**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 January 31, 2007**

**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 400

**Seattle, WA 98103**

(Address of principalexecutive offices)

**(206) 622-4191**

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months and (2) hasbeen subject to such filing requirements for the past 90 days.  x Yes  o No

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated 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 mark whether the registrant is ashell company (as defined in rule 12b-2 of the Exchange Act).  o Yes  x No

Thenumber of shares of Common Stock of the registrant outstanding as of February 28,2007 was 10,590,290.

 

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**CUTTER &BUCK INC.Quarterly Report on Form 10-QFor the Quarter Ended January 31, 2007**

**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 |       |     | 11         |   |   |
| Item 3.                                |       | Quantitative and Qualitative Disclosures about Market  Risk                                 |       |     | 19         |   |   |
| Item  4.                               |       | Controls  and Procedures                                                                    |       |     | 19         |   |   |
| PART II—OTHER INFORMATION    |       |                                                                                        |       |     |       |
| Item 1.                                |       | Legal Proceedings                                                                           |       |     | 20         |   |   |
| Item 1A.                               |       | Risk Factors                                                                                |       |     | 20         |   |   |
| Item 2.                                |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                |       |     | 20         |   |   |
| Item 3.                                |       | Defaults Upon Senior Securities                                                             |       |     | 20         |   |   |
| Item 4.                                |       | Submission of Matters to a Vote of Security Holders                                         |       |     | 20         |   |   |
| Item 5.                                |       | Other Information                                                                           |       |     | 20         |   |   |
| Item 6.                                |       | Exhibits                                                                                    |       |     | 20         |   |   |
| SIGNATURES                             |       |                                                                                        | 21         |     |       |
|                                        |            |                                                                                             |            |          |            |  |  |  |  |

 

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**PART 1—FINANCIALINFORMATION**

**Item 1.**                        FinancialStatements

**CUTTER& BUCK INC.**

**CondensedConsolidated Balance Sheets**

| ** **                                                                                                                                                                                         | ** ** | **January 31, 2007**                               | ** ** | **April 30, 2006** | ** ** | **January 31, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                                                                                         | ** ** | **(unaudited)**                                              | ** ** | ** **                   | ** ** | **(unaudited)**                | ** ** |
| ** **                                                                                                                                                                                         | ** ** | **(in thousands, except share amounts)** | ** ** |
| **Assets**                                                                                                                                                                                         |       |                                                         |       |                         |       |                           |       |   |   |   |   |   |   |
| Current assets:                                                                                                                                                                                    |       |                                                         |       |                         |       |                           |       |   |   |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                          |       |                                                         | $          | 7,516                        |       |                           |       | $ | 7,808 |   |   |   | $ | 6,006 |   |   |
| Short-term investments                                                                                                                                                                             |       |                                                         | 16,071     |                         |       |                           | 12,314     |   |   |   | 15,622 |   |   |
| Accounts receivable, net of allowances for doubtful  accounts, returns, and allowances of $1,357 at January 31, 2007, $1,732  at April 30, 2006 and $1,533 at January 31, 2006      |       |                                                         | 16,218     |                         |       |                           | 22,993     |   |   |   | 18,577 |   |   |
| Inventories, net                                                                                                                                                                                   |       |                                                         | 31,267     |                         |       |                           | 25,659     |   |   |   | 27,755 |   |   |
| Income tax receivable                                                                                                                                                                              |       |                                                         | 911        |                         |       |                           | 88         |   |   |   | 809 |   |   |
| Deferred income taxes                                                                                                                                                                              |       |                                                         | 2,072      |                         |       |                           | 1,993      |   |   |   | 2,040 |   |   |
| Prepaid expenses and other current assets                                                                                                                                                          |       |                                                         | 2,995      |                         |       |                           | 2,701      |   |   |   | 3,206 |   |   |
| Total current assets                                                                                                                                                                               |       |                                                         | 77,050     |                         |       |                           | 73,556     |   |   |   | 74,015 |   |   |
| Furniture and equipment, net                                                                                                                                                                       |       |                                                         | 6,428      |                         |       |                           | 6,428      |   |   |   | 6,345 |   |   |
| Deferred income taxes                                                                                                                                                                              |       |                                                         | 316        |                         |       |                           | 264        |   |   |   | 252 |   |   |
| Other assets                                                                                                                                                                                       |       |                                                         | 1,270      |                         |       |                           | 1,445      |   |   |   | 1,505 |   |   |
| Total assets                                                                                                                                                                                       |       |                                                         | $          | 85,064                       |       |                           |       | $ | 81,693 |   |   |   | $  | 82,117 |   |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                                                                     |       |                                                         |       |                         |       |                           |       |   |   |   |   |   |   |
| Current liabilities:                                                                                                                                                                               |       |                                                         |       |                         |       |                           |       |   |   |   |   |   |   |
| Accounts payable                                                                                                                                                                                   |       |                                                         | $          | 5,495                        |       |                           |       | $ | 5,767 |   |   |   | $ | 5,347 |   |   |
| Accrued liabilities                                                                                                                                                                                |       |                                                         | 6,857      |                         |       |                           | 5,934      |   |   |   | 6,303 |   |   |
| Total current liabilities                                                                                                                                                                          |       |                                                         | 12,352     |                         |       |                           | 11,701     |   |   |   | 11,650 |   |   |
| Restructuring  liability, net of current portion                                                                                                                                                   |       |                                                         | 986        |                         |       |                           | 1,575      |   |   |   | 1,655 |   |   |
| Deferred rent                                                                                                                                                                                      |       |                                                         | 1,448      |                         |       |                           | 1,431      |   |   |   | 1,414 |   |   |
| Total liabilities                                                                                                                                                                                  |       |                                                         | 14,786     |                         |       |                           | 14,707     |   |   |   | 14,719 |   |   |
| 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; 10,587,647 issued and outstanding at January 31, 2007,  10,476,069 at April 30, 2006, and 10,690,316 at January 31, 2006 |       |                                                         | 58,645     |                         |       |                           | 58,041     |   |   |   | 60,770 |   |   |
| Deferred compensation                                                                                                                                                                              |       |                                                         | —     |                         |       |                           | (61        | ) |   |   | (242 | ) |   |
| Retained earnings                                                                                                                                                                                  |       |                                                         | 11,633     |                         |       |                           | 9,006      |   |   |   | 6,870 |   |   |
| Total shareholders’ equity                                                                                                                                                                    |       |                                                         | 70,278     |                         |       |                           | 66,986     |   |   |   | 67,398 |   |   |
| Total liabilities  and shareholders’ equity                                                                                                                                                   |       |                                                         | $          | 85,064                       |       |                           |       | $ | 81,693 |   |   |   | $ | 82,117 |   |   |

 

See accompanying notes.

