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, 2007**





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





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




Large
      accelerated filer o Accelerated
      filer x Non-accelerated
      filer o





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 - 56,914,891 shares as of October 31, 2007.










**INDEX**





**FORM
      10-Q**





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




Page
                No.Part
                I.
            
            Financial
                InformationItem
                1.
            
            Financial
                StatementsCondensed
                Consolidated Balance Sheets - September 30, 2007 (unaudited) and
                December
                31, 2006
            
            3Unaudited
                Condensed Consolidated Income Statements - Three and Nine Months
                Ended
                September 30, 2007 and 2006
            
            4Unaudited
                Condensed Consolidated Statement of Stockholders' Equity - Nine Months
                Ended September 30, 2007
            
            5Unaudited
                Condensed Consolidated Statements of Cash Flows - Nine Months Ended
                September 30, 2007 and 2006
            
            6Notes
                to Unaudited Condensed Consolidated Financial Statements
            
            8Item
                2.
            
            Management's
                Discussion and Analysis of Financial Condition and Results of
                Operations
            
            17Item
                3.
            
            Quantitative
                and Qualitative Disclosures about Market Risk
            
            21Item
                4.
            
            Controls
                and Procedures
            
            21Part
                II.
            
            Other
                Information
            
            22Item
                1.
            
            Legal
                Proceedings
            
            22Item
                1A.
            
            Risk
                Factors
            
            22Item
                2.
            
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            
            24Item
                4.
            
            Submission
                of Matters to a Vote of Security Holders
            
            24Item
                5
            
            Other
                Information
            
            24Item
                6.
            
            Exhibits
            
            24Signatures
            
            
            
            25




2





Part
      I.
 Financial Information


Item
      1.
      FINANCIAL STATEMENTS





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


Condensed
      Consolidated Balance Sheets


(in
      thousands, except par value)




September
                30,
            
            December
                31,2007
            
            2006**Assets**
            
            (unaudited)Current
                Assets:Cash
                and cash equivalents (including restricted cash of $3,647 in 2007
                and
                $4,268 in 2006)
            
            $
            255,987
            
            $
            77,840Cash
                and cash equivalents in escrow for pending acquisition
            
            
            24,000
            
            
            -Marketable
                securities
            
            
            13,000
            
            
            -Accounts
                receivable, net of reserve for doubtful accounts of $3,050 in 2007
                and
                $1,633 in 2006
            
            
            31,304
            
            
            14,548Due
                from affiliate
            
            
            200
            
            
            297Promissory
                note receivable
            
            
            1,000
            
            
            1,000Deferred
                income tax assets
            
            
            3,028
            
            
            3,440Prepaid
                advertising and other
            
            
            5,644
            
            
            2,704Total
                Current Assets
            
            
            334,163
            
            
            99,829Property
                and equipment:Furniture,
                fixtures and equipment
            
            
            2,837
            
            
            2,769Less:
                Accumulated depreciation and amortization
            
            
            (1,502
            )
            
            (1,385
            )1,335
            
            
            1,384Other
                Assets:Restricted
                cash
            
            
            14,507
            
            
            11,659Goodwill
            
            
            101,026
            
            
            93,593Trademarks
                and other intangibles, net
            
            
            745,463
            
            
            467,688Deferred
                financing costs, net
            
            
            7,519
            
            
            3,355Non-current
                deferred income tax assets
            
            
            28,143
            
            
            17,970Other
            
            
            4,751
            
            
            5,574901,409
            
            
            599,839Total
                Assets
            
            $
            1,236,907
            
            $
            701,052**Liabilities
                and Stockholders' Equity**Current
                liabilities:Accounts
                payable and accrued expenses
            
            $
            9,409
            
            $
            7,043Accounts
                payable, subject to litigation
            
            
            4,886
            
            
            4,886Deferred
                revenue
            
            
            3,686
            
            
            1,644Current
                portion of long-term debt
            
            
            25,882
            
            
            22,132Total
                current liabilities
            
            
            43,863
            
            
            35,705Deferred
                income taxes
            
            
            69,066
            
            
            59,054Long-term
                debt, less current maturities
            
            
            616,297
            
            
            140,676Long
                term deferred revenue
            
            
            520
            
            
            160Total
                Liabilities
            
            
            729,746
            
            
            235,595Commitments
                and contingenciesStockholders'
                EquityCommon
                stock, $.001 par value-shares authorized 150,000; shares issued 56,956 and 56,227
                respectively
            
            
            57
            
            
            57Additional
                paid-in capital
            
            
            466,249
            
            
            468,881Retained
                earnings (deficit)
            
            
            41,715
            
            
            (2,814
            )Accumulated
                other comprehensive loss
            
            
            (193
            )
            
            -Less:
                Treasury stock - 198 shares at cost
            
            
            (667
            )
            
            (667
            )Total
                stockholders' equity
            
            
            507,161
            
            
            465,457Total
                Liabilities and Stockholders' Equity
            
            $
            1,236,907
            
            $
            701,052




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
                30,2007
            
            2006
            
            2007
            
            2006Licensing
                and commission revenue
            
            $
            42,681
            
            $
            22,113
            
            $
            112,593
            
            $
            53,791Selling,
                general and administrative expenses
            
            
            13,400
            
            
            6,072
            
            
            30,130
            
            
            17,572Special
                charges
            
            
            (39
            )
            
            632
            
            
            1,055
            
            
            1,900Operating
                income
            
            
            29,320
            
            
            15,409
            
            
            81,408
            
            
            34,319Other
                expenses:Interest
                expense
            
            
            9,299
            
            
            3,441
            
            
            20,706
            
            
            8,620Interest
                and other income
            
            
            (4,580
            )
            
            (277
            )
            
            (6,452
            )
            
            (629
            )Interest
                - net and other income
            
            
            4,719
            
            
            3,164
            
            
            14,254
            
            
            7,991Income
                before income taxes
            
            
            24,601
            
            
            12,245
            
            
            67,154
            
            
            26,328Provision
                for income taxes
            
            
            7,608
            
            
            4,299
            
            
            22,625
            
            
            2,680Net
                income
            
            $
            16,993
            
            $
            7,946
            
            $
            44,529
            
            $
            23,648Earnings
                per share:Basic
            
            $
            0.30
            
            $
            0.20
            
            $
            0.79
            
            $
            0.62Diluted
            
            $
            0.28
            
            $
            0.18
            
            $
            0.73
            
            $
            0.54Weighted
                average number of common shares outstanding:Basic
            
            
            56,801
            
            
            39,782
            
            
            56,569
            
            
            38,075Diluted
            
            
            61,380
            
            
            44,818
            
            
            61,289
            
            
            43,469





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, 2007


***(in
      thousands)***




AccumulatedAdditional
            
            Retained
            
            OtherCommon
                Stock
            
            Paid
                - in
            
            Earnings/
            
            Comprehensive
            
            TreasuryShares
            
            Amount
            
            Capital
            
            (Deficit)
            
            Loss
            
            Stock
            
            TotalBalance
                at January 1, 2007
            
            
            56,227
            
            $
            57
            
            $
            468,881
            
            $
            (2,814
            )
            $
            -
            
            $
            (667
            )
            $
            465,457Warrants
                issued to non-employee related to the acquisition of
                Danksin®
            
            
            -
            
            
            -
            
            
            2,260
            
            
            -
            
            
            -
            
            
            -
            
            
            2,260Warrants
                issued to non-employee related to the acquisition of
                Rocawear®
            
            
            -
            
            
            -
            
            
            2,671
            
            
            -
            
            
            -
            
            
            -
            
            
            2,671Common
                stock issued to non-employee related to the acquisition of
                Danksin®
            
            
            13
            
            
            -
            
            
            241
            
            
            -
            
            
            -
            
            
            -
            
            
            241Common
                stock issued to non-employee related to the acquisition of
                Rocawear®
            
            
            12
            
            
            -
            
            
            255
            
            
            -
            
            
            -
            
            
            -
            
            
            255Exercise
                of stock options and warrants
            
            
            684
            
            
            -
            
            
            1,962
            
            
            -
            
            
            -
            
            
            -
            
            
            1,962Stock
                option compensation
            
            
            -
            
            
            -
            
            
            135
            
            
            -
            
            
            -
            
            
            -
            
            
            135Tax
                benefit of stock option exercise
            
            
            -
            
            
            -
            
            
            928
            
            
            -
            
            
            -
            
            
            -
            
            
            928Amortization
                in connection with restricted stock
            
            
            20
            
            
            -
            
            
            1,207
            
            
            -
            
            
            -
            
            
            -
            
            
            1,207Expenses
                related to common stock issuance
            
            
            -
            
            
            -
            
            
            (184
            )
            
            -
            
            
            -
            
            
            -
            
            
            (184
            )Net
                cost of hedge on convertible note
            
            
            -
            
            
            -
            
            
            (12,107
            )
            
            -
            
            
            -
            
            
            -
            
            
            (12,107
            )Comprehensive
                income:Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            44,529
            
            
            -
            
            
            -
            
            
            44,529Change
                in fair value of cash flow hedge
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (193
            )
            
            
            
            
            (193
            )Total
                comprehensive income
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            44,336Balance
                at September 30, 2007
            
            
            56,956
            
            $
            57
            
            $
            466,249
            
            $
            41,715
            
            $
            (193
            )
            $
            (667
            )
            $
            507,161




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 30,2007
            
            2006Cash
                flows from operating activities:Net
                income
            
