**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

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**Form 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe quarterly period ended October 31, 2006**

**or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from**                to                 

**CommissionFile No. 0-26608**

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**CUTTER & BUCK INC.**

(Exact Name of Registrantas Specified in Its Charter)

| **Washington**            |   | **91-1474587**                        |
|---------------------------|--------|---------------------------------------|
| (State of  incorporation) |   | (I.R.S. Employer  Identification No.) |

 

**701 N. 34**th Street, Suite 400Seattle, WA 98103

(Address of principalexecutive offices)

**(206) 622-4191**

(Registrant’s telephonenumber)

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months and (2) has been subject to such filing requirements forthe past 90 days. x Yes  o  No

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated file” in Rule 12b-2 of the Exchange Act.(Check one):
| Large  accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |
|---------------------------------|--------|--------------------------|--------|------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in rule 12b-2of the Exchange Act). o  Yes  x  No

Thenumber of shares of Common Stock of the registrant outstanding as of November 27,2006 was 10,576,995.

 

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**CUTTER &BUCK INC.Quarterly Report on Form 10-QFor the Quarter Ended October 31, 2006**

**INDEX**
|                                        | ** ** | ** **                                                                                  | ** ** | **Page** |
|----------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
| PART I—FINANCIAL INFORMATION |       |                                                                                        |
| Item 1.                                |       | Financial  Statements (unaudited):                                                          |       |     |
|                                   |       | Condensed  Consolidated Balance Sheets                                                      |       | 1        |   |
|                                   |       | Condensed  Consolidated Statements of Income                                                |       | 2        |   |
|                                   |       | Condensed  Consolidated Statements of Cash Flows                                            |       | 3        |   |
|                                   |       | Notes  to Condensed Consolidated Financial Statements                                       |       | 4        |   |
| Item 2.                                |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 12       |   |
| Item 3.                                |       | Quantitative  and Qualitative Disclosures about Market Risk                                 |       | 20       |   |
| Item 4.                                |       | Controls  and Procedures                                                                    |       | 21       |   |
| PART II—OTHER  INFORMATION   |       |                                                                                        |       |
| Item 1.                                |       | Legal  Proceedings                                                                          |       | 22       |   |
| Item 1A.                               |       | Risk Factors                                                                                |       | 22       |   |
| Item 2.                                |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       | 22       |   |
| Item 3.                                |       | Defaults  Upon Senior Securities                                                            |       | 22       |   |
| Item 4.                                |       | Submission  of Matters to a Vote of Security Holders                                        |       | 22       |   |
| Item 5.                                |       | Other Information                                                                           |       | 22       |   |
| Item 6.                                |       | Exhibits                                                                                    |       | 23       |   |
| SIGNATURES                             |       | 24                                                                                          |       |

 

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**PART I—FINANCIALINFORMATION**

**Item 1.**                        FinancialStatements

**CUTTER &BUCK INC.Condensed Consolidated Balance Sheets**

| ** **                                                                                                                                                                                          | ** ** | **October 31, 2006**                               | ** ** | **April 30, 2006** | ** ** | **October 31, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                                          | ** ** | **(unaudited)**                                              | ** ** | ** **                   | ** ** | **(unaudited)**                | ** ** |
| ** **                                                                                                                                                                                          | ** ** | **(in thousands, except share amounts)** | ** ** |
| **Assets**                                                                                                                                                                                          |       |                                                         |       |                         |       |                           |       |   |   |   |   |   |   |
| Current assets:                                                                                                                                                                                     |       |                                                         |       |                         |       |                           |       |   |   |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                          |       |                                                         | $          | 7,545                        |       |                           |       | $ | 7,808 |   |   |   | $ | 17,049 |   |   |
| Short-term investments                                                                                                                                                                              |       |                                                         | 17,649     |                         |       |                           | 12,314     |   |   |   | 23,260 |   |   |
| Accounts receivable, net  of allowances for doubtful accounts, returns, and allowances of $1,631 at October 31,  2006, $1,732 at April 30, 2006 and $1,453 at October 31, 2005  |       |                                                         | 19,603     |                         |       |                           | 22,993     |   |   |   | 19,511 |   |   |
| Inventories, net                                                                                                                                                                                    |       |                                                         | 29,535     |                         |       |                           | 25,659     |   |   |   | 24,984 |   |   |
| Income tax receivable                                                                                                                                                                               |       |                                                         | 103        |                         |       |                           | 88         |   |   |   | 536 |   |   |
| Deferred income taxes                                                                                                                                                                               |       |                                                         | 1,968      |                         |       |                           | 1,993      |   |   |   | 2,290 |   |   |
| Prepaid expenses and  other current assets                                                                                                                                                          |       |                                                         | 2,636      |                         |       |                           | 2,701      |   |   |   | 2,739 |   |   |
| Total current assets                                                                                                                                                                                |       |                                                         | 79,039     |                         |       |                           | 73,556     |   |   |   | 90,369 |   |   |
| Furniture and equipment,  net                                                                                                                                                                       |       |                                                         | 6,437      |                         |       |                           | 6,428      |   |   |   | 6,675 |   |   |
| Deferred income taxes                                                                                                                                                                               |       |                                                         | 327        |                         |       |                           | 264        |   |   |   | 174 |   |   |
| Other assets                                                                                                                                                                                        |       |                                                         | 1,318      |                         |       |                           | 1,445      |   |   |   | 1,552 |   |   |
| Total assets                                                                                                                                                                                        |       |                                                         | $          | 87,121                       |       |                           |       | $ | 81,693 |   |   |   | $ | 98,770 |   |   |
| **Liabilities and Shareholders’ Equity**                                                                                                                                                       |       |                                                         |       |                         |       |                           |       |   |   |   |   |   |   |
| Current liabilities:                                                                                                                                                                                |       |                                                         |       |                         |       |                           |       |   |   |   |   |   |   |
| Accounts payable                                                                                                                                                                                    |       |                                                         | $          | 6,933                        |       |                           |       | $ | 5,767 |   |   |   | $ | 4,202 |   |   |
| Dividend payable                                                                                                                                                                                    |       |                                                         | —     |                         |       |                           | —     |   |   |   | 14,653 |   |   |
| Accrued liabilities                                                                                                                                                                                 |       |                                                         | 7,213      |                         |       |                           | 5,934      |   |   |   | 6,109 |   |   |
| Total current  liabilities                                                                                                                                                                          |       |                                                         | 14,146     |                         |       |                           | 11,701     |   |   |   | 24,964 |   |   |
| Restructuring liability,  net of current portion                                                                                                                                                    |       |                                                         | 1,050      |                         |       |                           | 1,575      |   |   |   | 1,735 |   |   |
| Deferred rent                                                                                                                                                                                       |       |                                                         | 1,465      |                         |       |                           | 1,431      |   |   |   | 1,390 |   |   |
| Total liabilities                                                                                                                                                                                   |       |                                                         | 16,661     |                         |       |                           | 14,707     |   |   |   | 28,089 |   |   |
| Commitments and  contingencies                                                                                                                                                                      |       |                                                         | —     |                         |       |                           | —     |   |   |   | — |   |   |
| Shareholders’ equity:                                                                                                                                                                          |       |                                                         |       |                         |       |                           |       |   |   |   |   |   |   |
| Preferred stock, no par  value: 6,000,000 shares authorized; none issued and outstanding                                                                                                            |       |                                                         | —     |                         |       |                           | —     |   |   |   | — |   |   |
| Common stock, no par  value: 25,000,000 shares authorized; 10,576,995 issued and outstanding at  October 31, 2006, 10,476,069 at April 30, 2006, and 10,935,104 at  October 31, 2005 |       |                                                         | 58,417     |                         |       |                           | 58,041     |   |   |   | 63,728 |   |   |
| Deferred compensation                                                                                                                                                                               |       |                                                         | —     |                         |       |                           | (61        | ) |   |   | (199 | ) |   |
| Retained earnings                                                                                                                                                                                   |       |                                                         | 12,043     |                         |       |                           | 9,006      |   |   |   | 7,152 |   |   |
| Total shareholders’  equity                                                                                                                                                                    |       |                                                         | 70,460     |                         |       |                           | 66,986     |   |   |   | 70,681 |   |   |
| Total liabilities and shareholders’ equity                                                                                                                                                     |       |                                                         | $          | 87,121                       |       |                           |       | $ | 81,693 |   |   |   | $ | 98,770 |   |   |

 

See accompanying notes.