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

| ** **                                                     | ** ** | **Three Months Ended January 31,**                                    | ** ** | **Nine Months Ended January 31,** | ** ** |
|----------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                     | ** ** | **2007**                                                                                  | ** ** | **2006**                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                     | ** ** | **(in thousands, except share and per share amounts)** | ** ** |
| Net sales                                                      |       | $                                                                                         | 30,291     |                                                  | $          | 31,247 |   | $ | 102,544 |   | $ | 94,657 |   |
| Cost of sales                                                  |       | 16,781                                                                                    |       | 17,472                                                |       | 55,421 |   | 51,819 |   |
| Gross profit                                                   |       | 13,510                                                                                    |       | 13,775                                                |       | 47,123 |   | 42,838 |   |
| Operating  expenses:                                           |       |                                                                                      |       |                                                  |       |   |   |   |   |
| Selling, general and administrative                            |       | 12,700                                                                                    |       | 12,636                                                |       | 39,151 |   | 37,148 |   |
| Depreciation                                                   |       | 692                                                                                       |       | 773                                                   |       | 2,012 |   | 2,189 |   |
| Restructuring expenses                                         |       | —                                                                                    |       | (35                                                   | )          | (401 | ) | (230 | ) |
| Restatement expenses                                           |       | —                                                                                    |       | —                                                |       | — |   | (648 | ) |
| Total operating expenses                                       |       | 13,392                                                                                    |       | 13,374                                                |       | 40,762 |   | 38,459 |   |
| Operating income                                               |       | 118                                                                                       |       | 401                                                   |       | 6,361 |   | 4,379 |   |
| Interest income  (expense)                                     |       |                                                                                      |       |                                                  |       |   |   |   |   |
| Interest income                                                |       | 301                                                                                       |       | 312                                                   |       | 936 |   | 965 |   |
| Interest expense                                               |       | —                                                                                    |       | —                                                |       | — |   | (9 | ) |
| Net interest income                                            |       | 301                                                                                       |       | 312                                                   |       | 936 |   | 956 |   |
| Pre-tax income                                                 |       | 419                                                                                       |       | 713                                                   |       | 7,297 |   | 5,335 |   |
| Income tax  expense                                            |       | 89                                                                                        |       | 232                                                   |       | 2,456 |   | 1,861 |   |
| Net income                                                     |       | $                                                                                         | 330        |                                                  | $          | 481 |   | $ | 4,841 |   | $ | 3,474 |   |
| Basic earnings per share                                       |       | $                                                                                         | 0.03       |                                                  | $          | 0.04 |   | $ | 0.46 |   | $ | 0.32 |   |
| Diluted earnings  per share                                    |       | $                                                                                         | 0.03       |                                                  | $          | 0.04 |   | $ | 0.45 |   | $ | 0.31 |   |
| Shares used in  computation of:                                |       |                                                                                      |       |                                                  |       |   |   |   |   |
| Basic earnings per share                                       |       | 10,526,124                                                                                |       | 10,851,639                                            |       | 10,509,688 |   | 11,020,316 |   |
| Diluted earnings per share                                     |       | 10,728,116                                                                                |       | 11,143,454                                            |       | 10,709,899 |   | 11,277,677 |   |
| Cash dividends  declared per share of common stock outstanding |       | $                                                                                         | 0.07       |                                                  | $          | 0.07 |   | $ | 0.21 |   | $ | 1.55 |   |

 

See accompanying notes.

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

| ** **                                                                         | ** ** | **Three Months Ended  January 31,** | ** ** | **Nine Months Ended  January 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                           | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                         | ** ** | **(in thousands)**                            | ** ** |
| **Operating activities:**                                                          | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                                  | 330        |                                              | $          | 481 |   | $ | 4,841 |   | $ | 3,474 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                               |       |                                              |       |   |   |   |   |
| Depreciation                                                                       |       | 688                                                |       | 787                                               |       | 2,054 |   | 2,230 |   |
| Noncash restructuring expenses                                                     |       | —                                             |       | (35                                               | )          | (401 | ) | (230 | ) |
| Deferred income taxes                                                              |       | (93                                                | )          | 172                                               |       | (131 | ) | 285 |   |
| Stock-based compensation                                                           |       | 91                                                 |       | 25                                                |       | 183 |   | 72 |   |
| Tax benefit from exercises of stock options                                        |       | 13                                                 |       | 5                                                 |       | 68 |   | 194 |   |
| Loss on fixed asset disposal                                                       |       | (1                                                 | )          | 23                                                |       | 3 |   | 63 |   |
| Changes in assets  and liabilities:                                                |       |                                               |       |                                              |       |   |   |   |   |
| Accounts receivable, net                                                           |       | 3,385                                              |       | 934                                               |       | 6,775 |   | 3,237 |   |
| Inventories, net                                                                   |       | (1,732                                             | )          | (2,771                                            | )          | (5,608 | ) | (2,357 | ) |
| Income tax receivable                                                              |       | (808                                               | )          | (273                                              | )          | (823 | ) | 110 |   |
| Prepaid expenses and other assets                                                  |       | (279                                               | )          | (420                                              | )          | (134 | ) | (780 | ) |
| Accounts payable, accrued liabilities and other  liabilities                       |       | (1,875                                             | )          | 1,337                                             |       | 480 |   | 979 |   |
| Net cash (used  in) provided by operating activities                               |       | (281                                               | )          | 265                                               |       | 7,307 |   | 7,277 |   |
| **Investing  activities:**                                                         | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchases of furniture  and equipment                                              |       | (678                                               | )          | (480                                              | )          | (2,057 | ) | (1,904 | ) |
| Purchases of  short-term investments                                               |       | (10,142                                            | )          | (11,695                                           | )          | (34,986 | ) | (48,898 | ) |
| Maturities of  short-term investments                                              |       | 11,688                                             |       | 19,333                                            |       | 31,244 |   | 62,107 |   |
| Net cash provided  by (used in) investing activities                               |       | 868                                                |       | 7,158                                             |       | (5,799 | ) | 11,305 |   |
| **Financing  activities:**                                                         | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Payment of  dividends                                                              |       | (740                                               | )          | (15,416                                           | )          | (2,214 | ) | (16,975 | ) |
| Issuance of  common stock                                                          |       | 115                                                |       | 97                                                |       | 491 |   | 690 |   |
| Repurchases of  common stock                                                       |       | —                                             |       | (3,128                                            | )          | (153 | ) | (7,932 | ) |
| Excess tax  benefit from exercises of stock options                                |       | 9                                                  |       | —                                            |       | 76 |   | — |   |
| Principal  payments under capital lease obligations                                |       | —                                             |       | (19                                               | )          | — |   | (111 | ) |
| Net cash used in  financing activities                                             |       | (616                                               | )          | (18,466                                           | )          | (1,800 | ) | (24,328 | ) |
| Net decrease in  cash and cash equivalents                                         |       | (29                                                | )          | (11,043                                           | )          | (292 | ) | (5,746 | ) |
| Cash and cash  equivalents, beginning of period                                    |       | 7,545                                              |       | 17,049                                            |       | 7,808 |   | 11,752 |   |
| Cash and cash  equivalents, end of period                                          |       | $                                                  | 7,516      |                                              | $          | 6,006 |   | $ | 7,516 |   | $ | 6,006 |   |

 

See accompanying notes.

