**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

**Form 10-K**

| x | ** ** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|---|------------|------------------------------------------------------------------------------------------------------|

 

**Forthe fiscal year ended April 30, 2006**

**or**

| o | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|---|------------|----------------------------------------------------------------------------------------------------------|

 

**Forthe transition period from ___________*** * to __________* *

**CommissionFile No. 0-26608**

**CUTTER &BUCK INC.**

(Exact name of registrantas specified in its charter)

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

 

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

(Address of PrincipalExecutive Offices, Including Zip Code)

**(206) 622-4191**

(Registrant’s TelephoneNumber, Including Area Code)

Securities registered pursuant to Section 12(b) ofthe Act:  None

Securities registered pursuant to Section 12(g) ofthe Act:  Common stock, no par value

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes  x No

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.o Yes  x No

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 check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is alarge, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (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 Act) o Yes   x No

The aggregate market value of common stock held bynon-affiliates of the registrant as of October 31, 2005, was $131,728,000,based on the last reported sale price of the Company’s common stock on that dayas reported by the NASDAQ National Market System.

The number of shares of Common Stock of the registrantoutstanding as of June 20, 2006 was 10,531,535.

**Documentsincorporated by reference:****  **Portionsof the Company’s definitive 2006 Proxy Statement to be filed with theSecurities and Exchange Commission within 120 days of our fiscal year end areincorporated by reference intoPart III hereof.

 

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**CUTTER &BUCK INC.Annual Report on Form 10-KFor the fiscal year ended April 30, 2006**

**INDEX**

|               | ** ** | ** **                                                                                                         | ** ** | **Page** |
|---------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I   |       |                                                                                                               |       |     |   |   |
| Item 1.       |       | Business                                                                                                           |       |     | 1 |   |
| Item 1A.      |       | Risk Factors                                                                                                       |       |     | 6 |   |
| Item 1B.      |       | Unresolved Staff Comments                                                                                          |       |     | 8 |   |
| Item 2.       |       | Properties                                                                                                         |       |     | 8 |   |
| Item 3.       |       | Legal  Proceedings                                                                                                 |       |     | 8 |   |
| Item 4.       |       | Submission of Matters to a Vote of Security Holders                                                                |       |     | 8 |   |
| PART II  |       |                                                                                                               |       |     |   |   |
| Item 5.       |       | Market for Registrant’s Common Equity, Related  Shareholder Matters and Issuer Purchases of Equity Securities |       |     | 9 |   |
| Item 6.       |       | Selected Financial Data                                                                                            |       |     | 11 |   |
| Item 7.       |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                        |       |     | 12 |   |
| Item 7A.      |       | Quantitative and Qualitative Disclosures about Market  Risk                                                        |       |     | 20 |   |
| Item 8.       |       | Financial Statements and Supplementary Data                                                                        |       |     | 20 |   |
| Item 9.       |       | Changes in and Disagreements With Accountants on  Accounting and Financial Disclosure                              |       |     | 21 |   |
| Item 9A.      |       | Controls and Procedures                                                                                            |       |     | 21 |   |
| PART III |       |                                                                                                               |       |     |   |   |
| Item 10.      |       | Directors and Executive Officers of the Registrant                                                                 |       |     | 23 |   |
| Item 11.      |       | Executive Compensation                                                                                             |       |     | 23 |   |
| Item 12.      |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                    |       |     | 23 |   |
| Item 13.      |       | Certain Relationships and Related Transactions                                                                     |       |     | 23 |   |
| Item 14.      |       | Principal Accounting Fees and Services                                                                             |       |     | 23 |   |
| Part IV  |       |                                                                                                               |       |     |   |   |
| Item 15.      |       | Exhibits, Financial Statement Schedules                                                                            |       |     | 24 |   |
| SIGNATURES    |       |                                                                                                               | 46         |     |

 

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**PART I**

**Item 1.**                        Business

**Overview**

Cutter & Buck Inc. (the “Company”), aWashington corporation formed in 1990, is based in Seattle, Washington. TheCompany designs and markets upscale sportswear and outerwear under the Cutter &Buck brand name. Cutter & Buck products feature distinctive,comfortable designs, high quality materials, and rich detailing. In order toreach our target consumer, we sell our products through several wholesaledistribution channels, including golf pro shops and resorts, specialty retailshops, corporate sales via promotional products distributors, college bookstores, and professional sports team shops. In addition, our wholly-ownedsubsidiary, Cutter & Buck Direct LLC, sells directly to consumersthrough catalogs and online at www.cutterbuck.com. We also have agreements withseveral distributors and licensees that sell our products internationally aswell as selected non-apparel and non-competing products both internationallyand domestically.

In March 2006, weannounced the appointment of Ernie Johnson to the position of chief executiveofficer and to the Company’s board of directors and the appointments of KaiaAkre as president, Michael Gats as vice president and chief financial officer,and Jon Runkel as vice president of global sourcing and distribution. Theseannouncements were part of a reorganization resulting from the resignation ofTom Wyatt, the Company’s former chief executive officer.

**Brand and Products**

The Cutter & Buck brand is grounded in thetimeless and classic appeal of the golf lifestyle. Our products are designedfor men and women who embrace the spirit and values of golf and appreciate ourdistinctive styling. Cutter & Buck represents quality,performance, and innovation and reflects our passion for this activelifestyle. We are focused on providing updated traditional products forour consumer’s wardrobe needs, both on and off the course. The foundation of our product line is golf,but we offer other active lifestyle sportswear for business and weekend casualand other casual situations. Our product line includes knit and woven shirts,wind and rain apparel, outerwear, pants, shorts, sweaters, vests, swimwear, andaccessories. During fiscal 2006, 82% and 18% of our sales were men’s andwomen’s apparel, respectively.

Our product offering consists of our core line, CBClassics, as well as two seasonal fashion releases each year, Spring and Fall.CB Classics and fashion releases accounted for approximately 77% and 23%,respectively, of our fiscal 2006 net sales. CB Classics are those styles whichare typically in demand for multiple seasons. The Spring and Fall seasonalcollections include several “deliveries” that convey a theme through color,styling and fabric.

In fiscal 2006, we made significant improvements toour offerings, including updating the CB Classics line to include coordinated,complementary styles for men and women, which is an important benefit to ourCorporate customer base. We expanded our offering of performance and technical apparelthat provide a variety of moisture and weather management solutions in severalproduct categories and which we market under our “Cutter & Buck CBProTec” label. We also introduced our Signature Collections for men and women,featuring premium double mercerized cotton and tonal embroidery treatments.

Cutter & Buck CB ProTec is a line of productswhich includes CB DryTec, CB WindTec, CB WeatherTec, CB SunTec, and CBThermaTec. We continue to identify new textile technologies that offerperformance benefits which we believe are relevant and compelling to our coreconsumers. CB DryTec offers moisture management to keep cool and dry in humidconditions, CB WindTec provides advanced light-weight wind protection, CBWeatherTec provides protection from a variety of extreme weather 

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conditions, CB SunTecprovides UV sun protection, and CB ThermaTec has temperature regulatingproperties.

Many of our customersrequest custom embroidery on our apparel, primarily golf course or event logos,collegiate and pro sports emblems, and corporate trademarks. Our distributioncenter has a dedicated embroidery department that offers a full range ofembroidery services, including developing and digitizing logos and matching acustomer’s specific logo and color requests with the appropriate garments andthread, as well as the actual embroidery. We also provide other value-addedservices that allow our customers to sell our products without furtherprocessing. These services include adding a customer’s hang tag, foldingproducts to specific measurements, wrapping products in gift and event boxes orpacking orders to particular specifications.

**Design**

The hallmarks of Cutter & Buck products arequality craftsmanship, distinctive details, and vibrant color. We tailor our golfproducts to incorporate technical innovation and consideration of the golfer’sswing and motion. The products sold through specialty retail channels areintended as the golfer’s off-the-course wardrobe and offer high-quality wovenand knit shirts for a business casual environment. The corporate productoffering reflects the heritage of the golf line and is colored and designed toappeal to the corporate market as well as accommodate logo applications. Manyof the products offered through collegiate and pro sports channels featurecustomized colors for each unique team.

Our design team develops both seasonal lines and ourannual collection of CB Classics. The design process combines market trendresearch with feedback from buyers, consumers, and sales agents. We continuallyintegrate relevant color, textile, and construction trends into our productofferings. Many of our products feature unique and proprietary textiles as wellas seasonal color and style themes.

In fiscal 2006, due toprocess improvements, we achieved greater efficiency and have shortened ourdevelopment timeline.

**Production andDistribution**

We contract with manufacturers who produce ourgarments in accordance with our quality standards. Like most of our competitors,we do not own or operate any manufacturing facilities. We use a combination ofagents, sourcing companies, and factory-direct relationships to source ourproducts. We contract to purchase our goods in United States dollars. Mostproducts bound to our domestic customers are first shipped to our distributioncenter in Renton, Washington, prior to shipment to our customers.

To reinforce our dedication to social responsibilityand global citizenship, we have adopted SA8000 as our Social AccountabilityPlatform. SA8000 addresses all widely accepted labor rights and provides afully operational global and independent certification system. During fiscal2006, approximately 60% of the dollar value of our product came from factoriesthat meet the stringent SA8000 standards.

Although we place a high-value on long term workingrelationships with our factory partners, we do not have long-term contractswith them and only place orders for specific quantities of product. Duringfiscal 2006, we used 54 factories in 13 countries, primarily Thailand andIndia, in which 48% and 16%, respectively, of our total 2006 productionoccurred. 79% of our production occurs in Asian countries and 36% of ourproduction comes from two factories in Thailand.

Pursuant to agreementsnegotiated under the framework established by the World Trade Organization (“WTO”),the United States and other WTO member countries were required, with fewexceptions, to remove quotas on goods from WTO member countries effective January 1,2005. The removal of these quotas allows us to source our products without theneed for our factories to purchase 

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andobtain quotas. We do not anticipate that the recent reimplementation of quotasin certain categories for China until the end of 2008 will have a materialimpact on our business.