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**CUTTER &BUCK INC.Condensed Consolidated Statements of Income (Unaudited)**

| ** **                                                     | ** ** | **Three Months Ended October 31,**                                    | ** ** | **Six Months Ended October 31,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2006**                                                                                  | ** ** | **2005**                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                     | ** ** | **(in thousands, except share and per share amounts)** | ** ** |
| Net sales                                                      |       |                                                                                      | $          | 37,281                                               |       |   |   | $ | 33,669 |   |   | $ | 72,253 |   | $ | 63,410 |   |
| Cost of sales                                                  |       |                                                                                      | 19,745     |                                                 |       |   | 18,651 |   |   | 38,640 |   | 34,347 |   |
| Gross profit                                                   |       |                                                                                      | 17,536     |                                                 |       |   | 15,018 |   |   | 33,613 |   | 29,063 |   |
| Operating  expenses:                                           |       |                                                                                      |       |                                                 |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative                            |       |                                                                                      | 13,846     |                                                 |       |   | 13,596 |   |   | 26,451 |   | 24,512 |   |
| Depreciation                                                   |       |                                                                                      | 678        |                                                 |       |   | 750 |   |   | 1,320 |   | 1,416 |   |
| Restructuring expenses                                         |       |                                                                                      | (401       | )                                                    |       |   | (195 | ) |   | (401 | ) | (195 | ) |
| Restatement expenses                                           |       |                                                                                      | —     |                                                 |       |   | (165 | ) |   | — |   | (648 | ) |
| Total operating expenses                                       |       |                                                                                      | 14,123     |                                                 |       |   | 13,986 |   |   | 27,370 |   | 25,085 |   |
| Operating income                                               |       |                                                                                      | 3,413      |                                                 |       |   | 1,032 |   |   | 6,243 |   | 3,978 |   |
| Interest income  (expense)                                     |       |                                                                                      |       |                                                 |       |   |   |   |   |   |   |   |   |
| Interest income                                                |       |                                                                                      | 323        |                                                 |       |   | 345 |   |   | 635 |   | 653 |   |
| Interest expense                                               |       |                                                                                      | —     |                                                 |       |   | (1 | ) |   | — |   | (9 | ) |
| Net interest income                                            |       |                                                                                      | 323        |                                                 |       |   | 344 |   |   | 635 |   | 644 |   |
| Pre-tax income                                                 |       |                                                                                      | 3,736      |                                                 |       |   | 1,376 |   |   | 6,878 |   | 4,622 |   |
| Income tax  expense                                            |       |                                                                                      | 1,267      |                                                 |       |   | 485 |   |   | 2,367 |   | 1,629 |   |
| Net income                                                     |       |                                                                                      | $          | 2,469                                                |       |   |   | $ | 891 |   |   | $ | 4,511 |   | $ | 2,993 |   |
| Basic earnings  per share:                                     |       |                                                                                      | $          | 0.23                                                 |       |   |   | $ | 0.08 |   |   | $ | 0.43 |   | $ | 0.27 |   |
| Diluted earnings per  share:                                   |       |                                                                                      | $          | 0.23                                                 |       |   |   | $ | 0.08 |   |   | $ | 0.42 |   | $ | 0.26 |   |
| Shares used in  computation of:                                |       |                                                                                      |       |                                                 |       |   |   |   |   |   |   |   |   |
| Basic earnings per share                                       |       |                                                                                      | 10,519,680 |                                                 |       |   | 11,044,913 |   |   | 10,501,470 |   | 11,104,655 |   |
| Diluted earnings per share                                     |       |                                                                                      | 10,705,896 |                                                 |       |   | 11,286,158 |   |   | 10,700,790 |   | 11,362,172 |   |
| Cash dividends  declared per share of common stock outstanding |       |                                                                                      | $          | 0.07                                                 |       |   |   | $ | 0.07 |   |   | $ | 0.14 |   | $ | 1.48 |   |

 

See accompanying notes.

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**CUTTER & BUCK INC.Condensed Consolidated Statements of Cash Flows (Unaudited)**

| ** **                                                                         | ** ** | **Three Months Ended  October 31,** | ** ** | **Six Months Ended  October 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                           | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                            | ** ** |
| **Operating activities:**                                                          |       |                                               |       |                                             |       |   |   |   |   |
| Net Income                                                                         |       | $ 2,469                                       |       | $      891         |       | $   4,511 |   | $   2,993 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                               |       |                                             |       |   |   |   |   |
| Depreciation                                                                       |       | 710                                                |       | 764                                              |       | 1,366 |   | 1,443 |   |
| Noncash restructuring expenses                                                     |       | (401                                               | )          | (195                                             | )          | (401 | ) | (195 | ) |
| Deferred income taxes                                                              |       | (77                                                | )          | 35                                               |       | (38 | ) | 113 |   |
| Stock-based compensation                                                           |       | 36                                                 |       | 23                                               |       | 92 |   | 47 |   |
| Tax benefit from exercises of stock options                                        |       | 14                                                 |       | 24                                               |       | 55 |   | 189 |   |
| Loss on fixed asset disposal                                                       |       | 4                                                  |       | 40                                               |       | 4 |   | 40 |   |
| Changes in assets  and liabilities:                                                |       |                                               |       |                                             |       |   |   |   |   |
| Accounts receivable, net                                                           |       | (1,104                                             | )          | (1,323                                           | )          | 3,390 |   | 2,303 |   |
| Inventories, net                                                                   |       | 38                                                 |       | 3,703                                            |       | (3,876 | ) | 414 |   |
| Prepaid expenses and other assets                                                  |       | 283                                                |       | (13                                              | )          | 145 |   | (360 | ) |
| Accounts payable, accrued liabilities and other  liabilities                       |       | 393                                                |       | (1,820                                           | )          | 2,355 |   | (358 | ) |
| Income tax receivable                                                              |       | (775                                               | )          | (29                                              | )          | (15 | ) | 383 |   |
| Net cash provided  by operating activities                                         |       | 1,590                                              |       | 2,100                                            |       | 7,588 |   | 7,012 |   |
| **Investing  activities:**                                                         | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchases of  furniture and equipment                                              |       | (877                                               | )          | (732                                             | )          | (1,379 | ) | (1,424 | ) |
| Purchases of  short-term investments                                               |       | (9,164                                             | )          | (10,895                                          | )          | (24,844 | ) | (37,203 | ) |
| Maturities of  short-term investments                                              |       | 11,740                                             |       | 17,910                                           |       | 19,556 |   | 42,774 |   |
| Net cash provided  by (used in) investing activities                               |       | 1,699                                              |       | 6,283                                            |       | (6,667 | ) | 4,147 |   |
| **Financing  activities:**                                                         | ** ** | ** **                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Payment of  dividends                                                              |       | (738                                               | )          | (774                                             | )          | (1,474 | ) | (1,559 | ) |
| Issuance of  common stock                                                          |       | 55                                                 |       | 110                                              |       | 376 |   | 593 |   |
| Repurchases of  common stock                                                       |       | —                                             |       | (3,488                                           | )          | (153 | ) | (4,804 | ) |
| Excess tax  benefit from exercises of stock options                                |       | —                                             |       | —                                           |       | 67 |   | — |   |
| Principal  payments under capital lease obligations                                |       | —                                             |       | (27                                              | )          | — |   | (92 | ) |
| Net cash used in  financing activities                                             |       | (683                                               | )          | (4,179                                           | )          | (1,184 | ) | (5,862 | ) |
| Net increase (decrease) in cash and cash equivalents                               |       | 2,606                                              |       | 4,204                                            |       | (263 | ) | 5,297 |   |
| Cash and cash  equivalents, beginning of period                                    |       | 4,939                                              |       | 12,845                                           |       | 7,808 |   | 11,752 |   |
| Cash and cash  equivalents, end of period                                          |       | $ 7,545                                       |       | $17,049                                          |       | $   7,545 |   | $17,049 |   |

 

See accompanying notes.

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**Cutter &Buck Inc.Notes to Condensed Consolidated Financial Statements (Unaudited)**

**Note 1. Basisof Presentation**

Cutter & Buck Inc. (the “Company”) designsand markets upscale sportswear and outerwear, primarily through wholesalechannels. The Company has two wholly-owned subsidiaries, Cutter & BuckDirect LLC and Cutter & Buck (Europe) B.V. The accompanying condensedconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries. All significant intercompany accounts andtransactions have been eliminated.

The accompanying unaudited condensed consolidatedfinancial statements have been prepared by the Company in accordance withaccounting principles generally accepted in the United States for interimfinancial statements and in accordance with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, they do notinclude all of the information and disclosures required by generally acceptedaccounting principles for complete annual financial statements. In the opinionof the Company’s management, all adjustments (consisting of normal recurringaccruals) necessary for a fair presentation of the results for the interimperiods have been included. The preparation of financial statements inaccordance with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the amountsreported in the financial statements and accompanying notes. Actual resultscould differ from those estimates.

The Company’s revenues are seasonal, and therefore theresults of operations for the six months ended October 31, 2006, may notbe indicative of the results for the full fiscal year. For further information,refer to the consolidated financial statements and footnotes thereto for theyear ended April 30, 2006, included in the Company’s filing with theSecurities and Exchange Commission on Form 10-K.

Certain prior year amountshave been reclassified to conform with the current year presentation.

**Note 2. Recent AccountingPronouncement**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”)48, *Accounting for Uncertainty in IncomeTaxes,*which prescribes a minimum “more likely than not” recognitionthreshold (i.e. greater than 50%) that a tax position is required to meetbefore being recognized in the financial statements. FIN 48 will be effectivebeginning with the first quarter of the Company’s next fiscal year. Thecumulative effect of an adjustment, if any, pursuant to adoption of FIN 48would be recorded in retained earnings as of the date of adoption. We arecurrently assessing the potential impact that the adoption of FIN 48 will haveon our financial statements.

**Note 3. Stock-BasedCompensation**

Effective May 1, 2006, the Company adoptedStatement of Financial Accounting Standards (“SFAS”) No. 123(R), *Share-Based Payment*. SFAS No. 123(R) requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the income statement based on their fair values. Pro formadisclosure is no longer a permitted alternative. The Company previouslyaccounted for its share-based payments using the intrinsic value methodprescribed in Accounting Principles Board Opinion (“APB”) No. 25, *Accounting for Stock Issued to Employees*, and relatedinterpretations, electing to apply the disclosure-only provisions of SFAS No. 123,*Accounting for Stock-Based Compensation*,as amended by SFAS No. 148, *Accounting for Stock-basedCompensation—Transition and Disclosure*. Compensation expense forstock options was recognized over the vesting period of the grant based on the 

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excess, if any, of themarket price of the Company’s common stock at the date of grant over the stockoption exercise price. Under the Company’s plans, stock options are generallygranted at fair market value on the date of grant.

The Company has adopted SFAS No. 123(R) usingthe modified prospective transition method. Under this method, compensationcost is recognized, beginning with the effective date, based on the grant datefair value estimated in accordance with the provisions of SFAS No. 123(R) forall share-based payments granted after the effective date and based on thegrant date fair value estimated in accordance with the provisions of SFAS No. 123for all awards granted prior to the effective date. Prior periods have not beenrestated.