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

**Note 1. Basis of 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 not includeall 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 nine months ended January 31, 2007, 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. RecentAccounting Pronouncement**

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 theexcess, if any, of the market price of the Company’s common stock at the dateof grant over the stock 

4

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option exercise price.Under the Company’s plans, stock options are generally granted at fair marketvalue 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 monthsand nine months ended January 31, 2007, the Company recognized $91,000 and$183,000, respectively, for stock compensation expense, which is included inselling, general and administrative expense. Of this total, $63,000 and$81,000, respectively, of compensation expense resulting from stock options wasrecognized pursuant to SFAS No. 123(R) that would not have beenrecognized under the accounting proscribed by APB No. 25. This did nothave a material impact on our basic or diluted earnings per share. As of January 31,2007, there is $411,000 of total unrecognized compensation cost related tononvested share-based compensation arrangements. This amount is expected to berecognized over a weighted average period of 1.6 years.

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Ifcompensation costs for stock-based compensation had been recognized based onthe fair value method during the three months and nine months ended January 31,2006, the pro forma amounts of the Company’s net income and net earnings pershare would have been as follows:

| ** **                                                                                                                        | ** ** | **Three Months Ended  January 31,  2006**              | ** ** | **Nine Months Ended  January 31,  2006** | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|
| ** **                                                                                                                        | ** ** | **(in thousands, except per share amounts)** | ** ** | ** **                                              |
| Net income as  reported                                                                                                           |       |                                                                  | $          | 481                                                     |       |       |   | $ | 3,474 | ** ** |   | ** ** |
| Add employee  stock-based compensation expense, net of tax, as reported                                                           |       |                                                                  | 17         |                                                    |       |       | 47 | ** ** |   | ** ** |
| Deduct total  stock-based employee compensation expense, net of tax, determined under the  fair value based method for all awards |       |                                                                  | (107       | )                                                       |       |       | (249 | ) |   | ** ** |
| Pro forma net  income                                                                                                             |       |                                                                  | $          | 391                                                     |       |       |   | $ | 3,272 | ** ** |   | ** ** |
| Earnings per  share:                                                                                                              |       |                                                                  |       |                                                    |       |       |   | ** ** |   | ** ** |
| Basic—as reported                                                                                                            |       |                                                                  | $          | 0.04                                                    |       |       |   | $ | 0.32 | ** ** |   | ** ** |
| Basic—pro forma                                                                                                              |       |                                                                  | $          | 0.04                                                    |       |       |   | $ | 0.30 |   |   |   |
| Diluted—as reported                                                                                                          |       |                                                                  | $          | 0.04                                                    |       |       |   | $ | 0.31 |   |   |   |
| Diluted—pro forma                                                                                                            |       |                                                                  | $          | 0.04                                                    |       |       |   | $ | 0.29 |   |   |   |

 

Prior to adoption of SFAS No. 123(R),all tax benefits resulting from the exercise of stock options were consideredoperating cash flows. SFAS No. 123(R) requires that the benefits oftax deductions in excess of the compensation cost recognized for those awards(the “excess tax benefit”) be classified as financing cash flows on aprospective basis. As a result, $9,000 and $76,000 of tax benefits from theexercise of stock options is shown as a financing cash flow in the statement ofcash flows for the three and nine months ended January 31, 2007,respectively.

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 stock awardof 6,000 shares that was granted to the Company’s President in January 2006is not subject to any performance conditions. A summary of the Company’snonvested stock awards as of and for the nine months ended January 31,2007, is as follows:

| ** **                          | ** ** | **Awards Subject to  Performance Conditions** | ** ** | **Awards Not Subject to  Performance Conditions** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                          | ** ** | **Shares**                                                   | ** ** | **Weighted-  Average Grant-  Date Fair  Value**             | ** ** | **Shares** | ** ** | **Weighted-  Average Grant-  Date Fair  Value** | ** ** |
| Nonvested at  May 1, 2006      |       | —                                                       |       |                                                                  |       |   |   | 6,000 |   |   | $ | 11.32 |   |   |
| Granted                             |       | 40,487                                                       |       |                                                                  | $          | 10.96 |   |   | 8,094 |   |   | 10.96 |   |   |
| Vested                              |       | —                                                       |       |                                                                  | —     |   |   | (2,000 | ) |   | 11.32 |   |   |
| Forfeited                           |       | (3,809                                                       | )          |                                                                  | 10.96      |   |   | (762 | ) |   | 10.96 |   |   |
| Nonvested at  January 31, 2007 |       | 36,678                                                       |       |                                                                  | $          | 10.96 |   |   | 11,332 |   |   | $ | 11.09 |   |   |

 

6

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No options were granted during the three months ended January 31,2007. The fair values for options granted during fiscal 2007 and 2006 wereestimated at the date of grant using the Black-Scholes option pricing model.The weighted-average assumptions used in the pricing model and the resultingfair values are as follows:

| ** **               | ** ** | **Three Months  Ended  January 31,** | ** ** | **Nine Months  Ended  January 31,** | ** ** |
|--------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **               | ** ** | **2007**                                       | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Risk-free  interest rate |       |                                           | —     |                                          |       | 4.4% |   | 4.8% |   | 4.4% |   |
| Volatility               |       |                                           | —     |                                          |       | 48% |   | 45% |   | 57% |   |
| Dividend yield           |       |                                           | —     |                                          |       | 2.5% |   | 2.5% |   | 2.5% |   |
| Expected life            |       |                                           | —     |                                          |       | 4 years |   | 5 years |   | 5 years |   |
| Grant-date fair value    |       |                                           | —     |                                          |       | $ | 4.35 |   | $ | 4.09 |   | $ | 5.81 |   |
|                          |            |                                                |            |                                               |            |  |  |  |  |  |  |  |  |  |

 