**Sales and Marketing**

We sell our products through various wholesale anddirect to consumer distribution channels. Our distribution model allows us todeliver product to our end consumers via outlets consistent with theirlifestyle and shopping preferences. We manage these channels via businessunits, which are responsible for managing the customer relationships andselling our products. Our business units are Golf, Corporate, Specialty Retail(including Big & Tall and select department stores and collegiate andpro team shops), International and Licensing, and Direct to Consumer. We havean experienced sales force dedicated to each sales channel and positionedstrategically throughout the U.S. to work in close proximity with customers.During fiscal 2006, we launched a direct to consumer catalog in order to offerour end consumer a wider assortment of Cutter & Buck products.Congruently, we enhanced the ecommerce capabilities of our website, www.cutterbuck.com.Although our business is primarily dedicated to our wholesale channels, ourdirect to consumer efforts are growing and we expect this will increase ourbrand awareness and thus positively impact sell-through in our wholesalechannels. We operate our direct to consumer channel through our wholly-ownedsubsidiary, Cutter & Buck Direct LLC.

For more information about our reportable segments,see Note 14 to our consolidated Financial Statements filed under Part IV,Item 15(a)(1) of this report.

The apparel industry has long product lead times;orders for spring product are typically taken from July to December andorders for fall product are taken from January through June. With theexception of our Corporate business unit, our wholesale business primarilyconsists of pre-booked orders. However, we see this trending more toward “at-once”orders in all channels as customers tend to purchase later into the seasonand/or fill-in inventory during the season with at-once product orders.

Our backlog, whichconsists of open, unfilled orders, was approximately $16.3 million as of April 30,2006, compared to approximately $19.4 million as of April 30, 2005. Orderstypically ship within nine months of the order date. Approximately 94% oforders are ultimately fulfilled. The small unfulfilled portion is due tovarious reasons common to the apparel industry, including occasional sold-outinventory positions, credit issues, and other customer-related issues.

**Corporate**

Our Corporate business unit accounted for 44% of netsales during fiscal 2006. This business unit sells primarily to promotionalproducts distributors (“PPD”) who then sell to corporations or events. Cutter &Buck provides a quality consumer brand to the corporate market that isrecognized and valued by end customers. We are the leading premium brandedapparel supplier to this industry. Corporate customers primarily order CBClassics. Many of the garments sold to corporate customers are embroidered withan organization’s logo. We embroider 18% of these items at our own distributioncenter, but typically the PPD will have the product embroidered with theirlocal provider. This is a standard practice in this industry and not reflectiveof our embroidery capabilities, cost, or fulfillment.

Corporate orders tend to be “at-once,” therefore westock adequate quantities of core product to fulfill the demand for corporateorders.

Marketing for thisbusiness unit includes catalog and web-based initiatives as well as customizedmarketing tools to support the promotional needs of our Corporate customers. Webelieve many of our Corporate end consumers are golfers and therefore we areable to leverage our golf-lifestyle brand position and the product selectionthat has evolved from our Golf business unit.

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**Golf**

During fiscal 2006, Golf sales accounted for 24% ofour total net sales. The majority of these sales were to golf course pro shopsand individual tournaments. Most Golf customers have their event or club logoembroidered on the apparel they order. During fiscal 2006, we enhanced 69% ofthe items sold to these customers with embroidery.

Our numerous golf-related partnerships andaffiliations increase brand awareness. These key partnerships include the PGAof America, the United States Golf Association, and the Executive Women’s GolfAssociation. Our key sponsorships include The Golf Channel cable televisionnetwork, LPGA Golf Clinics, the Duramed FUTURES Golf Tour Inc., andprofessional tour players including LPGA hall-of-fame inductee, AnnikaSorenstam.

In fiscal 2006, we announced that we will continue ourlongtime partnership with Annika Sorenstam, the No. 1 ranked golfer on theLPGA tour since 2001. Under the agreement, Annika will continue to wear andendorse Cutter & Buck apparel, including her signature AnnikaCollection, at all her professional golf events and media appearances through2011. We also announced a sponsorship agreement with PGA tour player RyanPalmer to wear Cutter & Buck products while on tour. Additionally, wecontinue to sponsor LPGA professional tour players Pat Hurst, Mhairi McKay, andCharlotta Sorenstam, PGA tour professionals Jeff Gove, Bubba Dickerson, andBill Glasson, and Champions tour professional Dave Stockton.

We renewed our partnership with *The GolfChannel,* enabling us to continue our status as the Official GolfApparel Supplier of *The Golf Channel*cable television network through 2006. We also provide apparel to the ESPN golfbroadcasting team. In fiscal 2006, we signed a seven-year event merchandisingagreement with The PGA of America, extending a relationship which began in1999. This agreement ensures our products will be available at all PGAChampionships and all Ryder Cup tournaments held in the U.S. for an additionalseven years through 2012.

Our Golf line includes avariety of high-end knit shirts, pants, skirts, shorts, and outerwear andtechnical products from our CB ProTec collection. Men’s Golf customers orderapproximately 59% CB Classic styles, and women’s Golf customers orderapproximately 64% seasonal styles. Our women’s “Annika Collection” is developedin collaboration with Annika Sorenstam to create sporty, comfortable productswith European styling. Annika wears her namesake collection exclusively whileon tour and, at her request, we also provide Annika with product to wear whileoff the golf course.

**Specialty Retail**

Our Specialty Retail business unit accounted for 19%of net sales for fiscal 2006. Specialty Retail customers include over 1,300 men’sand women’s clothing retailers, including select department stores such as VonMaur, Patrick James, Parisian, and Nordstrom, big and tall catalogs and storessuch as Rochester Big & Tall and Casual Male, and collegiate and prosports teams and shops, selling sports team apparel through licenses withcolleges, Major League Baseball, the National Football League, the NationalBasketball Association, the National Hockey League and Minor League Baseball.

Specialty Retail customersorder approximately 45% from our seasonal collections. Our product assortmentfor this business unit is influenced by our golf collection but isdistinctively designed for our consumer off-the-course and includes more wovenand sport shirt options. Our collegiate and pro sports product assortment forthis channel includes special color options for specific teams and CB Classics.Most of our collegiate and pro sports product ships embroidered with theuniversity or team logo. We support this business unit by point-of-sale marketing,consumer promotions and direct marketing.

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**Direct to Consumer**

Our Direct to Consumerbusiness unit expanded in fiscal 2006 to include a consumer catalog and anenhanced ecommerce website at www.cutterbuck.com. In order to manage thisexpansion, we formed a wholly-owned subsidiary, Cutter & Buck DirectLLC. Overall, our Direct to Consumer business unit accounted for 4% of totalnet sales in fiscal 2006. The direct to consumer channel provides anopportunity to showcase our product assortment and increase brand awareness.

**International andLicensing**

Cutter & Buck branded products are soldworldwide via various licensing agreements. In fiscal 2006, our internationallicensing accounted for 2% of net sales. We have transitioned the majority ofour international distributor relationships to licensees and the products theysell are generally identical to products offered in the U.S. with certainunique offerings to select markets. We have renewable contracts withinternational licensees to sell our products in Canada, Europe, Australia, NewZealand, China, Japan, Korea, Philippines, Southeast Asia, the Middle East, andSouth Africa.

Our domestic licensingpartnerships leverage the Cutter & Buck brand by developingcomplimentary and non-competing products through selected manufacturing anddistribution relationships. In April 2006, we signed an agreement withSignature Eyewear to design and distribute Cutter & Buck brandedeyewear in optical and sun styles. We plan to debut the collection at VisionExpo West in the Fall of 2006.

**Trademarks**

CUTTER & BUCK,the Cutter & Buck pennant logo, and the Cutter & Buck tourlogo are all registered trademarks in the United States. CUTTER & BUCKis also registered for use on apparel and other products in over 50 countriesand both the Cutter & Buck pennant and tour logos are similarlyregistered in over 25 countries. We have applied to register the ANNIKA patchand the ANNIKA logo in over 40 countries, including the United States. Wehave applied to register CBUK in the European Union and in the United States.

**Competition**

The sportswear segment of the apparel industry ishighly competitive. We encounter substantial competition in all of ourdistribution channels from other apparel companies. Our two primarydistribution channels, golf pro shops and promotional products distributors,are highly fragmented. We believe that our ability to compete effectively isprimarily dependant upon brand awareness, product differentiation, technicalinnovation, product quality, distribution capabilities, and embroidery andvalue-added services.

We primarily compete inthree market niches: customized apparel for corporations and corporate events,the golf apparel market, and specialty and department store retail. Theseniches are within the much larger markets of corporate gifts and merchandise,golf equipment and merchandise, and independent specialty and upscale fashion.Most of the data relating to these markets is aggregated data; it is difficultto obtain market data that is relevant specifically to sportswear apparel. Overthe last year, we believe the overall corporate market has increased along withoverall corporate spending. According to industry sources, rounds of golfplayed in the United States have declined over the past several years, but haveincreased approximately 9% from the prior year at golf courses in the UnitedStates during the first four months of 2006.

**Information Systems**

During fiscal 2006, wesuccessfully implemented our new enterprise resource planning (“ERP”) systemand upgraded our warehouse management system. Additional system functionalitywill be 

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implementedin future periods to gain additional operational efficiencies. Also duringfiscal 2006, we installed a new catalog order system and a voice-over internetprotocol phone system with call center management software and we launched aproduct design management (“PDM”) project. The installation of new systems andupgrades of existing systems will continue to require investment of employeetime, as well as additional capital investment, over at least the next twoyears. During fiscal 2007, we plan to complete the PDM project and commence asupply-chain management project.

**Employees**

As of April 30, 2006,we had 359 full-time and 21 part-time employees in the United States. Themajority of our sales force are independent agents. None of our employees is amember of a union and we consider our relations with our employees and agentsto be satisfactory.

**AvailableInformation**

Copies of our annualreports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and proxy statements, as well as anyamendments thereto, are available free of charge via our website,www.cutterbuck.com. In addition, as soon as reasonably practicable after theyare filed with the Securities and Exchange Commission, these reports areavailable on the Securities and Exchange Commission website:  www.sec.gov.