The Company has historically utilized two types ofstock-based compensation, stock awards and option grants. The fair value ofstock awards is based on the market price of the stock on the grant date of theaward, net of the present value of the estimated dividends that will not bepaid on unvested awards. The fair value of option grants is based upon theBlack-Scholes option pricing model as of the grant date. For the compensationarrangements estimated to ultimately vest, the grant-date fair values areamortized on a straight-line basis over their vesting periods. For stock awardsand option grants that vest solely based on an employee maintaining employment,estimated forfeitures are based upon historical rates of employee attrition.For awards or grants subject to performance conditions, management alsoestimates the probability of those conditions being achieved and compensationcost is only accrued for the awards or grants that are considered probable tovest. These estimates are reviewed quarterly. Any change in these estimateswill result in a cumulative adjustment in the period in which the estimate ischanged, so that as of the end of a period, the cumulative compensation expenserecognized for an award or grant equals the amount that would be recognized ona straight-line basis as if the current estimates had been utilized since thebeginning of the service period.

During the three months and six months ended October 31,2006, the Company recognized a total of $36,000 and $92,000, respectively, forstock compensation expense, which is included in selling, general andadministrative expense. Of this total, $10,000 and $18,000, respectively, ofcompensation expense resulting from stock options was recognized pursuant toSFAS No. 123(R) that would not have been recognized under theaccounting proscribed by APB No. 25. This did not have a material impacton our basic or diluted earnings per share. As of October 31, 2006, thereis $524,000 of total unrecognized compensation cost related to nonvestedshare-based compensation arrangements. This amount is expected to be recognizedover a weighted average period of 1.8 years.

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Ifcompensation costs for stock-based compensation had been recognized based onthe fair value method during the three months and six months ended October 31,2005, the pro forma amounts of the Company’s net income and net earnings pershare would have been as follows:

| ** **                                                                                                                            | ** ** | **Three Months Ended**             | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                            | ** ** | **October 31,**                         | ** ** | **October 31,**           | ** ** |
| ** **                                                                                                                            | ** ** | **2005**                                     | ** ** | **2005**                       | ** ** |
| ** **                                                                                                                            | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net income as  reported                                                                                                               |       |                                         | $          | 891                            | * *   |   |   | $ | 2,993 | * * |   |
| Add employee  stock-based compensation expense, net of tax, as reported                                                               |       |                                         | 14         | * *                       |       |   | 30 | * * |   |
| Deduct total stock-based employee compensation expense, net of tax,  determined under the fair value based method for all awards |       |                                         | (442       | *)*                            |       |   | (518 | *)* |   |
| Pro forma net  income                                                                                                                 |       |                                         | $          | 463                            | * *   |   |   | $ | 2,505 | * * |   |
| Earnings per  share:                                                                                                                  |       |                                         |       | * *                       |       |   |   | * * |   |
| Basic—as reported                                                                                                                |       |                                         | $          | 0.08                           | * *   |   |   | $ | 0.27 | * * |   |
| Basic—pro forma                                                                                                                  |       |                                         | $          | 0.04                           | * *   |   |   | $ | 0.23 | * * |   |
| Diluted—as reported                                                                                                              |       |                                         | $          | 0.08                           | * *   |   |   | $ | 0.26 | * * |   |
| Diluted—pro forma                                                                                                                |       |                                         | $          | 0.04                           | * *   |   |   | $ | 0.22 | * * |   |

 

The $442,000 of stock compensation expense, net oftax, during the three months ended October 31, 2005, is primarily a resultof certain stock plan amendments that wereapproved at the 2005 annual meetingof shareholders in order to allow for certain adjustments to employeestock-based compensation awards to offset the economic impact of a $1.34special dividend. Under the accounting prescribed by APB No. 25 and FASBinterpretation No. 44, “Accounting for Certain Transactions involvingStock Compensation”, no compensation cost was recorded in the Company’sfinancial statements as a result of this modification. If the Company had beenaccounting for stock-based compensation under SFAS No. 123, compensationcost would have been recorded equal to the fair value of the modified option asof the modification date, less the value of the original option at that datebased upon the shorter of any remainder of its expected life as of the originalgrant date or the expected remaining life of the modified option. Because manyof the modified options were fully vested, the entire estimated fair value ofthe modified option would be expensed as of the modification date, resulting inadditional pro forma compensation expense, net of tax, of approximately$375,000 for the three months ended October 31, 2005.

Prior to adoption of SFAS No. 123(R), all taxbenefits resulting from the exercise of stock options were considered operatingcash flows. SFAS No. 123(R) requires the benefits of tax deductionsin excess of the compensation cost recognized for those awards (the “excess taxbenefit”) to be classified as financing cash flows on a prospective basis. As aresult, $67,000 of tax benefits from the exercise of stock options is shown asa financing cash flow in the statement of cash flows for the six months ended October 31,2006.

6

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Awardsof stock totaling up to 48,581 shares were granted in June 2006 to certainkey employees of the Company. The vesting for 40,487 of these awards is subjectto the achievement of performance conditions measurable during fiscal 2007. Inaccordance with SFAS No. 123(R), management has estimated the probabilityof achieving each of the performance conditions and compensation cost has onlybeen recorded for the awards that are considered probable to vest based onmanagement’s estimate. Any awards for which performance conditions are met,vest in equal amounts annually over a three year period. These awards werevalued at $10.96 per share, which was the grant-date market price of the stockless the net present value of estimated dividends that will be declared overthe vesting period, which will not be paid on unvested awards. The previousstock award of 6,000 shares is not subject to any performance conditions. Asummary of the Company’s nonvested stock awards as of and for the six monthsended October 31, 2006, is as follows:

| ** **                          | ** ** | **Shares** | ** ** | **Weighted-  Average Grant-  Date Fair  Value** | ** ** |
|-------------------------------------|------------|------------|------------|-----------------------------------------------------------|------------|
| Nonvested at  May 1, 2006      |       | 6,000      |       |                                                      | $          | 11.32 |   |   |
| Granted                             |       | 48,581     |       |                                                      | 10.96      |   |   |
| Nonvested at  October 31, 2006 |       | 54,581     |       |                                                      | $          | 11.00 |   |   |

 

Noemployee options were granted during the three months or six months ended October 31,2006. Each director who is not an officer or employee of the Company receivedan option grant to purchase 7,500 shares of the Company’s common stock on October 24,2006. These options vest ratably each month over a ten-month period commencingon the grant date and expire after ten years. The fair value for optionsgranted during fiscal 2006 was estimated at the date of grant using theBlack-Scholes option pricing model. The weighted-average assumptions used inthe pricing model and the resulting fair values are as follows:

| ** **               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **October 31,**             | ** ** | **October 31,**           | ** ** |
| ** **               | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| Risk-free  interest rate |       | 4.8                              | %          | 4.4                            | %          | 4.8 | % | 4.4 | % |
| Volatility               |       | 45                               | %          | 58                             | %          | 45 | % | 58 | % |
| Dividend yield           |       | 2.5                              | %          | 2.5                            | %          | 2.5 | % | 2.5 | % |
| Expected life            |       | 5 years                          |       | 6 years                        |       | 5 years |   | 6 years |   |
| Grant-date fair value    |       | $                                | 4.09       |                           | $          | 5.97 |   | $ | 4.09 |   | $ | 5.97 |   |
|                          |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |

 

Asummary of stock option activity as of and for the six months ended October 31,2006, is as follows:

| ** **                                            | ** ** | ** ** | ** ** | **Weighted Average** | ** ** | ** **      | ** ** |
|-------------------------------------------------------|------------|------------|------------|---------------------------|------------|-----------------|------------|
| ** **                                            | ** ** | ** ** | ** ** | ** **                | ** ** | **Remaining**   | ** ** | **Aggregate** | ** ** |
| ** **                                            | ** ** | ** ** | ** ** | **Exercise**              | ** ** | **Contractual** | ** ** | **Intrinsic** | ** ** |
| **Options**                                           | ** ** | ** ** | ** ** | **Shares**                | ** ** | **Price**       | ** ** | **Term** | ** ** | **Value** | ** ** |
| ** **                                            | ** ** | ** ** | ** ** | ** **                | ** ** | ** **      | ** ** | **(in 000’s)** | ** ** |
| Outstanding,  May 1, 2006                        |       | 652,994    |       |                      | $          | 7.27            |       |   |   |   |   |   |   |   |   |   |
| Granted                                               |       | 45,000     |       |                      | 10.99      |            |       |   |   |   |   |   |   |   |   |
| Exercised                                             |       | (61,762    | )          |                      | 5.58       |            |       |   |   |   |   |   |   |   |   |
| Forfeited                                             |       | (1,200     | )          |                      | 12.25      |            |       |   |   |   |   |   |   |   |   |
| Expired                                               |       | (33,022    | )          |                      | 12.46      |            |       |   |   |   |   |   |   |   |   |
| Outstanding,  October 31, 2006                   |       | 602,010    |       |                      | 7.43       |            |       |   | 5.2 |   |   |   | $ | 2,485 |   |   |
| Vested at  October 31, 2006, or expected to vest |       | 602,010    |       |                      | $          | 7.43            |       |   |   | 5.2 |   |   |   | $ | 2,485 |   |   |
| Exercisable at  October 31, 2006                 |       | 549,445    |       |                      | $          | 7.10            |       |   |   | 4.8 |   |   |   | $ | 2,462 |   |   |
|                                                       |            |            |            |                           |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

7

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**Note 4. Short-termInvestments**

