interest rates. As of December 31, 2005 and September 30, 2006, we had no debts
      with variable rates.




**Item
      4.**  **Controls
      and Procedures**





The
      Company maintains “disclosure controls and procedures, “ as such term is defined
      under Rule 13a-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”),
      that are designed to ensure that information required to be disclosed in the
      Company's Exchange Act reports is recorded, processed, summarized and reported
      within the time periods specified in the SEC's rules and forms, and that such
      information is accumulated and communicated to its management, including its
      Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
      timely decisions regarding required disclosures. In designing and evaluating
      the
      disclosure controls and procedures, the Company's management recognized that
      any
      controls and procedures, no matter how well designed and operated, can provide
      only reasonable assurance of achieving the desired control objectives and the
      Company's management necessarily was required to apply its judgment in
      evaluating the cost-benefit relationship of possible controls and procedures.
      The Company has carried out an evaluation, as of the end of period covered
      by
      this report, under the supervision and with the participation of the Company's
      management, including its Chief Executive Officer and Chief Financial Officer,
      of the effectiveness of the design and operation of the Company's disclosure
      controls and procedures. Based upon the management's evaluation and subject
      to
      the foregoing, the Chief Executive Officer and Chief Financial Officer concluded
      that the Company's disclosure controls and procedures were effective in ensuring
      that material information relating to the Company that is required to be
      disclosed in the Company's Exchange Act reports is made known to the Chief
      Executive Officer and Chief Financial Officer by others within the Company
      in a
      timely manner.




There
      have been no significant changes in the Company's internal control over
      financial reporting (as defined in Exchange Act Rule 13a-15(f)) that occurred
      during the quarter ended September 30, 2006 that have materially affected,
      or
      are reasonably likely to materially affect, the Company's internal control
      over
      financial reporting.









28





PART
      II.
      Other Information





**Item
      1.**  **Legal
      Proceedings**





See
      Note
      H of Notes to Condensed Consolidated Financial Statements.




**Item 1A.**  **Risk
        Factors.**
 
 In
        addition to the risk factors disclosed in Part 1, Item 1A, “Risk
        Factors” of our Annual Report on Form 10-K/A for the year ended
        December 31, 2005, the additional risk related to the increase in our total
        consolidated debt to approximately $170.4 million at September 30, 2006
        (approximately $304.4 million after giving pro forma effect to the note issued
        by our subsidiary, Mossimo Holdings, in connection with the Mossimo merger
        and
        the note issued by us in connection with the Ocean Pacific brand acquisition)
        and the increase in our goodwill and other intangible assets to approximately
        $42.5 million and $267.9 million, respectively, at September 30, 2006, set
        forth
        below are certain factors that have affected, and in the future could affect,
        our operations or financial condition. The risks described below and in our
        Annual Report on Form 10-K/A for the year ended December 31, 2005 are not
        the only risks we face. Additional risks and uncertainties not currently
        known
        to us or that we currently deem to be immaterial also may materially adversely
        affect our financial condition and/or operating results.
 
 **A
        substantial portion of our licensing revenue is concentrated with three
        retailers such that the loss of any of such licensees could decrease our
        revenue
        and impair our cash flows.**
 
 Our
        licenses with Kohl’s and Kmart Corporation, a subsidiary of Sears Holdings
        Corp., were our two largest licenses during the nine months ended September
        30,
        2006, representing approximately 16% and 26%, respectively, of our total
        revenue
        for such period. In addition, in connection with the Mossimo merger in October
        2006, we acquired a license agreement with Target Corporation. Assuming,
        on a
        pro forma basis, that the Mossimo merger had been completed as of January
        1,
        2006, revenue under the Kohl’s, Kmart and Target licenses would have
        collectively represented approximately 50% of our total pro forma revenue
        for
        the nine months ended September 30, 2006. Our license agreement with Kohl’s
        grants it the exclusive U.S. license with respect to the Candie’s trademark for
        a wide variety of product categories for an initial term expiring in January
        2011; our license agreement with Kmart grants it the exclusive U.S. license
        with
        respect to the Joe Boxer trademark for a wide variety of product categories
        for
        an initial term expiring in December 2010; and our license agreement with
        Target
        grants it the exclusive U.S. license with respect to the Mossimo trademark
        for
        substantially all Mossimo-branded products for an initial term expiring in
        January 2010. Because we are dependent on these licensees for a significant
        portion of our licensing revenue, if any of them were to have financial
        difficulties affecting its ability to make guaranteed payments, or if any
        of
        these licensees decides not to renew or extend its existing agreement with
        us,
        our revenue and cash flows could be reduced substantially. In addition, as
        of
        September 2006, Kmart had not approached the sales levels of Joe Boxer products
        needed to trigger royalty payments in excess of its guaranteed minimums since
        2004, and, as a result, when we entered into the current license agreement
        with
        Kmart in September 2006 expanding its scope to include Sears stores and
        extending its term from December 2007 to December 2010, we agreed to reduce
        its
        guaranteed annual royalty minimums by approximately half, as a result of
        which
        our revenues from this license, at least for the short term, will likely
        be
        substantially reduced.
 
