UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549







FORM
10-Q










(MARK
      ONE)x
            QUARTERLY REPORT UNDER
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
  1934For
      the quarterly period ended March 31, 2008ORo
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACTFor
      the transition period from  ______________ to
      ______________




Commission
File Number: 033-07075-LA




THE
FASHION HOUSE HOLDINGS, INC.


(Exact
name of small business issuer as specified in its charter)




Colorado
            33-1079781(State
      or other jurisdiction of   incorporation or
      organization)
            (IRS
      Employer Identification No.)




16633 Ventura Blvd., 6th
Floor


Encino,CA91436


(Address of principal executive offices)  (Zip Code)




(818)
907-0400


(Issuer’s
telephone number including area code)








Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes x  No o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large
      accelerated file         
      o
                
                Accelerated
      filer                                                     oNon-accelerated
      filer           o
                
                Smaller
      reporting
      company                                  x
 (Do not
check if a smaller reporting company)
 
 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




State the
number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date.
  Common
Stock Outstanding as of May 20, 2008: 24,887,063 shares
  Transitional
Small Business Disclosure Format: Yes o   No x


Table of Contents




TheFashion House Holdings, Inc


Index
to Form 10-Q




PagePart
      I Financial InformationItem 1.
            Financial
      StatementsCondensed Consolidated Balance
      Sheet as ofMarch31,
      2008(Unaudited) and December 31,
      2007
            3Condensed Consolidated Statements
      of Operations for the three month periods endedMarch31, 2008and
      2007(Unaudited)
            4Condensed Consolidated Statements
      of Cash flows for thethreemonth
      periods endedMarch31,
      2008and 2007(Unaudited)
            5Notes to Unaudited Condensed
      Consolidated Financial Statements
            6Item 2.
            Management’s Discussion and
      Analysis or Plan of Operation
            16Item 3.
            Controls and
      Procedures
            22Part
      II Other InformationItem 1.
            Legal
      Proceedings
            23Item 2.
            Unregistered Sales of Equity
      Securities and Use of Proceeds
            24Item 3.
            Defaults Upon Senior
      Securities
            24Item 4.
            Submission of Matters to a Vote of
      Security Holders
            24Item 5.
            Other
      Information
            24Item 6.
            Exhibits
            24SIGNATURES
            25Exhibit
      31.1Exhibit
      31.2Exhibit
      32.1









Table of Contents








PART
I — FINANCIALINFORMATION




Item1. Financial Statements





THE
FASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY


CONDENSED
CONSOLIDATED BALANCE SHEETS


MARCH
31, 2008 and DECEMBER 31, 2007







March
      31,
            
            
            December
      31,2008
            
            
            2007(Unaudited)ASSETSCurrent
      assets:Cash
            
            $
            11,032
            
            
            $
            6,390Accounts
      receivable, net of allowance of $46,918
            
            
            110,905
            
            
            
            1,230,969Inventories
            
            
            431,554
            
            
            
            480,374Prepaid
      expenses
            
            
            44,200
            
            
            
            109,164Total
      current assets
            
            
            597,691
            
            
            
            1,826,897Property
      and equipment, net
            
            
            242,638
            
            
            
            262,574Restricted
      cash
            
            
            136,847
            
            
            
            136,847Deposits
            
            
            10,000
            
            
            
            68,021TOTAL
      ASSETS
            
            $
            987,176
            
            
            $
            2,294,339LIABILITIES
      AND STOCKHOLDERS’ DEFICITCurrent
      liabilities:Due
      to related parties
            
            $
            11,949,457
            
            
            $
            11,724,991Accounts
      payable and accrued expenses
            
            
            3,224,701
            
            
            
            3,153,672Accrued
      payroll and related
            
            
            239,377
            
            
            
            239,377Due
      to factor
            
            
            80,737
            
            
            
            1,066,630Accrued
      interest
            
            
            1,280,336
            
            
            
            843,904Notes
      payable
            
            
            280,293
            
            
            
            280,293Total
      current liabilities
            
            
            17,054,901
            
            
            
            17,308,867Long-term
      liabilities:Notes
      payable to stockholders
            
            
            1,090,100
            
            
            
            1,090,100Total
      liabilities
            
            
            18,145,001
            
            
            
            18,398,967Commitments
      and contingenciesStockholders’
      deficit:Common
      stock, no par value;100,000,000
      shares authorized;24,887,063
      shares issued and outstanding
            
            
            17,847,701
            
            
            
            17,847,701Accumulated
      deficit
            
            
            (35,005,526
            )
            
            
            (33,952,329
            )Total
      stockholders’ deficit
            
            
            (17,157,825
            )
            
            
            (16,104,628
            )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIT
            
            $
            987,176
            
            
            $
            2,294,339






See
accompanying notes to unaudited condensed consolidated financial
statements.







3
 Table of Contents




THE
FASHIONHOUSE HOLDINGS, INC. AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


FOR
THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007


(UNAUDITED)




Three
      Months Ended March 31,2008
            
            
            2007Net
      sales
            
            $
            57,163
            
            
            $
            2,214,169Cost
      of sales and returns
            
            
            135,928
            
            
            
            2,342,294Gross
      (loss) profit
            
            
            (78,765
            )
            
            
            (128,125
            )Operating
      expenses:Selling,
      general and administrative
            
            
            462,116
            
            
            
            1,295,839Payroll
      and related expenses
            
            
            76,324
            
            
            
            716,963Royalties
            
            
            -
            
            
            
            360,983Total
      operating expenses
            
            
            538,440
            
            
            
            2,373,785Loss
      from operations
            
            
            (617,205
            )
            
            
            (2,501,910
            )Other
      income (expense):Interest
      expense, net of interest income
            
            
            (436,432
            )
            
            
            (2,140,996
            )Other
      Income
            
            
            440
            
            
            
            -Total
      other income (expense)
            
            
            (435,992
            )
            
            
            (2,140,996
            )Loss
      before income taxes
            
            
            (1,053,197
            )
            
            
            (4,642,906
            )Income
      taxes
            
            
            -
            
            
            
            800Net
      loss
            
            $
            (1,053,197
            )
            
            $
            (4,643,706
            )Basic
      and diluted net loss per share
            
            $
            (0.04
            )
            
            $
            (0.19
            )Weighted
      average shares outstanding — basic and diluted
            
            
            24,887,063
            
            
            
            24,887,063




See
accompanying notes to unaudited condensed consolidated financial
statements.







4
 Table of Contents





THEFASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


THREE
MONTHS ENDED MARCH 31, 2008 AND 2007


(UNAUDITED)





March
      31, 2008
            
            
            March
      31, 2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
            
            $
            (1,053,197
            )
            
            $
            (4,643,706
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            21,217
            
            
            
            38,363Bad
      debt expense
            
            
            46,918
            
            
            
            30,548Adjustments
      to fair value of warrants
            
            
            -
            
            
            
            1,768,000Change
      in operating assets and liabilities:Accounts
      receivable
            
            
            1,073,147
            
            
            
            665,444Inventories
            
            
            48,820
            
            
            
            523,501Prepaid
      expenses
            
            
            64,964
            
            
            
            2,425Deposits
            
            
            58,021
            
            
            
            -Accounts
      payable and accrued expenses
            
            
            71,029
            
            
            
            (1,712
            )Accrued
      interest
            
            
            436,432
            
            
            
            220,824Net
      cash provided (used) in operating activities
            
            
            767,351
            
            
            
            (1,396,313
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
            
            
            (1,281
            )
            
            
            (6,476
            )Net
      cash used in investing activities
            
            
            (1,281
            )
            
            
            (6,476
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Repayments
      of notes payable to stockholder
            
            
            -
            
            
            
            (4,000
            )Advances
      from related parties
            
            
            224,466
            
            
            
            1,751,520Repayments
      of notes payable
            
            
            -
            
            
            
            (15,000
            )Repayments
      of capital lease
            
            
            -
            
            
            
            (682
            )Advances
      from factor
            
            
            -
            
            
            
            2,558,393Payments
      to factor
            
            
            (985,894
            )
            
            
            (2,914,180
            )Net
      cash provided (used) by financing activities
            
            
            (761,428
            )
            
            
            1,376,051Net
      change in cash
            
            
            4,642
            
            
            
            (26,738
            )Cash,
      beginning of the period
            
            
            6,390
            
            
            
            131,907Cash,
      end of the period
            
            $
            11,032
            
            
            $
            105,169




SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid during the period for interest
            
            $
            -
            
            
            $
            152,682Cash
      paid during the period for income taxes
            
            $
            -
            
            
            $
            800SUPPLEMENTAL
      SCHEDULE OF NONCASH INVESTING AND FINANCING
    ACTIVITIES:Accrued
      liabilities converted to notes payable
            
            $
            -
            
            
            $
            191,393










See
accompanying notes to unaudited condensed consolidated financial
statements.






5
 Table of Contents







THEFASHION HOUSE HOLDINGS, INC. AND SUBSIDIARY


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


March
31, 2008


(UNAUDITED)




NOTE
1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Interim
Unaudited Condensed Financial Statements




The
accompanying unaudited condensed consolidated financial statements have been
prepared by The Fashion House Holdings, Inc. (the “Company”) in accordance with
accounting principles generally accepted in the United States of America for
interim financial information. These principles are consistent in all material
respects with those applied in the Company’s financial statements contained in
the Company’s annual report on Form 10-KSB for the fiscal year ended December
31, 2007, and pursuant to the instructions to Form 10-Q and Item 310(b) of
Regulation S-B promulgated by the Securities and Exchange Commission (“SEC”).
Interim financial statements do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments (all of which are of a normal recurring nature, including the
elimination of intercompany accounts) necessary to present fairly the financial
position, results of operations and cash flows of the Company for the periods
indicated. Interim results of operations are not necessarily indicative of the
results to be expected for the full year or any other interim periods. These
unaudited condensed consolidated financial statements should be read in
conjunction with the financial statements and footnotes thereto contained in the
Company’s annual report on Form 10-KSB for the year ended December 31,
2007.




Organization
and Nature of Operations





On August
19, 2005, TDI Holding Corporation (“TDI”) entered into an agreement of Plan of
Reorganization (“Merger”) with The Fashion House, Inc. (“TFH”) in a tax free
share exchange under Section 368(a)(1)(B) of the Internal Revenue Code of 1986,
as amended. Immediately after the Merger, the officers and directors of TDI
resigned and the management of TFH controlled such positions; therefore,
effecting a change of control. As a result, the transaction was recorded as a
“reverse merger” whereby TFH was considered to be the accounting acquirer as it
retained control of TDI after the Merger. Simultaneously with the Merger, TDI
changed its name to The Fashion House Holdings, Inc.




TFH was
incorporated under the laws of the State of Delaware on April 11, 2002 and
commenced operations on January 1, 2003. TFH designs, develops and markets
women’s dress footwear with an emphasis on celebrity appeal, style, quality and
fit. The Company targets the moderate to premium-priced categories of the
women’s footwear industry and implements its business model by licensing
recognized brand names.





On April
16, 2008, the Company and its wholly owned subsidiary filed voluntary
petitions under Chapter 11 of the US Bankruptcy Code with the United States
Bankruptcy Court, Central District of California, file numbers
1:08-BK-12363-KT and 1:08-BK-12359-KT, respectively.




Principles
of Consolidation




These
condensed consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All material intercompany accounts have been
eliminated in consolidation.