Short-terminvestments held-to-maturity consists of U.S. corporate debt securities andUnited States government agency debt with maturity dates within one year of thepurchase date. As of April 30, 2006, and October 31, 2005, amortizedcost includes amounts classified as accrued interest of $51,000, and $157,000,respectively (in thousands):

| ** **                     | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|--------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                     | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| **October 31, 2006** | ** ** | ** **    | ** ** | **Cost**       | ** ** | **Gains**      | ** ** | **Losses**    | ** ** | **Value** | ** ** |
| U.S. corporate  debt           |       |          | $          | 17,151         |       |           |       | $             | 3          |   |   |   | $ | (4 | ) |   |   | $ | 17,150 |   |   |
| U.S. government  agency debt   |       |          | 498        |           |       |           | —     |          |       |   | — |   |   |   | 498 |   |   |
|                           |       |          | $          | 17,649         |       |           |       | $             | 3          |   |   |   | $ | (4 | ) |   |   | $ | 17,648 |   |   |
|                                |            |               |            |                |            |                |            |               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                   | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                   | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| **April 30, 2006** | ** ** | ** **    | ** ** | **Cost**       | ** ** | **Gains**      | ** ** | **Losses**    | ** ** | **Value** | ** ** |
| U.S. corporate  debt         |       |          | $          | 10,957         |       |           |       | $             | —     |   |   |   | $ | (10 | ) |   |   | $ | 10,947 |   |   |
| U.S. government  agency debt |       |          | 1,408      |           |       |           | —     |          |       |   | (3 | ) |   |   | 1,405 |   |   |
|                         |       |          | $          | 12,365         |       |           |       | $             | —     |   |   |   | $ | (13 | ) |   |   | $ | 12,352 |   |   |
|                              |            |               |            |                |            |                |            |               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| ** **                      | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|---------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                      | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| **October 31, 2005**  | ** ** | ** **    | ** ** | **Cost**       | ** ** | **Gains**      | ** ** | **Losses**    | ** ** | **Value** | ** ** |
| U.S. corporate  debt            |       |          | $          | 17,908         |       |           |       | $             | —     |   |   |   | $ | (10 | ) |   |   | $ | 17,898 |   |   |
| U.S. government  treasury bills |       |          | 1,998      |           |       |           | —     |          |       |   | — |   |   |   | 1,998 |   |   |
| U.S. government  agency debt    |       |          | 3,511      |           |       |           | —     |          |       |   | (23 | ) |   |   | 3,488 |   |   |
|                            |       |          | $          | 23,417         |       |           |       | $             | —     |   |   |   | $ | (33 | ) |   |   | $ | 23,384 |   |   |
|                                 |            |               |            |                |            |                |            |               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 5. Debt**

The Company has a loanagreement with Wells Fargo HSBC Trade Bank, N.A. for a $35 million line ofcredit, which expires March 10, 2008, and is secured by all assets of theCompany. Borrowings under this agreement, if any, bear interest at prime minus1.0%. Covenants contained in this loan agreement include maintaining a debt toequity ratio of not more than 1.0, a quick ratio of not less than 1.0, and netincome of $5.0 million per year. Additionally, capital expenditures are limitedto $4.0 million per fiscal year. As of October 31, 2006, the Company is incompliance with all terms and covenants of this agreement. On October 31,2006, letters of credit outstanding against this line of credit totaledapproximately $0.8 million and there were no working capital advancesoutstanding.

**Note 6. Shareholders’Equity**

Restricted stock grants totaling up to 48,581 shareswere awarded during the six months ended October 31, 2006. During the sameperiod, the Company repurchased 12,585 shares under its Stock RepurchaseProgram and sold 3,168 shares under its employee stock purchase plan (“ESPP”)and 61,762 shares pursuant to the exercise of stock options. The aggregateintrinsic value of the shares issued under the ESPP was $6,000. The aggregateintrinsic value of the options exercised was $347,000.

On December 6, 2006,the Board of Directors declared a quarterly dividend of $0.07 per share payableon January 5, 2007, to shareholders of record on December 21, 2006.

8

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*2006 Equity IncentivePlan*

On August 10, 2006,the Board of Directors (the “Board”) adopted, subject to shareholder approval,the 2006 Equity Incentive Plan (the “Plan”). The Plan was approved byshareholders at the Annual Meeting of Shareholders held on October 19,2006. The Companyestablished the Plan as a successor to the 1997 Stock Incentive Plan, 1999Non-Employee Director Stock Incentive Plan, and 2000 Stock Incentive Plan(collectively, the “Prior Plans”). No further awards will be granted under thePrior Plans. The Plan authorizes the Compensation Committee of the Board togrant equity-based awards in the form of stock options, stock appreciationrights, restricted and unrestricted share awards, share units, and performanceunits to eligible employees and consultants. The Plan also authorizes theCorporate Governance, Nominating and Succession Committee to grant these sameequity-based awards to the Company’s non-employee directors. The number ofshares of common stock that may be issued under the Plan pursuant to awards iscurrently 952,086, which consists of 600,000 newly authorized shares and352,086 shares which were available for issuance under the Prior Plans uponadoption of the Plan. Additionally, 432,692 shares, which are currently subjectto awards outstanding under the Prior Plans, may become available for issuanceunder the Plan to the extent that such awards are cancelled, expire, or areforfeited for any reason, bringing the maximum number of shares which are, orwhich may become, available for issuance pursuant to the Plan to 1,384,778.

**Note 7. RestructuringLiability**

During fiscal year 2002, the Company adopted arestructuring plan. This restructuring plan has been completed, except forlosses that were recorded for excess warehouse capacity under lease through2011. The Company has a liability remaining for its contractual lease paymentsdue for the excess warehouse capacity, net of estimated sublease payments.

During the second quarter of fiscal 2007, managementreceived notice from one of its subtenants that they would extend their leaseterm through the remainder of the Company’s lease term. In previous estimates,management had provided reserves for the event that this space would need to besubleased to a different tenant and various costs of re-leasing would beincurred. Based on the extension by the existing subtenant, management removedthese costs from its estimated restructure liability. This estimated costreduction of $401,000 was recorded as a reduction to restructuring expenses.Currently, all of the excess capacity is being subleased and managementbelieves it will continue to be subleased through the end of the Company’slease term in 2011.

Forthe six months ended October 31, 2006, activity in the accrued liabilityaccount consisted of the following:

| ** **                 | ** ** | **Balance at**     | ** ** | **Subsequent** | ** ** | **Subsequent** | ** ** | **Balance at**  | ** ** | **Due**         | ** ** | **Due**         | ** ** |
|----------------------------|------------|-------------------------|------------|----------------|------------|----------------|------------|----------------------|------------|-----------------|------------|-----------------|------------|
| ** **                 | ** ** | **April 30,**      | ** ** | **Accruals,**  | ** ** | **(Payments)** | ** ** | **October 31,** | ** ** | **Within**      | ** ** | **After**       | ** ** |
| ** **                 | ** ** | **2006**                | ** ** | **Net**        | ** ** | **Receipts**   | ** ** | **2006**             | ** ** | **1 Year** | ** ** | **1 Year** | ** ** |
| ** **                 | ** ** | **(in thousands)** | ** ** |
| Lease obligations          |       |                    | $          | 7,922          |       |           |       | $                    | —     |            |       |            | $          | (709 | ) |   |   | $ | 7,213 |   |   | $ | 1,419 |   | $ | 5,794 |   |
| Estimated  sublease income |       |                    | (6,027     | )              |       |           | (401       | )                    |       |            | 549        |            |       |   | (5,879 | ) |   | (1,135 | ) | (4,744 | ) |
|                       |       |                    | $          | 1,895          |       |           |       | $                    | (401       | )               |       |            | $          | (160 | ) |   |   | $ | 1,334 |   |   | $ | 284 |   | $ | 1,050 |   |

 

**Note 8. IncomeTaxes**

The Company recorded$2,367,000 of income tax expense in the first six months of fiscal year 2007compared to $1,629,000 of income tax expense in the first six months of fiscalyear 2006. The effective rates for income taxes were 34.4% and 35.2% for thefirst six months of fiscal years 2007 and 2006, respectively. The lower rate inthe current year is due to adjustments based on the Company’s 2005 tax return.

9

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**Note 9. EarningsPer Share**

Basic earnings per share is based on the weightedaverage number of common shares outstanding. Diluted earnings per share isbased on the weighted average number of common shares and equivalentsconsidered outstanding, except when inclusion of these items would beantidilutive. Common share equivalents included in the computation representunvested stock awards for which all performance conditions, if any, have beensatisfied and the net shares that would be issued upon assumed exercise ofoutstanding stock options. For the three months ended October 31, 2006 and2005, 185,223 and 160,023 outstanding stock options, respectively, were excludedfrom the calculation of diluted earning per share because the exercise pricesexceeded the average market value of the common shares, thereby making themantidilutive. For the three months ended October 31, 2006, 40,487 stockawards were excluded from the calculation of diluted earning per share becausetheir vesting is contingent upon achievement of certain performance conditionsthat, as of October 31, 2006, had not been met.

Thefollowing table sets forth the computation of basic and diluted earnings pershare:

| ** **                                                 | ** ** | **Three Months Ended  October 31,**                                        | ** ** | **Six Months Ended  October 31,** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                 | ** ** | **2006**                                                                                  | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                 | ** ** | **(in thousands, except share and per share amounts)** | ** ** |
| Numerator for basic and  diluted earnings per share:  |       |                                                                                      |       |                                             |       |   |   |   |   |
| Net income                                                 |       | $                                                                                         | 2,469      |                                             | $          | 891 |   | $ | 4,511 |   | $ | 2,993 |   |
| Denominator for  basic earnings per share:                 |       |                                                                                      |       |                                             |       |   |   |   |   |
| Weighted average common shares                             |       | 10,519,680                                                                                |       | 11,044,913                                       |       | 10,501,470 |   | 11,104,655 |   |
| Dilutive effect  of employee stock options and awards |       | 186,216                                                                                   |       | 241,245                                          |       | 199,320 |   | 257,517 |   |
| Denominator for diluted  earnings per share                |       | 10,705,896                                                                                |       | 11,286,158                                       |       | 10,700,790 |   | 11,362,172 |   |
| Basic earnings per share                                   |       | $                                                                                         | 0.23       |                                             | $          | 0.08 |   | $ | 0.43 |   | $ | 0.27 |   |
| Diluted earnings per  share                                |       | $                                                                                         | 0.23       |                                             | $          | 0.08 |   | $ | 0.42 |   | $ | 0.26 |   |

 

**Note 10. SegmentInformation**

Cutter & Buck essentially has one productcategory, upscale sportswear and outerwear under the Cutter & Buckbrand name. We reach our end consumers primarily via wholesale channels in theUnited States and structure our business to manage the sell-through of ourproduct via various distribution channels that we believe will maximize ouroverall company-wide gross profit. These distribution channels are managed bybusiness units. For each business unit, we track net sales and gross profit.The measurement of net sales used by management at the business unit levelincludes shipping revenues and does not include intersegment revenues orreserves recorded for bad debts, returns, or allowances. The measurement ofgross profit at the business unit level does not include inventory writedownsor reserves or variances from our standard cost allocations for freight andembroidery.

