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, 2008**





OR





o 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 period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. Yes x No  ̈





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




Large accelerated filerx
            
            Accelerated fileroNon-accelerated filero(Do not check if a smaller reporting company)
            Smaller reporting companyo




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act)


Yes o 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 – 58,287,411shares as of November 5,
      2008.









**INDEX**





**FORM
      10-Q**





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





Page No.Part I.
            
            Financial
                Information
            
            3Item 1.
            
            Financial
                StatementsCondensed
                Consolidated Balance Sheets – September 30, 2008 (unaudited) and
                December 31, 2007
            
            3Unaudited
                Condensed Consolidated Income Statements - Three and Nine Months
                Ended
                September 30, 2008 and 2007
            
            4Unaudited
                Condensed Consolidated Statement of Stockholders' Equity - Nine Months
                Ended September 30, 2008
            
            5Unaudited
                Condensed Consolidated Statements of Cash Flows - Nine Months Ended
                September 30, 2008 and 2007
            
            6Notes
                to Unaudited Condensed Consolidated Financial Statements
            
            8Item 2.
            
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            21Item 3.
            
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            26Item 4.
            
            Controls
                and Procedures
            
            27Part II.
            
            Other
                Information
            
            27Item 1.
            
            Legal
                Proceedings
            
            27Item 1A.
            
            Risk
                Factors
            
            27Item 2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            30Item 6.
            
            Exhibits
            
            31Signatures
            
            
            
            32


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,**
                **2008**
              
              **December**
                **31,**
                **2007**(Unaudited)**Assets**Current
                  Assets:Cash
                  (including restricted cash of $1,286 in 2008 and $5,205 in
                  2007)
              
              $
              83,932
              
              $
              53,272Accounts
                  receivable
              
              
              42,721
              
              
              29,757Deferred
                  income taxes
              
              
              7,442
              
              
              7,442Prepaid
                  advertising and other
              
              
              15,273
              
              
              5,397Total
                  Current Assets
              
              
              149,368
              
              
              95,868Property
                  and equipment:Furniture,
                  fixtures and equipment
              
              
              7,148
              
              
              2,903Less:
                  Accumulated depreciation
              
              
              (2,121
              )
              
              (1,610
              )5,027
              
              
              1,293Other
                  Assets:Restricted
                  cash
              
              
              15,881
              
              
              15,186Marketable
                  securities
              
              
              10,660
              
              
              10,920Goodwill
              
              
              133,428
              
              
              128,898Trademarks
                  and other intangibles, net
              
              
              1,033,262
              
              
              1,038,201Deferred
                  financing costs, net
              
              
              6,960
              
              
              8,270Non-current
                  deferred income taxes
              
              
              10,668
              
              
              21,158Other
              
              
              19,524
              
              
              16,3361,230,383
              
              
              1,238,969Total
                  Assets
              
              $
              1,384,778
              
              $
              1,336,130**Liabilities
                  and Stockholders' Equity**Current
                  liabilities:Accounts
                  payable and accrued expenses
              
              $
              16,489
              
              $
              15,804Accounts
                  payable, subject to litigation
              
              
              1,878
              
              
              1,878Deferred
                  revenue
              
              
              2,285
              
              
              6,162Current portion of long-term debt
              
              
              62,711
              
              
              52,566Total
                  current liabilities
              
              
              83,363
              
              
              76,410Non-current
                  deferred income taxes
              
              
              83,114
              
              
              73,418Long-term
                  debt, less current maturities
              
              
              609,830
              
              
              649,590Long
                  term deferred revenue
              
              
              9,152
              
              
              8,792Total
                  Liabilities
              
              
              785,459
              
              
              808,210Commitments
                  and contingenciesStockholders'
                  EquityCommon
                  stock, $.001 par value-shares authorized 150,000; shares issued 57,928 and 57,330
                  respectively
              
              
              58
              
              
              58Additional
                  paid-in capital
              
              
              489,267
              
              
              469,941Retained
                  earnings
              
              
              113,958
              
              
              60,941Accumulated
                  other comprehensive loss
              
              
              (2,597
              )
              
              (2,353
              )Less:
                  Treasury stock - 230 and 198 shares at cost, respectively
              
              
              (1,367
              )
              
              (667
              )Total
                  Stockholders’ Equity
              
              
              599,319
              
              
              527,920Total
                  Liabilities and Stockholders' Equity
              
              $
              1,384,778
              
              $
              1,336,130





See
      Notes
      to Unaudited Condensed Consolidated Financial Statements.


3





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





Unaudited
      Condensed Consolidated Income Statements


(in
      thousands, except earnings per share data)


Three Months Ended September 30,
              
              Nine Months Ended September 30,2008
              
              2007
              
              2008
              
              2007Licensing
                  and other revenue
              
              $
              55,135
              
              
              42,681
              
              
              162,502
              
              
              112,593Selling,
                  general and administrative expenses
              
              
              18,558
              
              
              13,400
              
              
              55,589
              
              
              30,130Expenses
                  related to specific litigation
              
              
              279
              
              
              (39
              )
              
              665
              
              
              1,055Operating
                  income
              
              
              36,298
              
              
              29,320
              
              
              106,248
              
              
              81,408Other
                  expenses:Interest
                  expense
              
              
              8,527
              
              
              9,299
              
              
              27,112
              
              
              20,706Interest
                  income
              
              
              (948
              )
              
              (4,580
              )
              
              (3,362
              )
              
              (6,452
              )Equity
                  loss on joint venture
              
              
              428
              
              
              -
              
              
              428
              
              
              -Other
                  expenses - net
              
              
              8,007
              
              
              4,719
              
              
              24,178
              
              
              14,254Income
                  before income taxes
              
              
              28,291
              
              
              24,601
              
              
              82,070
              
              
              67,154Provision
                  for income taxes
              
              
              9,974
              
              
              7,608
              
              
              29,053
              
              
              22,625Net
                  income
              
              $
              18,317
              
              
              16,993
              
              
              53,017
              
              
              44,529Earnings
                  per share:Basic
              
              $
              0.32
              
              
              0.30
              
              
              0.92
              
              
              0.79Diluted
              
              $
              0.30
              
              
              0.28
              
              
              0.87
              
              
              0.73Weighted
                  average number of common shares outstanding:Basic
              
              
              57,841
              
              
              56,801
              
              
              57,662
              
              
              56,569Diluted
              
              
              61,091
              
              
              61,380
              
              
              61,241
              
              
              61,289





See
      Notes
      to Unaudited Condensed Consolidated Financial Statements.


4





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





Unaudited
      Condensed Consolidated Statement of Stockholders' Equity





Nine
      Months Ended September 30, 2008


***(in
      thousands)***


AccumulatedAdditional
              
              
              
              OtherCommon Stock
              
              Paid-in
              
              Retained
              
              Comprehensive
              
              TreasuryShares
              
              Amount
              
              Capital
              
              Earnings
              
              Loss
              
              Stock
              
              TotalBalance
                  at January 1, 2008
              
              
              57,330
              
              $
              58
              
              $
              469,941
              
              $
              60,941
              
              $
              (2,353
              )
              $
              (667
              )
              $
              527,920Shares
                  issued on exercise of stock options
              
              
              519
              
              
              -
              
              
              2,257
              
              
              -
              
              
              -
              
              
              -
              
              
              2,257Shares
                  issued on vesting of restricted stock
              
              
              79
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Shares
                  issued for earn-out on acquisition
              
              
              144
              
              
              -
              
              
              1,877
              
              
              -
              
              
              -
              
              
              -
              
              
              1,877Tax
                  benefit of stock option exercises
              
              
              -
              
              
              -
              
              
              8,958
              
              
              -
              
              
              -
              
              
              -
              
              
              8,958Amortization
                  expense in connection with restricted stock
              
              
              -
              
              
              -
              
              
              6,099
              
              
              -
              
              
              -
              
              
              -
              
              
              6,099Stock
                  option compensation
              
              
              -
              
              
              -
              
              
              135
              
              
              -
              
              
              -
              
              
              -
              
              
              135Shares
                  repurchased on vesting of restricted stock and exercise of stock
                  options
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (700
              )
              
              (700
              )Comprehensive
                  income:Net
                  Income
              
              
              -
              
              
              -
              
              
              -
              
              
              53,017
              
              
              -
              
              
              -
              
              
              53,017Change
                  in fair value of cash flow hedge
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              16
              
              
              -
              
              
              16Change
                  in fair value of securities
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (260
              )
              
              -
              
              
              (260
              )Total
                  comprehensive income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              52,773Balance
                  at September 30, 2008
              
              
              58,072
              
              
              58
              
              
              489,267
              
              
              113,958
              
              
              (2,597
              )
              
              (1,367
              )
              
              599,319





See
      Notes
      to Unaudited Condensed Consolidated Financial Statements.


5





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





Unaudited
      Condensed Consolidated Statements of Cash Flows


(in
      thousands)


Nine Months Ended September 30,2008
              
              2007Cash
                  flows from operating activities:Net
                  income
              
              $
              53,017
              
              
              44,529Depreciation
                  of property and equipment
              
              
              511
              
              
              117Amortization
                  of trademarks and other intangibles
              
              
              5,485
              
              
              3,869Amortization
                  of deferred financing costs
              
              
              1,316
              
              
              847Amortization
                  of convertible note discount
              
              
              1,133
              
              
              359Stock-based
                  compensation expense
              
              
              6,234
              
              
              1,342Bad
                  debt expense
              
              
              1,351
              
              
              1,606Accrued
                  interest on long-term debt
              
              
              983
              
              
              419Gain
                  on sale of trademarks
              
              
              (2,625
              )
              
              -Equity
                  loss on joint venture
              
              
              428
              
              
              -Deferred
                  income taxes
              
              
              20,186
              
              
              22,442Changes
                  in operating assets and liabilities, net of business
                  acquisitions:Accounts
                  receivable
              
              
              (14,315
              )
              
              (18,362
              )Prepaid
                  advertising and other
              
              
              (10,876
              )
              
              (2,843
              )Other
                  assets
              
              
              1,025
              
              
              630Deferred
                  revenue
              
              
              (3,517
              )
              
              2,402Accounts
                  payable and accrued expenses
              
              
              2,795
              
              
              1,057Net
                  cash provided by operating activities
              
              
              63,131
              
              
              58,414Cash
                  flows used in investing activities:Purchases
                  of property and equipment
              
              
              (4,245
              )
              
              (68
              )Additions
                  to trademarks
              
              
              (546
              )
              
              (110
              )Earn-out
                  payment on acquisition
              
              
              (4,453
              )
              
              -Collection
                  on promissory note
              
              
              1,000
              
              
              -Investment
                  in joint venture
              
              
              (2,000
              )
              
              -Payment
                  of accrued expenses related to acquisitions
              
              
              (1,293
              )
              
              (1,537
              )Cash
                  and cash equivalents placed in escrow
              
              
              -
              
              
              (24,000
              )Purchase
                  of marketable securities
              
              
              -
              
              
              (196,400
              )Sale
                  of marketable securities
              
              
              -
              
              
              183,400Acquisition
                  of Danskin
              
              
              -
              
              
              (70,799
              )Acquisition
                  of Rocawear
              
              
              -
              
              
              (204,233
              )Net
                  cash used in investing activities
              
              
              (11,537
              )
              
              (313,747
              )Cash
                  flows provided by (used in) financing activities:Proceeds
                  from long-term debt
              
              
              -
              
              
              493,531Proceeds
                  from exercise of stock options and warrants
              
              
              2,257
              
              
              1,742Proceeds
                  from sale of warrants
              
              
              -
              
              
              37,491Shares
                  repurchased on vesting of restricted stock and exercise of stock
                  options
              
              
              (700
              )Payment
                  of long-term debt
              
              
              (30,748
              )
              
              (14,938
              )Payment
                  of expenses related to common stock issuance
              
              
              -
              
              
              (184
              )Deferred
                  financing costs
              
              
              (6
              )
              
              (5,011
              )Excess
                  tax benefit from share-based payment arrangements
              
              
              8,958
              
              
              -Payment
                  for purchase of convertible note hedge
              
              
              -
              
              
              (76,303
              )Restricted
                  cash - current
              
              
              3,919
              
              
              621Restricted
                  cash - non-current
              
              
              (695
              )
              
              (2,848
              )Net
                  cash provided by (used in) financing activities
              
              
              (17,015
              )
              
              434,101Net
                  increase in cash and cash equivalents
              
              
              34,579
              
              
              178,768Cash,
                  beginning of period
              
              
              48,067
              
              
              73,572Cash,
                  end of period
              
              $
              82,646
              
              
              252,340Balance
                  of restricted cash - current
              
              
              1,286
              
              
              3,647Total
                  cash including current restricted cash, end of period
              
              $
              83,932
              
              
              255,987


6


**Supplemental
      disclosure of cash flow information:**




Nine Months Ended September 30,2008
            
            2007Cash
                paid during the period:Income
                taxes
            
            $
            5,325
            
            $
            1,576Interest
            
            $
            22,811
            
            $
            17,950





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




Nine Months Ended September 30,2008
            
            2007Net
                cost of hedge on convertible note
            
            $
            -
            
            $
            12,107Acquisitions:Common
                stock issued
            
            $
            1,877
            
            $
            496Warrants
                issued - acquisition cost
            
            $
            -
            
            $
            4,931




See
      Notes
      to Unaudited Condensed Consolidated Financial Statements.


7


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





Notes
      to
      Unaudited Condensed Consolidated Financial Statements


September
      30, 2008





**1.
      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 of Iconix Brand Group, Inc.
      ("Company"), 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, 2008 are not necessarily indicative of the
      results that may be expected for a full fiscal year.




Certain
      prior period amounts have been reclassified to conform to the current period’s
      presentation.





For
      further information, refer to the consolidated financial statements and
      footnotes thereto included in the Company's Annual Report on Form 10-K for
      the
      year ended December 31, 2007 (“Fiscal 2007”).