**Item 1A.**                RiskFactors

**Brand Integrity**

Because we position theCutter & Buck brand to consistently represent high-quality premium-brandedapparel that is available at select locations, maintaining the integrity of theCutter & Buck brand is essential to our business. We regard our nameand logo as valuable assets, and critical to marketing our products based onour brand image. Leading brands in the apparel industry have historically beensubject to competition from imitators that infringe the trademarks and tradedress of the brand. Although we do not believe we have been materially harmedby infringement of our trademarks or trade dress to date, we have experiencedsome instances of such infringement and have taken actions to protect ourrights. If we are unable to successfully defend the integrity of our brand, ourbusiness may be materially harmed.

**Design**

The success of Cutter &Buck is dependant on our ability to offer styles that please consumer tastesfor color, styles, and fabrics. If we misjudge these tastes, we couldexperience insufficient or excess inventory levels, missed marketopportunities, or higher markdowns.

**InventoryManagement**

Due to long lead times inthe apparel industry that result from the seasonal characteristics of ourbusiness, customer delivery schedules, and the shipping time from factories toour distribution center, which is generally four to six weeks, salesforecasting and inventory planning are of paramount importance. Our ability tocontinue to satisfy our Corporate customers is partially dependant upon ourability to meet their needs on demand. In order to meet the unique needs of allour distribution channels, we generally maintain inventory balances ofapproximately four to five months of sales. If we are unable to accuratelyforecast our sales or plan for appropriate levels of inventories, it may have amaterial adverse impact on our financial condition and results of operations.

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**Third-PartyProduction**

Our products are producedby third parties. We do not own or operate any production facilities. Althoughwe believe we have good relationships with our factory partners, we do not havelong-term contracts with them. Therefore, our competitors may gain productioncapacity that we need for our business or the factories may fail to perform asexpected, which may result in our customers canceling or reducing their orders.Reliance on third-party manufacturers also creates quality control risks. Afailure in our quality control program could result in diminished productquality.

**Overseas Production**

We have not experiencedany material difficulties as a result of foreign political, economic, or socialinstability, however we remain subject to the risks associated with foreignsuppliers, including, without limitation, economic, environmental, political,and health risks, especially if they impacted Thailand and India, where themajority of our production occurs. We may experience delays in shipping fromtime to time, whether due to third-party strikes or otherwise. Delays inshipments and other factors beyond our control could materially harm ourrelationships with our customers, our reputation in the industry, and ourfinancial condition and operating results.

**Distractions of a Governance or Proxy Challenge**

In the past, shareholdershave submitted nominees for our board of directors and it is possible that wemight receive shareholder nominations for our board at our 2006 annual meeting.If we do receive nominations our Corporate Governance Committee determines thatinclusion of those nominees as part of our recommended slate is not in the bestinterest of the Company or our shareholders, the Committee’s fiduciary dutieswould dictate that it oppose the election of those nominees. In thatcircumstance, we could face a proxy contest and management would be required toexpend substantial time and energy, which may divert management’s attentionfrom our operations. We could also incur significant additional costs,including legal and financial advisory fees, that would negatively impact ouroperating results. We could also experience management and employee distractionand may have difficulty attracting and retaining employees as a result of theuncertainty that often accompanies this type of event.

**Key Employees**

Because we position theCutter & Buck brand to represent high-quality, premium-brandedapparel, coupled with superior customer service, we rely on key employees invarious areas of our operations. We also operate on a strict seasonalmerchandise calendar that includes personnel from our design, productdevelopment, production, and sales groups. If we were to experience the loss ofkey employees in the future without orderly succession, our business might beharmed.

**Competition**

Some of our competitorsare significantly larger and more diversified than we are and havesubstantially greater resources available for developing, marketing, sourcing,and selling their products. We cannot provide assurance that we will be able tomaintain or increase our market share in our distribution channels. We may alsoface increased competition from new competitors. As a result of this competition,we may experience lower sales or greater operating costs, which would have anadverse effect on our margins and our results of operations.

**Item 1B.**               UnresolvedStaff Comments

None.

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**Item 2.**                        Properties

We lease our principalexecutive offices, which are located in Seattle, Washington, under a lease thatcovers approximately 49,000 square feet and expires in July 2010. We leaseapproximately 405,000 square feet of space for a distribution center andembroidery production facility in Renton, Washington under a lease that expiresin November 2011. We use approximately 170,500 square feet of the Rentonfacilities. The remainder is subleased in its entirety to three separatetenants. Two tenants occupy 80% of the subleased space under leases that arecoterminous with the Company’s lease. The remaining 20% is subleased through March 2007.Our wholly-owned subsidiary, Cutter & Buck Direct LLC, leasesapproximately 14,500 square feet of office space in Alpharetta, Georgia, undera lease that expires in October 2011, for employees that manage our directto consumer catalog and website operations. We also lease approximately 3,000square feet of space for a showroom in New York City under a lease that expiresin December 2010.

**Item 3.**                        LegalProceedings

The Company is a party toroutine litigation incidental to its business. Management believes the ultimateresolution of these other routine matters will not have a material adverseeffect on the Company’s financial condition or results of operations.

**Item 4.**                        Submissionof Matters to a Vote of Security Holders

No matters were submitted to a vote of shareholdersduring the fourth quarter of fiscal 2006.

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**PART II**

**Item 5.**                        Marketfor Registrant’s Common Equity, Related Stockholder Matters and IssuerPurchases of EquitySecurities

**Market Information**

Ourcommon stock is listed on the NASDAQ National Market under the symbol “CBUK.”The following table sets forth, for the periods indicated, the high and lowclosing prices of the common stock as reported on the NASDAQ National Market.

| **Fiscal 2006** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------|------------|------------|------------|----------|------------|---------|------------|
| Quarter:             |       |       |       |     |       |
| First                |       | $          | 13.50      |     | $          | 11.52   |       |
| Second               |       | $          | 13.86      |     | $          | 11.57   |       |
| Third                |       | $          | 12.49      |     | $          | 10.88   |       |
| Fourth               |       | $          | 12.78      |     | $          | 10.84   |       |

 

| **Fiscal 2005** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------|------------|------------|------------|----------|------------|---------|------------|
| Quarter:             |       |       |       |     |       |
| First                |       | $          | 10.86      |     | $          | 9.15    |       |
| Second               |       | $          | 12.12      |     | $          | 10.80   |       |
| Third                |       | $          | 15.16      |     | $          | 11.91   |       |
| Fourth               |       | $          | 16.10      |     | $          | 12.70   |       |

 

**Holders**

As of June 9, 2006,there were 3,376 holders of our common stock based on the number of registeredand beneficial shareholders.

**Dividends**

During each quarter of the fiscal years ended April 30,2005 and 2006, the Company paid a $0.07 per share dividend, except that duringthe first quarter of fiscal 2005 the quarterly dividend was $0.05 per share.Additionally, during the third quarter of fiscal 2006, the Company paid aspecial dividend of $1.34 per share.

On June 28, 2006, ourboard of directors approved a $.07 per share quarterly dividend payable on July 28,2006, to shareholders of record on July 13, 2006.

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**Securitiesauthorized for issuance under equity compensation plans**

Thefollowing table sets forth our equity compensation plan information:
| Plan category                                              | ** ** | ** ** | ** ** | **Number of securities to  be issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available  for future issuance** | ** ** |
|-----------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by security  holders         |       |       | 606,208    |                                                                                                                                                 |       |                                                                                                             | $          | 7.53                                                                                        |       |   |   | 377,785 |   |   |
| Equity compensation plans not approved by security  holders (A) |       |       | 46,786     |                                                                                                                                                 |       |                                                                                                             | 3.53       |                                                                                        |       |   | — |   |   |
| Total                                                           |       |       | 652,994    |                                                                                                                                                 |       |                                                                                                             | $          | 7.24                                                                                        |       |   |   | 377,785 |   |   |

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(A)       Onboth November 15, 2002, and June 16, 2003, pursuant to the exemptionprovided in Section 4(2) of the Securities Act, the Company grantedoptions to purchase shares of the Company’s common stock to newly hiredexecutives. The options are exercisable at the closing price of the Company’scommon stock on the date of grant, as adjusted for the impact of the specialdividend paid in November 2005. The options are exercisable for a periodof 10 years, subject to earlier termination in the event of a change in theexecutive’s employment with the Company.

**Purchases of equitysecurities by the issuer**

In March 2004,the Company announced a stock repurchase program, allowing for the repurchaseof up to $6.0 million of common stock. On July 5, 2005, the board ofdirectors approved an increase in the stock repurchase program to provide forup to $10.0 million of additional repurchases beyond the $4.2 millionrepurchased through that date, bringing the total repurchase authorizationsince inception of the program to $14.2 million. The following table sets forthour purchases of our common stock for the fiscal quarter ended April 30,2006:
| Period                        | ** ** | ** ** | ** ** | **Total number of  shares purchased** | ** ** | **Average price  paid per share** | ** ** | **Total number of  shares purchased as  part of a publicly  announced plan** | ** ** | **Maximum dollar  value of shares that  may yet be purchased  under the plan** | ** ** |
|-------------------------------|------------|------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| February 02/01/06  - 02/28/06 |       |       | 94,500     |                                                 |       |                                             | $          | 11.51                                                                                                                |       |                                                                                                                        |       | 94,500 |   |   |   | $ | 1,857,000 |   |   |
| March 03/01/06 - 03/31/06     |       |       | 25,600     |                                                 |       |                                             | $          | 12.07                                                                                                                |       |                                                                                                                        |       | 25,600 |   |   |   | $ | 1,549,000 |   |   |
| April 04/01/06 - 04/30/06     |       |       | 114,444    |                                                 |       |                                             | $          | 12.18                                                                                                                |       |                                                                                                                        |       | 114,444 |   |   |   | $ | 154,000 |   |   |
|                          |       |       | 234,544    |                                                 |       |                                             |       |                                                                                                                 |       |                                                                                                                        | 234,544    |   |   |   |   |   |   |

 

Subsequent to year end, the Company has utilized therepurchase authorization that remained as of April 30, 2006, ofapproximately $154,000. At this time, the Company has no plans to implement anew repurchase program.