            $
            44,529
            
            $
            23,648Depreciation
                of property and equipment
            
            
            117
            
            
            157Amortization
                of intangibles
            
            
            3,869
            
            
            1,365Amortization
                of deferred financing costs
            
            
            847
            
            
            600Provision
                for doubtful accounts
            
            
            1,606
            
            
            904Stock
                option compensation
            
            
            1,342
            
            
            140Accrued
                interest on long-term debt
            
            
            419
            
            
            -Other
                comprehensive loss
            
            
            (193
            )
            
            -Deferred
                income tax provision
            
            
            22,442
            
            
            2,680Changes
                in operating assets and liabilities, net of business
                acquisitions:Accounts
                receivable
            
            
            (18,362
            )
            
            (9,180
            )Due
                from affiliate
            
            
            97
            
            
            (51
            )Prepaid
                advertising and other
            
            
            (2,940
            )
            
            (422
            )Other
                assets
            
            
            823
            
            
            232Deferred
                revenue
            
            
            2,402
            
            
            (1,630
            )Accounts
                payable and accrued expenses
            
            
            1,057
            
            
            327Net
                cash provided by operating activities
            
            
            58,055
            
            
            18,770Cash
                flows from investing activities:Purchases
                of property and equipment
            
            
            (68
            )
            
            (558
            )Acquisition
                of Mudd®
            
            
            -
            
            
            (45,787
            )Acquisition
                of London Fog®
            
            
            -
            
            
            (30,735
            )Acquisition
                of Danskin
            
            
            (71,035
            )
            
            -Acquisition
                of Rocawear
            
            
            (205,534
            )
            
            -Purchase
                of trademarks
            
            
            (110
            )
            
            (1,269
            )Cash
                and cash equivalents placed in escrow
            
            
            (24,000
            )
            
            -Purchase
                of marketable securities
            
            
            (196,400
            )
            
            (78
            )Sale
                of marketable securities
            
            
            183,400
            
            
            -Net
                cash used in investing activities
            
            
            (313,747
            )
            
            (78,427
            )Cash
                flows from financing activities:Proceeds
                from long-term debt
            
            
            493,531
            
            
            78,000Proceeds
                from the sale of warrants
            
            
            37,491
            
            
            -Payment
                for purchase of convertible note hedge
            
            
            (76,303
            )
            
            -Proceeds
                from exercise of stock options and warrants
            
            
            1,742
            
            
            4,231Payment
                of long-term debt
            
            
            (14,579
            )
            
            (6,863
            )Payment
                of expenses related to common stock issuance
            
            
            (184
            )
            
            -Deferred
                financing costs
            
            
            (5,011
            )
            
            (550
            )Restricted
                cash - current
            
            
            621
            
            
            (11,961
            )Restricted
                cash - non-current
            
            
            (2,848
            )
            
            (5,593
            )Net
                cash provided by financing activities
            
            
            434,460
            
            
            57,264Net
                increase (decrease) in cash and cash equivalents
            
            
            178,768
            
            
            (2,393
            )Cash
                and cash equivalents, beginning of period
            
            
            73,572
            
            
            7,593Cash
                and cash equivalents, end of period
            
            $
            252,340
            
            $
            5,200Balance
                of restricted cash - current
            
            
            3,647
            
            
            16,055Total
                cash and cash equivalents including current restricted cash, end
                of
                period
            
            $
            255,987
            
            $
            21,255




6




**Supplemental
      disclosure of cash flow information:**




Nine
                Months Ended
              September
                30,2007
            
            2006Cash
                paid during the period:Interest
            
            $
            17,950
            
            $
            7,150Income
                Taxes
            
            $
            1,576
            
            $
            -





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





Nine
                Months Ended
              September
                30,2007
            
            2006Acquisitions:Common
                stock issued
            
            $
            496
            
            $
            54,969Warrants
                issued - acquisition cost
            
            $
            4,931
            
            $
            4,596Issuance
                of promissory note
            
            $
            -
            
            $
            750Net
                cost of hedge on convertible note
            
            $
            12,107
            
            $
            -





See
      Notes
      to Unaudited Condensed Consolidated Financial Statements.




7




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





Notes
      to
      Unaudited Condensed Consolidated Financial Statements (Unaudited)


September
      30, 2007





NOTE
      A  BASIS OF
      PRESENTATION




The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with generally accepted accounting principles for interim
      financial information and with the instructions to Form 10-Q and Article 10
      of
      Regulation S-X. Accordingly, they do not include all the information and
      footnotes required by generally accepted accounting principles for complete
      financial statements. In the opinion of management of Iconix Brand Group, Inc.
      ("Company", "we", "us", or "our"), 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
      nine months (“Current Nine Months”) ended September 30, 2007 are not necessarily
      indicative of the results that may be expected for a full fiscal
      year.




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.





Certain
      prior year amounts have been reclassified to conform to the current year'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, 2006.





NOTE
      B -
      MARKETABLE SECURITIES





Marketable
      securities, which are accounted for as available-for-sale, are stated at fair
      value in accordance with Statement of Financial Accounting Standards No. 115,
      “Accounting for Certain Investments in Debt and Equity Securities,” and consist
      of short-term debt securities. As of September 30, 2007, the Company had $13.0
      million in marketable securities. There were no such investments as of December
      31, 2006.





NOTE
      C  ACQUISITION OF DANSKIN





On
      March
      9, 2007, the Company completed its acquisition of the Danskin trademarks from
      Danskin, Inc. and Danskin Now, Inc. Danskin is a 125 year-old iconic brand
      of
      women's activewear, legwear, dancewear, yoga apparel and fitness equipment.
      The
      brand is sold through better department, specialty and sporting goods stores,
      and directly by Triumph Apparel Corporation (formerly known as Danskin, Inc.)
      (“Triumph”) through freestanding Danskin boutiques and Danskin.com. In
      connection with the acquisition, we acquired Danskin Now, Inc.'s license of
      the
      Danskin Now® brand of apparel and fitness equipment to Wal-Mart
      Stores.




The
      purchase price for the acquisition was $70 million in cash and contingent
      additional consideration of up to $15 million based on certain criteria relating
      to the achievement of revenue and performance targets involving the licensing
      of
      the Danskin brand, all or a portion of which contingent consideration, if
      earned, may be paid in shares of the Company's common stock. The cash
      portion of the purchase price was self-funded from the Company's cash reserves.
      Upon the closing, a subsidiary of the Company entered into a license agreement
      with Triumph granting Triumph the right to continue to operate its wholesale
      business and freestanding retail stores under the Danskin marks acquired by
      the
      Company in the acquisition.





***(000's
                omitted except share information)***Cash
                paid at closing to sellers
            
            
            
            
            $
            70,000Fair
                value of 12,500 shares of $.001 par value common stock, at $19.33
                fair
                market value per share issued as a cost of the
                acquisition
            
            $
            241Fair
                value of 30,000 warrants ($20.18 exercise price) issued as a cost
                of the
                acquisition
            
            
            284Fair
                value of 133,334 warrants ($8.81 exercise price) issued as a cost
                of the
                acquisition
            
            
            1,976Total
                equity consideration
            
            
            
            
            
            2,501Other
                estimated costs of the acquisition
            
            
            
            
            
            1,782Total
            
            
            
            
            $
            74,283




The
      preliminary purchase price was allocated to the estimated fair value of the
      assets acquired as follows:





Trademarks
            
            $
            71,700License
                agreements
            
            
            1,700Goodwill
            
            
            883Total
                allocated preliminary purchase price
            
            $
            74,283





The
      Danskin trademark has been determined by management to have an indefinite useful
      life and accordingly, consistent with Statement of Financial Accounting
      Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”),
      no amortization will be recorded in the Company's consolidated income
      statements. The licensing contracts are being amortized on a straight-line
      basis
      over the remaining contractual period of approximately 3 to 5 years. The
      goodwill is subject to a test for impairment on an annual basis. Any adjustments
      resulting from the finalization of the purchase price allocations will affect
      the amount assigned to goodwill.




8




NOTE
      D  ACQUISITION OF ROCAWEAR AND UNAUDITED PROFORMA INFORMATION





On
      March
      30, 2007, the Company completed its acquisition of the Rocawear brand and
      certain of the assets and rights related to the business of designing,
      marketing, licensing and/or managing the Rocawear brand from Rocawear Licensing
      LLC (“RLC”).




The
      purchase price for the acquisition was $204 million in cash and contingent
      additional consideration of up to $35 million based on certain criteria relating
      to the achievement of revenue and performance targets involving the licensing
      of
      the Rocawear assets, all of which contingent consideration, if earned, is to
      be
      paid in shares of the Company's common stock. The cash portion of the purchase
      price was funded pursuant to the Company's credit agreement with Lehman Brothers
      Inc. and Lehman Commercial Paper Inc., which consists of a term loan facility
      in
      an aggregate principal amount of $212.5 million. For further details on this
      credit agreement, see Note E. Upon the closing, a subsidiary of the Company
      entered into a license agreement, expiring in March 2012, with Roc Apparel
      Group, LLC (“Roc Apparel”), an affiliate of RLC, in which it granted Roc Apparel
      the exclusive right to use the Rocawear assets in connection with the design,
      manufacture, market and sale of menswear apparel products in the United States,
      its territories and possessions and military installations throughout the world.
      Further, upon closing, the Company committed an amount of $5.0 million to fund
      its investment in Scion LLC, a joint venture formed by the Company with Shawn
      Carter, a principal of RLC, which will operate as a brand management and
      licensing company to identify brands to be acquired across a broad spectrum
      of
      consumer product categories. This investment has been funded subsequent to
      September 30, 2007.