**2.  Fair
      Value Measurements**





Statement
      of Financial Accounting Standards (“SFAS”) No. 157 “Fair Value Measurements”
(“SFAS No. 157”), which the Company adopted on January 1, 2008, establishes a
      framework for measuring fair value and requires expanded disclosures about
      fair
      value measurement. While SFAS No.157 does not require any new fair value
      measurements in its application to other accounting pronouncements, it does
      emphasize that a fair value measurement should be determined based on the
      assumptions that market participants would use in pricing the asset or
      liability. As a basis for considering market participant assumptions in fair
      value measurements, SFAS No. 157 established the following fair value hierarchy
      that distinguishes between (1) market participant assumptions developed based
      on
      market data obtained from sources independent of the reporting entity
      (observable inputs) and (2) the reporting entity's own assumptions about market
      participant assumptions developed based on the best information available in
      the
      circumstances (unobservable inputs):





Level
      1:
      Observable inputs such as quoted prices for identical assets or liabilities
      in
      active markets





Level
      2:
      Other inputs that are observable directly or indirectly, such as quoted prices
      for similar assets or liabilities or market-corroborated inputs





Level
      3:
      Unobservable inputs for which there is little or no market data and which
      requires the owner of the assets or liabilities to develop its own assumptions
      about how market participants would price these assets or
      liabilities





The
      valuation techniques that may be used to measure fair value are as
      follows:





(A)
      Market approach - Uses
      prices and other relevant information generated by market transactions involving
      identical or comparable assets or liabilities





(B)
      Income approach - Uses
      valuation techniques to convert future amounts to a single present amount based
      on current market expectations about those future amounts, including present
      value techniques, option-pricing models and excess earnings method





(C)
      Cost approach - Based
      on the amount that would currently be required to replace the service capacity
      of an asset (replacement cost)





The
      Company relies on a combination of Level 1 inputs generated by market
      transactions of identical instruments and Level 3 inputs using an income
      approach, to determine the fair value of certain financial instruments. The
      Company’s assessment of the significance of a particular input to the fair value
      measurement requires judgment and may affect the valuation of financial assets
      and financial liabilities and their placement within the fair value hierarchy.
      The following table summarizes the instruments measured at fair value at
      September 30, 2008:


8





Carrying Amount as of
              September 30, 2008
              *(000’s omitted)*
            
            Level 1
            
            Level 2
            
            Level 3
            
            Valuation
              TechniqueMarketable
                Securities
            
            
            -
            
            
            -
            
            $
            10,660
            
            
            
            
            
            (B
            )Cash
                Flow Hedge
            
            $
            71
            
            
            -
            
            
            -
            
            
            
            
            
            (A
            )





In
      accordance with the provisions of FSP No. FAS 157-2, Effective Date of FASB
      Statement No. 157, the Company has elected to defer implementation of SFAS
      No.
      157 as it relates to its non-financial assets and non-financial liabilities
      until January 1, 2009 and is evaluating the impact, if any, this standard will
      have on its financial statements.





*Marketable
      Securities*





Marketable
      securities, which are accounted for as available-for-sale, are stated at fair
      value in accordance with SFAS No. 115, “Accounting for Certain Investments in
      Debt and Equity Securities,” (“SFAS No. 115”) and consist of auction rate
      securities. Temporary changes in fair market value are recorded as other
      comprehensive income or loss, whereas other than temporary markdowns will be
      realized through the Company’s income statement.





As
      of
      September 30, 2008, the Company held auction rate securities with a face value
      of $13.0 million and a fair value of $10.7 million. Although these auction
      rate
      securities continue to pay interest according to their stated terms, during
      the
      Current Nine Months the Company recorded an unrealized pre-tax loss of $0.3
      million in other comprehensive loss as a reduction to stockholders’ equity to
      reflect a temporary decline in the fair value of the marketable securities
      reflecting failed auctions due to sell orders exceeding buy orders. The Company
      believes the decrease in fair value is temporary due to general macroeconomic
      market conditions, as interest is being paid in full as scheduled, the Company
      has the ability to hold the securities until an anticipated full redemption,
      and
      the underlying securities have maintained their investment grade rating. These
      funds will not be available to the Company until a successful auction occurs
      or
      a buyer is found outside the auction process. As these instruments have failed
      to auction and may not auction successfully in the near future, the Company
      has
      classified its marketable securities as non-current. The following table
      summarizes the activity for the period:




Description*(000's omitted)*
            
            Auction
              Rate
              SecuritiesBalance
                at January 1, 2008
            
            $
            10,920Additions
            
            
            -Gains
                (losses) reported in earnings
            
            
            -Gains
                (losses) reported in other comprehensive income (loss)
            
            
            (260
            )Balance
                at September 30, 2008
            
            $
            10,660




*Cash
      Flow Hedge*





On
      July
      26, 2007, the Company purchased a hedge instrument from Lehman Brothers Special
      Financing Inc. (“LBSF”) to mitigate the cash flow risk of rising interest rates
      on the Term Loan Facility (see Note 4). This hedge instrument caps the Company’s
      exposure to rising interest rates at 6.00% for LIBOR for 50% of the forecasted
      outstanding balance of the Term Loan Facility (“Interest Rate Cap”). Based on
      management’s assessment, the Interest Rate Cap qualifies for hedge accounting
      under SFAS 133 “Accounting for Derivative Instruments and Hedging Transactions”.
      On a quarterly basis, the value of the hedge is adjusted to reflect its current
      fair value, with any adjustment flowing through other comprehensive income.
      The
      fair value of this instrument is calculated based on Level 1 inputs. At
      September 30, 2008, the fair value of the Interest Rate Cap was $71,000,
      resulting in an other comprehensive gain of $16,000 for the Current Nine Months,
      which is reflected in the Unaudited Condensed Consolidated Balance Sheet and
      Statement of Stockholders’ Equity, respectively. On October 3, 2008, LBSF filed
      a petition for bankruptcy protection under Chapter 11 of the United States
      Bankruptcy Code. The Company currently believes that the LBSF bankruptcy filing
      and its potential impact on LBSF will not have a material adverse effect on
      the
      Company’s financial position, results of operations or cash
      flows.


9





**3.  Trademarks
      and Other Intangibles, net**




Trademarks
      and other intangibles, net consist of the following:


September 30, 2008
              
              December 31, 2007Estimated
              
              Gross
              
              
              
              GrossLives in
              
              Carrying
              
              Accumulated
              
              Carrying
              
              Accumulated***(****000's omitted)*
              
              Years
              
              Amount
              
              Amortization
              
              Amount
              
              AmortizationTrademarks:Indefinite
                  life trademarks
              
              
              indefinite
              
              $
              1,007,921
              
              $
              9,498
              
              $
              1,007,625
              
              $
              9,498Definite
                  life trademarks
              
              
              10-15
              
              
              19,147
              
              
              1,903
              
              
              18,897
              
              
              856Non-compete
                  agreements
              
              
              2-15
              
              
              10,075
              
              
              5,720
              
              
              10,075
              
              
              4,585Licensing
                  agreements
              
              
              1.5-6
              
              
              21,093
              
              
              8,115
              
              
              21,093
              
              
              4,897Domain
                  names
              
              
              5
              
              
              570
              
              
              308
              
              
              570
              
              
              223$
              1,058,806
              
              $
              25,544
              
              $
              1,058,260
              
              $
              20,059




Amortization
      expense for intangible assets for the Current Nine Months and the nine months
      ended September 30, 2007 (“Prior Year Nine Months”) was $5.5 million and $3.9
      million, respectively. The trademarks of Candies®, Bongo®, Joe Boxer®, Rampage®,
      Mudd®, London Fog®, Mossimo®, Ocean Pacific®, Danskin®, Rocawear®, Cannon®,
      Royal Velvet®, Fieldcrest®, Charisma®, and Starter® have been determined to have
      an indefinite useful life and accordingly, consistent with SFAS No. 142, no
      amortization has been recorded in the Company's consolidated income statements.
      Instead, each of these intangible assets will be tested for impairment at least
      annually on an individual basis as separate single units of accounting, with
      any
      related impairment charge recorded to the statement of operations at the time
      of
      determining such impairment.




**4.  Debt
      Arrangements**




The
      Company's debt is comprised of the following:


September 30,
              
              December 31,*(000’s omitted)*
              
              2008
              
              2007Convertible
                  Senior Subordinated Notes
              
              $
              282,684
              
              $
              281,714Term
                  Loan Facility
              
              
              255,307
              
              
              270,751Asset-Backed
                  Notes
              
              
              122,364
              
              
              137,505Sweet
                  Note (Note 7)
              
              
              12,186
              
              
              12,186Total
                  Debt
              
              $
              672,541
              
              $
              702,156




*Convertible
      Senior Subordinated Notes*





On
      June
      20, 2007, the Company completed the issuance of $287.5 million principal amount
      of the Company's 1.875% convertible senior subordinated notes due 2012 (the
      “Convertible Notes”) in a private offering to certain institutional investors.
      The net proceeds received by the Company from the offering were approximately
      $281.1 million.




The
      Convertible Notes bear interest at an annual rate of 1.875%, payable
      semi-annually in arrears on June 30 and December 31 of each year, beginning
      December 31, 2007. The Convertible Notes will be convertible into cash and,
      if
      applicable, shares of the Company's common stock based on a conversion rate
      of
      36.2845 shares of the Company's common stock, subject to customary adjustments,
      per $1,000 principal amount of the Convertible Notes (which is equal to an
      initial conversion price of approximately $27.56 per share) only under the
      following circumstances: (1) during any fiscal quarter beginning after September
      30, 2007 (and only during such fiscal quarter), if the closing price of the
      Company's common stock for at least 20 trading days in the 30 consecutive
      trading days ending on the last trading day of the immediately preceding fiscal
      quarter is more than 130% of the conversion price per share, which is $1,000
      divided by the then applicable conversion rate; (2) during the five business
      day
      period immediately following any five consecutive trading day period in which
      the trading price per $1,000 principal amount of the Convertible Notes for
      each
      day of that period was less than 98% of the product of (a) the closing price
      of
      the Company's common stock for each day in that period and (b) the conversion
      rate per $1,000 principal amount of the Convertible Notes; (3) if specified
      distributions to holders of the Company's common stock are made, as set forth
      in
      the indenture governing the Convertible Notes (“Indenture”); (4) if a “change of
      control” or other “fundamental change,” each as defined in the Indenture,
      occurs; (5) if the Company chooses to redeem the Convertible Notes upon the
      occurrence of a “specified accounting change,” as defined in the Indenture; and
      (6) during the last month prior to maturity of the Convertible Notes. If the
      holders of the Convertible Notes exercise the conversion provisions under the
      circumstances set forth, the Company will need to remit the lower of the
      principal balance of the Convertible Notes or their conversion value to the
      holders in cash. As such, the Company would be required to classify the entire
      amount outstanding of the Convertible Notes as a current liability in the
      following quarter. The evaluation of the classification of amounts outstanding
      associated with the Convertible Notes will occur every quarter.


10





Upon
      conversion, a holder will receive an amount in cash equal to the lesser of
      (a)
      the principal amount of the Convertible Note or (b) the conversion value,
      determined in the manner set forth in the Indenture. If the conversion value
      exceeds the principal amount of the Convertible Note on the conversion date,
      the
      Company will also deliver, at its election, cash or the Company's common stock
      or a combination of cash and the Company's common stock for the conversion
      value
      in excess of the principal amount. In the event of a change of control or other
      fundamental change, the holders of the Convertible Notes may require the Company
      to purchase all or a portion of their Convertible Notes at a purchase price
      equal to 100% of the principal amount of the Convertible Notes, plus accrued
      and
      unpaid interest, if any. If a specified accounting change occurs, the Company
      may, at its option, redeem the Convertible Notes in whole for cash, at a price
      equal to 102% of the principal amount of the Convertible Notes, plus accrued
      and
      unpaid interest, if any. Holders of the Convertible Notes who convert their
      Convertible Notes in connection with a fundamental change or in connection
      with
      a redemption upon the occurrence of a specified accounting change may be
      entitled to a make-whole premium in the form of an increase in the conversion
      rate.




Pursuant
      to Emerging Issues Task Force (“EITF”) 90-19, “Convertible Bonds with Issuer
      Option to Settle for Cash upon Conversion” (“EITF 90-19”), EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
      Settled in, a Company's Own Stock” (“EITF 00-19”), and EITF 01-6, “The Meaning
      of Indexed to a Company's Own Stock” (“EITF 01-6”), the Convertible Notes are
      accounted for as convertible debt in the accompanying Condensed Consolidated
      Balance Sheet and the embedded conversion option in the Notes has not been
      accounted for as a separate derivative. For a discussion of the effects of
      the
      Convertible Notes and the Convertible Note Hedge and Sold Warrants discussed
      below on earnings per share, see Note 6.





At
      September 30, 2008, the balance of the Convertible Notes was $282.7 million.
      The
      Convertible Notes do not provide for any financial covenants.




In
      connection with the sale of the Convertible Notes, the Company entered into
      hedges for the Convertible Notes (“Convertible Note Hedges”) with respect to its
      common stock with two entities, one of which was Lehman Brothers OTC Derivatives
      Inc. (“Lehman OTC” and together with the other counterparty, the
“Counterparties”). Pursuant to the agreements governing these Convertible Note
      Hedges, the Company purchased call options (the “Purchased Call Options”) from
      the Counterparties covering up to approximately 10.4 million shares of the
      Company's common stock of which 40% were purchased from Lehman OTC. These
      Convertible Note Hedges are designed to offset the Company's exposure to
      potential dilution upon conversion of the Convertible Notes in the event that
      the market value per share of the Company's common stock at the time of exercise
      is greater than the strike price of the Purchased Call Options (which strike
      price corresponds to the initial conversion price of the Convertible Notes
      and
      is simultaneously subject to certain customary adjustments). On June 20, 2007,
      the Company paid an aggregate amount of approximately $76.3 million of the
      proceeds from the sale of the Convertible Notes for the Purchased Call Options,
      of which $26.7 million was included in the balance of deferred income tax assets
      at June 30, 2007 and is being recognized over the term of the Convertible Notes.
      As of September 30, 2008, the balance of deferred income tax assets related
      to
      this transaction was $20.1 million.