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**Item6.**                        SelectedFinancial Data

| **Year Ended April 30,**                       | ** ** | ** **                                                              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| *** ***                                                  | ** ** | ***(in thousands, except per share amounts)*** | ** ** |
| Net sales                                                     |       | $                                                                       | 131,298    |     | $          | 126,560  |       | $        | 128,374    |     | $          | 131,699  |       | $ | 161,113 |   |
| Gross profit                                                  |       | 59,666                                                                  |       | 60,606   |       | 58,590   |       | 54,787   |       | 54,924   |       |
| Selling, general and administrative                           |       | 49,104                                                                  |       | 45,397   |       | 41,376   |       | 42,400   |       | 52,350   |       |
| Depreciation                                                  |       | 2,821                                                                   |       | 2,767    |       | 3,988    |       | 5,109    |       | 5,423    |       |
| Restatement  expenses                                         |       | (648                                                                    | )          | 368      |       | 4,968    |       | 8,169    |       | —   |       |
| Restructuring and  asset impairment                           |       | (230                                                                    | )          | —   |       | (349     | )          | 3,806    |       | 5,524    |       |
| Total operating expenses                                      |       | 51,047                                                                  |       | 48,532   |       | 49,983   |       | 59,484   |       | 63,297   |       |
| Operating income (loss)                                       |       | 8,619                                                                   |       | 12,074   |       | 8,607    |       | (4,697   | )          | (8,373   | )          |
| Net interest income (expense)                                 |       | 1,161                                                                   |       | 678      |       | 122      |       | (386     | )          | (1,599   | )          |
| Income (loss)  from continuing operations before income taxes |       | 9,780                                                                   |       | 12,752   |       | 8,729    |       | (5,083   | )          | (9,972   | )          |
| Income tax  expense (benefit)                                 |       | 3,431                                                                   |       | 4,138    |       | 944      |       | (65      | )          | (2,945   | )          |
| Income (loss)  from continuing operations                     |       | 6,349                                                                   |       | 8,614    |       | 7,785    |       | (5,018   | )          | (7,027   | )          |
| Income (loss) from  discontinued operations, net of tax       |       | —                                                                  |       | —   |       | 146      |       | (6,980   | )          | (3,346   | )          |
| Net income (loss)                                             |       | 6,349                                                                   |       | 8,614    |       | 7,931    |       | (11,998  | )          | (10,373  | )          |
| Diluted earnings  (loss) per share:                           |       |                                                                    |       |     |       |     |       |     |       |     |       |
| From continuing operations                                    |       | $                                                                       | 0.57       |     | $          | 0.75     |       | $        | 0.70       |     | $          | (0.47    | )          | $ | (0.66 | ) |
| From discontinued operations                                  |       | $                                                                       | —     |     | $          | —   |       | $        | 0.01       |     | $          | (0.66    | )          | $ | (0.32 | ) |
| Net earnings (loss) per share                                 |       | $                                                                       | 0.57       |     | $          | 0.75     |       | $        | 0.71       |     | $          | (1.13    | )          | $ | (0.98 | ) |
| Cash dividends  declared per common share                     |       | $                                                                       | 1.62       |     | $          | 0.26     |       | $        | 0.05       |     | $          | —   |       | $ | — |   |

 

| **April 30,**                            | ** ** | ** **                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-----------------------------------------------|------------|---------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| *** ***                                  | ** ** | ***(in thousands)*** | ** ** |
| Working capital                               |       | $                         | 61,855     | *        | $          | 82,672   |       | $        | 75,080     |     | $          | 65,622   |       | $ | 71,924 |   |
| Total assets                                  |       | 81,693                    | *          | 100,226  |       | 93,930   |       | 95,678   |       | 106,769  |       |
| Long-term debt  and capital lease obligations |       | —                    |       | —   |       | 111      |       | 702      |       | 3,716    |       |
| Total shareholders’  equity              |       | 66,986                    | *          | 87,875   |       | 79,729   |       | 71,988   |       | 83,394   |       |
|                                               |            |                           |            |          |            |          |            |          |            |          |            |          |            |  |  |  |  |  |

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*                    The decline inworking capital, total assets, and shareholders’ equity during fiscal 2006 wasdue primarily to the $17.7 million of dividends paid and $10.7 million of sharerepurchases made.

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**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

*You should readthis section together with “Selected Financial Data” and our consolidatedfinancial statements and related notes thereto in this report. In addition tothe historical information contained herein, this report containsforward-looking statements that involve risks and uncertainties. You should beaware that our actual results could differ materially from those contained inany forward-looking statements. Our actual results will depend upon a number offactors, including but not limited to the following: the risk factors set forthin Part I, Item 1A of this report; our ability  to control costs and expenses, includingcosts associated with the ongoing upgrade of some of our computer systems andour marketing initiatives and costs associated with regulatory compliance; the potential outcome of pending and future auditsby various taxing jurisdictions; our ability to maintain ourrelationships with our sponsored professional golfers; relations with andperformance of suppliers; our ability to carryout successful 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, including risks of strikes or labor disputes involvingthese third parties; the ability of a concentrated group of shareholders to significantlyinfluence matters requiring shareholder apparel; distractions of a governanceor proxy challenge, which may divert management attention from operations;identifying, attracting and retaining employees, including key managementpersonnel especially during potentially uncertain times resulting fromcompeting shareholder proposals; political and trade relations; the overall levelof consumer spending on apparel; and global economic and political conditions,including impacts of increasing oil prices, disease and terrorism and responsesthereto, including war. Additional information on these and other factors thatcould affect our financial results is set forth below and in Part I, Item1A. Finally, there may be other factors not mentioned above or includedelsewhere in this report that may cause actual results to differ materiallyfrom any forward-looking statements. You should not place undue reliance on anyforward-looking statements. We assume no obligation to update anyforward-looking statements as a result of new information, future events, ordevelopments, except as required by the securities laws.*

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

**Overview**

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

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**Results ofOperations**

Thefollowing table sets forth, for the fiscal years indicated, certainconsolidated income statements data expressed as a percentage of net sales.

| **Year Ended April 30,**                | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Consolidated  Income Statement Data:                   |       |       |       |     |       |     |       |
| Net sales                                              |       | 100.0      | %          | 100.0    | %          | 100.0    | %          |
| Cost of sales                                          |       | 54.6       |       | 52.1     |       | 54.4     |       |
| Gross profit                                           |       | 45.4       |       | 47.9     |       | 45.6     |       |
| Operating expenses:                                    |       |       |       |     |       |     |       |
| Selling, general and administrative                    |       | 37.2       |       | 35.9     |       | 31.9     |       |
| Depreciation                                           |       | 2.1        |       | 2.2      |       | 3.1      |       |
| Restatement expenses                                   |       | (0.5       | )          | 0.3      |       | 3.9      |       |
| Total operating expenses                               |       | 38.8       |       | 38.4     |       | 38.9     |       |
| Operating income                                       |       | 6.6        |       | 9.5      |       | 6.7      |       |
| Net interest income                                    |       | 0.9        |       | 0.6      |       | 0.1      |       |
| Income from continuing operations before income  taxes |       | 7.5        |       | 10.1     |       | 6.8      |       |
| Income tax  expense                                    |       | 2.6        |       | 3.3      |       | 0.7      |       |
| Income from  continuing operations                     |       | 4.9        |       | 6.8      |       | 6.1      |       |
| Income from discontinued operations, net of tax        |       | —     |       | —   |       | 0.1      |       |
| Net income                                             |       | 4.9        | %          | 6.8      | %          | 6.2      | %          |

 

The decline in grossprofit percentage during fiscal 2006 was primarily due to increased markdownsand liquidation sales as the Company phased-out more discontinued styles infiscal 2006 than fiscal 2005. Selling, general and administrative costsincreased as a percentage of sales during fiscal 2006 primarily due to theexpenditures related to the direct to consumer catalog and website initiatives.

**Year Ended April 30,2006 Compared to the Year Ended April 30, 2005**

**Net Sales**

Overall,sales increased in fiscal 2006. The sales growth is primarily a result of ourexpanded direct to consumer catalog and enhanced website. The detail of netsales by business unit is as follows:

| **Year Ended April 30,** | ** ** | ** **                                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **Increase/  (Decrease)** | ** ** | **Percent  Change** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------------------|------------|----------|------------|----------|------------|---------------------------|------------|---------------------|------------|
| *** ***                            | ** ** | ***(in thousands, except percent change)*** | ** ** |
| Corporate                               |       | $                                                               | 58,219     |     | $          | 56,874   |       |                      | $          | 1,345               |       |   |   | 2.4 | % |   |
| Golf                                    |       | 31,453                                                          |       | 34,753   |       |     | (3,300     | )                         |       |                | -9.5       |   |   |
| Specialty Retail                        |       | 25,285                                                          |       | 23,453   |       |     | 1,832      |                      |       |                | 7.8        |   |   |
| Direct to  Consumer                     |       | 5,586                                                           |       | 2,041    |       |     | 3,545      |                      |       |                | 173.7      |   |   |
| International and  Licensing            |       | 3,263                                                           |       | 3,130    |       |     | 133        |                      |       |                | 4.2        |   |   |
| Other                                   |       | 7,492                                                           |       | 6,309    |       |     | 1,183      |                      |       |                | 18.8       |   |   |
| Total                                   |       | $                                                               | 131,298    |     | $          | 126,560  |       |                      | $          | 4,738               |       |   |   | 3.7 | % |   |

 

The Corporate business unit sells primarily topromotional products distributors and represented 44.3% and 44.9% of sales forfiscal 2006 and 2005, respectively. The 2.4% year over year increase was due tothe earlier October release date of our annual catalog, which featured ourupdated classics line, including CB ProTec, women’s companion pieces, and ourSignature Collection. Corporate sales for the 

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first six months of fiscal2006 were down 6.6% from the prior year. Since the introduction of our updatedclassics line, net Corporate sales increased 12.2% year over year for the lasttwo fiscal quarters.