Use
of Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities
and disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
periods. Significant estimates made by management include, among others, the
realizability of receivables and inventories, recoverability of long-lived
assets, valuation of common stock, derivative liabilities and warrants to
purchase common stock and deferred tax assets. Actual results may differ from
these estimates under different assumptions or conditions.




Going
Concern and Chapter 11 Bankruptcy Filed on April 16, 2008




The
condensed consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company incurred net losses
for the three months ended March 31, 2008 and each year from 2004
through 2007, and as of March 31, 2008 the Company has a working capital
deficit of $16,457,210 and a stockholders’ deficit of $17,157,825. These factors
raise substantial doubt about the Company’s ability to continue as a going
concern. These condensed consolidated financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.






6
 Table of Contents





The
Company’s ability to continue in existence and achieve success in operations is
dependent upon numerous items, among which are the growth of revenues from its
products, its ability to obtain new customers in order to achieve levels of
revenues adequate to support the Company’s current and future cost structure,
and its ability to obtain financing for operations, for which there is no
assurance. Unanticipated problems, expenses and delays are frequently
encountered in establishing and maintaining profitable operations. These
include, but are not limited to, competition, the need to develop customer
support capabilities and market expertise, setbacks in product development,
technical difficulties, market acceptance and sales and marketing. The failure
of the Company to meet any of these conditions could have a materially adverse
effect on the Company. No assurance can be given that the Company can achieve or
maintain profitable operations.





The
Company will require financing to repay its existing obligations and resume
operating activities. There can be no assurance that additional funding will be
adequate or will enable the Company to achieve or sustain
profitable.





On
January 15, 2008, the Company terminated a substantial portion of its operations
because of its continuing cash flow deficits.  Prior to that date, on
December 15, 2007, in order to reduce its monthly rent obligation, the Company
established a new corporate office by leasing space on a month to month basis at
the office location of Westrec Capital Partners, LLC (“Westrec”) at 16633
Ventura Blvd., 6th Floor,
Encino, CA 91436. On January 15, 2008, concurrent with the reduction of its
business operations, the Company surrendered its San Vicente office
space.  Westrec is considered a control stockholder of the Company
because of its warrant position, and the Company’s Interim Chief Financial
Officer is a part-time and temporary employee of an affiliate of
Westrec.





On April
16, 2008, the Company and its wholly owned subsidiary filed voluntary
petitions under Chapter 11 of the US Bankruptcy Code with the United States
Bankruptcy Court, Central District of California, file numbers
1:08-BK-12363-KT and 1:08-BK-12359-KT, respectively.




The
Company plans to emerge from Chapter 11 proceedings operating two divisions,
wholesale and retail.  The reorganization plan includes resuming
the Company’s historical wholesale business model of licensing, designing,
manufacturing and marketing designer brand women’s footwear.  The
Company is presently in discussions with several haute couture designers to
license their brands and plans to retain its strategy of producing high end
footwear for these licensed brands and selling the product in domestic and
international markets.  The Company plans to also introduce diffusion lines
for the same brands at more affordable price points of $79 to $ 150. 
The company will continue to limit business to designer brands that
highlight design aspects in order to capitalize on brand
recognition.




The
Company’s first retail outlet opened on March 31, 2008 and is located at 607
West Knoll, West Hollywood California. This store operates under the
name Shoe Bliss and occupies 1,500 square feet of retail
space.   The Company plans to expand its retail
division by opening Shoe Bliss stores in the State of California and
ultimately across the United States.





Risks
and Uncertainties




Credit
Risk




The
Company maintains its cash accounts in financial institutions. Accounts at these
institutions are insured by the Federal Deposit Insurance Corporation up to
$100,000.




Three
customers accounted for 94% of sales during the three months ended March 31,
2008. The three customers were: Amazon.com (23%), Loehman’s (41%), and Gateway
(6%). One customer accounted for 25% of sales during the three months ended
March 31, 2007.




The
Company assigns the majority of its trade accounts receivable to a factor. The
Company also makes sales to customers not approved by its factor at its own risk
and monitors the outstanding receivable balance. At March 31, 2008, the Company
established an allowance for doubtful accounts of $46,918.





Two
customers accounted for 96% of accounts receivable as of March 31, 2008. 
The two customers were: Bergdorf Goodman (67%) and Winner’s merchant
(29%).




The
Company operates in an industry that is subject to intense competition. The
Company’s operations are subject to significant risks and uncertainties
including financial, operational, technological, regulatory and other risks
associated with an operating business, including the potential risk of business
failure.




Merchandise
Risk




The
Company’s success is largely dependent upon its ability to gauge the market
trends and the tastes of its targeted consumers and provide merchandise that
satisfies consumer demand. Any inability to provide appropriate merchandise in
sufficient quantities in a timely manner could have a material adverse effect on
the Company’s business, operating results and financial condition.





7
 Table of Contents




Inventories





Inventories
consist almost entirely of footwear and are valued at the lower of cost or
market. Cost is determined on a first-in, first-out basis. The Company
periodically reviews its inventory quantities on hand and adjusts for excess and
obsolete inventory based primarily on its estimated forecast of product demand.
Actual demand may differ from the Company's estimates. Once established,
write-downs of inventory are considered permanent adjustments to the basis of
the excess or obsolete inventory.




Property
and Equipment




Property
and equipment are stated at cost. Depreciation of equipment is provided for by
using the straight-line method over the estimated useful lives of the related
assets, which are five years for machinery and equipment, seven years for
furniture and fixtures, and the shorter of lease terms or estimated useful lives
for leasehold improvements. Expenditures for maintenance and repairs are charged
to expense as incurred; additions, renewals and betterments are capitalized.
When property and equipment are retired or otherwise disposed of, the related
cost and accumulated depreciation are removed from the respective accounts, and
any gain or loss is included in operations.




Long-Lived
Assets




In
accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, the Company evaluates
the carrying value of long-lived assets for impairment whenever events or change
in circumstances indicate that such carrying values may not be recoverable. The
Company estimates the future undiscounted cash flows derived from an asset to
assess whether or not a potential impairment exists when events or circumstances
indicate the carrying value of a long-lived asset may not be recoverable. An
impairment loss is recognized when the discounted future cash flows are less
than its carrying amount. If assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount exceeds the fair value of the assets. At March 31, 2008, the Company’s
management believes there is no impairment of its long-lived
assets.




Fair
Value of Financial Instruments




The
Company’s financial instruments consist of cash, accounts receivable, restricted
cash, accounts payable and accrued expenses, accrued payroll and related, due to
factor, due to related parties, notes payable, notes payable stockholders and
accrued interest. The carrying value for all such instruments approximates fair
value at March 31, 2008 due to their short maturities.




Revenue
Recognition




SEC Staff
Accounting Bulletin (“SAB”) 101, Revenue Recognition , as
amended by SAB 104, outlines the basic criteria that must be met to recognize
revenue and provide guidance for presentation of revenue and for disclosure
related to revenue recognition policies in financial statements filed with the
Securities and Exchange Commission. Management believes that the Company’s
revenue recognition policy conforms to SAB 104.




The
Company evaluates the criteria of Financial Accounting Standards Board (“FASB”)
Emerging Issues Task Force (“EITF”) Issue No. 99-19, Reporting Revenue Gross as a
Principal Versus Net as an Agent, in determining whether it is
appropriate to record the gross amount of revenue and related costs or the net
amount earned as commissions. The Company is the primary obligor, is subject to
inventory risk, has latitude in establishing prices and selecting suppliers,
establishes product specifications, and has the risk of loss as it relates to
cargo losses. Accordingly, the Company’s revenue is recorded on a gross
basis.




The
Company issues letters of credit in favor of the manufacturers in accordance
with the information provided by the Company and the manufacturer. The Company
imports the goods and pays the import and delivery costs and forwards the goods
to a public warehouse. The goods are held by the Company at a public warehouse
until the customers requested ship date. The Company arranges and maintains the
goods while in its warehouse at its expense. The Company has title to the goods
when shipped from the manufacturer and in the public warehouse.




Revenue
is recognized upon shipment of goods from the public warehouse to the customers,
which is when title transfers to the customers. The accounts receivable factor
approves credit to the customers and factors the sale. The factor charges the
Company .85% of the sales which are factored. For sales that are not factor
approved, the Company will ask the customer to prepay before shipment. In some
instances, the Company will retain the accounts receivable.




Shipping
and handling costs billed to the customers are recorded in sales. Shipping and
handling costs as incurred by the Company are recorded in cost of
sales.





8
 Table of Contents




Loss
Per Share





Basic
loss per share is computed by dividing loss available to common stockholders by
the weighted average number of common shares assumed to be outstanding during
the period of computation. Diluted loss per share is computed similar to basic
loss per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
shares had been issued and if the additional common shares were dilutive. All
potentially dilutive shares, 141,671,655 and zero at March 31, 2008 and
2007, respectively, have been excluded from diluted loss per share, as their
effect would be anti-dilutive for the periods then ended.




Stock-Based
Compensation




As of
March 31, 2008, the Company had no stock-based compensation plans and has not
issued any share-based payments to its employees.




Issuance
of Stock for Non-cash Consideration





All
issuances of the Company’s common stock for non-cash consideration have been
assigned a dollar amount equaling either the market value of the shares issued
or the value of consideration received whichever is more readily determinable.
The majority of the non-cash consideration received pertains to services
rendered by consultants and others and has been valued at the market value of
the shares issued.





The
Company’s accounting policy for equity instruments issued to consultants and
vendors in exchange for goods and services follows the provisions of EITF Issue
No. 96-18, Accounting for
Equity Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services and EITF Issue No. 00-18,
Accounting Recognition for
Certain Transactions Involving Equity Instruments Granted
to Other Than Employees. The measurement date for the fair value of the
equity instruments issued is determined at the earlier of (i) the date at which
a commitment for performance by the consultant or vendor is reached or (ii) the
date at which the consultant or vendor’s performance is complete. In the case of
equity instruments issued to consultants, the fair value of the equity
instrument is recognized over the term of the consulting agreement.




Derivative
Financial Instruments





In
connection with the issuance of warrants with certain notes payable (see Note
5), the Company was required to file a registration statement in November 2005
and have such registration statement declared effective no later than 180 days
following the Merger (the “Effectiveness Deadline”) and to maintain the
effectiveness of such registration. In addition, the Company was required to
issue certain holders of convertible warrants for each subsequent 30-day period
that such registration statement had not been filed and additional warrants for
each 30-day period following the Effectiveness Deadline, in which the
registration statement was not declared effective. On July 26, 2006, the Company
filed the required registration statement. The Company’s registration statement
became effective on January 23, 2007. The Company determined that the
registration rights are an embedded derivative instrument pursuant to SFAS No.
133, Accounting for
Derivative  Instruments and Hedging
Activities , as amended. Under the provisions of Emerging Issues Task
Force (“ EITF ”) Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in a Company’s Own Stock
and View A of EITF No. 05-4, The Effect of a Liquidated Damages
Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock, the accounting treatment of these
derivative financial instruments required that the Company record the
derivatives at their fair values as of the inception date of the note agreements
and at fair value as of each subsequent balance sheet date. Any change in fair
value was recorded as non-operating, non-cash income or expense at each balance
sheet date. If the fair value of the derivatives was higher at the subsequent
balance sheet date, the Company recorded a non-operating, non-cash charge. If
the fair value of the derivatives was lower at the subsequent balance sheet
date, the Company recorded non-operating, non-cash income.