***(000's
                omitted except share information)***Cash
                paid at closing to sellers
            
            
            
            
            $
            204,000Fair
                value of 12,500 shares of $.001 par value common stock, at $20.40
                fair
                market value per share issued as a cost of acquisition
            
            
            255Fair
                value of 55,000 warrants ($20.40 exercise price) issued as a cost
                of the
                acquisition
            
            
            562Fair
                value of 133,334 warrants ($8.81 exercise price) issued as a cost
                of the
                acquisition
            
            
            2,109Total
                equity consideration
            
            
            
            
            
            2,926Other
                estimated costs of the acquisition
            
            
            
            
            
            3,208Total
            
            
            
            
            $
            210,134





The
      preliminary purchase price was allocated to the estimated fair value of the
      assets acquired as follows:


***(000's
                  omitted)***Trademarks
              
              $
              200,000License
                  agreements
              
              
              5,100Non-compete
                  agreement
              
              
              3,000Goodwill
              
              
              2,034Total
                  allocated preliminary purchase price
              
              $
              210,134




The
      Rocawear trademark has been determined by management to have an indefinite
      useful life and accordingly, consistent with FAS 142, no amortization will
      be
      recorded in the Company's consolidated income statements. The licensing
      contracts are being amortized on a straight-line basis over the remaining
      contractual period of approximately 4 years. The goodwill is subject to a test
      for impairment on an annual basis. Any adjustments resulting from the
      finalization of the purchase price allocations will affect the amount assigned
      to goodwill.




The
      following unaudited pro-forma information presents a summary of the Company's
      consolidated results of operations as if the 2006 acquisitions of Mossimo,
      Inc.
      ("Mossimo") and the Mudd and Ocean Pacific® brands and certain related
      assets, and the 2007 acquisitions of the Danskin (see Note C) and
      Rocawear brands and certain related assets, and financings related to such
      acquisitions had occurred on January 1, 2006. These pro forma results have
      been
      prepared for comparative purposes only and do not purport to be indicative
      of
      the results of operations which actually would have resulted had the
      acquisitions occurred on January 1, 2006, or which may result in the
      future.





***(000's
                omitted except share information)***Three
                Months Ended
              September
                30,
            
            Nine
                Months Ended
              September
                30,2007
            
            2006
            
            2007
            
            2006Licensing
                revenues
            
            $
            42,681
            
            $
            45,960
            
            $
            125,379
            
            $
            119,768Operating
                income
            
            $
            29,320
            
            $
            26,755
            
            $
            90,497
            
            $
            61,572Net
                income
            
            $
            16,993
            
            $
            9,026
            
            $
            47,843
            
            $
            22,750Basic
                earnings per common share
            
            $
            0.30
            
            $
            0.21
            
            $
            0.85
            
            $
            0.54Diluted
                earnings per common share
            
            $
            0.28
            
            $
            0.19
            
            $
            0.78
            
            $
            0.47




9




NOTE
      E  DEBT
      ARRANGEMENTS





*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 secured by intellectual property assets
      (trade names, trademarks, license agreements and payments and proceeds with
      respect thereto relating to the Candies®, Bongo®, Joe Boxer®, Rampage®, Mudd and
      London Fog brands) of IP Holdings. At September 30, 2007, the balance of the
      Asset-Backed Notes was $142.3 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, $3.6 million and $4.3 million as of September
      30 , 2007 and December 31, 2006, 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 last principal
      payment with respect to the Asset-Backed Notes. Accordingly, $14.5 million
      and
      $11.7 million as of September 30, 2007 and December 31, 2006, 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, 2007 are as follows: $50.0 million principal amount bears
      interest at a fixed interest rate of 8.45% with a six year term, $22.1 million
      principal amount bears interest at a fixed rate of 8.12% with a six year term,
      and $70.2 million principal amount bears interest at a fixed rate of 8.99%
      with
      a six and a half year term.




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).





*The
      Kmart Note*





In
      connection with the acquisition of the Joe Boxer brand in July 2005, the Company
      assumed a promissory note, dated August 13, 2001 in the amount of $10.8 million,
      which originated with the execution of the Kmart License by the former owners
      of
      the Joe Boxer brand.   The note provides for interest at 5.12% and is
      payable in three (3) equal annual installments, on a self-liquidating basis,
      on
      the last day of each year commencing on December 31, 2005 and continuing through
      December 31, 2007.  Payments due under the note may be off-set against any
      royalties owed under the Kmart License.  As of September 30, 2007, the
      outstanding balance of the note was $3.8 million. The note may be pre-paid
      without penalty.





*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 (the “Credit Agreement”
or “Term Loan Facility”) with Lehman Brothers Inc. and Lehman Commercial
      Paper Inc. (“LCPI”). The Company pledged to LCPI 100% of the capital stock owned
      by the Company in 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").
      The
      guarantees are secured by a pledge to LCPI of, among other things, the Ocean
      Pacific, Danskin and Rocawear trademarks and related intellectual property
      assets, license agreements and proceeds therefrom. The loan under the Credit
      Agreement currently bears interest at a variable rate equal to the three-month
      LIBOR plus 2.25% per annum, with minimum principal payable in equal quarterly
      installments in annual aggregate amounts equal to 1.00% of the initial aggregate
      principal amount of the loan, in addition to an annual payment equal to 50%
      of
      the excess cash flow from the Term Loan Facility group, with any remaining
      unpaid principal balance to be due on March 30, 2013. The interest rate as
      of
      September 30, 2007 was 7.45%. At September 30, 2007, the balance of the Term
      Loan Facility was $211.4 million. The $212.5 million in proceeds from the
      Credit Agreement was 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; approximately $0.2 million was used to pay the costs associated
      with the acquisition; $2.7 million will be used to pay additional costs
      associated with the acquisition; 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. The remaining cash has
      been invested by the Company to fund its investment in Scion LLC. See
      Note D.





On
      July
      26, 2007, the Company purchased a hedge instrument to mitigate the risk of
      rising interest rates. 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 Statement
      of Financial Accounting Standards 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. At September 30, 2007, the fair value of the interest
      rate
      cap was $135,000, resulting in an other comprehensive loss of $193,000, which
      is
      reflected in the Unaudited Condensed Consolidated Balance Sheet and Statement
      of
      Stockholders’ Equity.





*Convertible
      Senior Subordinated Notes*





On
      June
      20, 2007, the Company completed the sale 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 warrants discussed below
      on
      earnings per share, see Note I.




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 (the “Counterparties”). Pursuant to the
      agreements governing these Convertible Note Hedges, the Company has purchased
      call options (the “Purchased Call Options”) from the Counterparties covering up
      to approximately 10.4 million shares of the Company's common stock. 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 is included in the balance of deferred tax
      assets.




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, 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.




The
      Convertible Note Hedge transactions and the warrant transactions were separate
      transactions, entered into by the Company with the Counterparties, and as such
      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. As a result of these transactions, the Company
      recorded a reduction to additional paid-in-capital of $12.1
      million.




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.




*Debt
      Maturities*





(In
      000's)





The
      Company's debt maturities are the following:




Total
            
            2007
            
            2008
            
            2009
            
            2010
            
            2011
            
            thereafterDue
                to Sweet (Note J)
            
            $
            3,230
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            3,230
            
            $
            -Kmart
                Note
            
            
            3,781
            
            
            3,781
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Asset
                backed notes
            
            
            142,339
            
            
            19,976
            
            
            21,760
            
            
            23,704
            
            
            25,822
            
            
            36,773
            
            
            14,304Term
                Loan Facility
            
            
            211,438
            
            
            2,125
            
            
            2,125
            
            
            2,125
            
            
            2,125
            
            
            2,125
            
            
            200,813Convertible
                Notes
            
            
            281,391
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            281,391Total
                Debt
            
            $
            642,179
            
            $
            25,882
            
            $
            23,885
            
            $
            25,829
            
            $
            27,947
            
            $
            42,128
            
            $
            496,508




11




NOTE
      F -
      UNZIPPED APPAREL, LLC (“UNZIPPED”)





*Equity
      Investment*





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.





*Acquisition*





On
      April
      23, 2002, the Company acquired the remaining 50% interest in Unzipped from
      Sweet
      for a purchase price of three million shares of the Company's common stock
      and
      $11 million in debt evidenced by the 8% Senior Subordinated Note due in 2012
      (“Sweet Note”). See Note J. 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.





*Related
      Party Transactions*





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 K.





There
      were no transactions with these related parties during the nine months ended
      September 30, 2007.





At
      September 30, 2007, the Company included in accounts payable subject to
      litigation amounts due to Azteca and ADS of $847,000 and $2,261,000
      respectively. These amounts, however, were in dispute in the litigation at
      September 30, 2007. See Note J.





NOTE
      G -
      SPECIAL CHARGES





Special
      charges consist of professional fees and reimbursement of certain fees related
      to the Unzipped litigation (See Note J)





NOTE
      H -
      STOCKHOLDERS' EQUITY





*Public
      Offering*





On
      December 13, 2006, the Company completed a public offering of its common stock.
      All 10,784,750 shares of common stock sold by the Company in the offering were
      sold at $18.75 per share. Net proceeds to the Company from the offering amounted
      to approximately $189.5 million.





*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.




12




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





Nine
                months endedSeptember
                30,2007Expected
                Volatility
            
            
            .30-.50Expected
                Dividend Yield
            
            
            0
            %Expected
                Life (Term)
            
            
            3-5
            yearsRisk-Free
                Interest Rate
            
            
            3.00-4.75
            %





The
      options that were granted under the Company's existing stock option and equity
      incentive plans expire between five and ten years from the date of
      grant.