During fiscal years 2006 and 2005, Golf net salesrepresented 24.0% and 27.5% of total net sales, respectively. Golf salesdeclined $3.3 million during fiscal 2006, of which $1.5 million of the declinewas due to decreased sales at tournaments, primarily the Ryder Cup, whichgenerates significant sales for us every fourth year when that tournament is heldin the United States. The remainder of the decrease is primarily attributableto poor acceptance of our Fall 2005 fashion collection. Our Spring 2006 fashioncollection has been better received and non-tournament golf sales have beenconsistent with the prior year during the six months ended April 30, 2006.

The Specialty Retail business unit encompasses upscaleclothing retailers, big and tall stores and catalogs, and collegiate and prosports team stores. Specialty Retail net sales represent 19.3% and 18.5% oftotal net sales during fiscal 2006 and 2005, respectively. Sales through thisbusiness unit increased $1.8 million during fiscal 2006 compared to fiscal2005, primarily due to growth in the Big & Tall market niche.Additionally, sales of our Spring 2006 fashion line to other specialtyretailers have been favorable. We offered four seasonal deliveries duringfiscal 2006, whereas we offered three in the prior year, with the firstdelivery scheduled a month earlier than in the previous year. These changeswere made in order to offer refreshed product on a more frequent basis to alignwith our customers’ needs.

Direct to Consumer sales increased $3.5 million overfiscal 2005 due to our new consumer catalog initiative and enhanced website,both of which were launched during the second quarter of fiscal 2006.

Other net sales includeliquidation and shipping revenue. These sales increased during fiscal 2006compared to the prior year due to increases in liquidation sales resulting fromto the significant quantity of discontinued styles in our Classics line, asdiscussed in the Gross Profit section, below.

**Gross Profit**

Our Gross Profit percentage decreased to 45.4% infiscal 2006 compared with 47.9% of net sales in fiscal 2005. The decrease wasprimarily due to price markdowns on discontinued CB Classics, as well asinventory writedowns for the discontinued CB Classics and prior season fashionlines that remain unsold as of April 30, 2006. In October 2005, weintroduced a significant change to our Classics line that included many new men’sstyles and added new women’s “companion” pieces to the line. In conjunctionwith the upgraded line, we discontinued a number of slow-selling Classicsstyles. In order to reduce the amount of liquidation sales of thesediscontinued styles, which would have further lowered our gross profitpercentage, we began selling them at discounted prices through our primarywholesale channels beginning in August 2005 and throughout most of thethird quarter. During fiscal year 2005, the changes to the Classics line werenot as significant and we did not begin discounting the discontinued stylesuntil October.

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 charges in cost of sales, and includedother costs of distribution in selling, general and administrative expenses.

**Selling, Generaland Administrative**

Selling, general and administrativeexpenses totaled $48.9 million in fiscal 2006 compared to $45.4 million in2005, an increase of $3.5 million or 7.7%. As a percentage of net sales,selling, general and administrative expenses increased from 35.9% in fiscal2005 to 37.2% in fiscal 2006. During the second quarter of fiscal 2006, welaunched a consumer catalog initiative. Direct costs of catalogs mailed duringfiscal 2006 totaled $3.1 million. Additionally, staffing expenses related tothe catalog and our enhanced ecommerce website totaled $0.7 million.

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**RestatementExpenses**

In fiscal 2002, werestated certain of our historical financial statements for irregularities anderrors. As a result of the circumstances underlying the restatement, threeshareholder class action lawsuits and a shareholder derivative lawsuit werefiled, naming us and certain of our current and former directors and officersas defendants. In addition, the Company filed a complaint against the insurancecarrier of its directors and officers liability policy, Genesis InsuranceCompany (“Genesis”). Fiscal 2005 restatement expenses of $0.4 million consistprimarily of legal fees incurred pursuant to the lawsuits. The Company was not successful in its appeal inits lawsuit against Genesis. Although we did not recover the damages we wereseeking, we were not required to repay the premium for the policy in questionand therefore the approximately $0.5 million that had been recorded for thisoutstanding liability, plus some additional accruals for legal and other estimatedcosts, was reversed during fiscal 2006.

**Income Taxes**

We recorded approximately$3.4 million of income tax expense for fiscal 2006 compared to $4.1 million ofincome tax expense for fiscal 2005. The effective tax rate was 35.1% and 32.5%for fiscal years 2006 and 2005, respectively. The lower tax rate in fiscal 2005was due to a reduction in estimated state income tax liabilities.

**Year Ended April 30,2005 Compared to the Year Ended April 30, 2004**

**Net Sales**

Salesin all business units, except Golf and Other sales, increased in fiscal 2005compared to fiscal 2004. Net sales in our Golf business unit were impacted bypoor acceptance of our fashion lines and a slow economic recovery in the golfindustry. Also during fiscal 2005, we hired and trained sales representativeswho were new to the Cutter & Buck brand. Other sales consist primarilyof liquidation sales and the Other sales decline reflects a decrease in suchsales in fiscal 2005 compared with fiscal 2004. The detail of net sales bybusiness unit is as follows:

| ** **                              | ** ** | ** **                                                      | ** ** | ** ** | ** ** | **Increase/** | ** ** | **Percent**    | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------------------|------------|------------|------------|---------------|------------|----------------|------------|
| **Year Ended April 30,** | ** ** | ** **                                                      | ** ** | **2005**   | ** ** | **2004**      | ** ** | **(Decrease)** | ** ** | **Change** | ** ** |
| *** ***                            | ** ** | ***(in thousands, except percent change)*** | ** ** |
| Corporate                               |       | $                                                               | 56,874     |       | $          | 53,942        |       |           | $          | 2,932 |   |   |   | 5.4 | % |   |
| Golf                                    |       | 34,753                                                          |       | 39,699     |       |          | (4,946     | )              |       |   | -12.5 |   |   |
| Specialty Retail                        |       | 23,453                                                          |       | 22,517     |       |          | 936        |           |       |   | 4.2 |   |   |
| Direct to  Consumer                     |       | 2,041                                                           |       | 1,365      |       |          | 676        |           |       |   | 49.5 |   |   |
| International and  Licensing            |       | 3,130                                                           |       | 2,686      |       |          | 444        |           |       |   | 16.5 |   |   |
| Other                                   |       | 6,309                                                           |       | 8,165      |       |          | (1,856     | )              |       |   | -22.7 |   |   |
| Total                                   |       | $                                                               | 126,560    |       | $          | 128,374       |       |           | ($1,814    | ) |   |   | -1.4% |   |   |
|                                         |            |                                                                 |            |            |            |               |            |                |            |  |  |  |  |  |  |  |  |  |

 

Corporate net sales, which represented 44.9% and 42.0%of sales for fiscal 2005 and 2004, respectively, demonstrated continuedstrength, primarily due to the sales and marketing of our 2004 Classics lineand as corporate customers began to increase spending on their events andprograms. In January 2004, we launched a new corporate catalog featuringnew designs, which had a positive impact on sales throughout the calendar year.

During fiscal years 2005 and 2004, Golf net salesrepresented 27.5% and 30.9% of total net sales, respectively. Net sales in theGolf business unit were impacted by a slower economic recovery in the golfindustry, as well as our hiring and training of sales representatives that werenew to the Cutter & Buck brand.

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Specialty Retail net sales represented 18.5% and 17.5%of total net sales during fiscal 2005 and 2004, respectively. Sales throughthis business unit increased $0.9 million during fiscal 2005 compared to fiscal2004, primarily due to growth in the collegiate and pro sports sales programs.

International and licensing net sales, whichrepresented 2.5% and 2.1% of our total net sales during fiscal 2005 and 2004,respectively, increased during fiscal 2005, primarily due to the strength ofour relationship with key licensees and their increased experience with ourbrand in their marketplaces coupled with improving economic conditions incertain of our international markets.

Direct to Consumer sales, which represented 1.6% and1.1% of net sales during fiscal 2005 and 2004, respectively, increased duringfiscal 2005, primarily due to increased customer acceptance of online shoppingand inclusion of Cutter & Buck product in third party catalogs andwebsites.

Other sales decreasedduring fiscal 2005 compared to the prior year, primarily due to decreases inliquidation sales as we continued to focus on inventory management.

**Gross Profit**

Our Gross Profit percentage increased to 47.9% infiscal 2005, compared with 45.6% of net sales in fiscal 2004. Our marginsincreased during 2005 as we improved our sourcing and adjusted our pricingstructure for certain products, while limiting the number of new styles in ourClassics line, resulting in fewer liquidation sales. We also shifted more ofour international sales to licensees, as opposed to distributors, whereby weincur fewer direct costs.

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 charges in cost of sales, and includedother costs of distribution in selling, general and administrative expenses.

**Selling, Generaland Administrative**

Selling, general andadministrative expenses totaled $45.4 million in fiscal 2005 compared to $41.0million in 2004, an increase of $4.4 million or 10.7%. As a percentage of netsales, selling, general and administrative expenses increased from 31.9% infiscal 2004 to 35.9% in fiscal 2005. During fiscal 2005, we added personnel inthe areas of product design, planning, and development and we increasedmarketing expenditures, primarily in the areas of corporate and women’s golfsales. We also invested in a new ERP system and incurred significant costs tocomply with new internal control reporting requirements for public companies.We also incurred higher costs during fiscal 2005 due to the transitioning to anew CEO.

**Depreciation**

Depreciation expensedecreased during fiscal 2005, primarily due to the phase-out of investments inin-store fixturing that was completed in the prior year, as well as thecompletion of several capital lease terms.

**RestatementExpenses**

Restatement expensestotaled approximately $5.0 million for the year ended April 30, 2004 andincluded $3.5 million of legal and professional fees, of which $0.9 million wasadvanced in connection with the indemnification of former officers, and $1.2million of accrued retention bonuses to certain key employees.

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**Income Taxes**

We recorded approximately$4.1 million of income tax expense for fiscal 2005 compared to $0.9 million ofincome tax expense for fiscal 2004. The effective rate for income taxes infiscal 2004 was well below our fiscal 2005 effective tax rate and below ouranticipated ongoing effective tax rate. In fiscal 2004, we reversed a valuationallowance against our deferred tax assets of $1.2 million, therebysignificantly reducing the effective tax rate. In addition, income tax expensefor fiscal 2004 was reduced by $0.9 million related to the reconciliation ofthe tax provision to the income tax return as filed for fiscal 2003 and changesin estimates of our income tax liabilities.