In
December 2006, the FASB issued Staff Position EITF 00-19-2, Accounting for
Registration Payment Arrangements (“ FSP EITF 00-19-2” ). FSP EITF 00-19-2
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
FASB Statement No. 5, Accounting for Contingencies
.. FSP EITF 00-19-2 further clarifies that a financial instrument subject to a
registration payment arrangement should be accounted for in accordance with
applicable generally accepted accounting principles without regard to the
contingent obligation to transfer consideration pursuant to the registration
payment arrangement.





In
accordance with the provisions of FSP EITF 00-19-2, the Company elected early
adoption of this statement. As of January 1, 2006, the Company recorded the
warrant liability of $904,000 to equity since the only provision which caused
the warrants issued to be accounted for as a derivative liability was the
liquidated damages provision in the registration rights agreement. In recording
the entry, the Company credited $688,000 to common stock which represents the
estimated fair value of these warrants on the date of issuance recorded and a
credit to accumulated deficit of $216,000 which represents the difference
between the estimated fair value of these warrants at the date of issuance and
the estimated fair value as of December 31, 2005. However, as retrospective
application of FSP EITF 00-19-2 is prohibited, the Company has not restated the
amounts presented as of March 31, 2008.




As a
result of unsuccessful fund raising efforts, the Company modified an existing
warrant (the “Modification”) and therefore did not have a sufficient number of
authorized shares to settle outstanding and exercisable options, warrants and
convertible instruments (see Note 7). Therefore, under the provisions of
Emerging Issues Task Force ("EITF") Issue No. 00-19, Accounting For Derivative Financial
Instruments Indexed To, And Potentially Settled In, A Company's Own
Stock, as a result of the Modification, the Company was required to
classify all non-employee options and warrants as derivative liabilities,
totaling $9,147,000 as of the Modification date, and record them at their fair
values at such date. Any change in fair value is required to be recorded as
non-operating, non-cash income or expense at each subsequent balance sheet date
until the Company has a sufficient number of authorized shares to settle its
convertible instruments and non-employee options and warrants. If the fair value
of the derivatives is higher at the subsequent balance sheet date, the Company
will record a non-operating, non-cash charge. If the fair value of the
derivatives is lower at the subsequent balance sheet date, the Company will
record non-operating, non-cash income. The Company recorded an additional
$93,200 for the fair value of warrants issued during the fourth quarter of 2007.
As a result of the Modification, the Company reclassified the fair value of
non-employee options and warrants of $9,240,200 from additional paid-in capital
to a derivative liability. During the year ended December 31, 2007, the Company
recognized other income of $9,240,200 related to recording the derivative
liability at fair value. At December 31, 2007, the warrants were deemed to be
worthless as a result of the planned Chapter 11 filing, and therefore the
derivative liability balance was reduced to zero.


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Recent
Accounting Standards





In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurement. SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
GAAP and expands disclosures about fair value measurements. The Statement does
not require any new fair value measurements but could change the current
practices in measuring current fair value measurements. The Statement is
effective for fiscal years beginning after November 15, 2007. Management is
currently evaluating the impact of the adoption of this statement; however, it
is not expected to have a material impact on our consolidated financial
position, results of operation or cash flows.





In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial
Assets and Financial Liabilities – including an amendment of FASB Statement No.
115, which permits entities to choose to measure many financial
instruments and certain other items at fair value. Most of the provisions of
this Statement apply only to entities that elect the fair value option. However,
the amendment to SFAS No. 115,Accounting for Certain Investments
in Debt and Equity Securities, applies to all entities with
available-for-sale and trading securities. SFAS No. 159 is effective as of
the beginning of an entity’s first fiscal year that begins after November 15,
2007. Management does not believe that the adoption of SFAS No. 159 will have a
material effect on the Company’s financial statements.





In
December 2007, the FASB issued SFAS No. 141(revised 2007), Business Combinations, and
SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements.  SFAS No. 141R
improves reporting by creating greater consistency in the accounting and
financial reporting of business combinations, resulting in more complete,
comparable, and relevant information for investors and other users of financial
statements. SFAS No. 141R requires the acquiring entity in a business
combination to recognize all (and only) the assets acquired and liabilities
assumed in the transaction; establishes the acquisition-date fair value as the
measurement objective for all assets acquired and liabilities assumed; and
requires the acquirer to disclose to investors and other users all of the
information they need to evaluate and understand the nature and financial effect
of the business combination.  SFAF No. 160 improves the relevance,
comparability, and transparency of financial information provided to investors
by requiring all entities to report noncontrolling (minority) interests in
subsidiaries in the same way—as equity in the consolidated financial statements.
Moreover, SFAS No. 160 eliminates the diversity that currently exists in
accounting for transactions between an entity and noncontrolling interests by
requiring they be treated as equity transactions.  The two statements
are effective for fiscal years beginning after December 15, 2008. Management
does not believe that the adoption of these statements will have a material
effect on the Company’s financial statements.





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No.
133.SFAS No. 161 changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133 and its related interpretations, (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows and (d) encourages, but does not
require, comparative disclosures for earlier periods at initial
adoption.  SFAS No. 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged.  Management does not believe that the
adoption of this statements will have a material effect on the Company’s
financial statements.




NOTE
2 — ACCOUNTS RECEIVABLE FACTORING AND PURCHASE ORDER FINANCING




On May 3,
2006, the Company entered into a factoring agreement with CIT Commercial
Services (“CIT”), as amended, which was terminated in July 2007 (see below). The
Company was charged a factoring fee of 1% on gross invoice amounts. The Company
agreed to sell and assign to CIT all accounts arising from the sale of
inventory, including those under any trade name, through any divisions, and
through any selling agent.




At the
Company’s request and at CIT’s sole discretion, CIT advanced funds to the
Company at up to 80% of the factor risk accounts. The advance request form was
required to be fully executed by the Company and Westrec Capital Partners, LLC
(see Note 8). Interest was charged based on the daily debit balances in the
funds in use account for the month, at a rate equal to the greater of the sum of
2% plus the J P Morgan Rate, or 6% per annum.




On July 25,
2007, the Company entered into a new accounts receivable factoring agreement
with Ultimate Financial Solutions, LLC (“Ultimate”). The Company agreed to sell
and assign to Ultimate all accounts arising from the sale of inventory. At the
Company’s request, Ultimate may advance funds to the Company at up to 80% of the
factor risk accounts. The Company is charged a factoring fee of .85% on gross
invoice amounts. Interest is charged based on the daily debit balances in the
funds in use account for the month, at a rate equal to 1.5% above the Prime Rate
as published from time to time in the Wall Street Journal. In connection with
this agreement, on July 30, 2007, Ultimate paid CIT for the outstanding balance
of funds in use by the Company on that day. As a result, the Company’s liability
for this amount was effectively transferred from CIT to Ultimate and the CIT
agreement was terminated.  The obligations under this agreement are secured
by substantially all of the Company’s assets. The loans are personally
guaranteed by the principal member of Westrec and a director and shareholder of
the Company. The Company did not factor any receivables during the three months
ended March 31, 2008 due to the reduction in operations on January 15, 2008 and
the Chapter 11 reorganization filed on April 16, 2008.





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At March
31, 2008, the following summarizes the Company’s accounts receivable and related
balances:




Receivables
      assigned to factor
            
            $
            57,258Advances
      from factor
            
            
            (80,737
            )Net
      amounts due to factor
            
            
            (23,479
            )Unfactored
      accounts receivable
            
            
            27,927Non
      trade receivables
            
            
            72,638Allowance
      for bad debts
            
            
            (46,918
            )Net
      receivable
            
            $
            30,168





During
the three months ended March 31, 2008 and 2007, factoring fees incurred totaled
$27,698 and $23,819 respectively.





On July
17, 2007, the Company entered into an agreement with Ashford Finance, LLC
(“Ashford”), whereby Ashford will provide up to $5,000,000 of purchase order
financing relating to the Company’s purchases of its products from foreign
manufacturers. Ashford will finance an amount up to 90% of the Company’s end
buyer’s purchase orders relating to the Company’s purchase order placed with the
foreign manufacturer. The Company is charged an Account Management Fee equal to
1.5% per month for Letters of Credit opened by Ashford on behalf of the Company
when the amount equals up to 75% of the Company’s related customer purchase
orders. The Account Management Fee will increase to 2.5% for Letters of Credit
when the amount is in excess of 75% of the related customer purchase order, but
in no event will the Letter of Credit amount be greater than 90% of the related
customer purchase orders. All loans will also bear interest at the rate of 2%
per annum above the Prime Rate as published time to time by the Wall Street
Journal. The agreement requires minimum usage during the first twelve months of
$3,000,000. If the Company cancels the agreement or fails to open letter of
credit that equal the minimum usage, the Company is required to pay all fees
under the agreement for the full minimum amount. The loans are secured by
virtually all of the Company’s assets. Transactions financed under this
agreement are guaranteed by two of the Company’s directors and shareholders, but
only in the event that fraud may have occurred. The Company did not execute any
purchase order financing transactions during the three months ended March 31,
20008 due to the reduction in operations on January 15, 2008 and the Chapter 11
reorganization filed on April 16, 2008.





In
connection with the July 20, 2007 agreement with Ultimate and the July 17, 2007
agreement with Ashford, Intercreditor Agreements were also entered into by and
between Westrec, Comerica, Ultimate and Ashford to establish a priority for
security interests in the Company’s assets. In these agreements, Comerica
subordinated its security interest to Ultimate in accounts factored by Ultimate.
Comerica also subordinated its security interest in all assets to Ashford.
Ultimate subordinated its security interest in purchase orders financed by
Ashford. Westrec subordinated its security interest to Ultimate in accounts
factored by Ultimate.  Westrec subordinated its security interest in
receivables, as defined, to Ashford. Westrec subordinated to Ashford its
security interest in inventory financed by Ashford. With regard to inventory
other than inventory financed by Ashford, security interests of Ashford and
Westrec rank pari passu with one another. Ashford’s lien and security interest
in all other assets and collateral is subordinate to Westrec’s security interest
(other than receivables or inventory).





NOTE
3 — NOTES PAYABLE TO STOCKHOLDERS




The
Company borrowed funds from two founding stockholders for working capital
purposes, which bear interest at 8% per annum and are due 13 months from
the date of demand. As of March 31, 2008, outstanding borrowings totaled
$1,090,100, net of a $4,000 payment made during 2007, and accrued interest
totaled $315,618. As of March 31, 2008, no demand for repayment has been made.
Interest expense on the notes totaled $21,747 and $22,255 for the three months
ended March 31, 2008 and 2007, respectively.  The balance above includes a
note payable issued during the year ended December 31, 2007 totaling $121,100 in
connection with payroll and bonus expense previously accrued.




NOTE
4 — COMMITMENTS AND CONTINGENCIES




Licensing
Agreements





As a
result of our continued cash flow deficits, our license agreements have either
been terminated for non-payment of royalties (Isaac and Oscar), or have expired
on their original termination date and have not been renewed
(Tyler).  Due to a continuing decline in the demand for Blass
footwear, this license agreement was mutually terminated. At this time, we do
not have any active license agreements in place. We are presently in discussions
with several haute couture designers to license their brands. However, there can
be no assurances that we will be successful in obtaining additional
licenses.





For the
rights to use trademarks, the Company had entered into licensing agreements with
various licensors.