Summaries
      of the Company's stock option and warrant activity and related information
      for
      the Current Nine Months follow:




Weighted-AverageOptions
            
            Exercise
                PriceOutstanding
                January 1, 2007
            
            
            5,769,632
            
            $
            4.35Granted
            
            
            -
            
            
            -Canceled
            
            
            -
            
            
            -Exercised
            
            
            (290,339
            )
            
            5.56Expired
            
            
            -
            
            
            -Outstanding
                September 30, 2007
            
            
            5,479,293
            
            $
            4.28Exercisable
                at September 30, 2007
            
            
            5,382,625
            
            $
            4.21




Weighted-AverageWarrants
            
            Exercise
                PriceOutstanding
                January 1, 2007
            
            
            799,175
            
            $
            11.02Granted
                in connection with Sold Warrants (see Note E)
            
            
            3,628,450
            
            
            42.40Granted
            
            
            80,000
            
            
            20.32Canceled
            
            
            -
            
            
            -Exercised
            
            
            (702,275
            )
            
            11.34Expired
            
            
            -
            
            
            -Outstanding
                September 30, 2007
            
            
            3,805,350
            
            $
            41.08Exercisable
                at September 30, 2007
            
            
            176,900
            
            $
            13.96





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. See Notes C and D.





Other
      warrants issued to non-employees are valued at fair market value using the
      Black
      Scholes model and are expensed over the vesting period.





At
      September 30, 2007, 1,904,345, 1,597,334, 922,250, and 564,721 shares of common
      stock were reserved for issuance upon exercise of stock options under the
      Company's 2006 Equity Incentive Plan and its 2002, 2001, and 2000 Stock Option
      Plans, respectively.




***Restricted
      stock***




Compensation
      cost for restricted stock is measured as the excess, if any, of the quoted
      market price of our 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 from time to time awarded restricted shares of common stock to
      certain employees. The awards have restriction periods tied to employment and
      vest over a period of six months to five years. The cost of the restricted
      stock
      awards, which is the fair market value on the date of grant net of estimated
      forfeitures, is expensed ratably over the vesting period. During the Current
      Nine Months, the Company awarded 93,804 restricted shares with a vesting period
      of six months to five years and a fair market value of $1.9 million. As of
      September 30, 2007, 19,838 shares related to restricted stock grants had
      vested.




13




Unearned
      compensation expense related to restricted stock grants for the Current Quarter
      and Current Nine Months was approximately $523,000 and $1,207,000, respectively.
      An additional amount of $2.1 million is expected to be expensed evenly over
      a
      period of approximately 2-3 years.




NOTE
      I
      - EARNINGS PER SHARE





Basic
      earnings per share includes no dilution and is computed by dividing net income
      available to common shareholders 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 common shares issuable upon
      exercise of stock options and warrants. The difference between reported basic
      and diluted weighted-average common shares results from the assumption that
      all
      dilutive stock options and warrants outstanding were exercised. Diluted loss
      per
      share reflects, in periods in which they have a dilutive effect, the effect
      of
      common shares issuable upon exercise of stock options.





As
      of
      September 30, 2007, of the total potentially dilutive shares related to stock
      options and warrants, approximately 3.6 million warrants to purchase common
      stock shares were anti-dilutive, and no stock options were
      anti-dilutive.





Certain
      effects on diluted net income per common share may result in future periods
      as a
      result of the Company's issuance of $281.1 million in Convertible Notes and
      the Company's entry into note hedge and warrant agreements during the Current
      Quarter. See Note E for a description of the key terms of these
      transactions. Under EITF 04-8, “The Effect of Contingently Convertible
      Instruments on Diluted Earnings Per Share”, and EITF 90-19, and because of the
      Company's obligation to settle the par value of the Convertible Notes in cash,
      the Company is not required to include any shares underlying the Convertible
      Notes in its weighted average shares outstanding - assuming dilution until
      the
      average stock price per share for the quarter exceeds the $27.56 conversion
      price of the Convertible Notes and only to the extent of the additional shares
      that the Company may be required to issue in the event that the Company's
      conversion obligation exceeds the principal amount of the Convertible Notes
      converted. These conditions had not been met as of September 30, 2007. At any
      such time in the future that these conditions are met, only the number of shares
      that would be issuable (under the “treasury” method of accounting for the share
      dilution) will be included, which is based upon the amount by which the average
      stock price exceeds the conversion price. Therefore, no additional shares are
      included in the Company's calculations of earnings per share and diluted
      earnings per share for the Current Quarter and the Current Nine Months. The
      condition to include underlying shares related to the warrants had not been
      met
      as of September 30, 2007 and was not met as of October 31, 2007.




For
                  the Quarter Ended
              
              For
                  the Nine Months EndedSeptember
                  30,
              
              September
                  30,
              
              September
                  30,
              
              September
                  30,*(in
                  millions)*
              
              2007
              
              2006
              
              2007
              
              2006BasicNet
                  income
              
              $
              16,993
              
              $
              7,946
              
              $
              44,529
              
              $
              23,648Weighted
                  average common shares outstanding
              
              
              56,801
              
              
              39,782
              
              
              56,569
              
              
              38,075Basic
                  earnings per share
              
              $
              0.30
              
              $
              0.20
              
              $
              0.79
              
              $
              0.62DilutedNet
                  income
              
              $
              16,993
              
              $
              7,946
              
              $
              44,529
              
              $
              23,648Weighted
                  average common shares outstanding
              
              
              56,801
              
              
              39,782
              
              
              56,569
              
              
              38,075Effect
                  of dilutive securities:Employee
                  stock options and restricted stock
              
              
              4,579
              
              
              5,036
              
              
              4,720
              
              
              5,394Weighted
                  average common shares and share
                equivalents
                  outstanding
              
              
              61,380
              
              
              44,818
              
              
              61,289
              
              
              43,469Diluted
                  earnings per share
              
              $
              0.28
              
              $
              0.18
              
              $
              0.73
              
              $
              0.54




NOTE
      J
      - 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 contact,
      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. Though 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%. Plaintiffs anticipate that
      a
      judgment taking into account these rulings will be entered in their favor within
      the next couple of weeks. In the upcoming months the Company and its
      subsidiaries will request that the Court award them, pursuant to various
      contractual and statutory fee-shifting provisions, certain fees, expenses and
      costs incurred in connection with this litigation.




The
      Company and its subsidiaries intend to vigorously pursue collection of the
      judgments against the Guez defendants. Upon the entry of such judgments by
      the
      Court, the Guez defendants have the right to appeal the judgments, but should
      be
      required to post an appropriate bond to secure the judgments and to stay
      execution proceedings. Plaintiffs also intend to appeal, among other things,
      those parts of the jury’s verdicts vacated by the Court in connection with the
      Guez defendants’ post-trial motions, and intend to vigorously pursue such
      appeal.




***Bader/Unzipped
      litigation***




On
      November 5, 2004, Unzipped commenced a lawsuit in the Supreme Court of New
      York,
      New York County, against Unzipped's former president of sales, Gary Bader,
      alleging that Mr. Bader breached certain fiduciary duties owed to Unzipped
      as
      its president of sales, unfairly competed with Unzipped and 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
      owes Bader and Sportswear Mercenaries $72,000. The Company intends to vigorously
      pursue its claims against Bader and Sportswear Mercenaries and to vigorously
      defend against the remaining claim asserted against it.




14




***Redwood
      Shoe litigation***




This
      litigation, which was commenced in January 2002, by Redwood Shoe Corporation
      (“Redwood”), one of the Company's former buying agents of footwear, was
      dismissed with prejudice by the court on February 15, 2007, pursuant to an
      agreement in principle by the Company, Redwood, its affiliate, Mark Tucker,
      Inc.
      (“MTI”) and MTI's principal, Mark Tucker, to settle the matter. The proposed
      settlement agreement provides for the Company to pay a total of $1.9 million
      to
      Redwood. The stipulation and order dismissing the action may be reopened should
      the settlement agreement not be finalized and consummated by all of the parties.
      The Company is awaiting receipt of the signed Settlement Agreement from the
      other parties.




***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 alleging
      certain breaches of contract and other claims and seeks, among other things,
      damages of at least $25 million. The Company believes that, in addition to
      other
      defenses and counterclaims that it intends to assert, the claims in the lawsuit
      are the subject of a release and settlement agreement that was entered into
      by
      the parties in August 2005, and has moved to dismiss most of the claims. In
      response to the motion to dismiss, BAI made a cross-motion for partial summary
      judgment on some of its claims. On April 25, 2007, the Court entered an order
      refusing to consider, and declining to accept, BAI's summary judgment motion.
      The Company's motion to dismiss remains pending before the Court.




Additionally,
      on or about October 6, 2006, the Company and IP Holdings filed suit in the
      U.S.
      District Court for the Southern District of New York against BAI and its
      guarantor, TKO Apparel, Inc. (“TKO”) In that complaint, the Company asserts
      various contract, tort and trademark claims that arose as a result of the
      failures of BAI with regard to the Bongo men's jeans wear business and its
      wrongful conduct with regard to the Bongo women's jeans wear business. The
      Company and IP Holdings are seeking monetary damages in an amount in excess
      of
      $10 million and a permanent injunction with respect to the use of the Bongo
      trademark. On January 4, 2007, the District Court denied the motion of BAI
      and
      TKO to dismiss the federal court action. Currently, a stay of the District
      Court
      proceedings is in place.