**Liquidity andCapital Resources**

Our primary ongoing capital requirements are tofinance working capital and the continued growth and operations of ourbusiness, including investments in fixed assets. During fiscal 2006, ourcapital requirements were funded by operating activities. Net cash provided byoperating activities during fiscal 2006 was $9.9 million compared to$8.8 million during fiscal 2005. Although net income was lower duringfiscal 2006 than fiscal 2005, operating cash generated during 2005 was lowerdue to an overall net increase in inventory in 2005.

Net cash provided by investing activities was $13.9million compared to $14.2 million used in fiscal 2005. During fiscal 2005, theCompany was investing its positive operating cash proceeds into additionalshort-term investments. During fiscal 2006, the short-term investments werereduced in order to pay a $1.34 per share special dividend. The remainingamounts in short-term investments are in short term interest-bearing U.S.Government and high-quality corporate debt instruments. We hold theseinstruments to maturity, which currently averages 122 days at the date ofpurchase. At April 30, 2006, we held $12.3 million in short-terminvestments. To support our operations, capital expenditures totaling $2.6million were incurred during fiscal 2006. These capital expenditures primarilyconsisted of information technology initiatives, as we upgraded and replacedsome of our computer systems.  Our annualcapital expenditures are limited by our loan agreement to $4.0 million peryear.

Net cash used in financing activities was $27.7million, which primarily consisted of dividends and repurchases of the company’scommon stock. The special dividend and the share repurchases representapproximately $28.4 million of capital the Company returned to shareholders. During fiscal 2006, we paid dividendstotaling $1.62 per share of common stock, which includes four quarterlydividends of $.07 per share and a special dividend of $1.34 per share. On June 28,2006, the board of directors approved a quarterly dividend of $.07 per share.We may decide to discontinue or modify our quarterly dividend payments at anytime if we determine that other uses of our capital may be in the bestinterests of our shareholders.

Our share repurchase program initiated in fiscal 2004authorized the purchase of up to $6.0 million in company stock. In July 2005,the board of directors approved an increase in the stock repurchase program toprovide for up to $10.0 million of additional repurchases beyond the $4.2million that had been repurchased at that time, bringing the total repurchaseauthorization of the program to $14.2 million. During fiscal 2006, we purchasedapproximately 886,000 shares of our common stock at an average price of $12.11.Subsequent to year end, we utilized the repurchase authorization that remainedas of April 30, 2006, of approximately $154,000. Over the life of the program,we repurchased 1,170,000 shares at an average price per share of $12.14. Atthis time, the board of directors has not authorized additional sharerepurchases.

The Company has a loan agreement with Wells Fargo HSBCTrade Bank, N.A., through March 10, 2008, secured by all assets of theCompany, for a $35 million line of credit. Borrowings, if any, under thisagreement would bear interest at prime minus 1.0%. Covenants contained in thisloan agreement include maintaining a debt to equity ratio of not more than 1.0,a quick ratio of not less than 1.0, and profitability

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of $5.0 million per year. Asof April 30, 2006, we had no borrowings with Wells Fargo HSBC Trade Bank, N.A. underthis line of credit other than open letters of credit, as discussed below.

We believe that theremaining cash on hand and cash generated from operations, as well as ourability to borrow under bank lines of credit, will be sufficient to meet ourcash requirements during fiscal 2007. Also, we have alternative sources offinancing available, including factoring our accounts receivable and financingour capital expenditures with leases. Although these methods of financing arecurrently available, we do not anticipate using alternative sources offinancing during fiscal 2007. However, our capital needs will depend on manyfactors, including our growth rate, the need to finance increased productionand inventory levels, the success of our various sales and marketing programs, andvarious other factors.

**Off- Balance SheetArrangements**

As of April 30, 2006, pursuantto its loan agreement with Wells Fargo HSBC Trade Bank, N.A., the Company hadopen letters of credit with suppliers totaling $2.1 million.

**ContractualObligations**

Thefollowing is a summary of our contractual obligations as of April 30,2006:

| ** **               | ** ** | **Payments due by period** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|
| ** **               | ** ** | **Less than  1 year**           | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After 5 years** | ** ** | **Total** | ** ** |
| *** ***             | ** ** | ***(in thousands)***                 | ** ** |
| Purchase  Obligations(1) |       |                                      | $          | 18,428 |   |   |   | $ | — |   |   |   | $ | — |   |   |   | $ | — |   |   | $ | 18,428 |   |
| Operating  leases(1)     |       |                                      | 3,582      |   |   |   | 7,565 |   |   |   | 6,641 |   |   |   | 1,385 |   |   | 19,173 |   |
|                     |       |                                      | $          | 22,010 |   |   |   | $ | 7,565 |   |   |   | $ | 6,641 |   |   |   | $ | 1,385 |   |   | $ | 37,601 |   |

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(1)         Thepurchase obligations and operating lease commitments are not reflected on theconsolidated balance sheets under accounting principles generally accepted inthe United States.

**Critical AccountingPolicies and Use of Estimates**

Our significant accountingpolicies are described in Note 1 to the consolidated financial statementsincluded herein under Item 8 of our annual report on Form 10-K. 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 rate of historical returns andtrends in changes to the rate, if any, when evaluating the adequacy of thisreserve. The rate of returns in our wholesale segment has remained consistentover the past several years. The Direct to Consumer business unit has a higherrate of returns than the wholesale segment. However, as of April 30, 2006,this higher rate does not have a material impact on our reserve for futureproduct returns. The estimate for 

18

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productreturns is included in our calculation of net sales. If we were to experiencean increase in our product returns or changes in our sales mix, additionalreserves may be required.

**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 current economic conditions and the customer’sfinancial condition and credit history. If the financial condition of ourcustomers were to deteriorate, resulting in an impairment of their ability tomake 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**

The Company offers certainsales incentives, including cash rebates, which are recorded as reductions tonet sales, 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 customersonly if 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. Key variables in determining thisestimate include the anticipated timing of sublease rentals, estimates ofsublease rental payment amounts, and estimates for brokerage and other relatedcosts. We periodically evaluate and, if necessary, adjust our estimates basedon currently available information. Should the creditworthiness of oursubtenants deteriorate or if we are unable to renew leases at the anticipatedlease rates or within the estimated time periods, this liability would need tobe increased.

19

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**Valuation Allowancefor Deferred Income Tax Assets**

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

**Pending Adoption ofan Accounting Pronouncement**

In December 2004, theFinancial Accounting Standards Board issued Statement (“SFAS”) 123(R), *Share-Based Payments*, which supercedes Accounting PrinciplesBoard Statement No. 25, *Accounting for StockIssued to Employees*. Generally, the approach in SFAS 123(R) issimilar to the approach described in SFAS 123 in its requirement to recognizeshare-based payments to employees in the income statement, based on estimatesof the fair value of the payments as of their grant date. However, pro formadisclosure is no longer an alternative. We are currently evaluating the impactof adopting SFAS 123(R), but do not expect a material impact upon its adoptionin the first quarter of fiscal 2007.

**Item 7A.**                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.

Investments with maturities beyond ninety days as ofthe purchase date are classified as short-term investments. Changes in interestrates may affect the fair market value of these instruments. We invest ininterest-bearing U.S. Government and high-quality U.S. corporate debtinstruments and hold these instruments until maturity. The average time tomaturity as of the purchase date for short-term investments held as of April 30,2006, was 122 days and none have maturity dates beyond August 15, 2006.The weighted average interest rate of our short-term investment portfolio at April 30,2006 was 4.78%. Due to the short-term nature of these instruments and ourinvestment policies and procedures, we do not expect interest rate fluctuationsto have a material adverse effect on our results of operations.

As of April 30, 2006, our short-term investmentportfolio totaled $12.3 million. This is substantially less than the $28.8million portfolio held as of April 30, 2005 due to the $14.7 millionspecial dividend paid during the third quarter of fiscal 2006 and the $10.7million of share repurchases that were made throughout fiscal 2006.

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 earn aresubject to foreign currency exchange rate risk. Additionally, we do have someremaining assets and liabilities from our closed European operations that aredenominated in Euros. Neither of these items is material to our consolidatedfinancial statements as of April 30, 2006.

**Item 8.**                        FinancialStatements and Supplementary Data

The financial statementsrequired pursuant to this item are filed under Part IV, Item 15(a)(1) ofthis report. The financial statement schedule required under Regulation S-X isfiled under Part IV, Item 15(a)(2) of this report.

20

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**Item 9.**                        Changesin and Disagreements with Accountants on Accounting and Financial Disclosure

None.

**Item 9A.**                Controlsand Procedures

**Disclosure Controlsand Procedures**

As of April 30, 2006,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 onthis evaluation, our principal executive and financial officers concluded that,as of April 30, 2006, our disclosure controls and procedures wereeffective in providing reasonable assurance that material information requiredto be disclosed in our reports filed under the Exchange Act is recorded, processed,summarized, and reported within the time periods specified in SEC rules andforms.

**Internal Controlover Financial Reporting**

Management of the company is responsible forestablishing and maintaining adequate internal control over financial reportingfor Cutter & Buck Inc., as defined in Rules 13a-15(f) and15d-15(f) of the Exchange Act. Management has assessed theeffectiveness of the Company’s internal control over financial reporting as of April 30,2006, based on the framework established in “*InternalControl- Integrated Framework”*, issued by the Committee ofSponsoring Organizations of the Treadway Commission. Based on this evaluation,management has concluded that the internal control of Cutter & BuckInc. over its financial reporting as of April 30, 2006, was effective inproviding reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. The independent registeredpublic accounting firm that audited the financial statements included in this Form 10-Khas issued an attestation report, included herein.

There were no changes in our internal control overfinancial reporting, as defined in Rules 13a-15 and 15d-15 ofthe Exchange Act, during our fourth quarter ended April 30, 2006, thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

21

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**REPORT OF ERNST &YOUNG LLP,INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors andShareholdersCutter & Buck Inc.