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The
agreements enable the Company to sell products using the name of the licensors
in return for a licensing fee based upon sales of the products using the
licensors’ names.





During
the year ended December 31, 2007, the Company had rights to use ten trademarks
as evidenced by licensing agreements entered into with Oscar by Oscar de la
Renta, O Oscar by Oscar de la Renta, Blass by Bill Blass, Bill Blass Couture,
Blassport and Bill Blass Collection, tyler, Richard Tyler, Isaac Isaac Mizrahi
and a new couture brand which expire through March 2011. Under these
licensing agreements, the Company agreed to pay the greater of between 3% and 8%
of net sales of the licensed products or guaranteed minimums ranging from
$70,000 to $1,000,000 per annum, per contract. The licensors may terminate the
licensing agreements upon events of default, as defined.





On
November 26, 2007, the Tyler licenses ended in accordance with the contract
termination date. While a two year renewal was available in the agreement, the
renewal option was not exercised.





The Company hadexperienced a declining
market for its Blass footwear. As a result,during the fourth quarter
of 2007,the Company and Bill Blass began negotiations to terminate the
Blass license. While the Company and Blass had mutually agreed that the Company
would discontinue the design, manufacture and sale of Blass footwear, a payment
of $90,000 by the Company to Blass was to be made to relive the Company’s
obligations under the license agreement for all future minimum payments. This
payment has not been made as of the date of this filing.





On
January 10, 2008, Oscar de la Renta issued a written notice of default for
failure to pay minimum royalties under the Company’s licensing agreement with
it.





On
January 27, 2008 Isaac Mizrahi requested termination of the Company’s licensing
agreement with it.





Royalty
expense was zero and $360,983 for the three months ended March 31, 2008 and
2007, respectively.





Indemnities
and Guarantees




The
Company and its subsidiary have made certain indemnities and guarantees, under
which it may be required to make payments to a guaranteed or indemnified party,
in relation to certain actions or transactions. The Company and its subsidiary
indemnifies its directors, officers, employees and agents, as permitted under
the laws of the States of Colorado and Delaware. In connection with its facility
lease, the Company has indemnified its lessors for certain claims arising from
the use of the facilities. Additionally, the Company indemnifies its factor and
licensors under the factoring and license agreements, respectively, against
certain claims as a result of the violation of any law. The duration of the
guarantees and indemnities varies, and is generally tied to the life of the
agreement. These guarantees and indemnities do not provide for any limitation of
the maximum potential future payments the Company could be obligated to make.
Historically, the Company has not been obligated nor incurred any payments for
these obligations and, therefore, no liabilities have been recorded for these
indemnities and guarantees in the accompanying condensed consolidated balance
sheet.





Litigation





On April
16, 2008, the Company and its wholly owned subsidiary filed voluntary
petitions under Chapter 11 of the US Bankruptcy Code with the United States
Bankruptcy Court, Central District of California, file numbers
1:08-BK-12363-KT and 1:08-BK-12359-KT, respectively. Active litigation at the
time of this bankruptcy filing will be moved to the bankruptcy
court.




The
Company is, from time to time, involved in various legal and other proceedings
which arise in the ordinary course of operating its business. In the opinion of
management, the amount of ultimate liability, if any, with respect to these
actions will not materially affect the consolidated financial position or
consolidated results of operations of the Company except as disclosed
below.





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





This
matter was filed October 26, 2005, seeking damages for breach of contract and
fraud regarding oral arrangements with the Company’s subsidiary. On April 10,
2007, a Notice of Entry of Judgment was filed with the court for the amount of
$460,000, which includes interest at 10% per year.  No appeal was
filed. In connection with this judgment, the Company has accrued $300,000 in
accounts payable and accrued expenses in the accompanying condensed consolidated
balance sheet based on management’s best estimate of the ultimate settlement of
this matter.





Artful
Mind Industrial, Ltd.





On March
6, 2007, the Company was served with a complaint, which Artful Mind Industrial
Ltd. (“Artful Mind”) filed on March 1, 2007 alleging that the Company failed to
make payments owed under a Settlement Agreement (the “Agreement”) entered into
between Artful Mind, Go Moda Limited and the Company in September 27, 2006.
Artful Mind seeks judgment for the full amount of all payments due, which
approximates $295,000, together with interest at a rate of 9% per annum
beginning on January 14, 2007 and costs of collection, including reasonable
attorneys’ fees incurred. Based on the event of a default, of not timely paying
the final two payments, the entire balance of all payments due were accelerated
and became immediately due and interest on all unpaid amounts accrued at a rate
of 9% per annum. The complaint states that the Company is currently in default
on the final two payments. On October 2, 2007, a default judgment was entered
for $315,055, including interest and court costs. The Company has included this
amount as accounts payable and accrued expenses in the accompanying condensed
consolidated balance sheet. A restraining order on $136,847 of the Company’s
cash balances at Comerica Bank was obtained and is classified as restricted cash
at March 31, 2008. The Company’s senior secured lender has filed a lawsuit to
block payment of these funds to Artful Minds.  The matter is currently
pending.





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TCK
Designs, LTD.





On May
11, 2007, a complaint was filed in New York by TCK Designs, LTD alleging breach
of contract for terminating a purported one year agreement without making
payment to the plaintiff. The plaintiff sought damages in the amount of $37,500,
plus legal fees and interest. A default judgment was entered on September 24,
2007. On October 31, 2007, an Order to Show Cause with Temporary Restraints was
filed in New Jersey, barring the Company’s public warehouse in New Jersey from
moving goods stored at that location. On November 5, 2007, at the Company’s
request, the Court granted a partial release on the restraining order allowing
the Company to continue shipping goods from the public warehouse.  The
Company was required by the court to maintain $100,000 of goods at the warehouse
and a cash deposit of $40,000 in its attorney’s trust account. The Company had
the option of placing an additional $20,000 in the attorney trust account to
fully release all goods in the warehouse.  The Company’s senior
secured lender filed a lawsuit subsequent to December 31, 2007 to block payment
of these funds to TCK Designs, LTD.  The court denied this request and
the funds were remitted to the plaintiff.





Barry
K. Rothman





On
October 26, 2007, a complaint was filed in Los Angeles by Barry K. Rothman
against the Company, John Hanna, Westrec Capital Partners, LLC and a principal
of Westrec Capital Partners, LLC for breach of contract in the amount of
$141,733 and appointment of receiver.  The suit relates to failure to
pay for legal services. The matter is currently pending.





Bowne
of Los Angeles





On
December 21, 2007 a complaint was filed in Los Angeles by Bowne of Los Angeles,
Inc. for breach of contract in the approximate amount of $20,000. The matter is
currently pending.





6310
San Vicente Associate, LLC





On
February 15, 2008, a complaint was filed in Los Angeles against the Company by
6310 San Vicente Associates, Inc., the Company’s former landlord for breach of
contract for failure to pay rent in the approximate amount of $26,000. The
matter is currently pending.


.


Oscar
De La Renta, Ltd





On
February 19, 2008, a complaint was filed in New York by Oscar De La Renta Ltd.
against the Company for breach of contract, unfair competition, and trademark
infringement relating to failure to make royalty payments in connection with the
Company’s license agreement with Oscar De La Renta, Ltd. The plaintiff seeks
damages totaling $1,786,015. The matter is currently pending.





Employment
Agreements




The
Company has entered into employment agreements with certain of its management
for services to be provided in the normal course of business. These agreements
call for minimum salary levels and various payments upon termination of
employment, as defined. In the event of termination for any reason, the Company
is required to pay its CEO one year salary and bonus. The CEO’s salary for the
year ending December 31, 2008 is $180,000 and the bonus was waived for
2007, 2006, and 2005.





NOTE
5 — NOTES PAYABLE





In
July 2005, the Company issued a note payable totaling $550,000, bearing
interest at 11 percent per annum (the “July 11% Note”). The
July 11% Note and accrued interest were due in April 2006, as amended. In
connection with the issuance of the July 11% Note, the Company issued
warrants to purchase an aggregate of 1,100,000 shares of the Company’s common
stock. The warrants vested upon grant, have an exercise price of $1.00 per share
and expire in August 2008. In connection with the registration rights
issued with the July 11% Notes and related warrants (see Note 1), the Company
issued warrants to purchase an aggregate of zero and 110,000 shares of the
Company’s common stock during the three months ended March 31, 2008 and 2007,
respectively, as penalties for not registering the underlying shares timely, as
defined (see Note 7). The penalty warrants ceased in January 2007, as the
related registration statement was declared effective. The warrants issued
during the three months ended March 31, 2008 and 2007, for penalties, had fair
values totaling zero and $58,000, respectively, and recorded such as
interest expense upon grant. The warrants vested upon grant, had an exercise
price of $1.00 per share and expire in August 2015. The July 11% Note
and accrued interest were repaid in March 2006.





On July
6, 2006, the Company issued a note payable totaling $300,000 with a maturity
date of August 20, 2006, and bearing interest at the prime rate plus 5% (the
“July Note”). In connection with the issuance of the July Note, the Company
issued a warrant to purchase 60,000 shares of the Company’s common stock. The
warrant is immediately exercisable, has an exercise price of $1.00 and expires
in July 2016. The warrant had a relative fair value of $33,000, and the Company
recorded such as debt discount. The Company amortized the debt discount to
interest expense during 2006. The Company repaid $75,000 on the note and the
maturity date was extended to August 20, 2007. On September 21, 2007, the
Company received a written demand for payment on this note. As of the date of
this filing, no payment has been made.


13
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On
February 8, 2007, the Company issued a note payable totaling $70,293 in
connection with services rendered, which bears interest at 1.5% per month. The
Company is required to make monthly principal payments of $15,000 through
maturity in July 2007. Only one monthly payment has been made on this note since
its inception. As a result, the note is currently in default and a lawsuit was
filed to recover the amount from the Company, along with accrued interest. At
March 31, 2008, the outstanding principal balance was $55,293.




NOTE
6 – DUE TO RELATED PARTIES





On July
27, 2006, the Company and Westrec Capital Partners, LLC (“Westrec”) entered into
an agreement (the “Credit Enhancement Agreement”) whereby Westrec and its
managing partner (“Guarantors”) have provided credit guarantees to the lender
sufficient to enable the bank to make advances to the Company (see below). In
connection with each advance, the Company paid a fee of 5.0% of each draw to
Westrec.





On
September 18, 2006, the Company entered into a Master Revolving Note (the
“Note”) with a bank (the “Lender”) to borrow funds from time to time, at the
Lender’s discretion, up to an aggregate of $5.0 million, payable in whole or in
part upon demand, at a per annum rate equal to the Lender’s prime rate plus 1%
per annum secured by deposits with the Lender. The note replaces previously
issued notes by the lender. Upon default, the Company is required to pay an
additional 3% interest per annum (the “Default Increase”). In connection with
entering into the Note, the Company entered into a Credit Enhancement Agreement
with Westrec pursuant to which each of the Guarantors agreed to guarantee the
Company’s obligations existing on or before the date that is the earliest of (i)
180 days following the closing of the Note with the Lender, (ii) the termination
of Guarantor’s obligations, or (iii) the Company’s repayment in full of the
amounts outstanding under Note, as defined. Additionally, pursuant to the terms
of the Credit Enhancement Agreement, the Company has agreed to pay the following
fees: upon any issuance of a letter of credit by the Lender that is guaranteed
by a Guarantor, the Company will pay Westrec 2% of the face amount of the letter
of credit; as long as any amount is outstanding on the Note that is guaranteed
by a Guarantor, revolving line-of-credit based fees equal to the difference
between (a) the sum of 20%, plus (if applicable) the
Default Increase (as noted above), or (b) the sum of the Lender’s prime rate
plus11.75% per annum , plus (if applicable) the
Default Increase (as noted above). In addition, the Company pays a monthly
credit monitoring fee of $5,000 for each calendar month up to and including the
month of termination. Effective June 1, 2007, the monthly monitoring fee was
increased to $9,000 per month to compensate Westrec for the services if the
Company’s Interim Chief Financial Officer, which is a part-time and temporary
employee of Westrec. The total fee of $9,000 is being accrued and not paid
at this time.  Any payments that are deemed late are subject to an
additional fee of 5% of each such late payment.