All of our business units sell the same product,except for certain licensees which may design certain products or styles thatare unique to their territories. Our inventory is designed, purchased, handled,and distributed in the same manner for all business units by central overheaddepartments. The costs of these departments are not allocated to the businessunits. We do not allocate any assets to business units.

Corporate business unit sales are primarily topromotional product distributors. Golf business unit sales are to pro shops orat tournaments. Specialty Retail business unit sales are to clothing retailers,department stores, and college and professional team apparel stores. Salesthrough these wholesale 

10

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business units areaggregated and reported as our wholesale segment as they each have similareconomic characteristics.

To a lesser extent, we sell directly to consumers viaa catalog and ecommerce website through our consumer direct business unit. Wealso have agreements with several distributors and licensees that sell ourproducts internationally as well as selected non-apparel and non-competingproducts both internationally and domestically through our International andLicensing business unit. Net sales and gross profit for these two businessunits, plus reserve adjustments, standard cost variances, and writedowns andliquidations of inventory are reported in the All Other category for segmentreporting, as their combined results are not material to the presentation ofour segment information.

Theaggregated net sales and gross profit of our operating segments are as follows:

| ** **   | ** ** | **Three Months Ended October 31,** | ** ** | **Six Months Ended October 31,** | ** ** |
|--------------|------------|--------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **   | ** ** | **2006**                                               | ** ** | **%**                                                | ** ** | **2005** | ** ** | **%** | ** ** | **2006** | ** ** | **%** | ** ** | **2005** | ** ** | **%** | ** ** |
| ** **   | ** ** | **(in thousands except percentages)**   | ** ** |
| Wholesale    |       | $                                                      | 33,395     |                                                 | 89.6       |   | $ | 31,184 |   | 92.6 |   | $ | 64,560 |   | 89.4 |   | $ | 59,191 |   | 93.3 |   |
| All Other    |       | $                                                      | 3,886      |                                                 | 10.4       |   | $ | 2,485 |   | 7.4 |   | 7,693 |   | 10.6 |   | 4,219 |   | 6.7 |   |
| Net Sales    |       | $                                                      | 37,281     |                                                 |       |   | $ | 33,669 |   |   |   | $ | 72,253 |   |   |   | $ | 63,410 |   |   |   |
| Wholesale    |       | $                                                      | 15,684     |                                                 | 89.4       |   | $ | 13,869 |   | 92.3 |   | $ | 30,327 |   | 90.2 |   | $ | 27,487 |   | 94.6 |   |
| All Other    |       | $                                                      | 1,852      |                                                 | 10.6       |   | $ | 1,149 |   | 7.7 |   | 3,286 |   | 9.8 |   | 1,576 |   | 5.4 |   |
| Gross Profit |       | $                                                      | 17,536     |                                                 |       |   | $ | 15,018 |   |   |   | $ | 33,613 |   |   |   | $ | 29,063 |   |   |   |

 

Areconciliation of total segment gross profit to the Company’s consolidatedincome from continuing operations before income taxes, is as follows:

| ** **                  | ** ** | **Three Months Ended October 31,**                                                               | ** ** | **Six Months Ended October 31,**                                                                 | ** ** |
|-----------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** |
| ** **                  | ** ** | **(in thousands)**                                                                                              | ** ** |
| Total segment  gross profit |       |                                                                                                                 | $          | 17,536                                                                                                               |       |   |   | $ | 15,018 |   |   |   | $ | 33,613 |   |   |   | $ | 29,063 |   |   |
| Operating  expenses         |       |                                                                                                                 | (14,123    | )                                                                                                                    |       |   | (13,986 | ) |   |   | (27,370 | ) |   |   | (25,085 | ) |   |
| Net interest  income        |       |                                                                                                                 | 323        |                                                                                                                 |       |   | 344 |   |   |   | 635 |   |   |   | 644 |   |   |
| Pre-tax income              |       |                                                                                                                 | $          | 3,736                                                                                                                |       |   |   | $ | 1,376 |   |   |   | $ | 6,878 |   |   |   | $ | 4,622 |   |   |

 

**Note 11. Litigation**

The Company is party to routine litigation incidentalto its business. Management believes the ultimate resolution of these routinematters will not have a material adverse effect on the Company’s financialcondition and results of operations.

11

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**Item 2.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

*You should readthis section together with our condensed consolidated financial statements andrelated notes thereto in this report. In addition to the historical informationcontained herein, this report contains forward-looking statements that involverisks and uncertainties. Our actual future results and trends may differmaterially from historical results or those projected in any forward-lookingstatements. Specifically, there are a number of factors that could cause actualfuture results to differ materially from those anticipated by any forwardlooking statements. Those factors include, but are not limited to, thefollowing: the risk factors set forth in Part I, Item 1A of our annualreport on Form 10-K for the fiscal year ended April 30, 2006;our ability to control costs and expenses, including costs associated with theongoing upgrade of some of our computer systems and our marketing initiativesand costs associated with regulatory compliance; the potential outcome of pending and future audits by various taxingjurisdictions; our ability to maintain our relationships with oursponsored professional golfers; relations with and performance of suppliers; our ability to carry out successfuldesigns and effectively advertise and communicate with the marketplace and topenetrate our chosen distribution channels; our ability to appropriately priceour products; the number of golf rounds played, which may be impacted by severeweather-related disasters and the weather in general; competition; risksrelated to the timely performance of third parties, such as shipping companies,including risks of strikes or labor disputes involving these third parties;identifying, attracting, and retaining employees, including key managementpersonnel; political and trade relations; the overall level of consumerspending on apparel; and global economic and political conditions, includingimpacts of increasing oil prices, disease and terrorism, and responses thereto,including war. Finally, there may be other factors not mentioned above orincluded elsewhere in this report that may cause actual results to differmaterially from any forward-looking statements. You should not place undue relianceon any forward-looking statement. We assume no obligation to update anyforward-looking statement as a result of new information, future events, ordevelopments, except as required by the securities laws.*

*All references to fiscal years are references to ourfiscal years ending April 30.*

**Overview**

Cutter & Buckdesigns and markets upscale sportswear and outerwear under the Cutter &Buck brand name. We sell our products primarily via our wholesale segment,which consists of our Corporate, Golf, and Specialty Retail business units. Wealso sell directly to consumers via a catalog and website and have agreementswith several distributors and licensees that sell our products internationallyas well as selected non-apparel and non-competing products both internationallyand domestically.

12

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**Results ofOperations**

Thefollowing table sets forth, for the periods indicated, certain consolidatedincome statement data expressed as a percentage of net sales.

| ** **                          | ** ** | **Three Months Ended October 31,**                                                                           | ** ** | **Six Months Ended October 31,**                                                                             | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **          2006          ** | ** ** | **          2005          ** | ** ** | **          2006          ** | ** ** | **          2005          ** | ** ** |
| Net sales                           |       |                                                                                                                             | 100.0      | %                                                                                                                                |       |   | 100.0 | % |   |   | 100.0 | % |   |   | 100.0 | % |   |
| Cost of sales                       |       |                                                                                                                             | 53.0       |                                                                                                                             |       |   | 55.4 |   |   |   | 53.5 |   |   |   | 54.2 |   |   |
| Gross profit                        |       |                                                                                                                             | 47.0       |                                                                                                                             |       |   | 44.6 |   |   |   | 46.5 |   |   |   | 45.8 |   |   |
| Operating  expenses:                |       |                                                                                                                             |       |                                                                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general and administrative |       |                                                                                                                             | 37.1       |                                                                                                                             |       |   | 40.4 |   |   |   | 36.6 |   |   |   | 38.7 |   |   |
| Depreciation                        |       |                                                                                                                             | 1.8        |                                                                                                                             |       |   | 2.2 |   |   |   | 1.8 |   |   |   | 2.2 |   |   |
| Restructuring expenses              |       |                                                                                                                             | (1.1       | )                                                                                                                                |       |   | (0.6 | ) |   |   | (0.5 | ) |   |   | (0.3 | ) |   |
| Restatement expenses                |       |                                                                                                                             | —     |                                                                                                                             |       |   | (0.5 | ) |   |   | — |   |   |   | (1.0 | ) |   |
| Total operating expenses            |       |                                                                                                                             | 37.8       |                                                                                                                             |       |   | 41.5 |   |   |   | 37.9 |   |   |   | 39.6 |   |   |
| Operating income                    |       |                                                                                                                             | 9.2        |                                                                                                                             |       |   | 3.1 |   |   |   | 8.6 |   |   |   | 6.2 |   |   |
| Net interest income                 |       |                                                                                                                             | 0.9        |                                                                                                                             |       |   | 1.0 |   |   |   | 0.9 |   |   |   | 1.0 |   |   |
| Pre-tax income                      |       |                                                                                                                             | 10.1       |                                                                                                                             |       |   | 4.1 |   |   |   | 9.5 |   |   |   | 7.2 |   |   |
| Income tax  expense                 |       |                                                                                                                             | 3.4        |                                                                                                                             |       |   | 1.4 |   |   |   | 3.3 |   |   |   | 2.6 |   |   |
| Net income                          |       |                                                                                                                             | 6.7        | %                                                                                                                                |       |   | 2.7 | % |   |   | 6.2 | % |   |   | 4.6 | % |   |

 

**Three Months Ended October 31,2006 Compared With Three Months Ended October 31, 2005**

**Net Sales**

During the second quarter of fiscal 2007, net salesincreased approximately $3.6 million, or 10.7%, to $37.3 million from$33.7 million in the same period of the prior year. This increase isattributable to broad acceptance of our upgraded Classics line, our CB ProTecline of products, and continued growth in our Direct to Consumer business unitas a result of our catalog and website initiative. In the prior year, we wereundergoing an extensive redesign of our Classics styles and were phasing-outmany styles at a discount.