The
      Company also entered into separate warrant transactions with the Counterparties
      whereby the Company, pursuant to the agreements governing these warrant
      transactions, sold to the Counterparties warrants (the “Sold Warrants”) to
      acquire up to 3.6 million shares of the Company's common stock of which 40%
      were
      sold to Lehman OTC, at a strike price of $42.40 per share of the Company's
      common stock. The Sold Warrants will become exercisable on September 28, 2012
      and will expire by the end of 2012. The Company received aggregate proceeds
      of
      approximately $37.5 million from the sale of the Sold Warrants on June 20,
      2007.





Pursuant
      to Emerging Issues Task Force (EITF) Issue No. 00-19 “Accounting for Derivative
      Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
      Stock,” (EITF 00-19), and EITF Issue No. 01-06, “The Meaning of Indexed to a
      Company’s Own Stock” (EITF 01-06), the Convertible Note Hedge and the proceeds
      received from the issuance of the Sold Warrants were recorded as a charge and
      an
      increase, respectively, in additional paid-in capital in stockholders’ equity as
      separate equity transactions. As a result of these transactions, the Company
      recorded a net reduction to additional paid-in-capital of $12.1 million in
      June
      2007.


11





As
      the
      Convertible Note Hedge transactions and the warrant transactions were separate
      transactions entered into by the Company with the Counterparties, they are
      not
      part of the terms of the Convertible Notes and will not affect the holders'
      rights under the Convertible Notes. In addition, holders of the Convertible
      Notes will not have any rights with respect to the Purchased Call Options or
      the
      Sold Warrants.





If
      the
      market value per share of the Company's common stock at the time of conversion
      of the Convertible Notes is above the strike price of the Purchased Call
      Options, the Purchased Call Options entitle the Company to receive from the
      Counterparties net shares of the Company's common stock, cash or a combination
      of shares of the Company's common stock and cash, depending on the consideration
      paid on the underlying Convertible Notes, based on the excess of the then
      current market price of the Company's common stock over the strike price of
      the
      Purchased Call Options. Additionally, if the market price of the Company's
      common stock at the time of exercise of the Sold Warrants exceeds the strike
      price of the Sold Warrants, the Company will owe the Counterparties net shares
      of the Company's common stock or cash, not offset by the Purchased Call Options,
      in an amount based on the excess of the then current market price of the
      Company's common stock over the strike price of the Sold Warrants.




These
      transactions will generally have the effect of increasing the conversion price
      of the Convertible Notes to $42.40 per share of the Company's common stock,
      representing a 100% percent premium based on the last reported sale price of
      the
      Company’s common stock of $21.20 per share on June 14, 2007.





In
      May
      2008 the Financial Accounting Standards Board (“FASB”) issued FASB Staff
      Position (“FSP”) APB 14-1 “Accounting for Convertible Debt Instruments That May
      Be Settled in Cash Upon Conversion (Including Partial Cash Settlements)”
(previously FSP APB 14-a), which will change the accounting treatment for
      convertible securities that an issuer may settle fully or partially in cash.
      Under the final FSP, cash-settled convertible securities will be separated
      into
      their debt and equity components. The value assigned to the debt component
      will
      be the estimated fair value, as of the issuance date, of a similar debt
      instrument without the conversion feature. As a result, the debt will be
      recorded at a discount to adjust its below-market coupon interest rate to the
      market coupon interest rate for the similar debt instrument without the
      conversion feature. The difference between the proceeds for the convertible
      debt
      and the amount reflected as the debt component represents the value of the
      conversion feature and will be recorded as additional paid-in capital. The
      debt
      will subsequently be accreted to its par value over its expected life, with
      an
      offsetting increase in interest expense on the income statement to reflect
      the
      market rate for the debt component at the date of issuance.





Beginning
      with fiscal 2009, and applied retrospectively to all past periods
      presented, the Company will be required to adopt the provisions of FSP
      APB 14-1 as they relate to the Convertible Notes. As compared to the
      current accounting for the Convertible Notes, adoption of the proposal will
      reduce long-term debt, increase stockholders’ equity, and reduce net income and
      earnings per share. Adoption of the proposal would not affect the
      Company's cash flows. The Company estimates that the impact of this change
      in accounting policy will be approximately $13.1 million of non-cash interest
      expense for the full year 2009 as compared to a $12.2 million of non-cash
      interest expense the Company would have incurred for the full year 2008 had
      APB
      14-1 been adopted on January 1, 2008.




On
      September 15, 2008 and October 3, 2008,
      respectively, Lehman Brothers Holdings Inc. (“Lehman Holdings”) and its
      subsidiary, Lehman OTC, filed for protection under Chapter 11 of the United
      States Bankruptcy Code in the United States Bankruptcy Court in the Southern
      District of New York. The Company currently believes that the bankruptcy filings
      and their potential impact on these entities will not have a material adverse
      effect on the Company’s financial position, results of operations or cash flows.
      The Company will continue to monitor the bankruptcy filings of Lehman Holdings
      and Lehman OTC. The terms of the Convertible Notes and the rights of the holders
      of the Convertible Notes are not affected in any way by the bankruptcy filings
      of Lehman Holdings or Lehman OTC.





*Term
      Loan Facility*





In
      connection with the acquisition of the Rocawear brand, in March 2007, the
      Company entered into a $212.5 million credit agreement with Lehman Brothers
      Inc., as lead arranger and bookrunner, and Lehman Commercial Paper Inc.
      (“LCPI”), as syndication agent and administrative agent (the “Credit Agreement”
or “Term Loan Facility”). At the time, the Company pledged to LCPI, for the
      benefit of the lenders under the Term Loan Facility (the “Lenders”), 100% of the
      capital stock owned by the Company in its subsidiaries, OP Holdings and
      Management Corporation, a Delaware corporation (“OPHM”), and Studio Holdings and
      Management Corporation, a Delaware corporation (“SHM”). The Company's
      obligations under the Credit Agreement are guaranteed by each of OPHM and SHM,
      as well as by two of its other subsidiaries, OP Holdings LLC, a Delaware limited
      liability company (“OP Holdings”), and Studio IP Holdings LLC, a Delaware
      limited liability company ("Studio IP Holdings").




On
      October 3, 2007, in connection with the acquisition of Official-Pillowtex LLC,
      a
      Delaware limited liability company (“Official-Pillowtex”), with the proceeds of
      the Convertible Notes, the Company pledged to LCPI, for the benefit of the
      Lenders, 100% of the capital stock owned by the Company in Mossimo, Inc., a
      Delaware corporation (“MI”), and Pillowtex Holdings and Management Corporation,
      a Delaware corporation (“PHM”), each of which guaranteed the Company’s
      obligations under the Credit Agreement. Simultaneously with the acquisition
      of
      Official-Pillowtex, each of Mossimo Holdings LLC, a Delaware limited
      liability company (“Mossimo Holdings”), and Official-Pillowtex guaranteed the
      Company’s obligations under the Credit Agreement.





On
      December 17, 2007, in connection with the acquisition of the Starter brand,
      the
      Company borrowed $63.2 million pursuant to the Term Loan Facility (the
“Additional Borrowing”). The net proceeds received by the Company from the
      Additional Borrowing were $60 million.


12





The
      guarantees are secured by a pledge to LCPI, for the benefit of the Lenders,
      of,
      among other things, the Ocean Pacific, Danskin, Rocawear, Mossimo, Cannon,
      Royal
      Velvet, Fieldcrest, Charisma, and Starter trademarks and related intellectual
      property assets, license agreements and proceeds therefrom. Amounts outstanding
      under the Term Loan Facility bear interest, at the Company’s option, at the
      Eurodollar rate or the prime rate, plus an applicable margin of 2.25% or 1.25%,
      as the case may be, per annum. The Credit Agreement provides that the Company
      is
      required to repay the outstanding term loan in equal quarterly installments
      in
      annual aggregate amounts equal to 1.00% of the aggregate principal amount of
      the
      loans outstanding, subject to adjustment for prepayments, in addition to an
      annual payment equal to 50% of the excess cash flow from the subsidiaries
      subject to the Term Loan Facility, as described in the Credit Agreement, with
      any remaining unpaid principal balance to be due on April 30, 2013 (the “Loan
      Maturity Date”). Upon completion of the Convertible Notes offering, the Loan
      Maturity Date was accelerated to January 2, 2012. The Term Loan Facility can
      be
      prepaid, without penalty, at any time. On March 11, 2008, the Company paid
      to
      LCPI, for the benefit of the Lenders, $15.6 million, representing 50% of the
      excess cash flow from the subsidiaries subject to the Term Loan Facility for
      Fiscal 2007. As a result of such payment, the Company is no longer required
      to
      pay the quarterly installments described above. The Term Loan Facility requires
      the Company to repay the principal amount of the term loan outstanding in an
      amount equal to 50% of the excess cash flow of the subsidiaries subject to
      the
      Term Loan Facility for the most recently completed fiscal year. If the Term
      Loan
      Facility had required the Company to repay the principal amount of the term
      loan
      outstanding based on the excess cash flow of such subsidiaries for the Current
      Nine Months rather than based upon the fiscal year end results, the Company
      would have been required to pay approximately $28.8 million, representing 50%
      of
      the excess cash flow of such subsidiaries for that nine-month period. This
      amount is now included in the Current portion of long-term debt. However, in
      accordance with the terms of the Term Loan Facility as noted above, the
      next calculation for determining the actual excess cash flow payment the Company
      will be required to make under the Term Loan Facility will be based on the
      results of the subsidiaries subject to the Term Loan Facility for the 12 months
      ending December 31, 2008, and therefore the $28.8 million shown in Current
      portion of long-term debt will more than likely change. The interest rate as
      of
      September 30, 2008 was 5.06%. At September 30, 2008, the balance of the Term
      Loan Facility was $255.3 million.  As of September 30, 2008, the Company
      was in compliance with all material covenants set forth in the Credit Agreement.
      The $272.5 million in proceeds from the Term Loan Facility were used by the
      Company as follows: $204.0 million was used to pay the cash portion of the
      initial consideration for the acquisition of the Rocawear brand; $2.1 million
      was used to pay the costs associated with the Rocawear acquisition; $60 million
      was used to pay the consideration for the acquisition of the Starter brand;
      and
      $3.9 million was used to pay costs associated with the Term Loan Facility.
      The
      costs of $3.9 million relating to the Term Loan Facility have been deferred
      and
      are being amortized over the life of the loan, using the effective interest
      method. As of September 30, 2008, the subsidiaries subject to the Term Loan
      Facility were Studio IP Holdings, OP Holdings, Mossimo Holdings and
      Official-Pillowtex. As of September 30, 2008, these subsidiaries owned the
      following trademarks: Danskin, Rocawear, Starter, Ocean Pacific/OP, Mossimo,
      Cannon, Royal Velvet, Fieldcrest, and Charisma.





On
      July
      26, 2007, the Company purchased a hedge instrument to mitigate the cash flow
      risk of rising interest rates on the Term Loan Facility. See Note 2 for further
      information.





*Asset-Backed
      Notes*





The
      financing for certain of the Company's acquisitions has been accomplished
      through private placements by its subsidiary, IP Holdings LLC ("IP
      Holdings") of asset-backed notes ("Asset-Backed Notes") secured
      by intellectual property assets (trade names, trademarks, license agreements
      and
      payments and proceeds with respect thereto relating to the Candie’s, Bongo, Joe
      Boxer, Rampage, Mudd and London Fog brands) of IP Holdings. At September 30,
      2008, the balance of the Asset-Backed Notes was $122.4
      million.




Cash
      on
      hand in the bank account of IP Holdings 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, $1.3 million and $5.2 million as of September
      30, 2008 and December 31, 2007, respectively, have been disclosed as restricted
      cash within the Company's Current assets. Further, in connection with IP
      Holdings' issuance of Asset-Backed Notes, a reserve account has been established
      and the funds on deposit in such account will be applied to the final principal
      payment with respect to the Asset-Backed Notes. Accordingly, $15.9 million
      and
      $15.2 million as of September 30, 2008 and December 31, 2007, respectively,
      have
      been disclosed as restricted cash within Other assets on the Company's balance
      sheets.





Interest
      rates and terms on the outstanding principal amount of the Asset-Backed Notes
      as
      of September 30, 2008 are as follows: $42.6 million principal amount bears
      interest at a fixed interest rate of 8.45% with a six year term, $18.9 million
      principal amount bears interest at a fixed rate of 8.12% with a six year term,
      and $60.9 million principal amount bears interest at a fixed rate of 8.99%
      with
      a six and a half year term. The Asset-Backed Notes have no financial covenants
      by which the Company or its subsidiaries need comply. The aggregate principal
      amount of the Asset-Backed Notes will be fully paid by February 22,
      2013.




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


13





*Sweet
      Note*





On
      April
      23, 2002, the Company acquired the remaining 50% interest in Unzipped (see
      Note
      7) from Sweet Sportswear, LLC (“Sweet”) for a purchase price comprised of
      3,000,000 shares of its common stock and $11.0 million in debt, which was
      evidenced by the Company’s issuance of the 8% Senior Subordinated Note due in
      2012 (“Sweet Note”). Prior to August 5, 2004, Unzipped was managed by Sweet
      pursuant to the Management Agreement (as defined in Note 7), which obligated
      Sweet to manage the operations of Unzipped in return for, commencing in fiscal
      2003, an annual management fee based upon certain specified percentages of
      net
      income achieved by Unzipped during the three- year term of the agreement. In
      addition, Sweet guaranteed that the net income, as defined in the agreement,
      of
      Unzipped would be no less than $1.7 million for each year during the term,
      commencing with fiscal 2003. In the event that the guarantee was not met for
      a
      particular year, Sweet was obligated under the Management Agreement to pay
      the
      Company the difference between the actual net income of Unzipped, as defined,
      for such year and the guaranteed $1.7 million. That payment, referred to as
      the
      shortfall payment, could be offset against the amounts due under the Sweet
      Note
      at the option of either the Company or Sweet. As a result of such offsets,
      the
      balance of the Sweet Note was reduced by the Company to $3.1 million as of
      December 31, 2006 and $3.0 million as of December 31, 2005 and was reflected
      in Long- term debt. This note bears interest, which was accrued for in the
      Current Nine Months, at the rate of 8% per year and matures in April
      2012.