The
Company also granted the Guarantors a security interest in all of the Company’s
tangible and intangible property and assets, for the duration of the Credit
Enhancement Agreement. In addition, the Chief Executive Officer of the Company
granted a security interest and pledge of all shares of the Company’s common
stock, options, warrants and other equity securities held by him. Furthermore,
each draw under the Note with the Lender is subject to the prior approval of the
Guarantors at their discretion. The Credit Enhancement Agreement terminates upon
repayment in cash of all amounts payable and the delivery of certain written
releases by the Lender and the Company.





During
the year ended December 31, 2006, in connection with the Credit Enhancement
Agreement, the Company granted a seven-year warrant to purchase a total of
9,000,000 shares of common stock at a purchase price of $0.40 per share that
expires in September 2013, as amended - see below. The warrant vested as
follows: (i) 20% immediately, (ii) an additional 20% vests, as amended, 60 days
after the date of the warrant, and on each succeeding 30th day thereafter such
that the entire warrant will vest on the 151st day after the date of the
warrant. The estimated fair value of the original warrant was $2,550,000 and the
Company was amortizing such amount to interest expense on a straight line basis
over the life of the guarantee, of which $1,710,000 was expensed during the year
ended December 31, 2007. However, the amount of interest expense recognized at
any date will be at least equal to the portion of the grant date fair value of
the vested amount.





Effective
December 20, 2006, the Company entered into an amended credit enhancement
agreement with Westrec, in which, among other things, Westrec agreed to extend
its guarantee on behalf of the Company to amounts owed to the Lender and include
its guarantee on amounts owed to CIT, the Company’s factor (see Note 2). In
exchange for the additional concessions, the Company modified the warrants
originally granted to Westrec to increase the number of warrants granted from
5,000,000 to 9,000,000 and decrease the exercise price from $0.65 to $0.40 and
extended the maturity date of the guarantee to September 2007. The estimated
fair value of the modification was $2,200,000, of which the Company amortized
$792,000 to interest expense during the year ended December 31, 2007 related to
this warrant, which was fully vested at March 31, 2007.





As the
termination of the Credit Enhancement Agreement did not occur on September 14,
2007, the number of shares underlying the Warrant was and will be increased in
the following amounts, which shares will be immediately vested: (i) an
additional number of shares equal to 3% of the shares based on the number of
warrants earned, as defined, on September 14, 2007, plus (ii) an additional
number of shares equal to 5% of the shares based on the number of warrants
earned, as defined, on October 14, 2007, plus (iii) an additional number of
shares equal to 8% of the shares based on the number of warrants earned, as
defined, on November 13, 2007, plus (iv) an additional number of shares equal to
10% of the shares based on the number of warrants earned, as defined, on
December 13, 2007, and (v) an additional number of shares equal to 10% of the
shares based on the number of warrants earned, as defined, every 30th day
thereafter until the Agreement Termination Date occurs.  If the
Company issues equity securities with a purchase price less than the current
exercise price of the Warrant, then the exercise price of the Warrant will be
reduced to such amount and the number of shares underlying the Warrant will be
increased accordingly.  There is no maximum number of warrants to be
issued under this agreement.  As of December 31, 2007, the Company
issued warrants to purchase an aggregate of 23,455,101 shares of the Company’s
common stock.  The warrants are exercisable at $0.05, vested upon
grant, were valued at $162,000 (based on the Black Scholes option pricing
model), expire through September 15, 2013 and were expensed as additional
interest expense during the year ended December 31, 2007.





14
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On
February 27, 2007, the Company amended its Note to increase the borrowing base
from an aggregate of $5.0 million to $6.5 million.




On April
10, 2007, the Company amended its Note (the “April Amendment”) to increase the
borrowing base from an aggregate of $6.5 million to $8.5 million.  In
connection with the April Amendment, the Company entered into an amendment of
the Credit Enhancement Agreement with Westrec pursuant to which each of the
Guarantors agreed to guarantee additional advances under the Comerica Loan of up
to an aggregate of $2,000,000, which advances are drawn no later than August 3,
2007, provided that at the time of each advance certain representations,
warranties, and conditions are all satisfied. The additional advances of
$2,000,000 were fully drawn by August 3, 2007.




In
consideration for this agreement, the Company issued to Westrec an amended
Warrant Agreement dated April 10, 2007, to purchase a total of 11,000,000 shares
of common stock at an exercise price of $0.40 per share. The Warrant vested upon
grant and expires on September 15, 2013. In connection with the warrant
modification, the Company recorded $320,000 of interest expense upon
grant.  The Company agreed to increase the number of warrants issued
under the April Amendment based on certain borrowing
thresholds.  During the year ended December 31, 2007, the Company
issued warrants to purchase an aggregate of 2,706,901 shares of common
stock.  The warrants vested upon grant, had an exercise price of $0.05
per share, expire through September 15, 2013 and had a value of $47,200 (based
on the Black Scholes option pricing model) and were recorded as additional
interest expense during the year ended December 31, 2007.





On July
9, 2007, Westrec and the Company entered into a Letter Agreement to amend the
Amended and Restated Credit Enhancement Agreement dated as of December 20,
2006 (the “Agreement”). The
purpose of the Letter Agreement was to amend the Agreement to allow for direct
loans to the Company in addition to the credit enchantment facility with
Comerica Bank. Each Direct Loan shall be shall be due and payable on demand
and shall bear interest at a rate equal to the greater of (i) twenty percent
(20%) per annum, or (ii) the sum of (A) the prime rate, plus (B) 11.75% per
annum.While there
is no obligation to continue these loans, as of March 31, 2008, $3,352,483 of
advances had been made under this amended Agreement.




In
November 2007, the Master Revolving Note was assigned by Comerica Bank to
Michael M. Sachs, the principal owner of Westrec Capital Partners,
LLC.





During
the three months ended March 31, 2008, the Company incurred total fees and
interest to Westrec and its principal of approximately $435,660, paid zero and
owes $1,124,728, which is included in accrued interest in the accompanying
condensed consolidated balance sheet.




NOTE
7 — EQUITY TRANSACTIONS




Warrants




During
the three months ended March 31, 2007, the Company issued warrants to purchase
approximately 110,000 shares of the Company’s common stock (see Note 5) in
connection with liquidated damages clauses of certain registration rights
agreements.





The
Company failed to raise $4,000,000 of net proceeds from the sale of equity
securities by August 3, 2007, as required by the amended Westrec warrant
agreement. Accordingly, the exercise price of the warrant was reduced to $0.05
per share and the number of shares of common stock to be purchased was increased
to 80,277,472. In connection with the warrant modification, the Company
recognized as expense approximately $6,928,000 in August 2007. Based on the
number of shares of common stock issuable upon exercise of the warrant and other
potentially issuable shares, the Company determined that it does not have enough
authorized shares to settle all such obligations and that feature was an
embedded derivative instrument pursuant to SFAS No. 133. In addition, under the
provisions of EITF Issue No. 00-19, the Company classified all other
non-employee warrants as derivative liabilities and recorded them at their fair
values at each balance sheet date until such time as the Company increased its
authorized shares or it has enough authorized shares to settle the issuance of
its convertible debt, options and warrants.





During
the three months ended March 31, 2008, the company issued an additional
35,232,180 warrants to purchase common stock to Westrec under the amended
Westrec warrant agreement. The Company did not recognize any expense for theses
warrants as they were deemed worthless as a result of the Chapter 11 filing on
April 16, 2008.





15
 Table of Contents




As of
March 31, 2008, Westrec had been granted a total of 141,769,424
warrants.




NOTE
8 — SUBSEQUENT EVENTS




On April
16, 2008, as a result of its continuing cash flow deficits, the Company and
its wholly owned subsidiary filed voluntary petitions under Chapter 11 of the US
Bankruptcy Code with the United States Bankruptcy Court, Central District of
California, file numbers 1:08-BK-12363-KT and 1:08-BK-12359-KT,
respectively.




The
Company remains in default under an approximately $8.5 million line of credit
initially provided to it by Comerica Bank which was subsequently assigned to
Michael M. Sachs, the principal owner of Westrec Capital Partners, LLC. The
Company is also in default of additional amounts owed to Westrec Capital
Partners, LLC of approximately $3.4 million.




Item 2.
Management’s Discussionand Analysis or Plan of
Operation




Some of
the statements made by us in this Quarterly Report on Form 10-Q are
forward-looking in nature, including but not limited to, statements relating to
our future revenue and expenses, licensing agreements, product development,
market acceptance, and our management’s plans and objectives for our current and
future operations, and other statements that are not historical facts.
Forward-looking statements include, but are not limited to, statements that are
not historical facts, and statements including forms of the words “intend”,
“believe”, “will”, “may”, “could”, “expect”, “anticipate”, “plan”, “possible”,
and similar terms. Actual results could differ materially from the results
implied by the forward looking statements due to a variety of factors, many of
which are discussed throughout this Quarterly Report and in our SEC filings.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. We undertake no obligation
to publicly release any revisions to these forward-looking statements that may
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events, unless required by law. Factors that could
cause actual results to differ materially from those expressed in any
forward-looking statement made by us include, but are not limited
to:





•
            
            our
      ability to finance our activities and maintain our financial
      liquidity;•
            
            our
      ability to enter into new licensing agreements and to maintain and renew
      existing licensing agreements;•
            
            changes
      in consumer preferences or fashion trends;•
            
            disruption
      in product shipment;•
            
            changes
      in import regulations;•
            
            our
      dependence on a small number of large customers;•
            
            changes
      in our relationships with vendors and other resources;
  and•
            
            intensely
      competitive industry conditions.




In this
document, the words “we,” “our,” “ours,” and “us” refers to The Fashion House
Holdings, Inc. and our wholly owned subsidiary The Fashion House, Inc., a
Delaware corporation.





On August
19, 2005, TDI Holding Corporation (“TDI”) entered into an agreement of Plan of
Reorganization (“Merger”) with The Fashion House, Inc. (“TFH”) in a tax free
share exchange under Section 368(a)(1)(B) of the Internal Revenue Code of 1986,
as amended. Immediately after the Merger, the officers and directors of TDI
resigned and the management of TFH controlled such positions; therefore,
effecting a change of control. As a result, the transaction was recorded as a
“reverse merger” whereby TFH was considered to be the accounting acquirer as it
retained control of TDI after the Merger. Simultaneously with the Merger, TDI
changed its name to The Fashion House Holdings, Inc.





TFH was
incorporated under the laws of the State of Delaware on April 11, 2002 and
commenced operations on January 1, 2003. TFH designs, develops and markets
women’s dress footwear with an emphasis on celebrity appeal, style, quality and
fit. The Company targets the moderate to premium-priced categories of the
women’s footwear industry and implements its business model by licensing
recognized brand names.