A summary of stock option activity as of and for thenine months ended January 31, 2007, is as follows:

| ** **                                       | ** ** | ** ** | ** ** | **Weighted Average** | ** ** | ** **          | ** ** |
|--------------------------------------------------|------------|------------|------------|---------------------------|------------|---------------------|------------|
| **Options**                                      | ** ** | ** ** | ** ** | **Shares**                | ** ** | **Exercise  Price** | ** ** | **Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
| ** **                                       | ** ** | ** ** | ** ** | ** **                | ** ** | ** **          | ** ** | **(in 000’s)** | ** ** |
| Outstanding,  May 1, 2006                   |       | 652,994    |       |                      | $          | 7.27                |       |   |   |   |   |   |   |   |   |   |
| Granted                                          |       | 45,000     |       |                      | 10.99      |                |       |   |   |   |   |   |   |   |   |
| Exercised                                        |       | (76,985    | )          |                      | 5.98       |                |       |   |   |   |   |   |   |   |   |
| Forfeited                                        |       | (1,200     | )          |                      | 12.25      |                |       |   |   |   |   |   |   |   |   |
| Expired                                          |       | (33,022    | )          |                      | 12.46      |                |       |   |   |   |   |   |   |   |   |
| Outstanding,  Janaury 31, 2007                   |       | 586,787    |       |                      | 7.42       |                |       |   | 4.8 |   |   |   | $ | 3,299 |   |   |
| Vested at Janaury  31, 2007, or expected to vest |       | 586,787    |       |                      | $          | 7.42                |       |   |   | 4.8 |   |   |   | $ | 3,299 |   |   |
| Exercisable at  January 31, 2007            |       | 547,722    |       |                      | $          | 7.18                |       |   |   | 4.5 |   |   |   | $ | 3,215 |   |   |
|                                                  |            |            |            |                           |            |                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 4. Short-Term Investments**

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 January 31, 2007, April 30, 2006, and January 31,2006, amortized cost includes amounts classified as accrued interest of $0,$51,000, and $106,000, respectively (in thousands):

| **January 31, 2007** | ** ** | ** ** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|--------------------------------|------------|------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| U.S. corporate  debt           |       |       | $          | 13,962              |       |                         |       | $                             | 1          |                       |       |   | $ | (5 | ) |   |   | $ | 13,958 |   |   |
| U.S. government  agency debt   |       |       | 2,109      |                |       |                         | —     |                          |       |                       | (1         | ) |   |   | 2,108 |   |   |
|                           |       |       | $          | 16,071              |       |                         |       | $                             | 1          |                       |       |   | $ | (6 | ) |   |   | $ | 16,066 |   |   |

 

| **April 30, 2006** | ** ** | ** ** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  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 |   |   |

 

| **January 31, 2006** | ** ** | ** ** | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|--------------------------------|------------|------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------|------------|
| U.S. corporate  debt           |       |       | $          | 14,733              |       |                         |       | $                             | —     |                       |       |   | $ | (16 | ) |   |   | $ | 14,717 |   |   |
| U.S. government  agency debt   |       |       | 995        |                |       |                         | —     |                          |       |                       | (2         | ) |   |   | 993 |   |   |
|                           |       |       | $          | 15,728              |       |                         |       | $                             | —     |                       |       |   | $ | (18 | ) |   |   | $ | 15,710 |   |   |

 

7

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**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 January 31, 2007, the Company wasin compliance with all terms and covenants of this agreement. On January 31,2007, letters of credit outstanding against this line of credit totaledapproximately $0.2 million and there were no working capital advancesoutstanding.

**Note 6. Shareholders’ Equity**

Restricted stock grantstotaling up to 48,581 shares were awarded during the nine months ended January 31,2007. During the same period, the Company repurchased 12,585 shares under itsStock Repurchase Program and sold 3,168 shares under its employee stockpurchase plan (“ESPP”) and 76,985 shares pursuant to the exercise of stockoptions. The aggregate intrinsic value of the shares issued under the ESPP was$6,000. The aggregate intrinsic value of the options exercised was $414,000.

On March 7, 2007, theBoard of Directors declared a quarterly dividend of $0.07 per share payable on April 9,2007, to shareholders of record on March 23, 2007.

**Note 7. Restructuring Liability**

During fiscal year 2002,the Company adopted a restructuring plan. This restructuring plan has beencompleted, except for losses that were recorded for excess warehouse capacityunder lease through 2011. The Company has a liability remaining for itscontractual lease payments due for the excess warehouse capacity, net ofestimated sublease payments.

During the second quarter of fiscal 2007, managementreceived notice from one of its subtenants that it would extend its lease termthrough 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 restructuring 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 nine months ended January 31, 2007, activity in the accrued liabilityaccount consisted of the following:

| ** **                 | ** ** | **Balance at  April 30,  2006** | ** ** | **Subsequent  Accruals,  Net** | ** ** | **Subsequent  (Payments)  Receipts** | ** ** | **Balance at  January 31,  2007** | ** ** | **Due  Within  1 Year** | ** ** | **Due  After  1 Year** | ** ** |
|----------------------------|------------|-------------------------------------------|------------|--------------------------------|------------|--------------------------------------|------------|---------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                 | ** ** | **(in thousands)**                   | ** ** |
| Lease obligations          |       |                                      | $          | 7,922                          |       |                                 |       | $                                           | —     |                         |       |                        | $          | (1,064 | ) |   |   | $ | 6,858 |   |   | $ | 1,419 |   | $ | 5,439 |   |
| Estimated sublease  income |       |                                      | (6,027     | )                              |       |                                 | (401       | )                                           |       |                         | 824        |                        |       |   | (5,604 | ) |   | (1,151 | ) | (4,453 | ) |
|                       |       |                                      | $          | 1,895                          |       |                                 |       | $                                           | (401       | )                            |       |                        | $          | (240 | ) |   |   | $ | 1,254 |   |   | $ | 268 |   | $ | 986 |   |

 

**Note 8. Income Taxes**

The Company recorded$2,456,000 of income tax expense in the first nine months of fiscal year 2007compared to $1,861,000 of income tax expense in the first nine months of fiscalyear 2006. The effective rates for income taxes were 33.7% and 34.9% for thefirst nine months of fiscal years 2007 and 2006, respectively. The lower ratein the current year is due to adjustments based on the Company’s 2006 taxreturns.

8

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**Note 9. Earnings Per Share**

The denominator for basicearnings per share is the weighted average number of common shares outstandingduring the period. The denominator for diluted earnings per share includes theweighted average number of both common shares and dilutive equivalentsoutstanding during the period. Common share equivalents included in thecomputation represent unvested stock awards for which all performanceconditions, if any, have been satisfied and the net shares that would be issuedupon assumed exercise of outstanding stock options, computed using the treasurystock method.

For the three months endedJanuary 31, 2007 and 2006, 166,000 and 176,000 outstanding stock options,respectively, were excluded from the calculation of diluted earnings per sharebecause the exercise prices exceeded the average market value of the commonshares, thereby making them antidilutive. For the three months ended January 31,2007, 38,395 weighted average stock awards outstanding were excluded from thecalculation of diluted earnings per share because their vesting is contingentupon achievement of certain performance conditions that, as of January 31,2007, had not been met.