In
      November 2007, the Company received a signed judgment related to the Sweet
      Sportswear/Unzipped litigation. See Note 9.





The
      judgment stated that the Sweet Note (originally $11.0 million when issued by
      the
      Company upon the acquisition of Unzipped from Sweet in 2002) should total
      approximately $12.2 million as of December 31, 2007. The recorded balance of
      the
      Sweet Note, prior to any adjustments related to the judgment was approximately
      $3.2 million. The Company increased the Sweet Note by approximately $6.2 million
      and recorded the expense as a special charge. The Company further increased
      the
      Sweet Note by approximately $2.8 million to record the related interest and
      included the charge in interest expense. The Sweet Note as of September 30,
      2008
      is approximately $12.2 million and included in the current portion of long-term
      debt.





In
      addition, in November 2007 the Company was awarded a judgment of approximately
      $12.2 million for claims made by it against Hubert Guez and Apparel Distribution
      Services, Inc. As a result, the Company recorded a receivable of approximately
      $12.2 million and recorded the benefit in special charges in Fiscal 2007. This
      receivable is included in other assets - non-current and bears interest, which
      was accrued for in the Current Nine Months, at the rate of 8% per
      year.




*Debt
      Maturities*





A
      breakdown of the Company’s estimated current portion of its long-term debt
      maturities as of September 30, 2008 are as follows:




*(000’s
                omitted)*
            
            September
                30,
              2008Convertible
                Notes
            
            $
            -Term
                Loan Facility
            
            
            28,765Asset-Backed
                Notes
            
            
            21,760Sweet
                Note
            
            
            12,186Total
                Debt
            
            $
            62,711





The
      Company’s debt maturities on a calendar year basis are as follows:





*(000’s
                omitted)*
            
            Total
            
            Q4
              2008
            
            2009
            
            2010
            
            2011
            
            2012
            
            2013Convertible
                Notes
            
            $
            282,684
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            282,684
            
            
            -Term
                Loan Facility
            
            
            255,307
            
            
            -
            
            
            28,765
            
            
            -
            
            
            -
            
            
            226,542
            
            
            -Asset-Backed
                Notes
            
            
            122,364
            
            
            5,267
            
            
            22,231
            
            
            24,216
            
            
            26,380
            
            
            33,468
            
            
            10,802Sweet
                Note
            
            
            12,186
            
            
            12,186
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                Debt
            
            $
            672,541
            
            $
            17,453
            
            $
            50,996
            
            
            24,216
            
            
            26,380
            
            
            542,694
            
            
            10,802





**5.  Stockholders'
      Equity**





*Stock
      Options*





The
      Black-Scholes option valuation model was developed for use in estimating the
      fair value of traded options which have no vesting restrictions and are fully
      transferable. In addition, option valuation models require the input of highly
      subjective assumptions including the expected stock price volatility. Because
      the Company's employee stock options have characteristics significantly
      different from those of traded options, and because changes in the subjective
      input assumptions can materially affect the fair value estimate, in management's
      opinion, the existing models do not necessarily provide a reliable single
      measure of the fair value of its employee stock options.


14





The
      fair
      value for these options and warrants was estimated at the date of grant using
      a
      Black-Scholes option-pricing model with the following weighted-average
      assumptions:





Expected
                Volatility
            
            
            30
                - 50%Expected
                Dividend Yield
            
            
            0%Expected
                Life (Term)
            
            
            3
                -
                7 yearsRisk-Free
                Interest Rate
            
            
            3.00
                - 4.75%





The
      options that the Company granted under its plans expire at
      various times, either five, seven or ten years from the date of grant, depending
      on the particular grant.





Summaries
      of the Company's stock options, warrants and performance related options
      activity, and related information for the Current Quarter are as
      follows:


Options
              
              Weighted-
                Average
                Exercise
                  PriceOutstanding
                  January 1, 2008
              
              
              5,106,543
              
              $
              4.23Granted
              
              
              -
              
              
              -Canceled
              
              
              -
              
              
              -Exercised
              
              
              519,405
              
              
              4.50Expired
              
              
              -
              
              
              -Outstanding
                  September 30, 2008
              
              
              4,587,138
              
              
              4.20Exercisable
                  at September 30, 2008
              
              
              4,569,138
              
              
              4.15


Warrants
              
              Weighted-
                Average
                Exercise
                  PriceOutstanding
                  January 1, 2008
              
              
              266,900
              
              $
              16.76Granted
              
              
              -Canceled
              
              
              -Exercised
              
              
              -Expired
              
              
              -Outstanding
                  September 30, 2008
              
              
              266,900
              
              $
              16.76Exercisable
                  at September 30, 2008
              
              
              266,900
              
              $
              16.76





All
      warrants issued in connection with acquisitions are recorded at fair market
      value using the Black Scholes model and are recorded as part of purchase
      accounting. Certain warrants are exercised using the cashless
      method.





The
      Company values other warrants issued to non-employees at the commitment date
      at
      the fair market value of the instruments issued, a measure which is more readily
      available than the fair market value of services rendered, using the Black
      Scholes model. The fair market value of the instruments issued is expensed
      over
      the vesting period.


15


*Restricted
      stock*





Compensation
      cost for restricted stock is measured as the excess, if any, of the quoted
      market price of the Company’s stock at the date the common stock is issued over
      the amount the employee must pay to acquire the stock (which is generally zero).
      The compensation cost, net of projected forfeitures, is recognized over the
      period between the issue date and the date any restrictions lapse, with
      compensation cost for grants with a graded vesting schedule recognized on a
      straight-line basis over the requisite service period for each separately
      vesting portion of the award as if the award was, in substance, multiple awards.
      The restrictions do not affect voting and dividend rights.





The
      Company has granted restricted stock-based awards to certain
      employees. The awards have restriction periods tied to employment and vest
      over
      a period of up to five years. The cost of the restricted stock-based awards,
      which is the fair market value on the date of grant net of estimated
      forfeitures, is expensed ratably over the vesting period. During the Current
      Nine Months, the Company awarded an aggregate of 1,658,698 restricted
      stock-based awards, of which 315,116 are performance based. During the Prior
      Year Nine Months, the Company awarded an aggregate of 79,545 restricted
      stock-based awards, none of which were performance based. The securities awarded
      during the Current Nine Months and the Prior Year Nine Months have a vesting
      period of up to five years and a fair market value of approximately $32.9
      million and $1.6 million, respectively. During the Current Nine Months, 98,242
      restricted stock-based awards had vested.





Unearned
      compensation expense related to restricted securities grants for the Current
      Nine Months and the Prior Year Nine Months was approximately $6.2 million and
      $1.2 million, respectively. An additional amount of $25.7 million is expected
      to
      be expensed evenly over a period of approximately three months to five
      years.





The
      following tables summarize information about unvested restricted securities
      transactions:




Securities
            
            Weighted
              Average
              Grant
                Date
              Fair
                ValueNon-vested,
                January 1, 2008
            
            
            144,127
            
            $
            19.41Granted
            
            
            1,658,698
            
            
            19.86Vested
            
            
            (98,242
            )
            
            19.09Forfeited
            
            
            -
            
            
            -Non-vested,
                September 30, 2008
            
            
            1,704,583
            
            $
            19.86




*Stockholder
      Rights Plan*





In
      January 2000, the Company's Board of Directors adopted a stockholder rights
      plan. Under the plan, each holder of common stock received a dividend of
      one right for each share of the Company's outstanding common stock, entitling
      the holder to purchase one thousandth of a share of Series A Junior
      Participating Preferred Stock, par value, $0.01 per share of the Company, at
      an
      initial exercise price of $6.00. The rights become exercisable and will trade
      separately from the common stock ten business days after any person or group
      acquires 15% or more of the common stock, or ten business days after any person
      or group announces a tender offer for 15% or more of the outstanding common
      stock.





*Securities
      Available for Issuance*





As
      of
      September 30, 2008, the number of securities remaining available for issuance
      under the Company’s 2001, 2002 and 2006 equity compensation plans, excluding
      securities to be issued upon exercise of outstanding options, warrants, and
      rights, is 51,750, 32,274, and 138,465, respectively.





**6.  Earnings
      Per Share**





Basic
      earnings per share includes no dilution and is computed by dividing net income
      available to common stockholders by the weighted average number of common shares
      outstanding for the period. Diluted earnings per share reflect, in periods
      in
      which they have a dilutive effect, the effect of restricted stock-based awards
      and common shares issuable upon exercise of stock options and warrants. The
      difference between basic and diluted weighted-average common shares results
      from
      the assumption that all dilutive stock options outstanding were exercised and
      all convertible notes have been converted into common stock.





As
      of
      September 30, 2008, of the total potentially dilutive shares related to
      restricted stock-based awards, stock options and warrants, 1.9 million were
      anti-dilutive. As of September 30 2007, 3.6_ million warrants to purchase common
      stock shares were anti-dilutive, and no restricted stock-based awards or stock
      options were anti-dilutive.


16





As
      of
      September 30, 2008, of the performance related restricted stock-based
      awards issued in connection with the Company’s new employment agreement
      with its chairman, chief executive officer and president, 1.2 million of such
      awards (which is included in the total 1.9 million anti-dilutive stock-based
      awards described above) were anti-dilutive and therefore not included in this
      calculation.





Warrants
      issued in connection with the Company’s Convertible Notes financing were
      anti-dilutive and therefore not included in this calculation. Portions of the
      convertible note that would be subject to conversion to common stock were
      anti-dilutive as of September 30, 2008 and therefore not included in this
      calculation.





A
      reconciliation of shares used in calculating basic and diluted earnings per
      share follows:


For the Three
                
                For the NineMonths Ended
                
                Months Ended*(000's omitted)*
                
                September 30,
                
                September 30,2008
                
                2007
                
                2008
                
                2007Basic
                
                
                57,841
                
                
                56,801
                
                
                57,662
                
                
                56,569Effect
                    of exercise of stock options
                
                
                3,106
                
                
                4,579
                
                
                3,426
                
                
                4,720Effect
                    of contingent common stock issuance
                
                
                144
                
                
                -
                
                
                144
                
                
                -Effect
                    of assumed vesting of restricted stock
                
                
                -
                
                
                -
                
                
                9
                
                
                -Diluted
                
                
                61,091
                
                
                61,380
                
                
                61,241
                
                
                61,289





**7.
      Unzipped Apparel, LLC (** ***“Unzipped”*** **)**





On
      October 7, 1998, the Company formed Unzipped with its then joint venture partner
      Sweet Sportswear, LLC (“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.




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. See Note 4. In connection
      with
      the acquisition of Unzipped, the Company filed a registration statement with
      the
      Securities and Exchange Commission ("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.





Prior
      to
      August 5, 2004, Unzipped was managed by Sweet pursuant to a management agreement
      (the “Management Agreement”). Unzipped also had a supply agreement with Azteca
      Productions International, Inc. ("Azteca") and a distribution agreement with
      Apparel Distribution Services, LLC ("ADS"). All of these entities are owned
      or
      controlled by Hubert Guez.





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 Hubert Guez. See Note 9.





There
      were no transactions with these related parties during the Current Nine Months
      and the Prior Year Nine Months.





In
      November 2007, a judgment was entered in the Unzipped litigation, pursuant
      to
      which the $3.1 million in accounts payable to ADS/Azteca (previously shown
      as
“accounts payable - subject to litigation”) was eliminated and recorded in the
      income statement as a benefit to the “expenses related to specific
      litigation”.





As
      a
      result of the judgment, in Fiscal 2007 the balance of the $11.0 million
      principal amount Sweet Note, originally issued by the Company upon the
      acquisition of Unzipped from Sweet in 2002, including interest, was increased
      from approximately $3.2 million to approximately $12.2 million as of December
      31, 2007. Of this increase, approximately $6.2 million was attributed to the
      principal of the Sweet Note and the expense was recorded as an expense related
      to specific litigation. The remaining $2.8 million of the increase was
      attributed to related interest on the Sweet Note and recorded as interest
      expense. As of September 30, 2008, the full $12.2 million current balance of
      the
      Sweet Note and $0.7 million of accrued interest are included in the current
      portion of long term debt and accounts payable and accrued expenses,
      respectively.





In
      addition, in November 2007 the Company was awarded a judgment of approximately
      $12.2 million for claims made by it against Hubert Guez and ADS. As a result,
      the Company recorded a receivable of approximately $12.2 million and recorded
      the benefit in special charges for Fiscal 2007. As of September 30, 2008, this
      receivable and the associated accrued interest of $0.7 million for the Current
      Nine Months are included in other assets - non-current.


17





**8.  Expenses
      Related to Specific Litigation**





Expenses
      related to specific litigation consist of legal expenses and costs related
      to
      the Unzipped litigation. For the Current Nine Months and Prior Year Nine Months,
      the Company recorded expenses related to specific litigation of $0.7 million
      and
      $1.1 million, respectively. See Note 7 for information relating to
      Unzipped.





**9.  Commitments
      and Contingencies**





***Sweet
      Sportswear/Unzipped litigation***





On
      August 5, 2004, the Company, along with its subsidiaries, Unzipped, Michael
      Caruso & Co., referred to as Caruso, and IP Holdings, 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, Azteca and 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 Guez defendants. The Company pursued
      numerous causes of action against the Guez defendants, including breach of
      contract, breach of fiduciary duty, trademark infringement and others and sought
      damages in excess of $20 million. On March 10, 2005, Sweet, Azteca and ADS,
      collectively referred to as cross-complainants, filed a cross-complaint against
      the Company claiming damages resulting from a variety of alleged contractual
      breaches, among other things.