As
reported in the Report of Independent Registered Public Accounting Firm on our
December 31, 2007 financial statements, the Company had suffered recurring
losses from operations, and had a working capital deficit that raises
substantial doubt about our ability to continue as a going concern.




16
 Table of Contents




Reduction
of Operations, Chapter 11 Filing and Planned Operations





On
January 15, 2008, the Company terminated a substantial portion of its operations
because of its continuing cash flow deficits.  Prior to that date, on
December 15, 2007, in order to reduce its monthly rent obligation, the Company
established a new corporate office by leasing space on a month to month basis at
the office location of Westrec Capital Partners, LLC (“Westrec”). On January 15,
2008, concurrent with the reduction of its business operations, the Company
surrendered its San Vicente office space.  Westrec is considered a
control stockholder of the Company and the Company’s Interim Chief Financial
Officer is a part-time and temporary employee of an affiliate of
Westrec.




On April
16, 2008, the Company and its wholly owned subsidiary filed voluntary
petitions under Chapter 11 of the US Bankruptcy Code with the United States
Bankruptcy Court, Central District of California, file numbers
1:08-BK-12363-KT and 1:08-BK-12359-KT, respectively.




Our
current operations include sales at our retail outlet opened on March 31,
2008, located at 607 West Knoll, West Hollywood California. This store
operates under the name Shoe Bliss and occupies 1,500 square feet
of retail space.   At Shoe Bliss, we sell well known
designer brands at a discount between 50 to 75% of the retail prices. Our shoes
sell in our retail store for $39 to $120, while similar shoes retail in the
market place from $140 to $300.  This retail division allows us
to reduce warehousing expenses, produce current income, and keep
our brand names in the market, thus preserving our goodwill.




We are
also currently indentifying and negotiating new designer licenses to actively
resume our women’s wholesale business, which was curtailed in January 2008 as
part of our business reorganization plans.




We plan
to emerge from Chapter 11 proceedings operating two divisions, wholesale and
retail.  Our reorganization plan includes resuming our historical
wholesale business model of licensing, designing, manufacturing and
marketing designer brand women’s footwear.  We are presently in
discussions with several haute couture designers to license their brands.
We will retain our successful pattern of producing high end
footwear for these licensed brands and selling the product in domestic and
international markets.  We will also introduce diffusion lines for the same
brands at more affordable price points of $79 to $ 150.  The Company
will continue to limit business to designer brands that highlight design
aspects in order to capitalize on brand recognition.




We plan
to expand our retail division by opening Shoe Bliss stores in the
State of California and ultimately across the United States.




Overview




We plan
to design, develop, and market a diversified selection of women’s dress and
casual fashion footwear with an emphasis on celebrity appeal, style, quality,
and fit. We target moderate to premium priced categories of the women’s fashion
footwear market. Our business centers on the licensing of recognized brand
names. The practice of licensing, or the leasing of trademarked or copyrighted
entity, including name, likeness, logo, graphic, saying, signature or character,
has become an increasingly common practice among apparel and footwear companies,
and the licensee typically pays royalties based upon product sales. We have sold
over 100 different styles of designer footwear through independent retailers,
specialty retailers and better department stores.





As a
result of our continued cash flow deficits, most of our license agreements have
either been terminated for non-payment of royalties (Isaac and Oscar), or have
expired on their original termination date and have not been renewed
(Tyler).  Due to a continuing decline in the demand for Blass
footware, this license agreement was mutually terminated. At this time, we do
not have any active license agreements in place. We are presently in discussions
with several haute couture designers to license their brands. However, there can
be no assurances that we will be successful in obtaining additional
licenses.





The
footwear sales cycle is well entrenched and most of the industry’s
infrastructure centers around four distinct selling seasons: Spring 1, Spring 2,
Fall 1 and Fall 2. Spring 1 occurs in June and products are debuted at trade
shows—such as the Fashion Footwear Association of New York—for introduction to
retail stores in November. Spring 2 occurs in August and coincides with the
industry’s largest trade show event—the World Shoe Association show in Las
Vegas. Lines that debut in this venue appear on retail shelves and counters the
following February and March. Fall 1 is a December event and translates to
retail introductions in April and May. Fall 2 occurs in February and shoes
ordered by buyers in this period are introduced to retail stores in July and
August.




Results
of Operations for the Three Months Ended March 31, 2008 and March 31,
2007.




Net sales
for the three months ended March 31, 2008 were $57,163, a decrease of $2,157,006
or 97% lower than the net sales for the prior year quarter of $2,214,169. The
net sales decrease of $2,157,006 was the result of the Company’s decision to
curtail operations as a result of continuing cash flow deficits and plan to file
Chapter 11 reorganization proceedings.




Gross
loss for the three months ended March 31, 2008 was $78,765 or (137.8%) of net
sales. This negative gross margin was primarily attributable to discounts and
returns offered to customers as a result of the pending Chapter 11
filing.  Gross loss for the three months ended March 31, 2007 was
$128,125 or 5.7% of net sales. The gross loss in 2007 was the result of late
product deliveries due to our negative cash flow and inability to pay suppliers
on time.




Operating
expenses include all costs associated with design, development, sales,
marketing, distribution, purchasing, and corporate functions. Operating expenses
decreased to $538,440 in the three months ended March 31, 2008 from $2,373,785
in 2006, for a decrease of $1,835,345. The decrease in operating expenses is
also attributable to the reduction in operations in anticipation of the planned
filing of the Chapter 11 reorganization.





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 Table of Contents




The net
loss for the three months ended March 31, 2008 is $1,053,197 compared to a net
loss of $4,643,706 for the same period in 2006 for a decreased loss of
$3,590,509, primarily as a result of the reduction in operations and accounting
for derivatives. The loss from operations was $617,205 during the three months
ended March 31, 2008 compared to a loss from operations of $2,501,910 for the
three months ended March 31, 2007. The decrease in the loss from operations of
$1,884,705 was entirely due to the reduction of operations due to continuing
cash flow deficits in anticipation of our filing for Chapter 11 reorganization.
The Company recorded in other expenses for the three months ended March 31, 2008
charges totaling $435,992. These charges include $436,432 for interest expense
and other income of $440. The company recorded in other expenses in the three
months ended March 31, 2007 charges totaling $2,140,996. These charges
included $1,710,000 to record the fair value of warrants issued as guarantees,
$58,000 for stock warrants issued as penalties for late filing and late
effectiveness of the Registration Statement on Form SB-2 with the SEC, and
interest expense of $372,996.




Liquidity
and Capital Resources




As
reported in the Report of Independent Registered Public Accounting Firm on our
December 31, 2007 and 2006 financial statements, the Company has suffered
recurring losses from operations, and has a working capital deficit that raises
substantial doubt about our ability to continue as a going concern.




During
the three months ended March  31, 2008, Company’s net cash position
increased by $4,642 to $11,032. During 2007, as a result of the Artful Minds
lawsuit, a lien was placed on $136,847 of the Company’s cash and is classified
as restricted cash as of March 31, 2008. The Company’s senior secured lender has
filed a lawsuit to block the payment of these funds to Artful
Minds.





The
Company’s financing activity used net cash of $761,428 for the three month ended
March 31, 2008, primarily due to the payment of $985,894 to our factor. The
funds to pay the factor came primarily from collections of accounts receivable
and also from borrowings from the Company’s senior secured lender of
$224,466.  These borrowing are classified as due from related parties
at March 31, 2008. There were no advances from the factor during the three
months ended March 31, 2008.





Net cash
provided in operating activities for the three months ended March 31, 2008 was
$767,351, an increase of $2,163,664 from the $1,396,313 used in operating
activities in the prior year period. The increase in the cash provided by
operating activities resulted from the cost savings associated with the
reduction of operations and the collection of outstanding trade
receivables.




The
Company had cash used for investing activities of 1,281 relating to the purchase
of property and equipment for the quarter ended March 31, 2008.  In
the 2006 period, the net cash used for investing was $288,397 for the purchase
of property and equipment..




Financing
Activities




We were
financing our operations primarily with borrowings from our senior secured
lender. With the exception of the year ended December 31, 2004, when we sold the
Nicole Miller License resulting in a gain for the year, we have incurred net
losses as a result of sales, design, and administrative staffing expenses in
support of our operations.





On
February 27, 2007, we amended our Master Revolving Note (the “Note”) dated
September 18, 2006, to increase the borrowing base from an aggregate of $5.0
million to $6.5 million, payable in whole or in part upon demand at a per annum
rate equal to the Lender’s prime rate plus 1% per annum secured by deposits with
the Lender. The note replaces previously issued notes by the bank. Upon default,
we are required to pay an additional 3% interest per annum.





On April
10, 2007, the Company amended its Note (the “April Amendment”) to increase the
borrowing base from an aggregate of $6.5 million to $8.5 million.  In
connection with the April Amendment, the Company entered into an amendment of
the Credit Enhancement Agreement with Westrec pursuant to which each of the
Guarantors agreed to guarantee additional advances under the Comerica Loan of up
to an aggregate of $2,000,000, which advances are drawn no later than August 3,
2007, provided that at the time of each advance certain representations,
warranties, and conditions are all satisfied. This additional $2,000,000 was
fully drawn by the Company as of July 12, 2007.





On July
9, 2007, Westrec and The Company entered into a Letter Agreement to amend the
Amended and Restated Credit Enhancement Agreement dated as of December 20,
2006, as amended (the “Agreement”). The
purpose of the Letter Agreement was to amend the Agreement to allow for direct
loans to the Company in addition to the credit enchantment facility with
Comerica Bank. Each direct loan shall be shall be due and payable on demand
and shall bear interest at a rate equal to the greater of (i) twenty percent
(20%) per annum, or (ii) the sum of (A) the prime rate, plus (B) 11.75% per
annum.While there
is no obligation to continue these loans, as of March 31, 2008, $3,352,483 of
advances had been made under this amended Agreement.




On July
17, 2007, the Company entered into an agreement with Ashford Finance, LLC
(“Ashford”), whereby Ashford will provide up to $5,000,000 of purchase order
financing relating to the Company’s purchases of its products from foreign
manufacturers. Ashford willl finance an amount up to 90% of the Company’s end
buyer’s purchase orders relating to the Company’s purchase orders placed with
the foreign manufacturer. The Company is charged an Account Management Fee equal
to 1.5% per month for Letters of Credit opened by Ashford on behalf of the
Company when the amount equals up to 75% of the Company’s related customer
purchase orders. The Account Management Fee will increase to 2.5% for Letters of
Credit when the amount is in excess of 75% of the related customer purchase
order, but in no event will the Letter of Credit amount be greater than 90% of
the related customer purchase orders. All loans will also bear interest at the
rate of 2% per annum above the Prime Rate as published time to time by the Wall
Street Journal. The agreement requires minimum usage during the first twelve
months of $3,000,000. If the Company cancels the agreement or fails to open
letter of credit that equal the minimum usage, the Company is required to pay
all fees under the agreement for the full minimum amount. The loans are secured
by virtually all of the Company’s assets. Transactions financed under this
agreement are guaranteed by two of the Company’s directors and shareholders, but
only in the event that fraud may have occurred. The Company did not execute any
purchase order financing transactions during the three months ended March 31,
20008 due to the reduction in operations on January 15, 2008 and the Chapter 11
reorganization filed on April 16, 2008.