***Mossimo
      litigation***




In
      April 2005, Mr. Mossimo Giannulli offered to acquire all of the outstanding
      publicly held common stock of Mossimo, Inc. at a price of $4.00 per share.
      Following the announcement of such offer, six purported class action lawsuits
      were filed in the Court of Chancery of the State of Delaware seeking an
      injunction preventing the proposed acquisition of Mossimo by the Company and
      asserting that the Mossimo directors breached their fiduciary duties to the
      Mossimo stockholders. These six cases were consolidated. Although Mr. Giannulli
      subsequently withdrew his acquisition proposal, plaintiffs filed a first
      consolidated amended complaint in March 2006, in which they allege, among other
      things, that Mossimo and its board of directors breached their fiduciary duties
      and engaged in self-dealing in approving the merger agreement with the
      Company.




In
      addition, on April 12, 2006, a purported shareholder class action lawsuit was
      filed in the Superior Court of the State of California for the County of Los
      Angeles asserting similar claims against Mossimo and its directors with respect
      to the merger and seeking, among other relief, to enjoin the merger and rescind
      any agreements entered into in connection with the merger, and to recover costs,
      including attorney's fees.




On
      September 27, 2006, Mr. Giannulli and other defendants entered into a memorandum
      of understanding with the Delaware plaintiffs to settle the Delaware action
      which was approved by the Delaware Chancery Court on February 26, 2007. The
      settlement agreement provides that if the Company sells Mossimo or the Mossimo
      business prior to October 31, 2007 to an unaffiliated third party and if the
      consideration for such sale is greater than 120% of the amount paid to the
      Mossimo stockholders in the merger, 30% of that excess amount will be paid
      into
      a settlement fund to be administered and distributed by the plaintiffs' lawyers
      under the supervision of the Delaware court. This additional amount, if it
      becomes due and distributable, will be paid to all persons who owned Mossimo
      stock, directly or indirectly, between April 12, 2005 and October 31, 2006,
      and
      will not constitute additional merger consideration. Mossimo also negotiated
      in
      good faith with the plaintiffs' lead counsel concerning the amount of attorney
      fees and expenses to be paid by Mossimo or the Company, as its successor, and
      not to oppose such counsel's application to the court of up to $800,000 in
      payment of such fees and expenses. In consideration of these terms, the parties
      agreed that they would fully and finally release and discharge all claims
      against each other. On February 26, 2007, the Court of Chancery of the State
      of
      Delaware entered an order approving the settlement and the action was dismissed
      with prejudice. In connection with the settlement, plaintiffs counsel was
      awarded fees and expenses in the amount of $800,000.




On
      October 27, 2006, Mr. Giannulli and other defendants also entered into a
      settlement letter with the California plaintiffs in the California action.
      Under
      the terms of this settlement, Mr. Giannulli and the other defendants agreed
      to
      pay plaintiffs' counsel between $620,000 and $650,000. On March 1, 2007,
      following the Delaware Chancery Court's approval of the Delaware settlement,
      the
      parties filed a stipulation with the California court requesting the dismissal
      of the action with prejudice and requesting an order awarding Plaintiffs'
      counsel between $620,000 and $650,000. On March 13, 2007, the California court
      entered an order approving the settlement, and the action was dismissed with
      prejudice, and Plaintiff's counsel was awarded $650,000 for fees and
      expenses.




The
      Company received an insurance payment of $700,000 in connection with the above
      mentioned litigations.




**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.





***Joint
      Venture with Shawn Carter***





The
      Company has committed an amount of $5.0 million to fund its investment in Scion
      LLC, a joint venture formed by the Company with Shawn Carter, which will operate
      as a brand management and licensing company to identify brands to be acquired
      across a broad spectrum of consumer product categories. This investment has
      been
      funded subsequent to September 30, 2007 (see Note D).




15




NOTE
      K -
      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
      Chief Executive Officer and President. During the Current Quarter and the three
      months ended September 30, 2006 (“Prior Year Quarter”), the Company received
      $283,000 and $350,000, 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 $200,000 and $297,000 at September 30, 2007 and
      December 31, 2006, respectively.




NOTE
      L -
      INCOME TAXES





The
      Company accounts for income taxes in accordance with SFAS No. 109, “Accounting
      for Income Taxes” (“SFAS 109”). Under SFAS 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 109, including current and historical
      results of operations, the annual limitation on utilization of net operating
      loss carry forwards pursuant to Internal Revenue Code section 382, future income
      projections and the overall prospects of the Company's business. Based upon
      management's assessment of all available evidence, including the Company's
      completed transition into a licensing business, estimates of future
      profitability based on projected royalty revenues from its licensees, and the
      overall prospects of the Company's business, management is of the opinion that
      the Company will be able to utilize the deferred tax assets in the foreseeable
      future, and as such do not anticipate requiring a further valuation allowance.
      Based on current estimates of pre-tax income for the year ending December 31,
      2007, the Company will have a net income tax expense for this year.





In
      July 2006, the FASB issued FASB Interpretation No. 48 “Accounting for
      Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for
      income taxes by prescribing the minimum recognition threshold a tax position
      is
      required to meet before being recognized in the financial statements. FIN 48
      also provides guidance on derecognition, measurement, classification, interest
      and penalties, and disclosure requirements. FIN 48 is effective for fiscal
      years
      beginning after December 15, 2006. Accordingly, we adopted FIN 48 beginning
      January 1, 2007. The implementation of FIN 48 did not have a significant impact
      on our financial position or results of operations. The total unrecognized
      tax
      benefit was $1,052,000 at the date of adoption. However, the liability is not
      recognized for accounting purposes because the related deferred tax asset has
      been fully reserved in prior years.





The
      Company recognizes interest and penalties related to uncertain tax positions
      in
      income tax expense which were zero for the Current Quarter.




The
      Company is subject to taxation in the US and various state and local
      jurisdictions. The Company remains subject to examination by US Federal and
      state tax authorities for tax years 2003 through 2006.




NOTE
      M  RECENT
      ACCOUNTING STANDARDS





In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (“SFAS
      157”) which establishes a framework for measuring fair value in generally
      accepted accounting principles and expands disclosures about fair value
      measurements. SFAS 157 defines fair value as the price that would be received
      to
      sell an asset or paid to transfer a liability in an orderly transaction between
      market participants at the measurement date. SFAS 157 is effective for financial
      statements issued for fiscal years beginning after November 15, 2007, and
      interim periods within those fiscal years. The adoption of SFAS 157 is not
      expected to have a material impact on our results of operations or our financial
      position.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Asset and Financial Liability: Including an amendment to FASB
      Statement No. 115” (“SFAS 159”). The standard permits all entities to elect to
      measure certain financial instruments and other items at fair value with changes
      in fair value reported in earnings. SFAS 159 is effective as of the beginning
      of
      the first fiscal year that begins after November 15, 2007. The adoption of
      SFAS
      No. 159 is not expected to have a material impact on our results of operations
      or our financial position.





NOTE
      N -
      SUBSEQUENT EVENTS





On
      October 3, 2007 (the “Closing Date”), the Company completed its acquisition of
      all of the issued and outstanding limited liability company interests (the
      “Company Interests”) of Official Pillowtex LLC (“Official Pillowtex”), from the
      owners of such Company Interests (the “Sellers”) pursuant to a purchase and sale
      agreement dated September 6, 2007 by and among the Company, Official Pillowtex
      and the Sellers. Official Pillowtex is the owner of a portfolio of home brands
      including four primary brands, Cannon®, Royal Velvet®, Fieldcrest® and Charisma®
and numerous others home brands including St. Mary's and Santa Cruz. The closing
      of this transaction occurred following the early termination of the statutory
      waiting period required under the Hart-Scott-Rodino Antitrust Improvements
      Act
      of 1976, as amended.




In
      accordance with the terms of the Purchase Agreement, on the Closing Date, the
      Company paid an aggregate of approximately $232.1 million in cash, which is
      subject to adjustment to reflect certain prepaid royalties and royalties
      receivable, as the purchase price for the Company Interests, of which (i)
      approximately $208.1 million was paid to the Sellers by the Company,(ii) $15.0
      million, together with any interest and any other income earned thereon, was
      released to the Sellers by U.S. Bank National Association (the “Escrow Agent”)
      in accordance with the escrow agreement dated September 6, 2007 (the “Escrow
      Agreement”) by and among the Company, the Official Pillowtex and the Escrow
      Agent, and (iii) $9.0 million, together with any interest and any other income
      earned thereon, will be paid to the Sellers by the Escrow Agent on the twelve
      (12) month anniversary of the Closing Date, less any amounts due to the Company
      pursuant to the Sellers' indemnification obligations to the Company for breaches
      of the Sellers' representations, warranties, covenants and obligations made
      under the Purchase Agreement. The total of $24.0 million held in escrow prior
      to
      closing is reflected in the Unaudited Condensed Consolidated Balance Sheet
      as of
      September 30, 2007 under cash and cash equivalents in escrow for pending
      acquisition.




In
      addition, in accordance with the terms of the Purchase Agreement, the Sellers
      were granted a contingent right to receive aggregate additional payments of
      up
      to $15.0 million in cash, based upon the Official Pillowtex brands surpassing
      specific revenue targets.





In
      connection with the Company’s purchase of Official Pillowtex, the Company
      pledged its membership interests in Official Pillowtex, as well as its
      membership interests in another of the Company’s wholly-owned subsidiaries,
      Mossimo Holdings LLC, to the lenders under the Company’s Term Loan Facility (see
      Note E). These two subsidiaries also became guarantors of the Company’s
      obligations under the Term Loan Facility, and their guarantees are secured
      by a
      pledge of, among other things, the Official Pillowtex portfolio of brands and
      the Mossimo brand, respectively.