In
      January 2007, a jury trial was commenced, and on April 10, 2007, the jury
      returned a verdict of approximately $45 million in favor of the Company and
      its
      subsidiaries, finding in favor of the Company and its subsidiaries on every
      claim that they pursued, and against the Guez defendants on every counterclaim
      asserted. Additionally, the jury found that all of the Guez defendants acted
      with malice, fraud or oppression with regard to each of the tort claims asserted
      by the Company and its subsidiaries, and on April 16, 2007, awarded plaintiffs
      $5 million in punitive damages against Mr. Guez personally. The Guez defendants
      filed post-trial motions seeking, among other things, a new trial. Through
      a set
      of preliminary rulings dated September 27, 2007, the Court granted in part,
      and
      denied in part, the Guez defendants’ post trial motions, and denied plaintiffs’
request that the Court enhance the damages awarded against the Guez defendants
      arising from their infringement of plaintiffs’ trademarks. Through these
      rulings, the Court, among other things, reduced the amount of punitive damages
      assessed against Mr. Guez to $4 million, and reduced the total damages awarded
      against the Guez defendants by approximately 50%.




The
      Court
      adopted these preliminary rulings as final on November 16, 2007. On the same
      day, the Court entered judgment against Mr. Guez in the amount of $10,964,730
      and ADS in the amount of $1,272,420, and against each of the Guez defendants
      with regard to each and every claim that they pursued in the litigation
      including, without limitation, ADS’s and Azteca’s unsuccessful efforts to
      recover against Unzipped any account balances claimed to be owed, totaling
      approximately $3.5 million including interest (collectively, the “Judgments”).
      In entering the Judgments, the Court upheld the jury’s verdict in favor of the
      Company relating to its write-down of the senior subordinated note due 2012,
      issued by the Company to Sweet in connection with the Company’s acquisition of
      Unzipped for Unzipped’s 2004 fiscal year. The monetary portion of the Judgments
      accrues interest at a rate of 10% per annum from the date of the Judgments’
entry. Also on November 16, 2007, the Court issued a Memorandum Order wherein
      it
      upheld an aggregate of approximately $7,000,000 of the jury’s verdicts against
      Sweet and Azteca, but declined to enter judgment against these entities since
      it
      had ordered a new trial with regard to certain other damage awards entered
      against these entities by the jury.





On
      March
      7, 2008, the Court commenced a hearing with regard to plaintiffs’ petition
      seeking in excess of $15.0 million attorneys’ fees and costs, which hearing was
      concluded on April 18, 2008. By order dated May 6, 2008, the Court awarded
      plaintiffs certain statutory costs against the Guez defendants. The Court also
      determined that plaintiffs were entitled to pursue recovery of their
      non-statutory costs, comprised primarily of expert witness fees, incurred in
      connection with this action. The hearing with regard to plaintiffs’ recovery of
      non-statutory costs was conducted on August 7 and 8, 2008.




By
      final order dated October 31, 2008, the
      Plaintiffs’
      petition for attorneys’ fees was granted with respect to $7,663,456 of fees. The
      Court did not award any non-statuatory costs.





On
      November 21, 2007, the Guez defendants filed a notice of appeal. They also
      filed
      a $49,090,491 undertaking with the Court, consisting primarily of a $43,380,491
      personal surety given jointly by Gerard Guez and Jacqueline Rose Guez, bonding
      the monetary portions of the Judgments. By Order dated December 17, 2008 the
      Court determined that the undertaking was adequate absent changed circumstances.
      This determination serves to prevent the Company and its subsidiaries from
      pursuing collection of the monetary portions of the Judgments during the
      pendency of the appeal. The Company and its subsidiaries filed a notice of
      appeal on November 26, 2007, appealing, among other things, those parts of
      the
      jury’s verdicts vacated by the Court in connection with the Guez defendants’
post-trial motions. The Company and its subsidiaries intend to vigorously pursue
      their appeal, and vigorously defend against the Guez parties’
appeal.


18





***Bader/Unzipped
      litigation***





This
      lawsuit was settled and discontinued with prejudice on March 25, 2008. The
      lawsuit was commenced on November 5, 2004, when Unzipped filed a complaint
      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 tortiously 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, which was dismissed in its entirety on June 9, 2006,
      except with respect to a single claim that it owed Bader and Sportswear
      Mercenaries $72,000.





***Bongo
      Apparel, Inc. litigation***





On
      or
      about June 12, 2006, Bongo Apparel, Inc. (“BAI”) filed suit in the Supreme Court
      of the State of New York, County of New York, against the Company and IP
      Holdings alleging certain breaches of contract and other claims and seeks,
      among
      other things, damages of at least $25 million. Additionally,
      on or about October 6, 2006, the Company and IP Holdings filed suit in the
      United States District Court for the Southern District of New York against
      BAI
      and its guarantor, TKO Apparel, Inc. (“TKO”). In that complaint, the
      Company and IP Holdings asserted various contract, tort and trademark claims
      that arose as a result of the failures of BAI with regard to the Bongo men's
      jeanswear business and its wrongful conduct with regard to the Bongo women's
      jeanswear business. The Company and IP Holdings sought monetary damages in
      an
      amount in excess of $10 million and a permanent injunction with respect to
      the
      use of the Bongo trademark.





By
      Agreement and Mutual General Release dated September 15, 2008, the Company,
      IP
      Holdings, BAI, and TKO entered into an Agreement and Mutual General Release
      settling their disputes identified or that could have been identified in the
      actions set forth immediately below (the “Settlement Agreement”). Among other
      things, the Settlement Agreement requires TKO to pay to the Company a total
      of
      $1,000,000 over an eight year period, and obligated the parties to dismiss
      all
      of the actions identified below with prejudice, which has occurred. Also, by
      Personal Guaranty dated September 15, 2008, J. Kenneth Tate and James D. Tate
      personally guaranteed TKO’s payment obligations arising pursuant to the
      Settlement Agreement.





**Normal
      Course litigation**





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 the Company’s financial position or future
      liquidity.





**10.  Related
      Party Transactions**




On
      May 1,
      2003, the Company granted Kenneth Cole Productions, Inc. the exclusive worldwide
      license to design, manufacture, sell, distribute and market footwear under
      its
      Bongo brand. The chief executive officer and chairman of Kenneth Cole
      Productions is Kenneth Cole, who is the brother of Neil Cole, the Company's
      chairman, chief executive officer and president. During the Current Nine Months
      and Prior Year Nine Months, the Company earned $0.9 million and $0.8 million,
      respectively, in royalties from Kenneth Cole Productions.





The
      Candie's Foundation, a charitable foundation founded by Neil Cole for the
      purpose of raising national awareness about the consequences of teenage
      pregnancy, owed the Company $0.5 million and $0.4 million at September 30,
      2008
      and December 31, 2007, respectively, which is included in prepaid advertising
      and other on the unaudited condensed consolidated balance sheet. The Candie's
      Foundation intends to pay-off the entire borrowing from the Company, although
      additional advances will be made as and when necessary. Mr. Cole’s wife,
      Elizabeth Cole, performs services for the foundation but receives no
      compensation.





The
      Company recorded expenses of approximately $303,000 for the Current Nine Months
      for the hire and use of aircraft owned by a company in which the Company’s
      chairman, chief executive officer and president is the sole owner.  There
      were no such expenses in the Prior Year Nine Months. Management believes that
      all transactions were made on terms and conditions similar to those available
      in
      the marketplace from unrelated parties.




**11.  Joint
      Venture**





On
      September 5, 2008, the Company and Novel Fashions Limited (“Novel”) formed a
      joint venture (“Iconix China”) to develop, exploit and market the Company's
      brands in the People’s Republic of China, Hong Kong, Macau and Taiwan (the
“Territory”). Pursuant to the terms of this transaction, the Company has
      committed to contribute to Iconix China $5 million and substantially all rights
      to its brands in the Territory, and Novel has committed to contribute $20
      million, over the two-year period following the consummation of the
      transaction.





FASB
      Interpretations No. 46(R) *Consolidation
      of Variable Interest Entities* (“FIN
      46(R)”) addresses consolidation by business enterprises of variable interest
      entities. Based on the corporate structure, voting rights and contributions
      of
      the Company and Novel, Iconix China is considered a variable interest entity
      that is not subject to consolidation, as the Company is not the primary
      beneficiary of Iconix China.


19





Upon
      consummation of this joint venture transaction, the Company recorded
      approximately a $2.6 million gain from its contribution of the substantially
      all
      rights to its brands in the Territory, which is included in Licensing and other
      revenue on the unaudited condensed consolidated income statements. During the
      Current Quarter, Iconix China recorded a net loss of approximately $856,000.
      The
      Company has recorded its 50% share of the net loss as an Equity loss on joint
      venture of $428,000, included in the Other expenses section of the unaudited
      condensed consolidated income statements. As of September 30, 2008 the Company
      has contributed $2.0 million and Novel has contributed $8.0
      million.





**12.  Segment
      Data**





The
      Company has one reportable segment, licensing revenue generated from its brands.
      The geographic regions consist of the United States and Other (which principally
      represents Canada, Japan and Europe). Long lived assets are all located in
      the
      United States. Revenues attributed to each region are based on the location
      in
      which licensees are located.





The
      revenues by type of license and information by geographic region are as
      follows:


For the three months ended
              
              For the nine months ended*(000's omitted)*
              
              September 30,
              
              September 30,2008
              
              2007
              
              2008
              
              2007Revenues
                  by product line:Direct-to-retail license
              
              $
              11,455
              
              $
              10,740
              
              $
              41,229
              
              $
              37,256Wholesale license
              
              
              40,247
              
              
              31,139
              
              
              116,658
              
              
              73,528Other
              
              
              3,433
              
              
              802
              
              
              4,615
              
              
              1,809$
              55,135
              
              $
              42,681
              
              $
              162,502
              
              $
              112,593Revenues
                  by geographic region:United States
              
              $
              48,930
              
              $
              40,201
              
              $
              149,722
              
              $
              105,787Other
              
              
              6,205
              
              
              2,480
              
              
              12,780
              
              
              6,806$
              55,135
              
              $
              42,681
              
              $
              162,502
              
              $
              112,593





**13.  Subsequent
      Events**





*Acquisition
      of Waverly*





On
      October 3, 2008, the Company completed its acquisition, from NexCen Brands,
      Inc.
      and its subsidiaries (the “Sellers”), of certain of the assets and rights
      related to the Sellers’ business of marketing, licensing and managing the
      Sellers’ Waverly group of trademarks, intellectual property and related names
      worldwide (“Waverly”) pursuant to an Asset Purchase Agreement, dated as of
      September 29, 2008 (the “Purchase Agreement”). The aggregate purchase price paid
      was $26,000,000.





In
      accordance with the terms of the Purchase Agreement, at the closing, the Company
      paid the Sellers $26,000,000 in cash and assumed certain liabilities of the
      Sellers. In accordance with the terms of the Purchase Agreement, the Sellers
      delivered all of their right, title and interest in Waverly to Studio IP
      Holdings.





*Stock
      Repurchase Program*





On
      October 30, 2008, the Company's Board of Directors authorized the repurchase
      of
      up to $75 million of the Company's common stock over a period of approximately
      three years. This authorization replaces any prior plan or authorization. The
      current plan does not obligate the Company to repurchase any specific number
      of
      shares and may be suspended at any time at management's
      discretion.


20





**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 for the fiscal year ended December 31, 2007 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.* We are a
      brand management company engaged in licensing, marketing and providing trend
      direction for a diversified and growing portfolio of consumer brands. Our brands
      are sold across every major segment of retail distribution, from luxury to
      mass.
      As of September 30, 2008, we owned 16 iconic consumer brands: Candie’s, Bongo,
      Badgley Mischka, Joe Boxer, Rampage, Mudd, London Fog, Mossimo, Ocean
      Pacific/OP, Danskin, Rocawear, Cannon, Royal Velvet, Fieldcrest, Charisma,
      and
      Starter. We license our brands worldwide through approximately 210
      direct-to-retail and traditional wholesale licenses for use in connection with
      a
      broad variety of product categories, including footwear, fashion accessories,
      sportswear, home products and décor, and beauty and fragrance. Our business
      model allows it to focus on its core competencies of marketing and managing
      brands without many of the risks and investment requirements associated with
      a
      more traditional operating company. Its licensing agreements with leading retail
      and wholesale partners throughout the world provide us with a predictable stream
      of guaranteed minimum royalties.





Our
      growth strategy is focused on increasing licensing revenue from its existing
      portfolio of brands through the addition of new product categories, expanding
      its brands’ retail penetration and optimizing the sales of its licensees. We
      will also seek to continue the international expansion of its brands by
      partnering with leading licensees throughout the world. Finally, we believe
      we
      will continue to acquire iconic consumer brands that can be merchandised over
      a
      wide range of categories to further diversify our brand portfolio. On October
      3,
      2008 we acquired Waverly, a premier home fashion and lifestyle brand and one
      of
      the most recognized names in home furnishings.





***Results
      of Operations***





*For
      the three months ended September 30, 2008*





*Revenue.* Revenue
      for the Current Quarter increased to $55.1 million from $42.7 million during
      the
      Prior Year Quarter, an increase of $12.4 million. During the Current Quarter,
      we
      recorded a non-cash gain of approximately $2.6 million related to the sale
      of a
      trademark to our 50% owned joint venture in China (see Note 11 in the Notes
      to
      unaudited condensed consolidated financial statements). The principal driver
      of
      the remaining growth of $9.8 million was a full quarter of revenue generated
      from the acquisitions of the Official-Pillowtex brands (i.e. Cannon, Royal
      Velvet, Fieldcrest, Charisma) and Starter made during the fourth quarter of
      Fiscal 2007, which had no comparable revenue in the Prior Year
      Quarter.