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

| ** **                                            | ** ** | **Three Months Ended  January 31,**                                        | ** ** | **Nine Months Ended  January 31,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                            | ** ** | **2007**                                                                                  | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                            | ** ** | **(in thousands, except share and per share amounts)** | ** ** |
| Numerator for basic and diluted earnings per share:   |       |                                                                                      |       |                                              |       |   |   |   |   |
| Net income                                            |       | $                                                                                         | 330        |                                              | $          | 481 |   | $ | 4,841 |   | $ | 3,474 |   |
| Denominator for basic earnings per share:             |       |                                                                                      |       |                                              |       |   |   |   |   |
| Weighted average common  shares                       |       | 10,526,124                                                                                |       | 10,851,639                                        |       | 10,509,688 |   | 11,020,316 |   |
| Dilutive effect of  employee stock options and awards |       | 201,992                                                                                   |       | 291,815                                           |       | 200,211 |   | 257,361 |   |
| Denominator for diluted  earnings per share           |       | 10,728,116                                                                                |       | 11,143,454                                        |       | 10,709,899 |   | 11,277,677 |   |
| Basic earnings per share                              |       | $                                                                                         | 0.03       |                                              | $          | 0.04 |   | $ | 0.46 |   | $ | 0.32 |   |
| Diluted earnings per share                            |       | $                                                                                         | 0.03       |                                              | $          | 0.04 |   | $ | 0.45 |   | $ | 0.31 |   |

 

**Note 10. Segment Information**

Cutter & Buckessentially has one product category, upscale sportswear and outerwear underthe Cutter & Buck brand name. We reach our end consumers primarily viawholesale channels in the United States and structure our business to managethe sell-through of our product via various distribution channels that webelieve will maximize our overall company-wide gross profit. These distributionchannels are managed by business units. For each business unit, we track netsales and gross profit. The measurement of net sales used by management at thebusiness unit level includes shipping revenues and does not includeintersegment revenues or reserves recorded for bad debts, returns, orallowances. The measurement of gross profit at the business unit level does notinclude inventory writedowns or reserves or variances from our standard costallocations for freight and embroidery.

All of our business unitssell primarily the same product, however some of our styles or sizes are notavailable in all sales channels, for example we do not carry big and tall sizesin our consumer direct catalog and some licensees may design certain productsor styles that are unique to their territories. Our inventory is designed,purchased, handled, and distributed in the same manner for all business unitsby central overhead departments. The costs of these departments are notallocated to the business units. We do not allocate any assets to businessunits.

Corporate business unitsales are primarily to promotional product distributors. Golf business unitsales are to pro shops or at tournaments. Specialty Retail business unit salesare to clothing retailers, department stores, and college and professional teamapparel stores. Sales through these wholesale 

9

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businessunits are aggregated and reported as our wholesale segment as they have similareconomic characteristics.

To a lesser extent, wesell directly to consumers via a catalog and ecommerce website through ourconsumer direct business unit. We also have agreements with severaldistributors and licensees that sell our products internationally as well asselected non-apparel and non-competing products both internationally anddomestically through our International and Licensing business unit. Net salesand gross profit for these two business units, plus reserve adjustments,standard cost variances, and writedowns and liquidations of inventory arereported in the All Other category for segment reporting, as their combinedresults are not material to the presentation of our segment information.

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

| ** **   | ** ** | **Three Months Ended January 31,** | ** ** | **Nine Months Ended January 31,** | ** ** |
|--------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **   | ** ** | **2007**                                               | ** ** | **%**                                                 | ** ** | **2006** | ** ** | **%** | ** ** | **2007** | ** ** | **%** | ** ** | **2006** | ** ** | **%** | ** ** |
| ** **   | ** ** | **(in thousands except percentages)**   | ** ** |
| Wholesale    |       | $                                                      | 23,668     |                                                  | 78.1       |   | $ | 26,324 |   | 84.2 |   | $ | 88,228 |   | 86.0 |   | $ | 85,515 |   | 90.3 |   |
| All Other    |       | $                                                      | 6,623      |                                                  | 21.9       |   | $ | 4,923 |   | 15.8 |   | 14,316 |   | 14.0 |   | 9,142 |   | 9.7 |   |
| Net Sales    |       | $                                                      | 30,291     |                                                  |       |   | $ | 31,247 |   |   |   | $ | 102,544 |   |   |   | $ | 94,657 |   |   |   |
| Wholesale    |       | $                                                      | 10,865     |                                                  | 80.4       |   | $ | 11,613 |   | 84.3 |   | $ | 41,192 |   | 87.4 |   | $ | 39,100 |   | 91.3 |   |
| All Other    |       | $                                                      | 2,645      |                                                  | 19.6       |   | $ | 2,162 |   | 15.7 |   | 5,931 |   | 12.6 |   | 3,738 |   | 8.7 |   |
| Gross Profit |       | $                                                      | 13,510     |                                                  |       |   | $ | 13,775 |   |   |   | $ | 47,123 |   |   |   | $ | 42,838 |   |   |   |

 

A reconciliation oftotal segment gross profit to the Company’s consolidated income from continuingoperations before income taxes is as follows:

| ** **                  | ** ** | **Three Months Ended  January 31,** | ** ** | **Nine Months Ended  January 31,** | ** ** |
|-----------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                           | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **(in thousands)**                            | ** ** |
| Total segment gross  profit |       | $                                                  | 13,510     |                                              | $          | 13,775 |   | $ | 47,123 |   | $ | 42,838 |   |
| Operating expenses          |       | (13,392                                            | )          | (13,374                                           | )          | (40,762 | ) | (38,459 | ) |
| Net interest income         |       | 301                                                |       | 312                                               |       | 936 |   | 956 |   |
| Pre-tax income              |       | $                                                  | 419        |                                              | $          | 713 |   | $ | 7,297 |   | $ | 5,335 |   |

 

**Note 11. Litigation**

As disclosed previously, the Company is party to alawsuit filed by a significant customer of the Company. The suit was filed inthe United States District Court for the District of Massachusetts: *Casual Male Retail Group, Inc., and Casual Male RBT, LLC v. Cutter &Buck Inc., Cutter & Buck Direct, LLC, Robert H. Yarbrough, RKC MailLLC, a.k.a. MP4 Limited, d/b/a Mile Post Four, Mile Post Investment, LLC -(Case No. 07-CA-10161)*. It alleges, among otherthings, that Cutter & Buck improperly interfered with Casual Male’srelationships with certain of its employees and that certain Cutter &Buck employees improperly accessed, misappropriated and destroyed Casual Male’sproprietary confidential information. The lawsuit also alleges that a Cutter &Buck employee breached contractual obligations not to compete with Casual Male.The lawsuit seeks a preliminary and/or permanent injunction enjoining Cutter &Buck from using its e-commerce Internet website and consumer catalog. Inaddition, the lawsuit seeks unspecified compensatory damages, punitive damages,reasonable costs and expenses, and such other relief as the Court deems proper.Cutter & Buck denies Casual Male’s allegations and intends tovigorously defend the lawsuit. As no liability is probable or estimable,management has not recorded an accrual with respect to this lawsuit. In lightof Casual Male’s recent actions, including the instigation of this lawsuit,Cutter & Buck believes that the Company’s longstanding relationshipwith Casual Male and its Rochester Big & Tall operation is unlikely tocontinue in the future.