18
 Table of Contents




On July
25, 2007, the Company entered into a new accounts receivable factoring agreement
with Ultimate Financial Solutions, LLC (“Ultimate”). The Company agreed to sell
and assign to Ultimate all accounts arising from the sale of inventory. At the
Company’s request, Ultimate may advance funds to the Company at up to 80% of the
factor risk accounts. The Company is charged a factoring fee of .85% on gross
invoice amounts. Interest is charged based on the daily debit balances in the
funds in use account for the month, at a rate equal to 1.5% above the Prime Rate
as published from time to time in the Wall Street Journal. In connection with
this agreement, on July 30, 2007, Ultimate paid CIT for the outstanding balance
of funds in use by the Company on that day. As a result, the Company’s liability
for this amount was effectively transferred from CIT to Ultimate and the CIT
agreement was terminated.  The loans under this agreement are secured by
substantially all of the Company’s assets. The loans are personally guaranteed
by the principal member of Westrec and a director and shareholder of the
Company. The Company did not factor any receivables during the three months
ended March 31, 20008 due to the reduction in operations on January 15, 2008 and
the Chapter 11 reorganization filed on April 16, 2008.




In
connection with the July 25, 2007 agreement with Ultimate and the July 17, 2007
agreement with Ashford, Intercreditor Agreements were also entered into by and
between Westrec, Comerica, Ultimate and Ashford to establish a priority for
security interests in the Company’s assets. In these agreements, Comerica
subordinated its security interest to Ultimate in accounts factored by Ultimate.
Comerica also subordinated its security interest in all assets to Ashford.
Ultimate subordinated its security interest in purchase orders financed by
Ashford. Westrec subordinated its security interest to Ultimate in accounts
factored by Ultimate.  Westrec subordinated its security interest in
receivables, as defined, to Ashford. Westrec subordinated to Ashford its
security interest in inventory financed by Ashford. With regard to inventory
other than inventory financed by Ashford, security interests of Ashford and
Westrec rank pari passu with one another. Ashford’s lien and security interest
in all other assets and collateral is subordinate to Westrec’s security interest
(other than receivables or inventory).





In
November 2007, the Master Revolving Note was assigned by Comerica Bank to
Michael M. Sachs, the principal owner of Westrec Capital Partners,
LLC.





During
the three months ended March 31, 2008, the Company incurred total fees and
interest to Westrec and its principal of approximately $435,660, paid zero and
owes $1,124,728, which is included in accounts payable and accrued expenses in
the accompanying condensed consolidated balance sheet.





Licenses




As a
result of our continued cash flow deficits, our license agreements have either
been terminated for non-payment of royalties (Isaac and Oscar), or have expired
on their original termination date and have not been renewed
(Tyler).  Due to a continuing decline in the demand for Blass
footwear, this license agreement was mutually terminated. At this time, we do
not have any active license agreements in place. We are presently in discussions
with several haute couture designers to license their brands. However, there can
be no assurances that we will be successful in obtaining additional
licenses.





For the
rights to use trademarks, the Company had entered into licensing agreements with
various licensors.





The
agreements enable the Company to sell products using the name of the licensors
in return for a licensing fee based upon sales of the products using the
licensors’ names.





During
the year ended December 31, 2007, the Company had rights to use ten trademarks
as evidenced by licensing agreements entered into with Oscar by Oscar de la
Renta, O Oscar by Oscar de la Renta, Blass by Bill Blass, Bill Blass Couture,
Blassport and Bill Blass Collection, tyler, Richard Tyler, Isaac Isaac Mizrahi
and a new couture brand which expire through March 2011. Under these
licensing agreements, the Company agreed to pay the greater of between 3% and 8%
of net sales of the licensed products or guaranteed minimums ranging from
$70,000 to $1,000,000 per annum, per contract. The licensors may terminate the
licensing agreements upon events of default, as defined.





On
November 26, 2007, the Tyler licenses ended in accordance with the contract
termination date. While a two year renewal was available in the agreement, the
renewal option was not exercised.





The Company hadexperienced a declining
market for its Blass footwear. As a result,during the fourth quarter
of 2007,the Company and Bill Blass began negotiations to terminate the
Blass license. While the Company and Blass had mutually agreed that the Company
would discontinue the design, manufacture and sale of Blass footwear, a payment
of $90,000 by the Company to Blass was to be made to relive the Company’s
obligations under the license agreement for all future minimum payments. This
payment has not been made as of the date of this filing.





On
January 10, 2008, Oscar de la Renta issued a written notice of default for
failure to pay minimum royalties under the Company’s licensing agreement with
it.





On
January 27, 2008 Isaac Mizrahi requested termination of the Company’s licensing
agreement with it.





Royalty
expense was zero and $360,983 for the months ended March 31, 2008 and 2007,
respectively.





19
 Table of Contents




Future
Liquidity




Our
principal sources of liquidity consist of existing cash balances. We believe the
key factors to our liquidity in 2008 will be our ability to successfully emerge
from Chapter 11 proceedings and execute on our plans to become profitable. There
is no assurance that the Company will be able to achieve profitability. Our cash
requirements will also depend on numerous other variable factors, including the
rate of growth of sales, the timing and levels of products purchased, payment
terms and credit limits from manufacturers, and the timing and level of accounts
receivable collections.




We will
require additional financing in the next twelve months. We cannot assure you
that additional financing (public or private) will be available on acceptable
terms or at all. If we issue additional equity securities to raise funds, the
ownership percentage of our existing stockholders would be reduced. New
investors may demand rights, preferences or privileges senior to those of
existing holders of common stock. If we cannot raise any needed funds, we might
be forced to make further substantial reductions in our operating expenses,
which could adversely affect our ability to implement our current business plan
and ultimately our viability as a company.




CRITICAL
ACCOUNTING POLICIES




In
preparing our financial statements, we make estimates, assumptions and judgments
that can have a significant effect on our revenues, income/loss from operations,
and net income/loss, as well as on the value of certain assets on our
consolidated balance sheet. We believe that there are several accounting
policies that are critical to an understanding of our historical and future
performance as these policies affect the reported amounts of revenues, expenses,
and significant estimates and judgments applied by management. While there are a
number of accounting policies, methods and estimates affecting our consolidated
financial statements, areas that are particularly significant include revenue
recognition and stock-based compensation. In addition, please refer to Note 1 to
the accompanying consolidated financial statements for further discussion of our
significant accounting policies.




Revenue
Recognition




Securities
and Exchange Commission Staff Accounting Bulletin (“SAB”) 101, Revenue Recognition , as amended by
SAB 104, outlines the basic criteria that must be met to recognize revenue and
provide guidance for presentation of revenue and for disclosure related to
revenue recognition policies in financial statements filed with the Securities
and Exchange Commission. Management believes that our revenue recognition policy
conforms to SAB 104.




We
evaluate the criteria of the FASB Emerging Issues Task Force (“EITF”) 99-19,
Reporting Revenue Gross as a
Principal Versus Net as an Agent, in determining whether it is
appropriate to record the gross amount of revenue and related costs or the net
amount earned as commissions. As the primary obligor, we are subject to
inventory risk have latitude in establishing prices and selecting suppliers, can
establish product specifications, and also have the risk of loss as it relates
to cargo losses. Accordingly, our revenue is recorded on a gross
basis.




We issue
letters of credit in favor of the manufacturers in accordance with the
information provided by us and the manufacturer. We import the goods and pay the
import and delivery costs and forwards the goods to a public warehouse. Goods
are held by us at a public warehouse until the customers requested ship date. We
arrange and maintain the goods while in our warehouse at our expense. The
Company has title to the goods when shipped from the manufacturer and in the
public warehouse.





Revenue
is recognized upon shipment of goods from the public warehouse to the customers,
which is when title transfers to the customers. The Factor approves credit to
the customers on the factored sales and charges us .85% of sales.





Shipping
and handling costs billed to the customers are recorded in sales. Shipping and
handling costs as incurred by us for the imported goods are recorded in cost of
sales.




Stock
Based Compensation




At March
31, 2008, the Company had no stock-based compensation plans and has not issued
any share-based payments to its employees.





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Derivative
Financial Instruments





In
connection with the issuance of warrants with certain notes payable the Company
was required to file a registration statement in November 2005 and have such
registration statement declared effective no later than 180 days following the
Merger (the “Effectiveness Deadline”) and to maintain the effectiveness of such
registration. In addition, the Company was required to issue certain holders of
convertible warrants for each subsequent 30-day period that such registration
statement had not been filed and additional warrants for each 30-day period
following the Effectiveness Deadline, in which the registration statement was
not declared effective. On July 26, 2006, the Company filed the required
registration statement. The Company’s registration statement became effective on
January 23, 2007. The Company determined that the registration rights are an
embedded derivative instrument pursuant to SFAS No. 133, Accounting for
Derivative  Instruments and Hedging
Activities , as amended. Under the provisions of Emerging Issues Task
Force (“ EITF ”) Issue No. 00-19, Accounting for Derivative Financial
Instruments Indexed to and Potentially Settled in a Company’s Own Stock
and View A of EITF No. 05-4, The Effect of a Liquidated Damages
Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19,
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock, the accounting treatment of these
derivative financial instruments required that the Company record the
derivatives at their fair values as of the inception date of the note agreements
and at fair value as of each subsequent balance sheet date. Any change in fair
value was recorded as non-operating, non-cash income or expense at each balance
sheet date. If the fair value of the derivatives was higher at the subsequent
balance sheet date, the Company recorded a non-operating, non-cash expense. If
the fair value of the derivatives was lower at the subsequent balance sheet
date, the Company recorded non-operating, non-cash income.





In
December 2006, the FASB issued Staff Position EITF 00-19-2, Accounting for
Registration Payment Arrangements (“ FSP EITF 00-19-2” ). FSP EITF 00-19-2
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
FASB Statement No. 5, Accounting for Contingencies.
FSP EITF 00-19-2 further clarifies that a financial instrument subject to a
registration payment arrangement should be accounted for in accordance with
applicable generally accepted accounting principles without regard to the
contingent obligation to transfer consideration pursuant to the registration
payment arrangement.





In
accordance with the provisions of FSP EITF 00-19-2, the Company elected early
adoption of this statement. As of January 1, 2006, the Company recorded the
warrant liability to equity since the only provision which caused the warrants
issued to be accounted for as a derivative liability was the liquidated damages
provision in the registration rights agreement. However, as retrospective
application of FSP EITF 00-19-2 is prohibited, the Company has not restated the
amounts presented as of December 31, 2007.




As a
result of unsuccessful fund raising efforts, the Company modified an existing
warrant (the “Modification”) and therefore did not have a sufficient number of
authorized shares to settle outstanding and exercisable options, warrants and
convertible instruments. Therefore, under the provisions of Emerging Issues Task
Force ("EITF") Issue No. 00-19, Accounting For Derivative Financial
Instruments Indexed To, And Potentially Settled In, A Company's Own
Stock, as a result of the Modification, the Company was required to
classify all warrants as derivative liabilities and apply the same accounting
treatment as noted above until the Company has a sufficient number of authorized
shares.





Going
Concern




The
condensed consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company incurred net losses
for the three months ended March 31, 2008 and each year from 2004 through 2007,
and as of March 31, 2008 the Company has a working capital deficit of
$16,457,210 and a stockholders’ deficit of $17,157,825. These factors raise
substantial doubt about the Company’s ability to continue as a going concern.
These consolidated financial statements do not include any adjustments that
might be necessary if the Company is unable to continue as a going
concern.