*Operating
      Expenses.* Selling,
      general and administrative (“SG&A”) expenses totaled $18.6 million in the
      Current Quarter compared to $13.4 million in the Prior Year Quarter. The
      increase of $5.2 million was primarily related to: (i) an increase of
      approximately $2.3 million in payroll costs, primarily due to an increase of
      $1.4 million in non-cash stock compensation expense, from $0.5 million in the
      Prior Year Quarter to $1.9 million in the Current Quarter, of which $1.3 million
      of the increase related to the new employment contract with our chairman, chief
      executive officer and president, with the balance of the aggregate increase
      in
      payroll costs attributable to the increase in employee headcount mainly related
      to our 2007 acquisitions; (ii) an increase of approximately $0.9 million in
      advertising mainly driven by increased advertising related to brands acquired
      in
      the fourth quarter of Fiscal 2007, with no comparable advertising expense in
      the
      Prior Year Quarter; and (iii) amortization of intangible assets (mainly
      contracts and non-competes) as a direct result of the Official-Pillowtex,
      Starter, and Artful Dodger brands acquisitions which accounted for $0.6 million
      in the Current Quarter and for which there was no comparable expense in the
      Prior Year Quarter. The remaining increase in SG&A of $1.4 million is
      primarily attributed to an increase in other general and administrative expenses
      associated with the Danskin, Rocawear, Official-Pillowtex, and Starter
      brand acquisitions.





For
      the
      Current Quarter and Prior Year Quarter our expenses related to specific
      litigation (formerly called special charges), included an expense for
      professional fees of $0.3 million and a reimbursement of certain fees totaling
      $39,000, respectively, relating to litigation involving Unzipped. See Notes
      7
      and 8 of Notes to Unaudited Condensed Consolidated Financial
      Statements.





*Operating
      Income.* Operating income for the Current Quarter increased to $36.3 million,
      representing approximately 66% of total revenue, compared to $29.3 million
      or
      approximately 69% of total revenue in the Prior Year Quarter. The decrease
      in
      our operating margin percentage is primarily the result of the increase in
      operating expenses for the reasons detailed above.


21





*Other
      Expenses - Net* -
      Interest expense increased by $2.9 million in the Current Quarter to $7.6
      million, compared to interest expense of $4.7 million in the Prior Year Quarter.
      This increase was due to several factors: (i) an increase in our debt financing
      arrangements in connection with the acquisition of Starter; (ii) interest
      expense related to the Sweet Note; and, (iii) a decrease in interest income
      related to our higher cash balance during the Prior Year Quarter related to
      the
      proceeds from the Convertible Notes. This increase was offset by a decrease
      in
      the interest rate for our variable rate debt (i.e. our Term Loan Facility)
      and
      interest income related to our judgment against Herbert Guez and ADS. See Note
      4
      of Notes to Unaudited Condensed Consolidated Financial Statements. Deferred
      financing costs increased by $0.5 million in the Current Quarter to $0.8 million
      from $0.3 million in the Prior Year Quarter due to additional financing obtained
      in Fiscal 2007.





*Provision
      for Income Taxes.* The
      effective income tax rate for the Current Quarter is approximately 35.3%
      resulting in the $10.0 million income tax expense, as compared to an effective
      income tax rate of 30.9% in the Prior Year Quarter which resulted in the $7.6
      million income tax expense.





*Net
      Income* .
      The
      Company’s net income was $18.3 million in the Current Quarter, compared to net
      income of $17.0 million in the Prior Year Quarter, as a result of the factors
      discussed above.





*For
      the nine months ended September 30, 2008*





*Revenue.* Revenue
      for the Current Nine Months increased to $162.5 million from $112.6 million
      during the Prior Year Nine Months. During the Current Nine Months, we recorded
      a
      non-cash gain of approximately $2.6 million related to the sale of a trademark
      to our joint venture in China. The principal driver of this growth of $47.3
      million was three full quarters of revenue generated from the acquisitions
      of
      Rocawear and Danskin, as compared to only two quarters of revenue from these
      brands in the Prior Year Nine Months, and three full quarters of revenue
      generated from the acquisitions of the Official-Pillowtex brands, Starter and
      Artful Dodger made during the fourth quarter of 2007, which had no comparable
      revenue in the Prior Year Nine Months.





*Operating
      Expenses.* SG&A
      expenses totaled $55.6 million in the Current Nine Months compared to $30.1
      million in the Prior Year Nine Months. The increase of $25.5 million was
      primarily related to: (i) an increase of approximately $9.4 million in payroll
      costs, primarily due to an increase of $4.9 million in non-cash stock
      compensation expense, from $1.3 million in the Prior Year Nine Months to $6.2
      million in the Current Nine Months, of which $4.0 million of the increase
      related to the new employment contract with our chairman, chief executive
      officer and president, with the balance of the aggregate increase in payroll
      costs attributable to the increase in employee headcount mainly related to
      our
      2007 acquisitions; (ii) an increase of approximately $7.6 million in advertising
      mainly driven by three full quarters of advertising related to brands acquired
      in Fiscal 2007; (iii) amortization of intangible assets (mainly contracts and
      non-competes) as a direct result of the Danskin, Rocawear, Official-Pillowtex,
      Starter, and Artful Dodger brands acquisitions, which accounted for $3.5 million
      in the Current Nine Months and $1.2 million in the Prior Year Nine Months;
      and
      (iv) an increase of $3.5 million in professional fees primarily related to
      increased maintenance costs on new trademarks. The remaining increase in
      SG&A of $2.7 million relates to an increase in other general and
      administrative expenses associated with the Danskin, Rocawear,
      Official-Pillowtex, and Starter brand acquisitions.





For
      the
      Current Nine Months and Prior Year Nine Months, our expenses related to specific
      litigation, formerly known as special charges, included an expense for
      professional fees of $0.7 million and $1.1 million, respectively, relating
      to
      litigation involving Unzipped. See Notes 7 and 8 of Notes to Unaudited Condensed
      Consolidated Financial Statements.





*Operating
      Income.* Operating income for the Current Nine Months increased to $106.2 million, or
      approximately 65% of total revenue, compared to $81.4 million or approximately
      72% of total revenue in the Prior Year Nine Months. The decrease in our
      operating margin percentage is primarily the result of the increase in operating
      expenses for the reasons detailed above.




*Other
      Expenses - Net* -
      Interest expense increased by $9.5 million in the Current Nine Months to $23.8
      million, compared to interest expense of $14.3 million in the Prior Year Nine
      Months. This increase was due to several factors: (i) an increase in our debt
      financing arrangements in connection with the acquisitions of Rocawear,
      Official-Pillowtex and Starter; (ii) interest expense related to the Sweet
      Note;
      and, (iii) a decrease in interest income related to our higher cash balance
      during the Prior Year Nine Months related to the proceeds from the Convertible
      Notes. This increase was offset by a decrease in interest rates for our variable
      rate debt (i.e. our Term Loan Facility) and interest income related to our
      judgment against Herbert Guez and ADS. See Note 4 of Notes to Unaudited
      Condensed Consolidated Financial Statements. Specifically, for the Current
      Nine
      Months, there was a total interest expense relating to the Term Loan Facility,
      Convertible Notes and the Sweet Note of approximately $11.5 million, $4.0
      million and $0.7 million respectively with no comparable interest expense in
      the
      Prior Year Nine Months. Deferred financing costs increased by $1.7 million
      in
      the Current Nine Months to $2.5 million from $0.8 million in the Prior Year
      Nine
      Months due to additional financing obtained in Fiscal 2007.





*Provision
      for Income Taxes.* The
      effective income tax rate for the Current Nine Months is approximately 35.4%
      resulting in the $29.1 million income tax expense, as compared to an effective
      income tax rate of 33.7% in the Prior Year Nine Months which resulted in the
      $22.6 million income tax expense.





*Net
      Income* .
      The
      Company’s net income was $53.0 million in the Current Nine Months, compared to
      net income of $44.5 million in the Prior Year Nine Months, as a result of the
      factors discussed above.


22





***Liquidity
      and Capital Resources***





*Liquidity*





Our
      principal capital requirements have been to fund acquisitions, working capital
      needs, and to a lesser extent capital expenditures. We have historically relied
      on internally generated funds to finance our operations and our primary source
      of capital needs for acquisition has been the issuance of debt and equity
      securities. At September 30, 2008 and December 31, 2007, our cash totaled $83.9
      million and $53.3 million, respectively, including short-term restricted cash
      of
      $1.3 million and $5.2 million, respectively.


Subsequent
        to the Current Quarter, on October 3, 2008, we completed our
        acquisition of Waverly for $26.0 million in cash. We funded the acquisition
        from cash on hand at September 30, 2008. See Note 13 for further details
        on this
        acquisition.





The
      Term
      Loan Facility requires us to repay the principal amount of the term loan
      outstanding in an amount equal to 50% of the excess cash flow of the
      subsidiaries subject to the Term Loan Facility for the most recently completed
      fiscal year. If the Term Loan Facility had required us to repay the principal
      amount of the term loan outstanding based on the excess cash flow of such
      subsidiaries for the nine months ended September 30, 2008 rather than based
      upon
      the fiscal year end results, we would have been required to pay approximately
      $28.8 million, representing 50% of the excess cash flow of such subsidiaries
      for
      that nine-month period. However, in accordance with the terms of the Term Loan
      Facility as noted above, the next calculation for determining the actual excess
      cash flow payment we will be required to make under the Term Loan Facility
      will
      be based on the results of the subsidiaries subject to the Term Loan Facility
      for the 12 months ending December 31, 2008, and therefore the $28.8 million
      shown in Current portion of long-term debt will more than likely
      change





We
      believe that cash from future operations as well as currently available cash
      will be sufficient to satisfy our anticipated working capital requirements
      for
      the foreseeable future. We intend to continue financing its brand acquisitions
      through a combination of cash from operations, bank financing and the issuance
      of additional equity and/or debt securities. See Note 4 of Notes to Unaudited
      Condensed Consolidated Financial Statements for a description of certain prior
      financings consummated by us..





As
      of
      September 30, 2008, our marketable securities consist of investment grade
      auction rate securities. During Fiscal 2007, we invested $196.4 million in
      auction rate securities and the majority of these securities ($183.4 million)
      had successful auctions. However, beginning in the third quarter of Fiscal
      2007,
      $13.0 million of the auction rate securities failed auctions due to sell orders
      exceeding buy orders. These funds will not be available to us until a successful
      auction occurs or a buyer is found outside the auction process. As a result,
      $13.0 million of auction rate securities were written down to $10.7 million,
      using Level 3 inputs with present value techniques as described by the fair
      value hierarchy and the income approach outlined in SFAS 157, as an unrealized
      pre-tax loss of $2.3 million to reflect a temporary decrease in fair value.
      As
      the write-down of $2.3 million has been identified as a temporary decrease
      in
      fair value, the write-down has not impacted our earnings and is reflected as
      an
      other comprehensive loss in the consolidated statement of stockholders’ equity.
      We believe this decrease in fair value is temporary due to general macroeconomic
      market conditions, as interest is being paid in full as scheduled, we have
      the
      ability to hold the securities until an anticipated full redemption, and the
      underlying securities have maintained their investment grade rating. We believe
      our cash flow from future operations and its cash will be sufficient to satisfy
      its anticipated working capital requirements for the foreseeable future,
      regardless of the timeliness of the auction process.





*Changes
      in Working Capital*





At
      September 30, 2008 and December 31, 2007 the working capital ratio (current
      assets to current liabilities) was 1.79 to 1 and 1.25 to 1, respectively. This
      increase was driven by an increase in cash as well as the factors set forth
      below:





*Operating
      Activities*





Net
      cash
      provided by operating activities totaled $63.1 million in the Current Nine
      Months, as compared to $58.4 million of net cash provided by operating
      activities in the Prior Year Nine Months. Cash provided by operating activities
      in the Current Nine Months increased $4.7 million primarily due to net income
      of
      $53.0 million, stock-based compensation expense of $6.2 million of which $4.0
      million can be directly attributed to our new contract with the chief executive
      officer, amortization of intangibles of $5.5 million of which $2.3 million
      relates to one additional quarter of amortization for those brands acquired
      at
      the end of the first quarter of 2007 (ie. Danskin and Rocawear) as well as
      three
      quarters of amortization for the Official-Pillowtex and Starter brands, and
      a
      net increase of $20.2 million in deferred income taxes primarily related to
      the
      provision for income taxes for the Current Nine Months, offset primarily by
      increases of $14.3 million in accounts receivable and $10.9 million in prepaid
      advertising and other, and a decrease of $3.5 million in deferred revenue.
      We
      continue to rely upon cash generated from licensing operations to finance our
      operations.





*Investing
      Activities*





Net
      cash
      used in investing activities in the Current Nine Months totaled $11.5 million,
      as compared to $313.7 million used in the Prior Year Nine Months. In the Current
      Nine Months, we paid cash earn-outs of $3.3 million related to our acquisition
      of Official-Pillowtex and $1.1 million related to our acquisition of Rocawear,
      which were recorded as increases to goodwill; in addition, and we made an
      initial cash contribution of $2.0 million to our 50% owned joint venture in
      China. This aggregate of cash used in investing activities was offset by
      collection of $1.0 million related to an outstanding promissory note. In the
      Prior Year Nine Months, we paid $70.8 million in cash for certain assets related
      to the Danskin brand, $204.2 million in cash for certain assets related to
      the
      Rocawear brand, and $196.4 million for the purchase of certain marketable
      securities, offset by the sale of $183.4 million of those marketable securities.
      Capital expenditures for the Current Nine Months were $4.2 million, compared
      to
      less than $0.1 million in capital expenditures in the Prior Year Nine Months,
      primarily relating to the purchase of fixtures for certain
      brands.


23





*Financing
      Activities*





Net
      cash
      used in financing activities was $17.0 million in the Current Nine Months,
      compared with $434.1 million of net cash provided by financing activities in
      the
      Prior Year Nine Months. Of the $17.0 million in net cash used in financing
      activities, $30.7 million was used for principal payments related to the
      Asset-Backed Notes and the Term Loan Facility. This was offset by $9.0 million
      from the excess tax benefit from share-based payment arrangements, $2.3 million
      from net proceeds in connection with the exercise of stock options and warrants,
      and a net decrease of $3.2 million in total restricted cash.