Ourrevenues are seasonal and, therefore, the results of operations for the threemonths ended October 31, 2006, may not be indicative of the results forthe full fiscal year. Over the previous five years, an average of 27% of ournet sales occurred during the second quarter. Net sales by business unit are asfollows:

| ** **                   | ** ** | **Three Months Ended October 31,**                                                               | ** ** | ** **                                                                                                           | ** ** | **Percent**  | ** ** |
|------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|--------------|------------|
| ** **                   | ** ** | **         2006         ** | ** ** | **         2005         ** | ** ** | **Increase** | ** ** | **Change** | ** ** |
| ** **                   | ** ** | **(in thousands, except percent change)**                                                        | ** ** |
| Corporate                    |       |                                                                                                                 | $          | 14,819                                                                                                               |       |         |       | $ | 13,995 |   |   |   | $ | 824 |   |   |   | 5.9 | % |   |
| Golf                         |       |                                                                                                                 | 7,656      |                                                                                                                 |       |         | 7,322      |   |   |   | 334 |   |   |   | 4.6 |   |   |
| Specialty Retail             |       |                                                                                                                 | 9,893      |                                                                                                                 |       |         | 8,885      |   |   |   | 1,008 |   |   |   | 11.3 |   |   |
| Direct to  Consumer          |       |                                                                                                                 | 2,495      |                                                                                                                 |       |         | 1,149      |   |   |   | 1,346 |   |   |   | 117.1 |   |   |
| International and  Licensing |       |                                                                                                                 | 887        |                                                                                                                 |       |         | 806        |   |   |   | 81 |   |   |   | 10.0 |   |   |
| Other                        |       |                                                                                                                 | 1,531      |                                                                                                                 |       |         | 1,512      |   |   |   | 19 |   |   |   | 1.3 |   |   |
| Total                        |       |                                                                                                                 | $          | 37,281                                                                                                               |       |         |       | $ | 33,669 |   |   |   | $ | 3,612 |   |   |   | 10.7 | % |   |

 

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Net sales in our Corporate business unit increased by$0.8 million to $14.8 million, from $14.0 million in the sameperiod of the prior year. Our upgraded Classics line has been well received,especially the pieces incorporating CB ProTec, our Signature collection, andour women’s companion pieces.

Net sales in our Golf business unit increased by $0.3million to approximately $7.7 million. We have seen a significant shift in ourgolf sales mix to our CB ProTec product line, which accounted for approximatelyone-third of the sales in this business unit for the quarter.

Specialty Retail sales increased by approximately $1.0million from the second quarter of fiscal 2006 to $9.9 million during thesecond quarter of fiscal 2007. Growth in sales to specialty department stores,through increased volume with existing customers, along with increases tocollegiate and pro sports teams and shops, due to strong acceptance of our CBProTec knits, were partially offset by lower sales to big and tall retailers.

Consumer Direct sales increased by approximately $1.3million from the second quarter of fiscal 2006 to $2.5 million during thesecond quarter of fiscal 2007 due to our consumer catalog initiative andenhanced website, both of which were launched in the middle of the secondquarter of fiscal 2006.

International andlicensing sales include sales to international distributors and royalties fromboth international and domestic licensing agreements. Other sales includeliquidation sales and shipping revenue, which are consistent with thecomparable period of the prior fiscal year.

**Gross Profit**

In the second quarter of fiscal 2007, gross margin was47.0% of net sales compared to 44.6% in the same period of the prior year. Theincrease is primarily due to fewer markdowns on discontinued Classics styles.In October 2005, we introduced a significant change to our Classics linethat included many new men’s styles and added new women’s “companion” pieces tothe line. In conjunction with the upgraded line, we discontinued a number ofslow-selling Classics styles and began selling them at discounted pricesthrough normal channels beginning in August 2005.

Additionally, the increased percentage of our salesthrough our higher-margin Direct to Consumer business unit, from 3.4% duringthe second quarter of fiscal 2006 to 6.7% during the second quarter of fiscal2007, have increased our overall company-wide gross margin by approximately 100basis points. This increase was offset during the quarter by higher productcosts for freight. Strong reorders of ourupdated CB Classics styles created shortages in our on-hand product. In orderto meet these customer-driven demands, a higher percentage of our product wasimported via air versus ocean freight. The additional freight costs reduced ourproduct margins by approximately 70 basis points. Based on our continued goalsfor earlier product delivery dates, we believe that these higher air freightcosts are likely to continue to impact our margin through at least the thirdquarter of the current fiscal year.

Our gross profit may notbe comparable to other companies, since some companies include all costsrelated to their distribution network in the cost of sales. We haveconsistently included inbound freight, import charges and embroidery costs incost of sales, and included other costs of distribution in selling, general andadministrative expenses.

**Selling, Generaland Administrative Expense**

Selling, general and administrative expenses totaled$13.8 million in the second quarter of fiscal 2007 compared to $13.6 million infiscal 2006, an increase of $0.2 million. The increase is primarily due tohigher sales commissions and other incentive-based pay as a result of ourincreased sales and profitability. Partially offsetting this increase was a $0.2million insurance recovery during the quarter ended October 31, 2006, and,in the prior year, we incurred approximately $0.3 million in costs associatedwith corporate governance and other shareholder matters.

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Costs incurred for our direct to consumer catalog andwebsite initiatives increased $0.8 million over the same period in the prioryear. Our first catalog was mailed in September 2005. These additionalcosts were offset by lower costs of marketing in other areas of our business,primarily related to timing of expenses related to our catalog mailing to ourwholesale customers. In the prior year, we mailed one annual catalog to ourCorporate customers. In fiscal 2007, we had a smaller mailing in October andplan to have another catalog mailing in six months.

We adopted SFAS No. 123(R) duringthe first quarter of fiscal 2007. Adoption of this new accounting standard didnot have a significant impact on our results of operations for the quarter and,based on the number of unvested stock options currently outstanding, is notanticipated to have a material impact on future results. However, the impact ofSFAS No. 123(R) on future periods will depend upon the types andquantities of share-based payments made in the future.

**Restructuring andRestatement Expenses**

During the second quarter of fiscal 2007, we receivednotice from one of our subtenants that they would extend their lease termthrough the remainder of our lease term. In previous estimates, we had providedreserves for the event that this space would need to be subleased to adifferent tenant and various costs of re-leasing would be incurred. Based onthe extension by the existing subtenant, we removed the cost of re-leasing thespace from the estimated restructure liability. This estimated cost reductionof $401,000 was recorded as restructuring expenses. Currently, all of theexcess capacity is being subleased and we believe it will continue to besubleased through the end of our lease term in 2011.

The prior year reduction in restructuring expenses relatesto reductions to estimates for other costs initially recorded as restructuringexpenses in 2002.

During the second quarterof the prior fiscal year, the Company’s lawsuit against Genesis InsuranceCompany was concluded and we reversed approximately $0.2 million that remainedaccrued for estimated costs associated with the lawsuit and other matterssurrounding the restatement.

**Income Taxes**

We recorded approximately$1.3 million of income tax expense in the second quarter of fiscal 2007compared to $0.5 million in the second quarter of fiscal 2006. The effectiverates for income taxes in the second quarters of fiscal 2007 and 2006 were33.9% and 35.3%, respectively. The overall ongoing effective rate is estimatedto be closer to 35%. The tax provision for the second quarter of fiscal 2007includes a benefit of approximately $50,000, for adjustments resulting fromdifferences between our 2005 income tax return and amounts previously recordedin our financial statements.

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**Six Months Ended October 31,2006 Compared With Six Months Ended October 31, 2005**

**Net Sales**

Duringthe first six months of fiscal 2007, net sales increased approximately$8.8 million, or 13.9%, to $72.3 million. This increase is attributable tobroad acceptance of our upgraded Classics line, our CB ProTec line ofproducts, and a strong Spring 2006 fashionrelease. Additionally, we have had continued growth in our Direct to Consumerbusiness unit as a result of our catalog and website initiative. Net sales bybusiness unit are as follows:

| ** **                   | ** ** | **Six Months Ended October 31,**                                                     | ** ** | ** **                                                                                               | ** ** | **Percent**  | ** ** |
|------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|--------------|------------|
| ** **                   | ** ** | **        2006        ** | ** ** | **        2005        ** | ** ** | **Increase** | ** ** | **Change** | ** ** |
| ** **                   | ** ** | **(in thousands, except percent change)**                                            | ** ** |
| Corporate                    |       |                                                                                                     | $          | 30,045                                                                                                   |       |         |       | $ | 27,737 |   |   |   | $ | 2,308 |   |   |   | 8.3 | % |   |
| Golf                         |       |                                                                                                     | 15,633     |                                                                                                     |       |         | 15,213     |   |   |   | 420 |   |   |   | 2.8 |   |   |
| Specialty Retail             |       |                                                                                                     | 16,825     |                                                                                                     |       |         | 14,363     |   |   |   | 2,462 |   |   |   | 17.1 |   |   |
| Direct to  Consumer          |       |                                                                                                     | 4,436      |                                                                                                     |       |         | 1,638      |   |   |   | 2,798 |   |   |   | 170.8 |   |   |
| International and  Licensing |       |                                                                                                     | 1,694      |                                                                                                     |       |         | 1,554      |   |   |   | 140 |   |   |   | 9.0 |   |   |
| Other                        |       |                                                                                                     | 3,620      |                                                                                                     |       |         | 2,905      |   |   |   | 715 |   |   |   | 24.6 |   |   |
| Total                        |       |                                                                                                     | $          | 72,253                                                                                                   |       |         |       | $ | 63,410 |   |   |   | $ | 8,843 |   |   |   | 13.9 | % |   |

 

Net sales in our Corporate business unit increased by$2.3 million to $30.0 million, from $27.7 million in the sameperiod of the prior year. The increase is attributed to our upgraded Classicsline, which has been well received, especially the pieces incorporating CBProTec, our Signature collection, and our women’s companion pieces.