We have audited management’sassessment included in the accompanying Management’s Report on Internal Controlover Financial Reporting that Cutter & Buck Inc. maintained effectiveinternal control over financial reporting, as of April 30, 2006, based oncriteria established in *Internal Control-Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO criteria”), Cutter &Buck Inc.’s management is responsible for maintaining effective internalcontrol over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of thecompany’s internal control over financial reporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

In our opinion, management’sassessment that Cutter & Buck Inc. maintained effective internalcontrol over financial reporting as of April 30, 2006, is fairly stated,in all material respects, based on the COSO criteria. Also, in our opinion, Cutter &Buck Inc. maintained, in all material respects, effective internal control overfinancial reporting as of April 30, 2006, based on the COSO criteria.

We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of Cutter & Buck Inc.as of April 30, 2006 and 2005, and the related consolidated statements of income,shareholders’ equity, and cash flows for each of the three years in the periodended April 30, 2006, and our report dated June 26, 2006, expressedan unqualified opinion thereon.

/s/ Ernst & Young LLP

Seattle, WashingtonJune 26, 2006

22

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**PART III**

**Item 10.**                 Directorsand Executive Officers of the Registrant

The information requiredby this Item is incorporated herein by reference to the Company’s ProxyStatement, relating to its annual meeting of shareholders to be held in 2006,to be filed with the Securities and Exchange Commission within 120 days afterthe close of our fiscal year.

**Item 11.**                 ExecutiveCompensation

The information requiredby this Item is incorporated herein by reference to the Company’s ProxyStatement, relating to its annual meeting of shareholders to be held in 2006,to be filed with the Securities and Exchange Commission within 120 days afterthe close of our fiscal year.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information requiredby this Item is incorporated herein by reference to the Company’s ProxyStatement, relating to its annual meeting of shareholders to be held in 2006,to be filed with the Securities and Exchange Commission within 120 days after theclose of our fiscal year.

**Item 13.**                 CertainRelationships and Related Transactions

The information requiredby this Item is incorporated herein by reference to the Company’s ProxyStatement, relating to its annual meeting of shareholders to be held in 2006,to be filed with the Securities and Exchange Commission within 120 days afterthe close of our fiscal year.

**Item 14.**                 PrincipalAccounting Fees and Services

The information requiredby this Item is incorporated herein by reference to the Company’s ProxyStatement, relating to its annual meeting of shareholders to be held in 2006,to be filed with the Securities and Exchange Commission within 120 days afterthe close of our fiscal year.

23

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**PART IV**

**Item15.**                 Exhibits,Financial Statement Schedules
|        | ** ** | ** **                                                                                                                            | ** ** | **Page** |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **1.** | ** ** | **Consolidated Financial  Statements:**                                                                                               |       |     |
|   |       | Report  of Ernst & Young LLP, Independent Registered Public Accounting Firm                                                  |       | 26       |
|   |       | Consolidated  Balance Sheets as of April 30, 2006 and 2005                                                                       |       | 27       |
|   |       | Consolidated  Income Statements for the years ended April 30, 2006, 2005 and 2004                                                |       | 28       |
|   |       | Consolidated  Statements of Shareholders’ Equity for the years ended April 30, 2006,  2005 and 2004     |       | 29       |
|   |       | Consolidated  Statements of Cash Flows for the years ended April 30, 2006, 2005 and  2004                                        |       | 30       |
|   |       | Notes to  Consolidated Financial Statements                                                                                           |       | 31       |
| **2.** | ** ** | **Financial Statement Schedule II-Valuation and  Qualifying Accounts**                                                                |       | 45       |

 

All other financialstatement schedules not listed are omitted because either they are notapplicable or not required, or the required information is included in theconsolidated financial statements or the notes thereto.

**3. Exhibits**

| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                                           |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1              |       | Restated Articles  of Incorporation, as amended (filed herewith)                                                                                                                                                                                                                                     |
| 3.2              |       | Bylaws of  Cutter & Buck Inc. , as amended and restated March 9, 2006  (3.2)(1)                                                                                                                                                                                                   |
| 4.1              |       | Specimen Common  Stock Certificate (4.1)(2)                                                                                                                                                                                                                                                          |
| 10.1             |       | Industrial Lease  dated May 27, 1999 between Cutter & Buck Inc. and Zelman  Renton, LLC (incorporated by reference to exhibit 10.19 filed with the  Registrant’s Annual Report on Form 10-K for the year ended April 30,  1999)                                         |
| 10.2             |       | First Amendment  dated October 6, 1999 to Industrial Lease dated May 27, 1999  between Cutter & Buck Inc. and Zelman Renton, LLC (incorporated by  reference to exhibit 10.1 filed with the Registrant’s Form 10-Q  for the quarter ended January 31, 2000)        |
| 10.3             |       | Amendment dated  May 16, 2001 to lease dated May 27, 1999 (See exhibit 10.2) between  Zelman Renton, LLC and Cutter & Buck Inc. (10.24)(3)                                                                                                                                        |
| 10.4             |       | Lease dated  May 16, 2001 between Zelman Renton, LLC and Cutter & Buck Inc.  (10.23)(3)                                                                                                                                                                                                |
| 10.5             |       | Lease dated  April 30, 2002 between Adobe Systems Incorporated and Cutter &  Buck Inc. (10.22)(3)                                                                                                                                                                                      |
| 10.6             |       | First Amendment  to Lease between Adobe Systems Incorporated and Cutter & Buck Inc.  dated October 27, 2004 (incorporated by reference to exhibit 10.6 filed  with the Registrant’s Form 10-K for the year ended April 30,  2005)                                       |
| 10.7             |       | 1997 Stock  Incentive Plan, as amended and restated as of October 19, 2005  (incorporated by reference to exhibit 10.3 of the Registrant’s Post-Effective  Amendment No. 1 to the Registration Statement on Form S-8  (File No. 333-129399) filed on December 8, 2005) |
| 10.8             |       | 1999 Non-Employee  Director Stock Incentive Plan (10.4)(4)                                                                                                                                                                                                                                           |
| 10.9             |       | 2000 Stock  Incentive Plan (10.5)(4)                                                                                                                                                                                                                                                                 |
| 10.10            |       | 2000 Transition  Stock Incentive Plan for Officers, as amended and restated as of  October 19, 2005 (10.6)(4)                                                                                                                                                                                   |
| 10.11            |       | 2000 Transition  Stock Incentive Plan for Non-Officers, as amended and restated as of  October 19, 2005 (10.7)(4)                                                                                                                                                                               |
| 10.12            |       | Ernest R. Johnson  Stock Option Agreement, as amended and restated as of October 19, 2005  (10.8)(4)                                                                                                                                                                                            |

24

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| 10.13  |   | Stock Bonus Plan  (incorporated by reference to exhibit 10.16 filed with the Registrant’s  Form 10-Q for the quarter ended October 31, 1998)                                                                                                                         |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.14  |   | Employment Agreement between Cutter & Buck  Inc. and Ernest R. Johnson (10.1)(1)                                                                                                                                                                                           |
| 10.15  |   | Change in Control Agreement as amended  November 15, 2002 between Cutter & Buck Inc. and Ernest R.  Johnson (incorporated by reference to exhibit 10.19 filed with the  Registrant’s Form 10-K for the year ended April 30, 2003)                      |
| 10.16  |   | Change in Control  Agreement dated January 2, 2006, as amended by Letter Agreement dated  March 9, 2006, between Cutter & Buck Inc. and Kaia Akre  (10.2)(1)                                                                                                     |
| 10.17  |   | Change in Control  Agreement dated March 7, 2006, between Cutter & Buck Inc. and  Michael Gats (10.3)(1)                                                                                                                                                              |
| 10.18  |   | Change in Control  Agreement dated March 7, 2006, between Cutter & Buck Inc. and  Jon Runkel (10.4)(1)                                                                                                                                                                |
| 10.19  |   | Change in Control  Agreement dated March 7, 2006, between Cutter & Buck Inc. and  Julie Snow (10.5)(1)                                                                                                                                                                |
| 10.20  |   | Change in Control  Agreement dated March 7, 2006, between Cutter & Buck Inc. and  Brian Thompson (10.7)(1)                                                                                                                                                            |
| 10.21  |   | Change in Control  Agreement dated March 24, 2003, between Cutter & Buck Inc. and  Theresa Treat (filed herewith)                                                                                                                                                     |
| 10.22  |   | Credit Agreement  dated March 10, 2005 between Cutter & Buck Inc. and Wells Fargo  HSBC Trade Bank, N.A.(incorporated by reference to exhibit 10.1 filed with  the Registrant’s Form 8-K on March 16, 2005)                                            |
| 10.23* |   | Endorsement  Agreement dated October 18, 2005 between Cutter & Buck Inc. and  Club 59, Inc. regarding Annika Sorenstam (incorporated by reference to  exhibit 10.1 filed with the Registrant’s Form 10-Q for the quarter  ended October 31, 2005) |
| 23.1   |   | Consent of  Ernst & Young LLP, Independent Registered Public Accounting Firm (filed herewith)                                                                                                                                                                              |
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certifications  of the Company’s Chief Executive Officer(5)                                                                                                                                                                                 |
| 31.2   |   | Rule 13a-14(a)/15d-14(a) Certifications  of the Company’s Chief Financial Officer(5)                                                                                                                                                                                 |
| 32.1   |   | Section 1350  Certifications of the Company’s Chief Executive Officer(5)                                                                                                                                                                                                  |
| 32.2   |   | Section 1350  Certifications of the Company’s Chief Financial Officer(5)                                                                                                                                                                                                  |

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*                    CONFIDENTIALTREATMENT HAS BEEN REQUESTED FOR PORTIONS OF THIS EXHIBIT.

(1)          incorporated byreference to the exhibit shown in the preceding parentheses and filed with theRegistrant’s Form 8-K on March 8, 2006

(2)          incorporated byreference to the exhibit shown in the preceding parentheses and filed with theRegistrant’s Registration Statement on Form SB-2 (File No. 33-94540-LA)

(3)          incorporated byreference to the exhibit shown in the preceding parentheses and filed with theRegistrant’s Form 10-K for the year ended April 30, 2002

(4)          incorporated byreference to the exhibit shown in the preceding parentheses and filed with theRegistrant’s Registration on Form S-8 (File No. 333-129399)filed on November 2, 2005

(5)          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

25

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**REPORTOF ERNST & YOUNG LLP,INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and ShareholdersCutter & Buck Inc.