***Other
      Matters***





*Summary
      of Critical Accounting Policies.*





Several
      of the Company's accounting policies involve management judgments and estimates
      that could be significant. The policies with the greatest potential effect
      on
      the Company's consolidated results of operations and financial position include
      the estimate of reserves to provide for collectability of accounts receivable.
      The Company estimates the collectability considering historical, current and
      anticipated trends related to deductions taken by customers and markdowns
      provided to retail customers to effectively flow goods through the retail
      channels, and the possibility of non-collection due to the financial position
      of
      its licensees' customers. Due to the licensing model, the Company has eliminated
      its inventory risk and reduced its operating risks, and can now reasonably
      forecast revenues and plan expenditures based upon guaranteed royalty
      minimums.





The
      preparation of the consolidated financial statements in conformity with
      accounting principles generally accepted in the U.S. 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
      connection with its licensing model, the Company has entered into various
      trademark 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.





In
      June
      2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 142,
      "Goodwill and Other Intangible Assets," (“SFAS No. 142”) which changed the
      accounting for goodwill from an amortization method to an impairment-only
      approach. Upon the Company's adoption of SFAS No. 142 on February 1, 2002,
      the
      Company ceased amortizing goodwill. As prescribed under SFAS No. 142, the
      Company had goodwill tested for impairment during the years ended December
      31,
      2007, 2006 and 2005, and no impairments were necessary.





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
      January 1, 2006, we adopted SFAS No. 123(R), “Accounting for
      share-based payment,” which requires companies to measure and recognize
      compensation expense for all stock-based payments at fair value. Under SFAS
      No.
      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. Prior to the adoption of SFAS No.123 (R), we accounted
      for our stock-based compensation plans under the recognition and measurement
      principles of accounting principles board, or 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 our common 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, our consolidated
      financial statements have not been restated to reflect the impact of SFAS
      No.123(R). The impact on our financial condition and results of operations
      from
      the adoption of SFAS 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 we cannot currently estimate.




The
      Company accounts for income taxes in accordance with SFAS No. 109 “Accounting
      for Income Taxes” (“SFAS No. 109”). 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 concluded in Fiscal
      2007
      that it is more likely than not that the net deferred income tax asset recorded
      as of December 31, 2006 will be realized.


24





The
      Company adopted FIN 48 beginning January 1, 2007. The implementation of FIN
      48
      did not have a significant impact on the Company’s financial position or results
      of operations. The total unrecognized tax benefit was $1.1 million at the date
      of adoption. At September 30, 2008, the total unrecognized tax benefit was
      $1.1
      million. However, the liability is not recognized for accounting purposes
      because the related deferred tax asset has been fully reserved in prior years.
      The Company is continuing its practice of recognizing interest and penalties
      related to income tax matters in income tax expense. There was no accrual for
      interest and penalties related to uncertain tax positions for the Current Nine
      Months. The Company files federal and state tax returns and is generally no
      longer subject to tax examinations for fiscal years prior to 2004.





Marketable
      securities, which are accounted for as available-for-sale, are stated at fair
      value in accordance with SFAS No. 115, “Accounting for Certain Investments in
      Debt and Equity Securities,” and consist of auction rate securities. Temporary
      changes in fair market value are recorded as other comprehensive income or
      loss,
      whereas other than temporary markdowns will be realized through the Company’s
      statement of operations. On January 1, 2008, the Company adopted SFAS No. 157,
      which establishes a framework for measuring fair value and requires expanded
      disclosures about fair value measurement. While SFAS No.157 does not require
      any
      new fair value measurements in its application to other accounting
      pronouncements, it does emphasize that a fair value measurement should be
      determined based on the assumptions that market participants would use in
      pricing the asset or liability. The Company’s assessment of the significance of
      a particular input to the fair value measurement requires judgment and may
      affect the valuation.





In
      December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
      Combinations” (“SFAS 141R”), which requires an acquirer to do the following:
      expense acquisition related costs as incurred; record contingent consideration
      at fair value at the acquisition date with subsequent changes in fair value
      to
      be recognized in the income statement; and, any adjustments to the purchase
      price allocation are to be recognized as a period cost in the income statement.
      SFAS 141R applies prospectively to business combinations for which the
      acquisition date is on or after beginning of the first annual reporting period
      beginning on or after December 15, 2008. Earlier application is prohibited.
      At
      the date of adoption, SFAS 141R is expected to have a material impact on the
      Company’s results of operations and our financial position due to our
      acquisition strategy.





In
      May
      2008 the Financial Accounting Standards Board (“FASB”) issued FASB Staff
      Position (“FSP”) APB 14-1 “Accounting for Convertible Debt Instruments That May
      Be Settled in Cash Upon Conversion (Including Partial Cash Settlements)”
(previously FSP APB 14-a), which will change the accounting treatment for
      convertible securities that an issuer may settle fully or partially in cash.
      Under the final FSP, cash-settled convertible securities will be separated
      into
      their debt and equity components. The value assigned to the debt component
      will
      be the estimated fair value, as of the issuance date, of a similar debt
      instrument without the conversion feature. As a result, the debt will be
      recorded at a discount to adjust its below-market coupon interest rate to the
      market coupon interest rate for the similar debt instrument without the
      conversion feature. The difference between the proceeds for the convertible
      debt
      and the amount reflected as the debt component represents the value of the
      conversion feature and will be recorded as additional paid-in capital. The
      debt
      will subsequently be accreted to its par value over its expected life, with
      an
      offsetting increase in interest expense on the income statement to reflect
      the
      market rate for the debt component at the date of issuance.





Beginning
      with fiscal 2009, and applied retrospectively to all past periods
      presented, the Company will be required to adopt the provisions of FSP
      APB 14-1 as they relate to the Convertible Notes. As compared to the
      current accounting for the Convertible Notes, adoption of the proposal will
      reduce long-term debt, increase stockholders’ equity, and reduce net income and
      earnings per share. Adoption of the proposal would not affect the
      Company's cash flows. The Company is currently evaluating the
      impact of the adoption of FSP APB 14-1 on its financial
      statements.





In
      October 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining
      the Fair Value of a Financial Asset When the Market for That Asset Is Not
      Active” (“FSP 157-3”). FSP 157-3 applies to financial assets within the scope of
      accounting pronouncements that require or permit fair value measurements in
      accordance with SFAS 157, and clarifies the application of SFAS 157 in
      determining the fair values of assets or liabilities in a market that is not
      active. This FSP is effective upon issuance, including prior periods for which
      financial statements have not been issued. The adoption of this FSP did not
      have
      a material impact on the Company’s unaudited condensed consolidated financial
      statements.





*Seasonal
      and Quarterly Fluctuations* .





The
      majority of the products manufactured and sold under the Company’s brands and
      licenses are for apparel, accessories, footwear and home products and decor,
      for
      which sales may vary as a result of holidays, weather, and the timing of product
      shipments. Accordingly, a portion of the Company’s revenue from its licensees,
      particularly from those mature licensees that are performing and actual sales
      royalties exceed minimum royalties, may be subject to seasonal fluctuations.
      The
      results of operations in any quarter therefore will not necessarily be
      indicative of the results that may be achieved for a full fiscal year or any
      future quarter.


25





*Other
      Factors*





We
      continue to seek to expand and diversify the types of licensed products being
      produced under our 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 remain largely dependent on our ability to
      build and maintain brand awareness and contract with and retain key licensees
      and on our licensees’ ability to accurately predict upcoming fashion trends
      within their respective customer bases and fulfill the product requirements
      of
      their particular retail channels within the global marketplace. Unanticipated
      changes in consumer fashion preferences, slowdowns in the U.S. economy, changes
      in the prices of supplies, consolidation of retail establishments, and other
      factors noted in “Part II - Item 1A-Risk Factors,” could adversely affect our
      licensees’ ability to meet and/or exceed their contractual commitments to us and
      thereby adversely affect our future operating results





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





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





The
      Company limits exposure to foreign currency fluctuations by requiring
      substantially all of its revenue to be paid in U.S. dollars.





The
      Company is exposed to potential loss due to changes in interest rates.
      Investments with interest rate risk include marketable securities. Debt with
      interest rate risk includes the fixed and variable rate debt. As of September
      30, 2008, the Company had approximately $255.3 million in variable interest
      debt
      under its Term Loan Facility. See Note 4 of the Notes to Unaudited Condensed
      Consolidated Financial Statements for further explanation. To mitigate interest
      rate risks, the Company is utilizing derivative financial instruments such
      as
      interest rate hedges to convert certain portions of the Company’s variable rate
      debt to fixed interest rates.




The
      Company invested in certain investment grade auction rate securities. During
      the
      Current Nine Months, our balance of auction rate securities failed to auction
      due to sell orders exceeding buy orders. These funds will not be available
      to us
      until a successful auction occurs or a buyer is found outside the auction
      process. As a result, $10.9 million of auction rate securities were written
      down
      to $10.7 million as an unrealized pre-tax loss of $0.2 million to reflect a
      temporary decrease in fair value. The Company believes this decrease in fair
      value is temporary due to general macroeconomic market conditions, as interest
      is being paid in full as scheduled, the Company has the ability to hold the
      securities until an anticipated full redemption, and the underlying securities
      have maintained their investment grade rating,. As the write-down of
      approximately $0.2 million has been identified as a temporary decrease in fair
      value, the write-down did not impact our earnings and is reflected as an other
      comprehensive loss in the consolidated statement of stockholders’ equity. The
      cumulative effect of the failure to auction since the third quarter of Fiscal
      2007 has resulted in an accumulated other comprehensive loss of $2.3 million
      which is reflected in the Stockholders’ equity section of the Unaudited
      Condensed Consolidated Balance Sheet.





In
      connection with the initial sale of its Convertible Notes, the Company entered
      into Convertible Note Hedges with the Counterparties, which hedging transactions
      are expected, but are not guaranteed, to eliminate the potential dilution upon
      conversion of the convertible notes. At the same time, the Company entered
      into
      Sold Warrant transactions with the hedge Counterparties. In connection with
      such
      transactions, the hedge Counterparties entered into various over-the-counter
      derivative transactions with respect to the Company’s common stock and purchased
      the Company’s common stock; and they may enter into or unwind various
      over-the-counter derivatives and/or purchase or sell the Company’s common stock
      in secondary market transactions in the future. Such activities could have
      the
      effect of increasing, or preventing a decline in, the price of our common stock.
      Such effect is expected to be greater in the event we elect to settle converted
      notes entirely in cash. The hedge Counterparties are likely to modify their
      hedge positions from time to time prior to conversion or maturity of the
      convertible notes or termination of the transactions by purchasing and selling
      shares of our common stock, other of our securities, or other instruments they
      may wish to use in connection with such hedging. In particular, such hedging
      modification may occur during any conversion reference period for a conversion
      of notes. In addition, we intend to exercise options we hold under the
      convertible note hedge transactions whenever notes are converted and we have
      elected, with respect to such conversion, to pay a portion of the consideration
      then due by us to the note holder in shares of our common stock. In order to
      unwind their hedge positions with respect to those exercised options, the hedge
      counterparties will likely sell shares of our common stock in secondary market
      transactions or unwind various over-the-counter derivative transactions with
      respect to our common stock during the conversion reference period for the
      converted notes. The effect, if any, of any of these transactions and activities
      on the trading price of our common stock will depend in part on market
      conditions and cannot be ascertained at this time, but any of these activities
      could adversely affect the value of our common stock. Also, the Sold Warrant
      transaction could have a dilutive effect on our earnings per share to the extent
      that the price of our common stock exceeds the strike price of the
      warrants.





On
      September 15, 2008 and October 3, 2008, respectively, Lehman Holdings and Lehman
      OTC, filed for protection under Chapter 11 of the United States Bankruptcy
      Code
      in the United States Bankruptcy Court in the Southern District of New York.
      The
      Company currently believes that the bankruptcy filings and their potential
      impact will not have a material adverse effect on the Company’s financial
      position, results of operations or cash flows. The Company will continue to
      monitor the bankruptcy filings of Lehman Holdings and Lehman OTC. The terms
      of
      the Convertible Notes and the rights of the holders of the Convertible Notes
      are
      not affected in any way by the bankruptcy filings of Lehman Holdings or Lehman
      OTC.


26





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




The
      Company, under the supervision and with the participation of its management,
      including its principal executive officer and principal financial officer,
      evaluated the effectiveness of the design and operation of its disclosure
      controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the
      Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the
      period covered by this report. The purpose of disclosure controls is to ensure
      that information required to be disclosed in our reports filed with or submitted
      to the SEC under the Exchange Act is recorded, processed, summarized and
      reported within the time periods specified in the SEC’s rules and forms.
      Disclosure controls are also designed to ensure that such information is
      accumulated and communicated to our management, including our principal
      executive officer and principal financial officer, to allow timely decisions
      regarding required disclosure.





Based
      on
      this evaluation, the principal executive officer and principal financial officer
      concluded that the Company’s disclosure controls and procedures are effective in
      timely alerting them to material information required to be included in our
      periodic SEC filings and ensuring that information required to be disclosed
      by
      the Company in the reports that it files or submits under the Exchange Act
      is
      recorded, processed, summarized and reported within the time period specified
      in
      the SEC’s rules and forms.





The
      principal executive officer and principal financial officer also conducted
      an
      evaluation of internal control over financial reporting (“Internal Control”) to
      determine whether any changes in Internal Control occurred during the quarter
      ended September 30, 2008 that may have materially affected or which are
      reasonably likely to materially affect Internal Control. Based on that
      evaluation, there has been no change in the Company’s Internal Control during
      the quarter ended September 30, 2008 that has materially affected, or is
      reasonably likely to affect, the Company’s Internal Control.





**PART
      II. Other Information**





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





See
      Note
      9 of Notes to Unaudited 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 for the year ended December 31, 2007, set forth
      below
      are certain factors that have affected, and in the future could affect, our
      operations or financial condition. We operate in a changing environment that
      involves numerous known and unknown risks and uncertainties that could impact
      our operations. The risks described below and in our Annual Report on Form
      10-K
      for the year ended December 31, 2007 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.