In the first six months of fiscal 2007, net sales inour Golf business unit increased $0.4 million to $15.6 million, primarilyattributable to strong sales of our CB ProTec product line.

Specialty Retail sales increased approximately $2.5million from the six months ended October 31, 2005, to $16.8 millionduring the six months ended October 31, 2006. This is attributable togrowth in sales to specialty department stores and collegiate and pro sportsteams and shops (“CPS”). The sales growth with specialty department stores wasdue to strong reorders of our Spring fashion release with existing customers aswell as deliveries of our Fall 2006 fashion release. CPS sales increased due tostrong acceptance of our CB ProTec knits and Spring fashion release, whichcreated additional reorders.

Consumer Direct sales increased approximately $2.8million from the first six months of fiscal 2006 to $4.4 million during the firstsix months of fiscal 2007 due to our consumer catalog initiative and enhancedwebsite, both of which were launched in the middle of the second quarter offiscal 2006.

Other sales includeliquidation sales and shipping revenue. Shipping revenues have increased forthe first six months of fiscal 2007, consistent with our increased productsales.

**Gross Profit**

Gross margin was 46.5% of net sales during the sixmonths ended October 31, 2006, compared to 45.8% for the six months ended October 31,2005. The increase is primarily attributable to fewer markdowns and discountson products as well as an increase in direct to consumer sales, which have ahigher marginal profit percentage. As a percentage of overall company sales,direct to consumer sales increased from 2.6% during the first six months offiscal 2006 to 6.1% during the first six months of fiscal 2007.

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In order to meet demand for some of our products, ahigher percentage was imported via air versus ocean. The additional freightcosts reduced our product margins by approximately 90 basis points. Based onour continued goals for earlier product delivery dates, we believe that thesehigher air freight costs are likely to continue to impact our margin through atleast the third quarter of the current fiscal year.

Our gross profit may notbe comparable to other companies, since some companies include all costsrelated to their distribution network in the cost of sales. We haveconsistently included inbound freight, import charges and embroidery costs incost of sales, and included other costs of distribution in selling, general andadministrative expenses.

**Selling, Generaland Administrative Expense**

Selling, general and administrative expenses totaled$26.5 million for the first six months of fiscal 2007 compared to $24.5 millionin fiscal 2006, an increase of $2.0 million. As a percentage of sales, SG&Adecreased 2.1%. Approximately $1.9 million of the increase was due to costsincurred for our direct to consumer catalog and website initiatives, which werelaunched during the second quarter of fiscal 2006. Commissions and otherincentive-based pay increased approximately $1.2 million as a result of ourincreased sales and profitability. As a percentage of sales, commissions areconsistent with the prior year. Partially offsetting these increases werereductions in wholesale marketing expenses and costs associated with corporategovernance and other shareholder matters.

We adopted SFAS No. 123(R) duringthe first quarter of fiscal 2007. Adoption of this new accounting standard didnot have a significant impact on our results of operations for the six monthsended October 31, 2006, and, based on the number of unvested stock optionscurrently outstanding, is not anticipated to have a material impact on futureresults. However, the impact of SFAS No. 123(R) on future periodswill depend upon the types and quantities of share-based payments made in thefuture.

**Restructuring andRestatement Expenses**

During the second quarter of fiscal 2007, we receivednotice from one of our subtenants that they would extend their lease termthrough the remainder of our lease term. In previous estimates, we had providedreserves for the event that this space would need to be subleased to adifferent tenant and various costs of re-leasing would be incurred. Based onthe extension by the existing subtenant, we removed the cost of re-leasing thespace from the estimated restructure liability. This estimated cost reductionof $401,000 was recorded as restructuring expenses. Currently, all of theexcess capacity is being subleased and we believe it will continue to besubleased through the end of our lease term in 2011.

The prior year reduction in restructuring expensesrelates to reductions to estimates for other costs initially recorded asrestructuring expenses in 2002.

During the first quarterof fiscal 2006, the Company lost its appeal in its lawsuit against GenesisInsurance Company. Although we did not recover the damages we were seeking, wewere not required to repay the premium for the policy in question and thereforereversed approximately $0.5 million that had been recorded for this outstandingliability, plus some additional accruals for legal and other estimated costs.

**Income Taxes**

We recorded approximately$2.4 million of income tax expense during the six months ended October 31,2006, compared to $1.6 million during the six months ended October 31,2005. The effective rates for income taxes were 34.4% and 35.2% for the firstsix months of fiscal years 2007 and 2006, respectively. The lower rate in thecurrent year is due to adjustments based on the Company’s 2005 tax return. Theoverall ongoing effective rate is estimated to be closer to 35%.

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**Liquidity andCapital Resources**

At October 31, 2006, our cash and short-terminvestments totaled $25.2 million compared to $20.1 million at April 30,2006, and $40.3 million at October 31, 2005. The decrease during thetwelve months ended October 31, 2006, is primarily attributable to $23.7million of capital returned to shareholders in the form of cash dividends andstock repurchases.

During the first six months of fiscal 2007, ourcapital requirements were funded by cash provided by operating activities. Netcash provided by operating activities in the first six months of fiscal 2007was $7.6 million compared to $7.0 million for the first six months offiscal 2006. The increase in net cash provided by operating activities wasprimarily a result of our improved operating results.

Net cash used in investing activities was $6.7 millionin the first six months of fiscal 2007 compared to $4.1 million provided byinvesting activities in the first six months of fiscal 2006. Our capitalexpenditures are consistent with the prior year. In the current year, we haveinvested more of our cash in short-term investments. In fiscal 2006, we wereconverting our short-term investments to cash equivalents in anticipation ofthe special dividend that was paid in the third quarter of fiscal 2006.

Net cash used in financing activities was $1.2 millionin the first six months of fiscal 2007, which primarily consisted of thequarterly $0.07 per share dividend payment. The decrease from the $5.9 millionused in the first six months of fiscal 2006 was due to fewer repurchases of ourcommon stock, as we have utilized the Board’s entire repurchase authorization.

During the quarter, we paid a cash dividend of $0.07per share. On December 6, 2006, the Board declared a quarterly dividend of$0.07 per share, payable on January 5, 2007, to shareholders of record on December 21,2006. We expect to pay similar dividends in future quarters. However, we maydecide to discontinue or modify these quarterly dividend payments at any timeif we determine that other uses of our capital may be in the best interests ofour shareholders.

We have a loan agreement with Wells Fargo HSBC TradeBank, N.A., through March 10, 2008, for a $35 million line of credit,secured by all assets of the Company. Borrowings under this agreement, if any,would bear interest at prime minus 1.0%. Covenants contained in this loanagreement include maintaining a debt to equity ratio of not more than 1.0, aquick ratio of not less than 1.0, and net income of $5.0 million per year.Additionally, capital expenditures are limited to $4.0 million per year. As of October 31,2006, we are in compliance with all of these covenants and there are noborrowings under this line of credit other than open letters of credit withsuppliers totaling approximately $0.8 million.

Our primary ongoingcapital requirements are to finance working capital and the continued growthand operations of our business, including investments in fixed assets. Webelieve the remaining cash on hand and cash generated from operations, as wellas our ability to borrow under bank lines of credit, will be sufficient to meetour cash requirements. We also have available alternative sources of financing,including factoring our accounts receivable and financing our capitalexpenditures with leases. Although these methods of financing are currentlyavailable to us, we do not anticipate using alternative sources of financingduring fiscal 2007. However, our capital needs will depend on many factors,including our growth rate, the need to finance increased production andinventory levels, the success of our various sales and marketing programs, andvarious other factors.

**Off- Balance SheetArrangements**

As of October 31, 2006,pursuant to its loan agreement with Wells Fargo HSBC Trade Bank, N.A., we hadopen letters of credit with suppliers totaling approximately $0.8 million.

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**Recently IssuedAccounting Standards**

In June 2006, theFASB issued its Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109,*(“FIN 48”), which clarifies the accounting for uncertainty in income taxesrecognized in financial statements*.*Theinterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 is effective for us at thebeginning of our next fiscal year, May 1, 2007. We are currently assessingthe potential impact that the adoption of FIN 48 will have on our financialstatements.

**Critical AccountingPolicies and Use of Estimates**

Our critical accountingpolicies are described in Item 7 in our filing on Form 10-K with theSecurities and Exchange Commission for the year ended April 30, 2006. Ourdiscussion and analysis of financial condition and results of operations arebased upon our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of the financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues,expenses, and related disclosures of contingent assets and liabilities. On an ongoingbasis, we evaluate the estimates that we have made. These estimates are basedupon our historical experience and on various other assumptions that we believeto be reasonable under the circumstances. Our actual results may differ fromthese estimates under different assumptions or conditions. We believe thefollowing critical accounting estimates affect our more significant judgmentsand estimates used in the preparation of our consolidated financial statements.