16




**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, 2006 and other SEC
      filings. The words “believe”, “anticipate,” “expect”, “confident”, “project”,
      provide “guidance” and similar expressions identify forward-looking statements.
      Readers are cautioned not to place undue reliance on these forward looking
      statements, which speak only as of the date the statement was made.





*Executive
      Summary.* The
      Company is a brand management company engaged in licensing, marketing and
      providing trend direction for a diversified and growing consumer brand
      portfolio. The Company’s brands are sold across every major segment of retail
      distribution, from luxury to mass. As of September 30, 2007, the Company owned
      11 iconic consumer brands: Candie’s, Bongo, Badgley Mischka, Joe Boxer, Rampage,
      Mudd, London Fog, Mossimo, Ocean Pacific/OP, Danskin, and Rocawear, which it
      licenses worldwide through over 150 direct-to-retail and wholesale licenses
      for
      use in connection with a broad variety of product categories, including women’s,
      men’s and children’s apparel, footwear and accessories, home furnishings and
      beauty and fragrance. The Company’s 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.
      The Company’s licensing agreements with leading retail and wholesale partners
      throughout the world provide the Company with a predictable stream of guaranteed
      minimum royalties.




The
      Company’s growth strategy is focused on increasing licensing revenue from its
      existing portfolio of brands through adding new product categories, expanding
      its brands’ retail penetration and optimizing the sales of its licensees. The
      Company also continues the international expansion of its brands by partnering
      with leading licensees throughout the world. In addition to these organic growth
      initiatives, the Company has and intends to continue to grow through acquisition
      and to diversify its brand portfolio with iconic consumer brands with
      applicability to a wide range of merchandise categories.





***Results
      of Operations***




*For
      the three months ended September 30, 2007*




*Revenue.* Revenue
      for the Current Quarter increased to $42.7 million, from $22.1 million in the
      Prior Year Quarter. The largest driver of the growth of $20.6 million was
      revenue from the acquisitions of Mossimo and the London Fog, Ocean Pacific,
      Danskin and Rocawear brands and certain related assets during the last 12 months
      and therefore were not included in the Prior Year Quarter’s
      revenue.




*Operating
      Expenses.* Selling,
      general and administrative ( **“** SG&A”)
      expenses totaled $13.4 million in the Current Quarter compared to $6.1 million
      in the Prior Year Quarter. The increase of $7.3 million was primarily related
      to
      an aggregate increase of $4.4 million in advertising expense and payroll costs
      associated with additions to employee headcount, both relating primarily to
      our
      recent acquisitions. Further, for the Current Quarter, non-cash items consisting
      of the amortization of restricted stock awards and an increase in the
      amortization of intangible assets as a direct result of the Mossimo, Danskin,
      Rocawear, and Ocean Pacific acquisitions accounted for an aggregate of $1.4
      million of the increase in SG&A expenses. For the Current Quarter and Prior
      Year Quarter, the Company’s special charges included reimbursement of certain
      fees totaling $39,000 and an expense for professional fees of $632,000
      respectively, relating to litigation involving Unzipped. See Note G of Notes
      to
      Unaudited Condensed Consolidated Financial Statements.





17




Operating
      Income for the Current Quarter increased to $29.3 million, or approximately
      69%
      of total revenue compared to $15.4 million or approximately 70% of total revenue
      in the Prior Year Quarter.





*Interest
      Expense - Net and Other Income* .
      Net
      interest expense increased by $1.5 million in the Current Quarter to $4.7
      million, compared to $3.2 million in the Prior Year Quarter. This increase
      was
      due primarily to an increase in the Company’s debt through financing
      arrangements in connection with the acquisitions of Mudd, London Fog and
      Rocawear. See Note D of the Notes to Unaudited Condensed Consolidated Financial
      Statements. Total interest expense for the Current Quarter increased by $5.9
      million compared to the Prior Year Quarter. For the Current Quarter, there
      was a
      total of $4.6 million in interest and other income to partially offset the
      increase in interest expense during the quarter as a result of the increase
      in
      cash and cash equivalents during the Current Quarter, compared to the Prior
      Year
      Quarter when there was only $277,000 in interest income to offset the interest
      expense in that quarter.





*Provision
      (Benefit) for Income Taxes.* The
      Company accounts for income taxes in accordance with SFAS No. 109 “Accounting
      for Income Taxes” (“SFAS 109”). Under SFAS 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. The effective
      income tax rate for the Current Quarter is approximately 31% resulting in the
      $7.6 million income tax expense, as compared to an effective tax rate of 35%
      resulting in the $4.3 million income tax expense for the Prior Year Quarter.
      The
      decrease in the effective tax rate from the Prior Year Quarter to the Current
      Year Quarter is primarily related to fluctuations in state rates expected to
      be
      realized by the Company due to new or revised tax legislation as well as the
      changes we have recently experienced in the level of business performed within
      specific tax jurisdictions.





*Net
      income* .
      The
      Company’s net income was $17.0 million in the Current Quarter, compared to net
      income of $7.9 million in the Prior Year Quarter, as a result of the factors
      discussed above.




*For
      the nine months ended September 30, 2007*




*Revenue.* Revenue
      for the Current Nine Months increased to $112.6 million from $53.8 million
      during the nine months ended September 30, 2006 (“Prior Year Nine Months”). The
      largest driver of the growth of $58.8 million was revenue from the acquisitions
      of Mossimo and the London Fog, Ocean Pacific, Danskin and Rocawear brands and
      certain related assets during the last 12 months and therefore was not included
      in the Prior Year Nine Months revenue.




*Operating
      Expenses.* SG&A
      expenses totaled $30.1 million in the Current Nine Months compared to $17.6
      million in the Prior Year Nine Months. The increase of $12.5 million was
      primarily related to an aggregate increase of $5.5 million in advertising
      expense and payroll costs associated with additions to employee headcount,
      both
      relating primarily to our recent acquisitions. Further, for the Current Nine
      Months, non-cash items consisting of the amortization of restricted stock
      awards, and the amortization of intangible assets as a direct result of the
      Mossimo, Danskin, Rocawear, and Ocean Pacific acquisitions accounted for an
      aggregate of $3.4 million of the increase in SG&A expenses. For the Current
      Nine Months and Prior Year Nine Months, the Company’s special charges included
      $1.1 and $1.9 million respectively, relating to litigation involving Unzipped.
      See Note G of Notes to Unaudited Condensed Consolidated Financial
      Statements.





Operating
      Income for the Current Nine Months increased to $81.4 million, or approximately
      72% of total revenue compared to $34.3 million or approximately 64% of total
      revenue in the Prior Year Nine Months.





*Interest
      Expense - Net and Other Income* .
      Net
      interest expense increased by $6.3 million in the Current Nine Months to $14.3
      million, compared to net interest expense of $8.0 million in the Prior Year
      Nine
      Months. This increase was due primarily to an increase in the Company’s debt
      through financing arrangements in connection with the acquisitions of Mudd,
      London Fog, and Rocawear. See Note D of the Notes to Unaudited Condensed
      Consolidated Financial Statements. Total interest expense for the Current Nine
      Months increased by $12.1 million compared to the Prior Year Nine Months. For
      the Current Nine Months, there was a total of $6.5 million in interest and
      other
      income to partially offset the increase in interest expense during the period,
      compared to the Prior Year Nine Months when there was only $629,000 in interest
      income to offset the interest expense for that period, as a result of the
      increase in cash and cash equivalents during the Current Nine Months as compared
      to the Prior Year Nine Months.




*Provision
      (Benefit) for Income Taxes.* The
      Company accounts for income taxes in accordance with SFAS 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. The effective income tax rate for the Current Nine Months is
      approximately 34% resulting in the $22.6 million income tax expense as compared
      to an effective tax rate of 10% resulting in the $2.7 million income tax expense
      for the Prior Year Nine Months due primarily from a reduction in the Company’s
      valuation allowance. There was no comparable reduction of the Company’s
      valuation allowance in the Current Nine Months.





*Net
      income* .
      The
      Company’s net income was $44.5 million in the Current Nine Months, compared to
      net income of $23.6 million in the Prior Year Nine Months, as a result of the
      factors discussed above.




18




***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 have been the issuance of debt and equity
      securities. At September 30, 2007 and December 31, 2006, our cash plus
      marketable securities totaled $293.0 million and $77.8 million, respectively,
      including restricted cash of $3.6 million and $4.3 million,
      respectively.





Subsequent
      to the Current Quarter, on October 3, 2007, the Company completed its
      acquisition of Official Pillowtex for approximately $232.1 million in cash,
      subject to adjustment to reflect certain prepaid royalties and royalties
      receivable. The Company funded the acquisition from cash on hand at September
      30, 2007. See Note N for further details on this acquisition.