The Company is party to other routine litigationincidental to its business. Management believes the ultimate resolution ofthese routine matters will not have a material adverse effect on the Company’sfinancial condition and results of operations.

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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 forward lookingstatements. Those factors include, but are not limited to, the following: therisk factors set forth in Part I, Item 1A of our annual report on Form 10-Kfor the fiscal year ended April 30, 2006; our ability to control costs andexpenses, including costs associated with regulatory compliance; the potential outcome of pending and future auditsby various taxing jurisdictions; the potential outcome of lawsuits and pendinglitigation; our ability to maintain our relationships with our customersand our sponsored professional golfers; relations with and performance ofsuppliers; our ability to carry outsuccessful designs and effectively advertise and communicate with themarketplace and to penetrate our chosen distribution channels; our ability toappropriately price our products; the number of golf rounds played, which maybe impacted by severe weather-related disasters and the weather in general;competition; risks related to the timely performance of third parties, such asshipping companies; identifying, attracting, and retaining employees, includingkey management personnel; political and trade relations; the overall level ofconsumer spending on apparel; and global economic and political conditions,including impacts of increasing oil prices, disease and terrorism, andresponses thereto, including war. Finally, there may be other factors notmentioned above or included elsewhere in this report that may cause actualresults to differ materially from any forward-looking statements. You shouldnot place undue reliance on any forward-looking statement. We assume noobligation to update any forward-looking statement as a result of newinformation, future events, or developments, except as required by securitieslaws.*

*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 agreements withseveral distributors and licensees that sell our products internationally aswell as selected non-apparel and non-competing products both internationallyand domestically.

11

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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  January 31,** | ** ** | **Nine Months  Ended  January 31,** | ** ** |
|-------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                       | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net sales                           |       | 100.0                                          | %          | 100.0                                         | %          | 100.0 | % | 100.0 | % |
| Cost of sales                       |       | 55.4                                           |       | 55.9                                          |       | 54.0 |   | 54.7 |   |
| Gross profit                        |       | 44.6                                           |       | 44.1                                          |       | 46.0 |   | 45.3 |   |
| Operating  expenses:                |       |                                           |       |                                          |       |   |   |   |   |
| Selling, general and administrative |       | 41.9                                           |       | 40.4                                          |       | 38.2 |   | 39.2 |   |
| Depreciation                        |       | 2.3                                            |       | 2.5                                           |       | 2.0 |   | 2.3 |   |
| Restructuring expenses              |       | —                                         |       | (0.1                                          | )          | (0.4 | ) | (0.2 | ) |
| Restatement expenses                |       | —                                         |       | —                                        |       | — |   | (0.7 | ) |
| Total operating expenses            |       | 44.2                                           |       | 42.8                                          |       | 39.8 |   | 40.6 |   |
| Operating income                    |       | 0.4                                            |       | 1.3                                           |       | 6.2 |   | 4.7 |   |
| Net interest income                 |       | 1.0                                            |       | 1.0                                           |       | 0.9 |   | 1.0 |   |
| Pre-tax income                      |       | 1.4                                            |       | 2.3                                           |       | 7.1 |   | 5.7 |   |
| Income tax  expense                 |       | 0.3                                            |       | 0.7                                           |       | 2.4 |   | 2.0 |   |
| Net income                          |       | 1.1                                            | %          | 1.6                                           | %          | 4.7 | % | 3.7 | % |

 

**Three Months Ended January 31,2007 Compared With Three Months Ended January 31, 2006**

**Net Sales**

During the third quarter of fiscal 2007, net salesdecreased approximately $1.0 million, or 3.1%, to $30.3 million from$31.2 million in the same period of the prior year. This decreaseprimarily relates to the significant quantity of discontinued Classics stylesthat we sold at discounted prices during the third quarter of fiscal 2006through our Corporate and Golf business units. In addition, our SpecialtyRetail sales were hurt by a decline in sales to our largest Big & Tallcustomer, a decline that we believe will continue in future periods. Sales inour Direct to Consumer business unit, consisting of our e-commerce website andconsumer catalog, continued to grow, helping to offset some of these declines.

Ourrevenues are seasonal and, therefore, the results of operations for the threemonths ended January 31, 2007, may not be indicative of the results forthe full fiscal year. The third quarter is historically our lowest salesquarter of the year due to seasonality. Net sales by business unit are asfollows:

| ** **                   | ** ** | **Three Months Ended  January 31,**            | ** ** | **Increase** | ** ** | **Percent**    | ** ** |
|------------------------------|------------|---------------------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **                   | ** ** | **2007**                                                      | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                   | ** ** | **(in thousands, except percent change)** | ** ** |
| Corporate                    |       | $                                                             | 12,929     |         | $          | 14,548         |       |   | $ | (1,619 | ) |   |   | (11.1 | )% |   |
| Golf                         |       | 4,800                                                         |       | 5,008        |       |           | (208       | ) |   |   | (4.2 | ) |   |
| Specialty Retail             |       | 5,163                                                         |       | 5,859        |       |           | (696       | ) |   |   | (11.9 | ) |   |
| Direct to  Consumer          |       | 3,515                                                         |       | 2,405        |       |           | 1,110      |   |   |   | 46.2 |   |   |
| International and  Licensing |       | 1,041                                                         |       | 754          |       |           | 287        |   |   |   | 38.1 |   |   |
| Other                        |       | 2,843                                                         |       | 2,673        |       |           | 170        |   |   |   | 6.4 |   |   |
| Total                        |       | $                                                             | 30,291     |         | $          | 31,247         |       |   | $ | (956 | ) |   |   | (3.1 | )% |   |

 

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Net sales in our Corporate sales channel decreased by$1.6 million, to $12.9 million, from $14.5 million in the sameperiod of the prior year. The decrease was primarily due to fewer stylesavailable for sale at a discount in the current year. In the prior year, wewent through a fairly significant enhancement of our Classics styles. In orderto transition to these new styles, we began selling the discontinued styles ata discount in the second quarter of fiscal 2006 and into the third quarter offiscal 2006.

In the third quarter of fiscal 2007, net sales in ourGolf business unit decreased by $0.2 million, to $4.8 million from$5.0 million in the same period of the prior year. Last year’s thirdquarter growth in this business unit was primarily due to sales of discontinuedstyles. Absent those sales, Golf net sales during our fiscal third quarter havebeen essentially flat over the past two years.