**Reserve for ProductReturns**

We maintain a reserve forprobable future product returns. We analyze the rates and timing of historicalreturns and trends in changes to the rates and timing, if any, when evaluatingthe adequacy of this reserve. The rate of returns in our wholesale segment hasremained consistent over the past several years. The direct to consumerbusiness unit has a higher rate of returns than the wholesale segment. However,as of October 31, 2006, this higher rate does not have a material impacton our reserve for future product returns. The estimate for product returns isincluded in our calculation of net sales. If we were to experience an increasein our product returns rates or changes in their timing or in our sales mix,additional reserves may be required.

**Allowances for DoubtfulAccounts**

We maintain an allowancefor accounts that are doubtful to be ultimately collected, resulting from theinability of our customers to make required payments. These losses are includedin bad debt expense. We determine the adequacy of this allowance by regularlyreviewing our accounts receivable aging and evaluating individual customerreceivables, considering customers’ financial condition, credit history andcurrent economic conditions. If the financial condition of our customers wereto deteriorate, resulting in an impairment of their ability to make payments,additional allowances may be required.

**Reserve for SalesAllowances**

We maintain a reserve forfuture sales allowances related to current period sales. We analyze the rate ofhistorical sales allowances and changes in sales programs when evaluating theadequacy of this reserve. The estimate for sales allowances is included in ourcalculation of net sales. If we were to grant additional sales allowances,additional reserves may be required.

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**Accrued Rebates**

We offer certain salesincentives, including cash rebates, which are recorded as reductions to netsales, and free product, which are recorded as cost of goods sold. Some ofthese incentives are earned upon customers achieving certain annual salesmilestones or sales growth. Although these incentives are due to customers onlyif and when the sales targets are achieved, we accrue a liability for theestimated incentives to be earned ratably over all of a customer’s projectedsales on a customer by customer basis. If actual customer sales differ from theprojected sales used to accrue the liabilities, net sales or gross margins maybe materially impacted.

**Inventories**

Inventories, which arepredominantly finished goods, are valued at the lower of cost or market. Weperform a detailed analysis of inventory on a quarterly basis to identifyunsold out-of-season or discontinued merchandise. We estimate the netrealizable value of this merchandise based upon disposition plans andhistorical experience and a valuation allowance is established to reduce thecarrying amount to its estimated net realizable value. Additionally, we reservea portion of our seasonal lines as it is received based on our historical rateof product that ultimately is sold below cost due to incomplete color andsizing runs. If actual market conditions are less favorable than those weproject or if our color and size runs of our fashion lines are not consistentwith customer purchases, additional writedowns may be required.

**RestructuringLiability**

The remainingrestructuring liability pertains to estimated losses pursuant to long-termleases due to excess warehouse capacity. Currently, all of the excess capacityis being subleased under leases that are coterminous with our lease and webelieve it will continue to be subleased through the end of our lease term in2011 based on our assessment of the creditworthiness of our subtenants. Weperiodically evaluate and, if necessary, adjust this assessment based oncurrently available information. Should the creditworthiness of our subtenantsdeteriorate or if the timing and rental rates for our subleases differ from ourestimates for other reasons, this liability would need to be adjusted.

**Valuation Allowancein Deferred Income Tax Assets**

We periodically review theneed for a valuation allowance to reduce our deferred income tax asset balancesto their net realizable value. To the extent we determine an allowance isrequired, we determine the adequacy of this allowance by regularly reviewingour historical taxable income and forecasts of future taxable income over theperiods in which the temporary differences are anticipated to reverse. If ouractual results are lower than our forecasted future results, allowances may berequired.

**Item 3.**                        Quantitativeand Qualitative Disclosures about Market Risk

We are subject to certain market risks, includinginterest rate risks associated with financial instruments included in cash andcash equivalents and short-term investments and foreign currency exchange raterisk on some of our receivables due from foreign licensees. None of thesefinancial instruments are entered into for trading purposes and we do not usederivative financial instruments to manage interest rate risk, to reduce ourexposure to changes in foreign currency exchange rates, or for speculativetrading purposes.

We invest in interest-bearing U.S. Government andhigh-quality corporate fixed-rate debt instruments and hold these instrumentsuntil maturity. Changes in interest rates may affect the fair market value ofthese instruments. Investments with maturities beyond ninety days as of thepurchase date are classified as short-term investments. The average time tomaturity as of the purchase date for short-term investments 

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held as of October 31,2006, was 134 days and the weighted average interest rate was 5.1%. Due to theshort-term nature of these instruments and our investment policies andprocedures, we do not expect interest rate fluctuations to have a materialadverse effect on our results of operations.

Some of our licensingagreements compute the royalties due to us in the functional currency of thecountry in which the licensee operates. From the date of licensee sales untilthe date on which we are paid, typically within 70 days, the revenues we earnare subject to foreign currency exchange rate risk. Additionally, we do havesome remaining assets and liabilities from our closed European operations thatare denominated in Euros. Neither of these items is material to ourconsolidated financial statements as of October 31, 2006.

**Item 4.**                        Controlsand Procedures

**Disclosure Controlsand Procedures**

As of October 31,2006, with the participation of our principal executive and financial officers,we evaluated the effectiveness of the design and operation of our disclosurecontrols and procedures as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities and Exchange Act of 1934, as amended (“Exchange Act”). Based onthat evaluation, our principal executive and financial officers concluded that,as of the end of the period covered by this report, our disclosure controls andprocedures were effective in providing reasonable assurance that materialinformation required to be disclosed in our reports filed under the ExchangeAct is recorded, processed, summarized, and reported within the time periodsspecified in SEC rules and forms.

**Changes in InternalControl over Financial Reporting**

During the second quarter ended October 31, 2006,there have been no changes in our internal control over financial reporting asdefined in Rules 13a-15(f) or 15d-15(f) of theExchange Act that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

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**PART II—OTHERINFORMATION**

**Item1.**                        LegalProceedings

The Company is party toroutine litigation incidental to its business. Management believes the ultimateresolution of these routine matters will not have a material adverse effect onthe Company’s financial condition and results of operations.

**Item1A.**                Risk Factors

There have been nomaterial changes from the risk factors previously disclosed in Item 1A of Part Iof the Company’s annual report on Form 10-K for the year ended April 30,2006.

**Item2.**                        UnregisteredSales of Equity Securities and Use of Proceeds

None

**Item3.**                        DefaultsUpon Senior Securities

None

**Item4.**                        Submissionof Matters to a Vote of Security Holders

Our Annual Meeting ofShareholders was held on October 19, 2006. Out of the Company’s 10,572,578shares of Common Stock entitled to vote at the meeting, 10,107,885 wererepresented, either in person or by proxy.

Proposal Number 1—Election of directors, to serveuntil the 2007 Annual Meeting of Shareholders:

| **Nominee**                        | ** ** | ** ** | ** ** | **For** | ** ** | **Withheld** | ** ** |
|------------------------------------|------------|------------|------------|---------|------------|--------------|------------|
| Ernest R. Johnson                  |       | 10,079,390 |       | 28,495  |       |
| Henry L. (Skip)  Kotkins, Jr. |       | 10,074,707 |       | 33,178  |       |
| Larry C. Mounger                   |       | 9,885,580  |       | 222,305 |       |
| Thomas F.  O’Riordan          |       | 10,065,978 |       | 41,907  |       |
| Douglas G.  Southern               |       | 10,070,987 |       | 36,898  |       |
| Whitney R. Tilson                  |       | 10,074,707 |       | 33,178  |       |
| James C. Towne                     |       | 10,061,129 |       | 46,756  |       |

 

Proposal Number 2—Approval of 2006 EquityIncentive Plan:

| For              |   | 7,713,431 |   |
|------------------|--------|-----------|--------|
| Against          |   | 593,363   |   |
| Abstain          |   | 5,326     |   |
| Broker Non-votes |   | 1,795,765 |   |

 

ProposalNumber 3—Ratification of Ernst & Young LLP as independent auditors forfiscal 2007:

| For              |   | 9,907,966 |   |
|------------------|--------|-----------|--------|
| Against          |   | 196,182   |   |
| Abstain          |   | 3,737     |   |
| Broker Non-votes |   | 0         |   |

 

**Item 5.**                        OtherInformation

None

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**Item 6.**                        Exhibits

a)     Exhibits

| Exhibit  Number | ** ** | ** **                                                                                          | ** ** | **Description** |
|-----------------|------------|-----------------------------------------------------------------------------------------------------|------------|-----------------|
| 3.1             |       | Bylaws of  Cutter & Buck Inc., as amended and restated October 19, 2006(1)            |
| 10.1            |       | 2006 Equity Incentive  Plan(1)                                                                      |
| 31.1            |       | Rule 13a-14(a)/15d-14(a) Certifications  of the Company’s Chief Executive Officer(2) |
| 31.2            |       | Rule 13a-14(a)/15d-14(a) Certifications  of the Company’s Chief Financial Officer(2) |
| 32.1            |       | Section 1350  Certifications of the Company’s Chief Executive Officer(2)                  |
| 32.2            |       | Section 1350 Certifications of the Company’s  Chief Financial Officer(2)                  |

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(1)          incorporated byreference to the exhibit of the same number filed with the Registrant’s Form 8-Kon October 25, 2006

(2)          a signed original ofthis written statement has been provided to the Company and will be retained bythe Company and furnished to the SEC or its staff upon request

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                               | CUTTER & BUCK INC. |
|-------------------------------|-----------------------------|
|                          | (Registrant)                |
| Dated: December 8,  2006 | By                          | /s/  MICHAEL GATS |
|                          |                        | Michael Gats |
|                          |                        | *Chief  Financial Officer and Vice President* |
|                          |                        | *(Principal  Accounting and Financial Officer)* |

 

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