 **Our
        license agreement with Target could be terminated by Target in the event
        we were
        to lose the services of Mossimo Giannulli as our creative director with respect
        to Mossimo-branded products, thereby significantly decreasing our expected
        revenues and cash flows.**
 
 While
        we
        believe that there has been significant consumer acceptance of products sold
        under our newly-acquired Mossimo brand as a stand-alone brand, the image
        and
        reputation of Mossimo Giannulli, the creator of the brand, remain important
        factors to Target, the brand’s primary licensee. Target has the right under its
        license agreement with us to terminate the agreement if Mr. Giannulli’s services
        as our creative director for Mossimo-branded products are no longer available
        to
        Target, upon his death or permanent disability or in the event a morals clause
        in the agreement relating to his future actions and behavior is breached.
        Although we have entered into an agreement with Mr. Giannulli in which he
        has
        agreed to continue to provide us with his creative director services, including
        those required under the Target license, for an initial term expiring in
        January
        31, 2006, there can be no assurance that he will continue to do so or that
        in
        the event we were to lose such services, Target would continue its license
        agreement with us. The loss of the Target license would significantly decrease
        our expected revenues and cash flows until we were able to enter into one
        or
        more replacement licenses.
 
 **If
        our competition for retail licenses and brand acquisitions increases, our
        growth
        plans could be slowed.**
 
 We
        may
        face increasing competition in the future for retail licenses as other companies
        owning established brands may decide to enter into licensing arrangements
        with
        retailers similar to the ones we currently have in place. Furthermore, our
        current or potential retailer licensees may decide to develop or purchase
        brands
        rather than maintain or enter into license agreements with us. We also compete
        with traditional apparel and consumer brand companies and with other brand
        management companies for brand acquisitions. If our competition for retail
        licenses and brand acquisitions increases, it may take us longer to procure
        additional retail licenses and/or acquire additional brands, which could
        slow
        down our growth rate.
 
 **We
        are** **currently in litigation that could negatively impact our financial results.**
 
 We
        are
        currently a plaintiff and cross-defendant in a litigation pending in California
        state court involving our wholly-owned subsidiary, Unzipped, a defendant
        in a
        litigation pending in federal district court in New York involving a former
        supplier and a defendant in a litigation pending in New York state court
        involving one of our licensees. Even if we prevail on all counts in these
        actions, the costs of these litigation matters have been and are expected
        to
        continue to be high, not only in absolute terms but also because they divert
        available cash and personnel resources from our business affairs. Moreover,
        if
        we are ultimately required to pay the monetary damages sought from us in
        these
        actions, or if it is adjudicated that our contractual rights concerning Unzipped
        are invalid, our operating results and profitability would be reduced.




**Item
      2. Unregistered Sales of Equity Securities
      and Use of Proceeds.**




On
        September 18, 2006 the Company issued to William Sweedler
        a  warrant to purchase  up to 400,000 shares of the
        Company's common stock pursuant a consulting agreement entered into
        that date between the Company and Mr. Sweedler. The warrants have an exercise
        price of $8.81 and expire on September 16, 2016. The warrants were
        issued  to Mr. Sweedler in a private transaction exempt from
        registration under Section 4(2) of the Securities Act of
        1933.


**Item
      4. Submission of Matters to a Vote of Security-Holders.**





At
      the
      Company’s Annual Meeting of Stockholders held on August 17, 2006, the
      stockholders of the Company voted to elect the five individuals named below
      to
      serve as Directors of the Company, to approve the Company’s 2006 Equity
      Incentive Plan and to ratify the appointment of BDO Seidman, LLP as the
      Company’s independent registered public accountants for the fiscal year ending
      December 31, 2006.