*Our
      existing and future debt obligations could impair our liquidity and financial
      condition, and in the event we are unable to meet our debt obligations we could
      lose title to our trademarks.*





As
      of
      September 30, 2008, we had consolidated debt of approximately $672.5 million,
      including secured debt of $377.7 million ($255.3 million under our Term Loan
      Facility and $122.4 million under Asset-Backed Notes issued by our subsidiary,
      IP Holdings), primarily all of which was incurred in connection with our
      acquisition activities. We may also assume or incur additional debt, including
      secured debt, in the future in connection with, or to fund, future acquisitions.
      Our debt obligations:




·
            could
                impair our liquidity;




·
            could
                make it more difficult for us to satisfy our other
                obligations;




·
            require
                us to dedicate a substantial portion of our cash flow to payments
                on our
                debt obligations, which reduces the availability of our cash flow
                to fund
                working capital, capital expenditures and other corporate
                requirements;




·
            could
                impede us from obtaining additional financing in the future for working
                capital, capital expenditures, acquisitions and general corporate
                purposes;




·
            impose
                restrictions on us with respect to future
                acquisitions;





27





·
            make
                us more vulnerable in the event of a downturn in our business prospects
                and could limit our flexibility to plan for, or react to, changes
                in our
                licensing markets; and




·
            place
                us at a competitive disadvantage when compared to our competitors
                who have
                less debt.





While
      we
      believe that by virtue of the guaranteed minimum royalty payments due to us
      under our licenses we will generate sufficient revenues from our licensing
      operations to satisfy our obligations for the foreseeable future, in the event
      that we were to fail in the future to make any required payment under agreements
      governing our indebtedness or fail to comply with the financial and operating
      covenants contained in those agreements, we would be in default regarding that
      indebtedness. A debt default could significantly diminish the market value
      and
      marketability of our common stock and could result in the acceleration of the
      payment obligations under all or a portion of our consolidated indebtedness.
      In
      the case of our Term Loan Facility, it would enable the lenders to foreclose
      on
      the assets securing such debt, including the Ocean Pacific/OP, Danskin,
      Rocawear, Starter and Mossimo trademarks, as well as the trademarks acquired
      by
      us in connection with the Official-Pillowtex acquisition, and, in the case
      of IP
      Holdings’ Asset-Backed Notes, it would enable the holders of such notes to
      foreclose on the assets securing such notes, including the Candie’s, Bongo, Joe
      Boxer, Rampage, Mudd and London Fog trademarks.





*A
      substantial portion of our licensing revenue is concentrated with a limited
      number of licensees such that the loss of any of such licensees could decrease
      our revenue and impair our cash flows.*





Our
      licensees Target, Kohl's, Kmart were our three largest direct-to-retail
      licensees during the Current Nine Months, representing approximately 12%, 5%
      and
      5%, respectively, of our total revenue for such period, while Li & Fung was
      our largest wholesale licensee, representing approximately 11% of our total
      revenue for such period. 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,
      and
      our other license agreement with Target grants it the exclusive U.S. license
      with respect to our Fieldcrest trademark for substantially all
      Fieldcrest-branded products for an initial term expiring in July 2010; 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 a term
      expiring in January 2011; and, 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 a term expiring in December 2010. Our license
      agreements with Li & Fung grant it the exclusive worldwide license with
      respect to our Royal Velvet trademarks for a variety of products, and the
      exclusive license (outside the U.S. and Canada) for the Cannon trademark for
      a
      variety of products. The term for each of these licenses with Li & Fung
      expires on December 31, 2013. 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. For example,
      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
      the
      guaranteed annual royalty minimums by approximately half, as a result of which
      our revenues from this license were substantially reduced.





*We
      have a material amount of goodwill and other intangible assets, including our
      trademarks, recorded on our balance sheet. As a result of changes in market
      conditions and declines in the estimated fair value of these assets, we may,
      in
      the future, be required to write down a portion of this goodwill and other
      intangible assets and such write-down would, as applicable, either decrease
      our
      net income or increase our net loss.*





As
      of
      September 30, 2008, goodwill represented approximately $133.4 million, or
      approximately 10% of our total assets, and trademarks and other intangible
      assets represented approximately $1,033.3 million, or approximately 75% of
      our total assets. Under SFAS No. 142, goodwill and indefinite life
      intangible assets, including some of our trademarks, are no longer amortized,
      but instead are subject to impairment evaluation based on related estimated
      fair
      values, with such testing to be done at least annually. While, to date, no
      impairment write-downs have been necessary, any write-down of goodwill or
      intangible assets resulting from future periodic evaluations would, as
      applicable, either decrease our net income or increase our net loss and those
      decreases or increases could be material.





*Changes
      in the accounting method for convertible debt securities will, when adopted
      by
      us, have an adverse impact on our reported or future financial
      results.*





For
      the
      purpose of calculating diluted earnings per share, a convertible debt security
      providing for net share settlement of the excess of the conversion value over
      the principal amount, if any, and meeting specified requirements under Emerging
      Issues Task Force, or EITF, Issue No. 90-19, “Convertible Bonds with Issuer
      Option to Settle for Cash upon Conversion,” such as our convertible notes, is
      accounted for similar to non-convertible debt, with the stated coupon
      constituting interest expense and any shares issuable upon conversion of the
      security being accounted for under the treasury stock method. The effect of
      the
      treasury stock method in relation to our Convertible Notes is that the shares
      potentially issuable upon conversion of the Convertible Notes are not included
      in the calculation of our diluted earnings per share until the conversion price
      is “in the money,” at which time we are assumed to have issued the number of
      shares of common stock necessary to settle.


28





In
      May
      2008 the Financial Accounting Standards Board (“FASB”) issued FASB Staff
      Position (“FSP”) APB 14-1 “Accounting for Convertible Debt Instruments That May
      Be Settled in Cash Upon Conversion (Including Partial Cash Settlements)”
(previously FSP APB 14-a), which will change the accounting treatment for
      convertible securities that the issuer may settle fully or partially in cash.
      Under the final FSP, cash-settled convertible securities will be separated
      into
      their debt and equity components. The value assigned to the debt component
      will
      be the estimated fair value, as of the issuance date, of a similar debt
      instrument without the conversion feature. As a result, the debt will be
      recorded at a discount to adjust its below-market coupon interest rate to the
      market coupon interest rate for the similar debt instrument without the
      conversion feature. The difference between the proceeds for the convertible
      debt
      and the amount reflected as the debt component represents the value of the
      conversion feature and will be recorded as additional paid-in capital. The
      debt
      will subsequently be accreted to its par value over its expected life, with
      an
      offsetting increase in interest expense on the income statement to reflect
      the
      market rate for the debt component at the date of issuance.





Beginning
      with fiscal 2009, and applied retrospectively to all past periods presented,
      we
      will be required to adopt the provisions of FSP APB 14-1 as they relate to
      our
      Convertible Notes. As compared to our current accounting for our Convertible
      Notes, adoption of the proposal will reduce long-term debt, increase
      stockholders’ equity, and reduce net income and earnings per share. Adoption of
      the proposal would not affect our cash flows. We are currently evaluating the
      impact of the adoption of FSP APB 14-1 on our financial statements.





At
      the
      time FSP APB 14-1 is implemented we will, pursuant to the terms of the indenture
      governing our outstanding Convertible Notes, have the right for a period of
      90
      days thereafter, at our option, to call the Convertible Notes for redemption.
      However, although we will have such redemption right, we may not have sufficient
      cash to pay, or may not be permitted to pay, the required cash portion of the
      consideration that would be due to holders of the convertible notes in the
      event
      we elected to exercise such right or the ability to raise funds through debt
      or
      equity financing within the time period required for us to make such an
      election.





*Convertible
      note hedge and warrant transactions that we have entered into may affect the
      value of our common stock.*




In
      connection with the initial sale of our Convertible Notes, we entered into
      Convertible Note Hedges with the Counterparties, which hedging transactions
      are
      expected, but are not guaranteed, to eliminate the potential dilution upon
      conversion of the convertible notes. At the same time, we entered into Sold
      Warrant transactions with the hedge counterparties. In connection with such
      transactions, the hedge Counterparties entered into various over-the-counter
      derivative transactions with respect to our common stock and purchased our
      common stock; and they may enter into or unwind various over-the-counter
      derivatives and/or purchase or sell our common stock in secondary market
      transactions in the future.




Such
      activities could have the effect of increasing, or preventing a decline in,
      the
      price of our common stock. Such effect is expected to be greater in the event
      we
      elect to settle converted notes entirely in cash. The hedge Counterparties
      are
      likely to modify their hedge positions from time to time prior to conversion
      or
      maturity of the convertible notes or termination of the transactions by
      purchasing and selling shares of our common stock, other of our securities,
      or
      other instruments they may wish to use in connection with such hedging. In
      particular, such hedging modification may occur during any conversion reference
      period for a conversion of notes. In addition, we intend to exercise options
      we
      hold under the convertible note hedge transactions whenever notes are converted
      and we have elected, with respect to such conversion, to pay a portion of the
      consideration then due by us to the note holder in shares of our common stock.
      In order to unwind their hedge positions with respect to those exercised
      options, the hedge Counterparties will likely sell shares of our common stock
      in
      secondary market transactions or unwind various over-the-counter derivative
      transactions with respect to our common stock during the conversion reference
      period for the converted notes.




The
      effect, if any, of any of these transactions and activities on the trading
      price
      of our common stock will depend in part on market conditions and cannot be
      ascertained at this time, but any of these activities could adversely affect
      the
      value of our common stock. Also, the sold warrant transaction could have a
      dilutive effect on our earnings per share to the extent that the price of our
      common stock exceeds the strike price of the warrants.





On
      September 15, 2008 and October 3, 2008, respectively, Lehman Holdings and Lehman
      OTC, filed for protection under Chapter 11 of the United States Bankruptcy
      Code
      in the United States Bankruptcy Court in the Southern District of New York.




The
      Company currently believes, although there can be no assurance, that the
      bankruptcy filings and their potential impact on these entities will not have
      a
      material adverse effect on the Company’s financial position, results of
      operations or cash flows. The Company will continue to monitor the bankruptcy
      filings of Lehman Holdings and Lehman OTC.


29





*Due
      to the recent downturn in the market, certain of the marketable securities
      we
      own may take longer to auction than initially anticipated, if at
      all.*





Marketable
      securities consist of investment grade auction rate securities. From the third
      quarter of 2007 to the present, our balance of auction rate securities failed
      to
      auction due to sell orders exceeding buy orders. These funds will not be
      available to us until a successful auction occurs or a buyer is found outside
      the auction process. As a result, $13.0 million of auction rate securities
      were
      written down to $10.7 million, based on our analysis, as an unrealized pre-tax
      loss to reflect a temporary decrease in fair value, reflected as an accumulated
      other comprehensive loss of $2.3 million in the stockholders’ equity section of
      our unaudited condensed consolidated balance sheet. We believe this decrease
      in
      fair value is temporary due to general macroeconomic market conditions, as
      the
      underlying securities have maintained their investment grade rating. There
      are
      no assurances that a successful auction will occur, or that we can find a buyer
      outside the auction process.




*A
      decline in general economic conditions resulting in a decrease in
      consumer-spending levels and an inability to access capital may adversely affect
      our business.*





Many
      economic factors beyond our control may impact our forecasts and actual
      performance. These factors include consumer confidence, consumer spending
      levels, employment levels, availability of consumer credit, recession,
      deflation, inflation, a general slowdown of the U.S. economy or an uncertain
      economic outlook. Furthermore, changes in the credit and capital markets,
      including market disruptions, limited liquidity and interest rate fluctuations,
      may increase the cost of financing or restrict our access to potential sources
      of capital for future acquisitions.





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





The
      following table represents information with respect to purchases of common
      stock
      made by the Company during the three months ended September 30,
      2008:


Month of purchase
              
              Total number
                of shares
                purchased(1)
              
              Average
                price
                paid per share
              
              Total number
                of
                shares
                purchased as
                part of
                publicly
                announced
                plans or
                programs
              
              Maximum
                dollar
                value of
                shares
                that may yet
                be
                purchased
                under the
                plans or
                programsJuly 1 – July
                  31, 2008
              
              
              308
              
              $
              11.03
              
              $
              -
              
              $
              -August
                  1 – August 31, 2008
              
              
              -
              
              $
              -
              
              $
              -
              
              $
              -September 1
                  - September 30, 2008
              
              
              3,413
              
              $
              13.08
              
              $
              -
              
              $
              -Total
              
              
              3,721
              
              $
              12.91
              
              $
              -
              
              $
              -




(1)
            
            Represents
                shares of common stock surrendered to the Company to pay employee
                withholding taxes due upon the vesting of restricted
                stock.


30





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








EXHIBIT
                NO.
            
            DESCRIPTION
                OF EXHIBITExhibit
                10.1
            
            Iconix
                Brand Group, Inc. 2006 Equity Incentive Plan, as amended
                (1)*Exhibit
                10.2
            
            Transition
                Services Agreement between the Company and David Conn
                (2)Exhibit
                10.3
            
            Asset
                Purchase Agreement by and among NexCen Brands, Inc., NexCen Fixed
                Asset
                Company, LLC, NexCen Brand Management, Inc., WV IP Holdings, LLC,
                and the
                Company dated September 29, 2008 (3).Exhibit
                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 2002Exhibit
                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 2002Exhibit
                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
                2002Exhibit
                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)  Filed
      as
      an exhibit to the Company’s Current Report on Form 8-K for the event dated July
      31, 2008 and incorporated by reference herein.




(2)  Filed
      as
      an exhibit to the Company’s Current Report on Form 8-K for the event dated
      August 13, 2008 and incorporated by reference herein.




(3)  Filed
      as
      an exhibit to the Company’s Current Report on Form 8-K for the event dated
      September 29, , 2008
      and
      incorporated by reference herein.




*
      Denotes
      management compensation plan or arrangement.


31


**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 5, 2008
            /s/
                Neil
                ColeNeil
                Cole
              Chairman
                of the Board, President
              and
                Chief Executive Officer
              (on
                Behalf of the Registrant)




Date:
                November 5, 2008
            /s/
                Warren ClamenWarren
                Clamen
              Chief
                Financial Officer


32