We
      believe that cash from future operations as well as currently available cash
      and
      marketable securities will be sufficient to satisfy our anticipated working
      capital requirements for the foreseeable future. We intend to continue financing
      our brand acquisitions through some combination of cash from operations, bank
      financing and the issuance of additional equity and/or debt securities. The
      Company funded the acquisition of Danskin from its cash reserves. The Rocawear
      acquisition has been funded from the proceeds of a loan under the Company’s
      $212.5 million Term Loan Facility, entered into with Lehman Brothers Inc. and
      Lehman Commercial Paper Inc. on March 30, 2007 which was amended and restated
      on
      May 2, 2007. We have limited ability, however, to secure additional indebtedness
      with our existing assets due to certain provisions of IP Holdings’ existing
      Asset-Backed Notes, in addition to certain provisions of the Term Loan Facility.
      The note issued by the Company under the Term Loan Facility currently bears
      interest at a variable rate equal to the three-month LIBOR plus 2.25% per annum,
      with principal payable in equal quarterly installments in annual aggregate
      amounts equal to 1.00% of the initial aggregate principal amount of the Term
      Loan Facility, in addition to an annual payment equal to 50% of the excess
      cash
      flow from the Term Loan Facility group, with any remaining unpaid principal
      balance to be due on March 30, 2013. At September 30, 2007 there was $211.4
      million principal amount outstanding on the Term Loan Facility. See Note E
      of
      Notes to Unaudited Condensed Consolidated Financial Statements.





*Changes
      in Working Capital*





At
      September 30, 2007 and December 31, 2006 the working capital ratio (current
      assets to current liabilities) was 7.2 to 1 and 2.8 to 1, respectively. This
      increase was driven by the increase in cash and cash equivalents and marketable
      securities from $77.8 million at December 31, 2006 to $293.0 million at
      September 30, 2007, which was primarily due to our sale of $287.5 million
      principal amount of Convertible Notes (some of the net proceeds of which were
      used by us to fund our acquisition of Official Pillowtex, LLC in October 2007,
      and the remainder of which may be used to invest in or acquire new brands and
      for general corporate purposes). This increase in cash and cash equivalents
      was
      offset by cash paid of $71.0 million for the acquisition of the Danskin brand.
      In addition, the increase in working capital can be partially attributed to
      the
      following factors: an increase in accounts receivable from $14.5 million at
      December 31, 2006, to $34.2 million at September 30, 2007, and the increase
      in
      prepaid advertising and other from $2.7 million at December 31, 2006, to $5.6
      million at September 30, 2007, both of which were direct results of the new
      acquisitions; partially offset by the decrease in the current portion of
      deferred income tax assets from $3.4 million at December 31, 2006, to $3.0
      million at September 30, 2007.





*Operating
      Activities*





Net
      cash
      provided by operating activities totaled $58.1 million in the Current Nine
      Months, as compared to $18.8 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 primarily due to net income of $44.5
      million, amortization of intangibles of $3.9 million, an increase of $2.4
      million in deferred revenues, and an increase of $22.4 million in deferred
      income tax assets primarily related to the provision for income taxes for the
      Current Nine Months, offset primarily by increases of $18.4 million in accounts
      receivable and $2.9 million in prepaid advertising and other. The Company
      continues to rely upon cash generated from licensing and commission operations
      to finance its operations.




19




*Investing
      Activities*





Net
      cash
      used in investing activities in the Current Nine Months totaled $313.7 million,
      as compared to $78.4 million in the Prior Year Nine Months. In the Current
      Nine
      Months, the Company purchased marketable securities totaling $196.4 million,
      of
      which marketable securities totaling $183.4 million were sold at par value
      plus
      accrued interest during the Current Quarter. In addition, the Company paid
      $71.0
      million in cash for certain assets relating to the Danskin brand and $205.5
      million in cash for certain assets relating to the Rocawear brand, and placed
      $24.0 million of cash into escrow related to the acquisition of Official
      Pillowtex, LLC. See Notes C and D of Notes to Unaudited Condensed Consolidated
      Financial Statements. Capital expenditures in the Current Nine Months were
      $68,000, compared to $558,000 in capital expenditures in the Prior Year Nine
      Months.





*Financing
      Activities*





Net
      cash
      provided by financing activities was $434.5 million in the Current Nine Months,
      compared with $57.3 million in the Prior Year Nine Months. Of the $434.5 million
      in net cash provided by financing activities, $212.5 million was provided from
      the net proceeds of the issuance of the Term Loan Facility, $281.0 million
      from
      the net proceeds of our sale of the Convertible Notes, $37.5 million from the
      proceeds of our sale of the Sold Warrants to the Convertible Note Hedge
      Counterparties, $1.7 million from proceeds in connection with the exercise
      of
      stock options, and $621,000 placed in the current reserve account. This was
      offset by an aggregate of $76.3 million used to purchase the Purchased Call
      Options from the Convertible Note Hedge Counterparties, $14.6 million used
      for
      principal payments related to the Asset-Backed Notes and the Term Loan Facility,
      $2.8 million in cash placed in a non-current reserve account, and $5.0 million
      in financing costs which have been deferred to be amortized over the remaining
      life of the Term Loan Facility. In the Prior Year Nine Months, $78.0 million
      was
      raised in long term debt to purchase certain assets related to the Mudd and
      London Fog brands, the Company received proceeds of $4.2 million from the
      exercise of stock options and warrants, approximately $6.9 million was used
      for
      principal payments related to the Asset-Backed Notes, $5.6 million in cash
      placed in a non-current reserve account, $12.0 million in cash placed in a
      current reserve account, and $550,000 used to pay the costs associated with
      the
      issuance of long term debt.





***Other
      Matters***





*Summary
      of Critical Accounting Policies.*





The
      unaudited condensed consolidated financial statements include the accounts
      of
      the Company and its wholly-owned subsidiaries. All significant intercompany
      transactions and items have been eliminated in consolidation. The Company
      acquired the Danskin brand on March 9, 2007 and the Rocawear brand on March
      30,
      2007. All acquisitions have been accounted for using purchase price accounting.
      The purchase method of accounting requires that the total purchase price of
      an
      acquisition be allocated to the assets acquired and liabilities assumed based
      on
      their fair values on the date of the business acquisition. Any excess of the
      purchase price over the estimated fair values of the net assets acquired is
      recorded as goodwill. See Notes C and D. of Notes to Unaudited Condensed
      Consolidated Financial Statements.





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





In
      June
      2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”
(“SFAS 142”), which changes the accounting for goodwill and other intangible
      assets without determinable lives from an amortization method to an
      impairment-only approach. The Candie’s and Bongo trademarks had previously been
      amortized on a straight-line basis over their estimated useful lives of
      approximately 20 years. Effective July 1, 2005 the Company had a change in
      estimate of the useful lives of both the Candie’s and Bongo trademarks to
      indefinite life. As of September 30, 2007, the net book value of the Candie’s
      and Bongo trademarks totaled $14.3 million. Impairment losses are recognized
      for
      long-lived assets, including certain intangibles, used in operations when
      indicators of impairment are present and the undiscounted cash flows estimated
      to be generated by those assets are not sufficient to recover the assets’
carrying amount. Impairment losses are measured by comparing the fair value
      of
      the assets to their carrying amount.





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





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




20




The
      Company accounts for income taxes in accordance with SFAS 109. Under SFAS 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 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 the Current
      Quarter that it is more likely than not that the net deferred income tax asset
      recorded as of September 30, 2007 will be realized.




*Seasonal
      and Quarterly Fluctuations* .





The
      majority of the products manufactured and sold under the Company’s brands and
      licenses are for apparel, accessories and footwear, which sales 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, is 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.





*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
      our company, however, will still remain largely dependent on our ability to
      build and maintain brand awareness with the consumer, 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 the Risk Factors section of this
      report and in our Annual Report on Form 10-K for the year ended December 31,
      2006, 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 United States, where it primarily
      competes, have had a significant effect on its revenues or
      profitability.




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




The
      market risk inherent in the Company’s financial instruments represents the
      potential loss in earnings or cash flows arising from adverse changes in
      interest rates. We manage this exposure through regular operating and financing
      activities when deemed appropriate.




The
      primary interest rate exposures on floating rate financing arrangements are
      with
      respect to short-term interest rates. The Company had approximately $211.4
      million in variable rate credit facilities at September 30, 2007, of which
      50%
      of the forecasted balance is hedged through an interest rate cap set at 6.00%
      for LIBOR.





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





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




There
      have been no changes in the Company’s internal control over financial reporting
      (as defined in Exchange Act Rule 13a-15(f)) that occurred during the quarter
      ended September 30, 2007 that have materially affected, or are reasonably likely
      to materially affect, the Company’s internal control over financial
      reporting.





21





**PART
      II. Other Information**




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





See
      Note
      J 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, 2006 (other than
      the
      risk relating to the California state court litigation which was decided in
      our
      favor in April 2007, and the additional risks related to an increase in our
      total consolidated debt and increases in our goodwill and other intangible
      assets during the Current Nine Months due to our acquisitions of the Danskin
      and
      Rocawear brands), 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, 2006 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, 2007, we had consolidated debt of approximately $642.2 million,
      including secured debt of $353.7 million ($211.4 million under our Term Loan
      Facility and $142.3 million under IP Holdings’ asset-backed notes), primarily
      all of which debt 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;
 ·
                                  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 our Term Loan Facility, it would enable the lenders to foreclose on
      the
      assets securing such debt, including Ocean Pacific/OP, Danskin, Rocawear and
      Mossimo trademarks, as well as the trademarks acquired by us in connection
      with
      our Official Pillowtex acquisition, and, in the case of 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.





*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
      profitability or increase our net loss.*




As
      of
      September 30, 2007, goodwill represented approximately $101.0 million, or 8%
      of
      our total assets, and trademarks and other intangible assets represented
      approximately $745.5 million, or 60% of our total assets. Under SFAS 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.