Net sales in our Specialty Retail business unitdecreased approximately $0.7 million, to $5.2 million from$5.9 million in the same period of the prior year, primarily as a resultof a decline in sales to Big & Tall customers and other specialtyretailers. We did see positive results in sales to Super Bowl concessionairesand e-tailers. We believe our sales of big and tall products, a significantcomponent of the Specialty Retail business unit, will continue to decline infuture periods.

Direct to Consumer sales increased approximately $1.1million to $3.5 million from $2.4 million in the same period of theprior year due to strong holiday sales generated by the continued growth of ourconsumer catalog business, which was launched during the second quarter offiscal 2006. The increase in Direct to Consumer sales is not a result ofreplacing lost sales through the Big and Tall sales channel; big and tall sizesare not carried in our direct to consumer catalog and comprise less than 4% ofsales in the Direct to Consumer business unit.

International Licensing and Distribution revenueincreased $0.3 million to $1.0 million for the three months ended January 31,2007. This increase is a result of strong sales of licensed Cutter &Buck branded corporate products and sales to our South African and Mexicandistributors.

Other sales includeliquidation sales and shipping revenue.

**Gross Profit**

In the third quarter of fiscal 2007, gross margin was44.6% of net sales compared to 44.1% in the same period of the prior year. Theincrease is primarily due to the fewer sales of discontinued Classics atmarked-down prices and the higher percentage of our sales via the Direct toConsumer business unit, which generate a higher margin. These increases werepartially offset by inventory write-downs.

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 in thethird quarter of fiscal 2007 were consistent with the third quarter of fiscal2006, totaling $12.7 million in the current fiscal quarter compared to $12.6million in fiscal 2006.

We adopted SFAS No. 123(R) during the firstquarter of fiscal 2007. Adoption of this new accounting standard did not have asignificant impact on our results of operations for the quarter and, based onthe number of unvested stock options currently outstanding, is not anticipatedto have a material impact on future results. However, the impact of SFAS No. 123(R) onfuture periods will depend upon the types and quantities of share-basedpayments made in the future.

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**Income Taxes**

We recorded approximately$0.1 million of income tax expense in the third quarter of fiscal 2007 comparedto $0.2 million in the third quarter of fiscal 2006. The effective rates forincome taxes in the third quarters of fiscal 2007 and 2006 were 21.3% and32.6%, respectively. The effective rate for the third quarter of fiscal 2007 islower than our expected ongoing effectiverate of approximately 35% due to adjustments recorded during the quarter as aresult of book to tax differences noted upon filing of our fiscal 2006 taxreturns.

**Nine Months Ended January 31,2007 Compared With Nine Months Ended January 31, 2006**

**Net Sales**

Duringthe first nine months of fiscal 2007, net sales increased approximately $7.9million, or 8.3%, to $102.5 million. This increase is attributable to broadacceptance of our CB ProTec line of products, our upgraded Classics line, andcontinued growth in our Direct to Consumer business unit as a result of ourcatalog and website initiatives launched during the second quarter of fiscal2006. Net sales by business unit are as follows:

| ** **                   | ** ** | **Nine Months Ended  January 31,**             | ** ** | **Increase** | ** ** | **Percent**    | ** ** |
|------------------------------|------------|---------------------------------------------------------------|------------|--------------|------------|----------------|------------|
| ** **                   | ** ** | **2007**                                                      | ** ** | **2006**     | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| ** **                   | ** ** | **(in thousands, except percent change)** | ** ** |
| Corporate                    |       | $                                                             | 42,974     |         | $          | 42,285         |       |   | $ | 689 |   |   |   | 1.6 | % |   |
| Golf                         |       | 20,433                                                        |       | 20,221       |       |           | 212        |   |   |   | 1.0 |   |   |
| Specialty Retail             |       | 21,988                                                        |       | 20,222       |       |           | 1,766      |   |   |   | 8.7 |   |   |
| Direct to  Consumer          |       | 7,951                                                         |       | 4,043        |       |           | 3,908      |   |   |   | 96.7 |   |   |
| International and  Licensing |       | 2,735                                                         |       | 2,308        |       |           | 427        |   |   |   | 18.5 |   |   |
| Other                        |       | 6,463                                                         |       | 5,578        |       |           | 885        |   |   |   | 15.9 |   |   |
| Total                        |       | $                                                             | 102,544    |         | $          | 94,657         |       |   | $ | 7,887 |   |   |   | 8.3 | % |   |

 

Net sales in our Corporate business unit increased by$0.7 million to $43.0 million during the first nine months of fiscal2007. The increase experienced during the first two quarters attributed to ourupgraded Classics line, especially the pieces incorporating CB ProTec, ourSignature collection, and our women’s companion pieces, were offset by thethird quarter decrease, which resulted from the heavy promotion of discontinuedClassics available in the prior year.

Net sales in our Golf business unit have increased by$0.2 million to $20.4 million during the first nine months of fiscal2007 from $20.2 million in the same period of the prior year. The increaseis primarily attributable to sales of our CB ProTec product line and sales atprofessional golf tournaments.

Year to date, sales in our Specialty Retail saleschannel have increased approximately $1.8 million, to $22.0 million from$20.2 million in the same period of the prior year. This is attributableto growth in sales to specialty department stores and collegiate and pro sportsteams and shops (“CPS”) due to strong reorders of our Spring fashion releaseand strong acceptance of our CB ProTec knits by our CPS customers, as well asstrong sales surrounding the Super Bowl. These increases were partially offsetby a decline in sales to Big & Tall customers. We believe our sales ofbig and tall products, a significant component of the Specialty Retail businessunit, will continue to decline in future periods.

Direct to Consumer sales increased approximately $3.9million from the first nine months of fiscal 2006 to $8.0 million during thefirst nine months of fiscal 2007 due to our consumer catalog initiative andenhanced website, both of which were launched during the second quarter offiscal 2006. This business unit continues to grow and had a strong holidayseason. The increase in Direct to Consumer sales is not a result of replacinglost sales through the Big and Tall sales channel; big and tall sizes are notcarried in our direct 

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to consumer catalog andcomprise less than 4% of sales in the Direct to Consumer business unit. We donot anticipate that the growth experienced during the first nine months offiscal 2007 will continue at such a high rate, because the prior year does not includea full year of comparable catalog sales.

International and Licensing sales increased $0.4million to $2.7 million during the nine months ended January 31, 2007,from $2.3 million during the nine months ended January 31, 2006. Thisincrease is a result of strong sales of licensed Cutter & Buck brandedcorporate products and sales to our South African and Mexican distributors.