The Company’s
ability to continue in existence and achieve success in operations is dependent
upon numerous items, among which are the growth of revenues from its products,
its ability to obtain new customers in order to achieve levels of revenues
adequate to support the Company’s current and future cost structure, and its
ability to obtain financing for operations, for which there is no assurance.
Unanticipated problems, expenses and delays are frequently encountered in
establishing and maintaining profitable operations. These include, but are not
limited to, competition, the need to develop customer support capabilities and
market expertise, setbacks in product development, technical difficulties,
market acceptance and sales and marketing. The failure of the Company to meet
any of these conditions could have a materially adverse effect on the Company.
No assurance can be given that the Company can achieve or maintain profitable
operations.





The
Company will require financing to repay its existing obligations and resume
operating activities. There can be no assurance that additional funding will be
adequate or will enable the Company to achieve or sustain
profitable





On
January 15, 2008, the Company terminated a substantial portion of its operations
because of its continuing cash flow deficits.  Prior to that date, on
December 15, 2007, in order to reduce its monthly rent obligation, the Company
established a new corporate office by leasing space on a month to month basis at
the office location of Westrec Capital Partners, LLC (“Westrec”). On January 15,
2008, concurrent with the reduction of its business operations, the Company
surrendered its San Vicente office space.  Westrec is considered a
control stockholder of the Company and the Company’s Interim Chief Financial
Officer is a part-time and temporary employee of an affiliate of
Westrec.




21
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On April
16, 2008, the Company and its wholly owned subsidiary filed voluntary
petitions under Chapter 11 of the US Bankruptcy Code with the United States
Bankruptcy Court, Central District of California, file numbers
1:08-BK-12363-KT and 1:08-BK-12359-KT, respectively.




We plan
to emerge from Chapter 11 proceedings operating two divisions, wholesale and
retail.  Our reorganization plan includes resuming our historical
wholesale business model of licensing, designing, manufacturing and
marketing designer brand women’s footwear.  We are presently in
discussions with several haute couture designers to license their brands.
We will retain our successful pattern of building high end
footwear for these licensed brands and selling the product in domestic and
international markets.  We will also introduce diffusion lines for the same
brands at more affordable price points of $79 to $ 150.  The company
will continue to limit business to designer brands that highlight design
aspects in order to capitalize on brand recognition.




We plan
to expand our retail division by opening Shoe Bliss stores in the
State of California and ultimately across the United




Item 3.
Controlsand Procedures





Evaluation of Disclosure and
Procedures





The
Company, under the supervision and with the participation of the Company's
management, including the Company's principal executive officer and principal
financial officer, has evaluated the effectiveness of the design and operation
of the Company's "disclosure controls and procedures," as such term is defined
in Rules 13a-15e promulgated under the Exchange Act as of this report. Based
upon that evaluation, the principal executive officer and principal financial
officer have concluded that the Company's disclosure controls and procedures
were effective as of the end of the period covered by this report to provide
reasonable assurance that information required to be disclosed by the Company in
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms.




Limitations on the
Effectiveness of Controls




The
Company's management, including the CEO and Interim CFO, does not expect that
our disclosure controls and procedures or our internal control over financial
reporting will necessarily prevent all fraud and material error. An internal
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of the control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the internal control. The design of any system of controls also is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Over time, control may
become inadequate because of changes in conditions, and/or the degree of
compliance with the policies or procedures may deteriorate.





Changes in Internal
Controls





As
discussed in detail in our annual report on Forms 10-KSB for the year ended
December 31, 2006, and subsequent quarterly reports on Forms 10-QSB, during the
second and third quarter of 2007 we undertook certain improvements to remediate
material weaknesses related to our internal control over financial reporting
that originally affected our year-end and quarterly filings for the period ended
December 31, 2006. To remediate these material weaknesses, we made the following
improvements:





During
the year ended December 31, 2007, the Company retained qualified internal
accounting personnel and actively engaged qualified external accounting
professionals to provide the Company with up to date current guidance with
respect to financial reporting and complex accounting issues affecting debt and
equity-based transactions.





There
were no other changes to the internal controls during the first quarter ended
March 31, 2008 that have materially affected or that are reasonably likely to
affect the internal controls.








22
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PART
II — OTHER INFORMATION




Item1. Legal Proceedings




On April
16, 2008, the Company and its wholly owned subsidiary filed voluntary
petitions under Chapter 11 of the US Bankruptcy Code with the United States
Bankruptcy Court, Central District of California, file numbers
1:08-BK-12363-KT and 1:08-BK-12359-KT, respectively. Active litigation at the
tine of this bankruptcy filing will be moved to the bankruptcy
court.




The
Company is, from time to time, involved in various legal and other proceedings
which arise in the ordinary course of operating its business. In the opinion of
management, the amount of ultimate liability, if any, with respect to these
actions will not materially affect the consolidated financial position or
consolidated results of operations of the Company except as disclosed
below.





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





This
matter was filed October 26, 2005, seeking damages for breach of contract and
fraud regarding oral arrangements with the Company’s subsidiary. On April 10,
2007, a Notice of Entry of Judgment was filed with the court for the amount of
$460,000, which includes interest at 10% per year.  No appeal was
filed. In connection with this judgment, the Company has accrued $300,000 in
accounts payable and accrued expenses in the accompanying condensed consolidated
balance sheet based on management’s best estimate of the ultimate settlement of
this matter.





Artful
Mind Industrial, Ltd.





On March
6, 2007, the Company was served with a complaint, which Artful Mind Industrial
Ltd. (“Artful Mind”) filed on March 1, 2007 alleging that the Company failed to
make payments owed under a Settlement Agreement (the “Agreement”) entered into
between Artful Mind, Go Moda Limited and the Company in September 27, 2006.
Artful Mind seeks judgment for the full amount of all payments due, which
approximates $295,000, together with interest at a rate of 9% per annum
beginning on January 14, 2007 and costs of collection, including reasonable
attorneys’ fees incurred. Based on the event of a default, of not timely paying
the final two payments, the entire balance of all payments due were accelerated
and became immediately due and interest on all unpaid amounts accrued at a rate
of 9% per annum. The complaint states that the Company is currently in default
on the final two payments. On October 2, 2007, a default judgment was entered
for $315,055, including interest and court costs. The Company has included this
amount as accounts payable and accrued expenses in the accompanying condensed
consolidated balance sheet. A restraining order on $136,847 of the Company’s
cash balances at Comerica Bank was obtained and is classified as restricted cash
at December 31, 2007. The Company’s senior secured lender filed a lawsuit
subsequent to December 31, 2007 to block payment of these funds to Artful Minds.
 The matter is currently pending.





TCK
Designs, LTD.





On May
11, 2007, a complaint was filed in New York by TCK Designs, LTD alleging breach
of contract for terminating a purported one year agreement without making
payment to the plaintiff. The plaintiff sought damages in the amount of $37,500,
plus legal fees and interest. A default judgment was entered on September 24,
2007. On October 31, 2007, an Order to Show Cause with Temporary Restraints was
filed in New Jersey, barring the Company’s public warehouse in New Jersey from
moving goods stored at that location. On November 5, 2007, at the Company’s
request, the Court granted a partial release on the restraining order allowing
the Company to continue shipping goods from the public warehouse.  The
Company was required by the court to maintain $100,000 of goods at the warehouse
and a cash deposit of $40,000 in its attorney’s trust account. The Company had
the option of placing an additional $20,000 in the attorney trust account to
fully release all goods in the warehouse.  The Company’s senior
secured lender filed a lawsuit subsequent to December 31, 2007 to block payment
of these funds to Artful Minds.  The court denied this request and the
funds were remitted to the plaintiff.





Barry
K. Rothman





On
October 26, 2007, a complaint was filed in Los Angeles by Barry K. Rothman
against the Company, John Hanna, Westrec Capital Partners, LLC and a principal
of Westrec Capital Partners, LLC for breach of contract in the amount of
$141,733 and appointment of receiver.  The suit relates to failure to
pay for legal services. The matter is currently pending.





Bowne
of Los Angeles





On
December 21, 2007 a complaint was filed in Los Angeles by Bowne of Los Angeles,
Inc. for breach of contract in the approximate amount of $20,000. The matter is
currently pending.





6310
San Vicente Associate, LLC





On
February 15, 2008, a complaint was filed in Los Angeles against the Company by
6310 San Vicente Associates, Inc., the Company’s former landlord for breach of
contract for failure to pay rent in the approximate amount of $26,000. The
matter is currently pending.


.


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 Table of Contents




Oscar
De La Renta, Ltd





On
February 19, 2008, a complaint was filed in New York by Oscar De La Renta Ltd.
against the Company for breach of contract, unfair competition, and trademark
infringement relating to failure to make royalty payments in connection with the
Company’s license agreement with Oscar De La Renta, Ltd. The plaintiff seeks
damages totaling $1,786,015. The matter is currently pending.





Item2. Unregistered Sales of Equity Securities and Use of
Proceeds




The
Company failed to raise $4,000,000 of net proceeds from the sale of equity
securities by August 3, 2007, as required by the amended Westrec warrant
agreement. Accordingly, the exercise price of the warrant was reduced to $0.05
per share and the number of shares of common stock to be purchased was increased
to 80,277,472. In connection with the warrant modification, the Company
recognized as expense approximately $6,928,000 in August 2007. Based on the
number of shares of common stock issuable upon exercise of the warrant and other
potentially issuable shares, the Company determined that it does not have enough
authorized shares to settle all such obligations and that feature was an
embedded derivative instrument pursuant to SFAS No. 133. In addition, under the
provisions of EITF Issue No. 00-19, the Company classified all other
non-employee warrants as derivative liabilities and recorded them at their fair
values at each balance sheet date until such time as the Company increased its
authorized shares or it has enough authorized shares to settle the issuance of
its convertible debt, options and warrants.





During
the three months ended March 31, 2008, the Company issued an additional
35,232,180 warrants to purchase common stock to Westrec under the amended
Westrec warrant agreement. The Company did not recognize any expense related to
these warrants they are deemed worthless due to the Chapter 11 filing on April
16, 2008.





As of
March 31, 2008, Westrec had been granted a total of 141,769,424
warrants.





The
issuances of securities described above were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving any public offering.
The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and other instruments issued in such
transactions. The sales of these securities were made without general
solicitation or advertising.




Item3. Defaults Upon Senior Securities




The
Company remains in default under an approximately $8.5 million line of credit
initially provided to it by Comerica Bank which was subsequently assigned to
Michael M. Sachs, the principal owner of Westrec. The Company is also in default
of additional amounts owed to Westrec of approximately $3.4
Million.




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




Not
Applicable




Item 5.
Other Information




Not
applicable




Item 6.
Exhibits




The
exhibits listed in the Exhibit Index are filed as part of this
report.







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 Table of Contents






SIGNATURES




In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.




The
      Fashion House Holdings, Inc.Date: May 20,
      2008
            By:
            /s/ John
      HannaJohn
      HannaChief
      Executive Officer













25
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EXHIBITINDEX




31.1
            
            Certification of Chief Executive
    Officer31.2
            
            Certification of Interim Chief Financial
      Officer32.1
            
            Section 1350 Certifications of Chief Executive Officer and
      Interim Chief Financial Officer















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