1)
      The
      votes cast by stockholders with respect to the election of Directors were as
      follows:





Votes
                Cast
            
            
            VotesDirector
            
            
            "For"
            
            
            WithheldNeil
                Cole
            
            
            33,320,545
            
            
            503,862Barry
                Emanuel
            
            
            32,335,269
            
            
            1,489,138Steven
                Mendelow
            
            
            32,732,363
            
            
            1,092,044Michael
                Groveman
            
            
            32,732,168
            
            
            1,092,239Drew
                Cohen
            
            
            32,731,185
            
            
            1,093,222





2)
      The
      votes cast by stockholders with respect to the approval of the Company’s 2006
      Equity Incentive Plan were as follows:







Votes
                Cast "For"
            
            
            Votes
                Cast "Against"
            
            
            Votes
                "Abstaining"12,565,996
            
            
            11,283,624
            
            
            79,193





In
      addition, there were 9,895,594 “broker non-votes” with respect to the proposal
      to approve the Company’s 2006 Equity Incentive Plan





3)
      The
      votes cast by stockholders with respect to the ratification of the appointment
      of BDO Seidman, LLP were as follows:





Votes
                Cast "For"
            
            
            Votes
                Cast "Against"
            
            
            Votes
                "Abstaining"33,649,208
            
            
            158,063
            
            
            17,136





In
      addition, there were 17,136 “broker non-votes” with respect to the proposal to
      ratify the appointment of BDO Seidman, LLP.


29





**Item
      6.** **Exhibits**




**Exhibit**





2.1
            Asset
                Purchase Agreement, dated as of August 21, 2006, between the Registrant
                and London Fog Group, Inc, (1)





4.1
            Fifth
                Amended and Restated Indenture dated of August 28, 2006 by and between
                IP
                Holdings LLC, as issuer, and Wilmington Trust Company as Trustee.
                (1)





10.1
            Stock
                Issuance and Registration Rights Agreement dated as of August 28,
                2006, by
                and among the Registrant and DDJ Capital Management, LLC.
                (1)  10.2*
            Iconix Brand Group, Inc. 2006 Equity
              Incentive
              Plan (2)  10.3*
            Employment Agreement dated September
              22, 2006
              between the Company and Andrew Tarshis. (3)  10.4*
            Amendment dated September 22, 2006
              to the
              Employment Agreement dated October 28, 2005 between the Company and
              Deborah Sorell Stehr. (3)  10.5*
            Restricted Stock Agreement dated September
              22,
              2006 between the Company and Andrew Tarshis.
              (3)  10.6*
            Restricted Stock Agreement dated September
              22,
              2006 between the Company and Deborah Sorell Stehr.
              (3)  10.7
            Form
              of Restricted Stock Agreement for officers under the Iconix Brand Group,
              Inc. 2006 Equity Incentive Plan.  10.8
            Form
              of Restricted Stock Agreement for Directors under the Iconix Brand
              Group,
              Inc. 2006 Equity Incentive Plan.





31.1
            Certification
                of Chief Executive Officer Pursuant To Rule 13a-14 Or 15d-14 Of The
                Securities Exchange Act Of 1934, As Adopted Pursuant To Section 302
                Of The
                Sarbanes-Oxley Act Of 2002.





31.2
            Certification
                of Chief Financial Officer Pursuant To Rule 13a-14 Or 15d-14 Of The
                Securities Exchange Act Of 1934, As Adopted Pursuant To Section 302
                Of The
                Sarbanes-Oxley Act Of 2002.





32.1
            Certification
                of Chief Executive Officer Pursuant To 18 U.S.C. Section 1350, As
                Adopted
                Pursuant To Section 906 Of The Sarbanes-Oxley Act Of
                2002.





32.2
            Certification
                of Chief Financial Officer 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 the applicable exhibit filed with the Company's Current
                Report on Form 8-K for the event dated August 28, 2006.  (2)
            Incorporated by reference to Annex
              B to the
              Company's definitive proxy statement on Schedule 14A filed with the
              SEC on July 19, 2006.  (3)
            Incorporated
                by reference to the applicable exhibit filed with the Company's Current
                Report on Form 8-K for the event dated September 22, 2006.  *
            Denotes
              management compensation plan or
              arrangement.








30





**Signatures**





Pursuant
      to the requirements 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.






**Iconix
                  Brand Group, Inc.****______________________________****(Registrant)**Date: November 7, 2006
              
              /s/
                  Neil
                  ColeNeil
                  ColeChairman
                  of the Board, Presidentand
                  Chief Executive Officer(on
                  Behalf of the Registrant)Date: November 7, 2006
              
              /s/
                  Warren
                  ClamenWarren
                  ClamenChief
                  Financial Officer
 
 31