22




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




Our
      licenses with Target, Kohl’s and Kmart Corporation, were our three largest
      licenses during the three months and nine months ended September 30, 2007,
      representing approximately 23% and 31%, respectively, of our total revenue
      for
      such periods. Our license agreement with Kohl’s grants it the exclusive U.S.
      license with respect to the Candie’s trademark for a wide variety of product
      categories for an initial term expiring in December 2010; 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; and our license agreement with Target grants it the exclusive
      U.S. license with respect to the Mossimo trademark for substantially all
      Mossimo-branded products for an initial term expiring in January 2010. Because
      we are dependent on these licensees for a significant portion of our licensing
      revenue, if any of them were to have financial difficulties affecting its
      ability to make guaranteed payments, or if any of these licensees decides not
      to
      renew or extend its existing agreement with us, our revenue and cash flows
      could
      be reduced substantially. 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 its guaranteed annual royalty
      minimums by approximately half, as a result of which our revenues from this
      license were substantially reduced.





*Changes
      in effective tax rates or adverse outcomes resulting from examination of our
      income or other tax returns could adversely affect our
      results.*





Our
      future effective tax rates could be adversely affected by changes in the
      valuation of our deferred tax assets and liabilities, or by changes in tax
      laws
      or interpretations thereof. In addition, we are subject to the continuous
      examination of our income tax returns by the Internal Revenue Service and other
      tax authorities. We regularly assess the likelihood of recovering the amount
      of
      deferred tax assets recorded on the balance sheet and the likelihood of adverse
      outcomes resulting from examinations by various taxing authorities in order
      to
      determine the adequacy of our provision for income taxes. We cannot guarantee
      that the outcomes of these evaluations and continuous examinations will not
      harm
      our reported operating results and financial conditions.




*We
      may not be able to pay the cash portion of the conversion price upon any
      conversion of the $287.5 million principal amount of our outstanding Convertible
      Notes, which would constitute an event of default with respect to such notes
      and
      could also constitute a default under the terms of our other
      debt.*




We
      may
      not have sufficient cash to pay, or may not be permitted to pay, the cash
      portion of the required consideration that we may need to pay if our Convertible
      Notes are converted. As described in Item 1. - Note E of Notes to Unaudited
      Condensed Consolidated Financial Statements, upon conversion of a Convertible
      Note, we will be required to pay to the holder of such note a cash payment
      equal
      to the lesser of the principal amount of such note or its conversion value.
      This
      part of the payment must be made in cash, not in shares of our common stock.
      As
      a result, we may be required to pay significant amounts in cash to holders
      of
      the Convertible Notes upon their conversion.




If
      we do
      not have sufficient cash on hand at the time of conversion, we may have to
      raise
      funds through debt or equity financing. Our ability to raise such financing
      will
      depend on prevailing market conditions. Further, we may not be able to raise
      such financing within the period required to satisfy our obligation to make
      timely payment upon any conversion. In addition, the terms of any current or
      future debt, including our outstanding Term Loan Facility, may prohibit us
      from
      making these cash payments or otherwise restrict our ability to make such
      payments and/or may restrict our ability to raise any such financing. In
      particular, the terms of our outstanding Term Loan Facility restrict the amount
      of proceeds from collateral pledged to secure our obligations thereunder that
      may be used by us to make payments in cash under certain circumstances,
      including payments to the Convertible Note holders upon conversion. Although
      the
      terms of our outstanding Term Loan Facility do not restrict our ability to
      make
      payments in cash with assets not pledged as collateral to secure our obligations
      thereunder, such assets may not generate sufficient cash to enable us to satisfy
      our obligations to make timely payment of the Convertible Notes upon conversion.
      A failure to pay the required cash consideration upon conversion would
      constitute an event of default under the indenture governing the Convertible
      Notes, which might constitute a default under the terms of our other
      debt.




*Proposed
      changes in the accounting method for convertible debt securities could, if
      implemented, 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 EITF
      Issue No. 90-19, “Convertible Bonds with Issuer Option to Settle for Cash upon
      Conversion,” 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 is that the shares potentially issuable upon
      conversion of the notes are not included in the calculation of our diluted
      earnings per share until the conversion price is “in the money,” and we are
      assumed to issue the number of shares of common stock necessary to
      settle.




In
      July
      2007, the FASB voted unanimously to reconsider the current accounting for
      convertible debt securities that requires or permits settlement in cash either
      in whole or in part upon conversion (“cash settled debt securities”), which
      includes our Convertible Notes. Under a potential FASB proposal for a method
      of
      accounting that would be applied retroactively, the debt and equity components
      of such a security would be bifurcated and accounted for separately in a manner
      that reflects the issuer’s economic interest cost. While the effect on us of
      this proposal cannot be quantified unless and until the FASB finalizes its
      guidance, under this proposal, we could recognize higher interest on our
      Convertible Notes at effective rates more comparable to what we would have
      incurred had we issued nonconvertible debt with otherwise similar terms.
      Therefore, if the proposed method of accounting for cash settled convertible
      debt securities is adopted by the FASB as described above, it would have an
      adverse impact on our past and future reported financial results. In addition,
      any other change that could affect the accounting for convertible securities,
      including any changes in generally accepted accounting principles in the United
      States, could have a material impact on our reported or future financial
      results.




In
      the
      event the proposed method of accounting described above is adopted, we will
      pursuant to the terms of the Indenture 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.




23




**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, 2007:




Month
                of purchase
            
            Total
                number
              of
                shares
              purchased(1)
            
            Average
              price
              paid
                per share
            
            Total
                number of shares purchased as part of publicly announced plan or
                program
            
            Maximum
                dollar
              value
                of shares
              that
                may yet be
              purchased
                under
              the
                programJuly
                1 - July 31 2007
            
            
            —
            
            $
            —
            
            $
            —
            
            $
            —August
                1 - August 31, 2007
            
            
            —
            
            $
            —
            
            $
            —
            
            $
            —September
                1 -September 30, 2007
            
            
            2,428
            
            $
            22.90
            
            $
            —
            
            $
            —Total
            
            
            2,428
            
            $
            22.90
            
            $
            —
            
            $
            —




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




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





At
      the
      Company’s Annual Meeting of Stockholders held on August 16, 2007, the
      stockholders of the Company voted to elect the six individuals named below
      to
      serve as Directors of the Company, to approve an amendment to the Company’s
      Certificate of Incorporation to increase the authorized common stock from
      75,000,000 shares to 150,000,000 shares and to ratify the appointment of BDO
      Seidman, LLP as the Company’s independent registered public accountants for the
      fiscal year ending December 31, 2007.





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




Director
            
            Votes
                Cast “For”
            
            Votes
                WithheldNeil
                Cole
            
            
            51,418,337
            
            
            1,149,655Barry
                Emanuel
            
            
            51,266,877
            
            
            1,301,115Steven
                Mendelow
            
            
            52,009,142
            
            
            558,850Drew
                Cohen
            
            
            50,097,668
            
            
            2,470,324F.
                Peter Cuneo
            
            
            52,008,953
            
            
            559,039Mark
                Friedman
            
            
            51,878,957
            
            
            689,035




2)
      The
      votes cast by stockholders with respect to the amendment to the Company’s
      Certificate of Incorporation to increase the Company’s authorized common stock
      to 150,000,000 shares were as follows:




Votes
                Cast “For”
            
            Votes
                Cast “Against”
            
            Votes
                “Abstaining”46,928,957
            
            
            5,585,057
            
            
            53,978





In
      addition, there were no “broker non-votes” with respect to the proposal to amend
      the Company’s Certificate of Incorporation.





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




Votes
                Cast “For”
            
            Votes
                Cast “Against”
            
            Votes
                “Abstaining”51,901,702
            
            
            624,711
            
            
            41,579





In
      addition, there were no “broker non-votes” with respect to the proposal to
      ratify the appointment of BDO Seidman, LLP.





**Item
      5. Other Information**





None
      noted.





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




Exhibit
                No.
            
            Description
                of ExhibitExhibit
                2.1 (1)*
            
            Purchase
                and Sale Agreement, dated September 16, 2007, by and among Iconix
                Brand
                Group, Inc., Official Pillowtex, LLC and the Sellers of interests
                in
                Official Pillowtex, LLC (the “Sellers)Exhibit
                3(i)
            
            Certificate
                of Incorporation, as amended.Exhibit
                10.1(1)
            
            Escrow
                Agreement dated September 6, 2007 by and between Iconix Brand Group,
                Inc.,
                Ben Kraner, on behalf of the Sellers as each Seller’s authorized
                attorney-in-fact, and the escrow agent.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 2002.Exhibit
                31.2
            
            Certification
                of Chief Financial Officer Pursuant To Rule 13a-14 or 15d-14 of The
                Securities Exchange Act of 1934, As Adopted Pursuant To Section 302
                Of The
                Sarbanes-Oxley Act of 2002.Exhibit
                32.1
            
            Certification
                of Chief Executive Officer Pursuant To 18 U.S.C. Section 1350, As
                Adopted
                Pursuant To Section 906 of The Sarbanes-Oxley Act of
                2002.Exhibit
                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 Current Report on Form 8-K of Iconix Brand Group, Inc.
      for
      the event dated October 3, 2007 and incorporated by reference
      herein.




*
              Iconix
                  Brand Group, Inc. has omitted certain schedules and exhibits pursuant
                  to
                  Item 601(b)(2) of Regulation S-K and shall furnish supplementally
                  to the
                  SEC copies of any of the omitted schedules and exhibits upon request
                  by
                  the SEC.




24




**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 6, 2007
            
            
            /s/
                Neil ColeNeil Cole
              Chairman of the Board, President
              and
                  Chief Executive Officer
                (on
                    Behalf of the
                    Registrant)




Date:
                November 6, 2007
            
            
            /s/
              Warren
              ClamenWarren Clamen
              Chief
                  Financial Officer




25