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

**Gross Profit**

During the first nine months of fiscal 2007, grossprofit was 46.0% of net sales compared to 45.3% in the same period of the prioryear. 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 4.3% during the first nine months offiscal 2006 to 7.8% during the first nine months of fiscal 2007. The firstconsumer catalog was mailed during the second quarter of fiscal 2006, so theprior year does not include a full nine months of sales generated by thecatalog.

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$39.2 million in the first nine months of fiscal 2007 compared to $37.1 millionin fiscal 2006. As a percentage of sales, SG&A decreased 1.1%.Approximately $1.8 million of the increase was due to costs incurred for ourdirect to consumer catalog and website initiatives, which were launched duringthe second quarter of fiscal 2006. Commissions and other incentive-based payincreased approximately $1.1 million as a result of our increased sales andprofitability. As a percentage of sales, commissions are consistent with theprior year. Partially offsetting these increases were reductions in wholesalemarketing expenses and costs associated with corporate governance and othershareholder 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 nine monthsended January 31, 2007, 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 periods willdepend 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 it would extend its lease term throughthe 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.

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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$2.5 million of income tax expense during the nine months ended January 31,2007, compared to $1.9 million during the nine months ended January 31,2006. The effective rates for income taxes were 33.7% and 34.9% for the firstnine months of fiscal years 2007 and 2006, respectively. The lower rate in thecurrent year is due to adjustments based on the Company’s 2006 tax returns.

**Liquidity andCapital Resources**

At January 31, 2007, our cash and short-terminvestments totaled $23.6 million compared to $20.1 million at April 30,2006, and $21.6 million at January 31, 2006. The increase during the twelvemonths ended January 31, 2007, is primarily attributable to our operatingresults during that period, offset by approximately $5.9 million of capitalreturned to shareholders in the form of dividends and share repurchases.

During the first nine months of fiscal 2007, ourcapital requirements were funded by cash provided by operating activities. Netcash provided by operating activities in the first nine months of fiscal 2007was consistent with the first nine months of fiscal 2006 at $7.3 million.

Net cash used in investing activities was $5.8 millionin the first nine months of fiscal 2007 compared to $11.3 million provided byinvesting activities in the first nine 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, weconverted many of our short-term investments to cash equivalents in order tofund the special dividend that was paid to shareholders in the third quarter offiscal 2006.

Net cash used in financing activities was $1.8 millionin the first nine months of fiscal 2007, which primarily consisted of thequarterly $0.07 per share dividend payment. The decrease from the $24.3 millionused in the first nine months of fiscal 2006 was due to the special dividendpaid to shareholders during fiscal 2006 and fewer repurchases of our commonstock, as we have utilized the Board’s entire repurchase authorization.

On March 7, 2007, the Board of Directors declareda quarterly dividend of $0.07 per share payable on April 9, 2007, toshareholders of record on March 23, 2007. We expect to pay similardividends in future quarters. However, we may decide to discontinue or modifythese quarterly dividend payments at any time if we determine that other usesof our capital may be in the best interests of our 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 January 31,2007, we were in compliance with all of these covenants and there were noborrowings under this line of credit other than open letters of credit withsuppliers totaling approximately $0.2 million.

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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 capital expenditureswith leases. Although these methods of financing are currently available to us,we do not anticipate using alternative sources of financing during fiscal 2007or 2008. However, our capital needs will depend on many factors, including ourgrowth rate, the need to finance increased production and inventory levels, thesuccess of our various sales and marketing programs, and various other factors.

**Off-Balance SheetArrangements**

As of January 31,2007, pursuant to our loan agreement with Wells Fargo HSBC Trade Bank, N.A., wehad open letters of credit with suppliers totaling approximately $0.2 million.

**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 anongoing basis, we evaluate the estimates that we have made. These estimates arebased upon our historical experience and on various other assumptions that webelieve to be reasonable under the circumstances. Our actual results may differfrom these 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 January 31, 2007, 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.

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**Allowances forDoubtful Accounts**

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.

**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 

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taxableincome over the periods in which the temporary differences are anticipated toreverse. If our actual results are lower than our forecasted future results,allowances may be required.

**Item3.**                        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 held as of January 31,2007, was 140 days and the weighted average interest rate was 5.2%. 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 January 31, 2007.

**Item4.**                        Controlsand Procedures

**Disclosure Controlsand Procedures**

As of January 31,2007, 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 third quarter ended January 31, 2007,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

As disclosed previously,the Company is party to a lawsuit filed by a significant customer of theCompany. The suit was filed in the United States District Court for theDistrict of Massachusetts: *Casual Male Retail Group, Inc.,and Casual Male RBT, LLC v. Cutter & Buck Inc., Cutter & BuckDirect, LLC, Robert H. Yarbrough, RKC Mail LLC, a.k.a. MP4 Limited, d/b/a MilePost Four, Mile Post Investment, LLC - (Case No. 07-CA-10161)*.It alleges, among other things, that Cutter & Buck improperlyinterfered with Casual Male’s relationships with certain of its employees andthat certain Cutter & Buck employees improperly accessed,misappropriated and destroyed Casual Male’s proprietary confidentialinformation. The lawsuit also alleges that a Cutter & Buck employeebreached contractual obligations not to compete with Casual Male. The lawsuitseeks a preliminary and/or permanent injunction enjoining Cutter &Buck from using its e-commerce Internet website and consumer catalog. Inaddition, the lawsuit seeks unspecified compensatory damages, punitive damages,reasonable costs and expenses, and such other relief as the Court deems proper.Cutter & Buck denies Casual Male’s allegations and intends tovigorously defend the lawsuit. As no liability is probable or estimable,management has not recorded an accrual with respect to this lawsuit. In lightof Casual Male’s recent actions, including the instigation of this lawsuit,Cutter & Buck believes that the Company’s longstanding relationshipwith Casual Male and its Rochester Big & Tall operation is unlikely tocontinue in the future.

The Company is party toother routine litigation incidental to its business. Management believes theultimate resolution of these routine matters will not have a material adverseeffect on the 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

None.

**Item5.**                        Other Information

None.

**Item6.**                        Exhibits

a)     Exhibits

| Exhibit  Number | ** ** | **Description**                                                                                     |
|-----------------|------------|-----------------------------------------------------------------------------------------------------|
| 31.1            |       | Rule 13a-14(a)/15d-14(a) Certifications  of the Company’s Chief Executive Officer(1) |
| 31.2            |       | Rule 13a-14(a)/15d-14(a) Certifications  of the Company’s Chief Financial Officer(1) |
| 32.1            |       | Section 1350 Certifications of the Company’s  Chief Executive Officer(1)                  |
| 32.2            |       | Section 1350 Certifications of the Company’s  Chief Financial Officer(1)                  |

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(1)          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: March 9, 2007 |   | By                                        |   | /s/  MICHAEL  GATS |
|                      |   |                                      |   | Michael Gats  Chief Financial Officer and Vice President  (Principal Accounting and Financial Officer) |

 

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