We have audited the accompanying consolidated balancesheets of Cutter & Buck Inc. as of April 30, 2006 and 2005, andthe related consolidated statements of income, shareholders’ equity, and cashflows for each of the three years in the period ended April 30, 2006. Ouraudits also included the financial statement schedule listed in the Index at15(a)2. These financial statements and schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements and schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Cutter & Buck Inc. at April 30, 2006 and 2005, andthe consolidated results of its operations and its cash flows for each of thethree years in the period ended April 30, 2006, in conformity with U.S.generally accepted accounting principles. Also, in our opinion, the relatedfinancial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Cutter & Buck Inc.’s internalcontrol over financial reporting as of April 30, 2006, based on criteriaestablished in Internal Control- Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission, and our report dated June 26,2006, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Seattle, WashingtonJune 26, 2006

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**CUTTER & BUCK INC.**

**Consolidated Balance Sheets**

| ** **                                                                                                                                                  | ** ** | **April 30,**                                         | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                                                                                                  | ** ** | **2006**                                                   | ** ** | **2005** | ** ** |
| *** ***                                                                                                                                                | ** ** | ***(in thousands, except  share amounts)*** | ** ** |
| **Assets**                                                                                                                                                  |       |                                                       |       |   |   |
| Current assets:                                                                                                                                             |       |                                                       |       |   |   |
| Cash and cash equivalents                                                                                                                                   |       | $                                                          | 7,808      |   | $ | 11,752 |   |
| Short-term investments                                                                                                                                      |       | 12,314                                                     |       | 28,831 |   |
| Accounts receivable, net of allowances of $1,732 at  April 30, 2006, and $1,455 at April 30, 2005                                                 |       | 22,993                                                     |       | 21,814 |   |
| Inventories, net                                                                                                                                            |       | 25,659                                                     |       | 25,398 |   |
| Income tax receivable                                                                                                                                       |       | 88                                                         |       | 919 |   |
| Deferred income taxes                                                                                                                                       |       | 1,993                                                      |       | 2,412 |   |
| Prepaid expenses and other current assets                                                                                                                   |       | 2,701                                                      |       | 2,317 |   |
| Total current assets                                                                                                                                        |       | 73,556                                                     |       | 93,443 |   |
| Furniture and equipment, net                                                                                                                                |       | 6,428                                                      |       | 6,734 |   |
| Deferred income  taxes                                                                                                                                      |       | 264                                                        |       | 165 |   |
| Other assets                                                                                                                                                |       | 1,445                                                      |       | 1,614 |   |
| Total assets                                                                                                                                                |       | $                                                          | 81,693     |   | $ | 101,956 |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                              |       |                                                       |       |   |   |
| Current liabilities:                                                                                                                                        |       |                                                       |       |   |   |
| Accounts payable                                                                                                                                            |       | $                                                          | 5,767      |   | $ | 3,077 |   |
| Accrued liabilities                                                                                                                                         |       | 5,934                                                      |       | 7,742 |   |
| Total current liabilities                                                                                                                                   |       | 11,701                                                     |       | 10,819 |   |
| Restructuring liability, net of current portion                                                                                                             |       | 1,575                                                      |       | 1,895 |   |
| Deferred rent                                                                                                                                               |       | 1,431                                                      |       | 1,367 |   |
| Total liabilities                                                                                                                                           |       | 14,707                                                     |       | 14,081 |   |
| Commitments and contingencies                                                                                                                               |       | —                                                     |       | — |   |
| Shareholders’  equity:                                                                                                                                 |       |                                                       |       |   |   |
| Preferred stock, no par value, 6,000,000 shares  authorized: none issued                                                                                    |       | —                                                     |       | — |   |
| Common stock, no par value, 25,000,000 shares  authorized: 10,476,069 issued and outstanding at April 30, 2006, and  11,220,376 at April 30, 2005 |       | 58,041                                                     |       | 67,750 |   |
| Deferred compensation                                                                                                                                       |       | (61                                                        | )          | (246 | ) |
| Retained earnings                                                                                                                                           |       | 9,006                                                      |       | 20,371 |   |
| Total shareholders’ equity                                                                                                                             |       | 66,986                                                     |       | 87,875 |   |
| Total liabilities  and shareholders’ equity                                                                                                            |       | $                                                          | 81,693     |   | $ | 101,956 |   |

 

See accompanying notes.

27

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**CUTTER & BUCK INC.**

**Consolidated Income Statements**

| ** **                                             | ** ** | **Year Ended April 30,**                                 | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| *** ***                                           | ** ** | ***(in thousands, except per share amounts)*** | ** ** |
| Net sales                                              |       | $                                                                       | 131,298    |   | $ | 126,560 |   | $ | 128,374 |   |
| Cost of sales                                          |       | 71,632                                                                  |       | 65,954 |   | 69,784 |   |
| Gross profit                                           |       | 59,666                                                                  |       | 60,606 |   | 58,590 |   |
| Operating  expenses:                                   |       |                                                                    |       |   |   |   |   |
| Selling, general and administrative                    |       | 48,874                                                                  |       | 45,397 |   | 41,027 |   |
| Depreciation                                           |       | 2,821                                                                   |       | 2,767 |   | 3,988 |   |
| Restatement expenses                                   |       | (648                                                                    | )          | 368 |   | 4,968 |   |
| Total operating expenses                               |       | 51,047                                                                  |       | 48,532 |   | 49,983 |   |
| Operating income                                       |       | 8,619                                                                   |       | 12,074 |   | 8,607 |   |
| Interest income  (expense):                            |       |                                                                    |       |   |   |   |   |
| Interest income                                        |       | 1,170                                                                   |       | 722 |   | 277 |   |
| Interest expense                                       |       | (9                                                                      | )          | (44 | ) | (155 | ) |
| Net interest income                                    |       | 1,161                                                                   |       | 678 |   | 122 |   |
| Income from  continuing operations before income taxes |       | 9,780                                                                   |       | 12,752 |   | 8,729 |   |
| Income tax expense                                     |       | 3,431                                                                   |       | 4,138 |   | 944 |   |
| Income from  continuing operations                     |       | 6,349                                                                   |       | 8,614 |   | 7,785 |   |
| Income from  discontinued operations, net of tax       |       | —                                                                  |       | — |   | 146 |   |
| Net income                                             |       | $                                                                       | 6,349      |   | $ | 8,614 |   | $ | 7,931 |   |
| Basic earnings  per share:                             |       |                                                                    |       |   |   |   |   |
| Earnings from continuing operations                    |       | $                                                                       | 0.58       |   | $ | 0.79 |   | $ | 0.73 |   |
| Earnings from discontinued operations                  |       | $                                                                       | —     |   | $ | — |   | $ | 0.01 |   |
| Net earnings                                           |       | $                                                                       | 0.58       |   | $ | 0.79 |   | $ | 0.74 |   |
| Diluted earnings  per share:                           |       |                                                                    |       |   |   |   |   |
| Earnings from continuing operations                    |       | $                                                                       | 0.57       |   | $ | 0.75 |   | $ | 0.70 |   |
| Earnings from discontinued operations                  |       | $                                                                       | —     |   | $ | — |   | $ | 0.01 |   |
| Net earnings                                           |       | $                                                                       | 0.57       |   | $ | 0.75 |   | $ | 0.71 |   |

 

See accompanying notes.

28

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**CUTTER & BUCK INC.**

**Consolidated Statements of Shareholders’ Equity**

| ** **                                                 | ** ** | **Common Stock**                                          | ** ** | **Deferred** | ** ** | **Retained**     | ** ** | ** **   | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------------|------------|--------------|------------|------------------|------------|--------------|------------|
| ** **                                                 | ** ** | **Shares**                                                     | ** ** | **Amount**   | ** ** | **Compensation** | ** ** | **Earnings** | ** ** | **Total** | ** ** |
| *** ***                                               | ** ** | ***(in thousands, except share amounts)*** | ** ** |
| Balance,  April 30, 2003                              |       | 10,634,132                                                     |       | $            | 64,805     |             |       | ($37         | )          |   | $ | 7,220 |   | $ | 71,988 |   |
| Stock issued under employee stock purchase plan            |       | 17,323                                                         |       | 65           |       |             | —     |         |       | — |   | 65 |   |
| Exercise of stock  options                                 |       | 157,923                                                        |       | 593          |       |             | —     |         |       | — |   | 593 |   |
| Tax benefit on  exercise of stock options                  |       | —                                                         |       | 236          |       |             | —     |         |       | — |   | 236 |   |
| Amortization of  deferred compensation                     |       | —                                                         |       | —       |       |             | 37         |         |       | — |   | 37 |   |
| Repurchase of  common stock                                |       | (56,826                                                        | )          | (583         | )          |             | —     |         |       | — |   | (583 | ) |
| Dividends on  common stock ($0.05 per share)          |       | —                                                         |       | —       |       |             | —     |         |       | (538 | ) | (538 | ) |
| Net income                                                 |       | —                                                         |       | —       |       |             | —     |         |       | 7,931 |   | 7,931 |   |
| Balance,  April 30, 2004                              |       | 10,752,552                                                     |       | 65,116       |       |             | —     |         |       | 14,613 |   | 79,729 |   |
| Stock issued under employee stock purchase plan            |       | 7,632                                                          |       | 64           |       |             | —     |         |       | — |   | 64 |   |
| Exercise of stock  options                                 |       | 655,292                                                        |       | 3,579        |       |             | —     |         |       | — |   | 3,579 |   |
| Tax benefit on  exercise of stock options                  |       | —                                                         |       | 1,459        |       |             | —     |         |       | — |   | 1,459 |   |
| Repurchase of  common stock                                |       | (215,100                                                       | )          | (2,749       | )          |             | —     |         |       | — |   | (2,749 | ) |
| Deferred  compensation relating to restricted stock grants |       | 20,000                                                         |       | 281          |       |             | (281       | )            |       | — |   | — |   |
| Amortization of  deferred compensation                     |       | —                                                         |       | —       |       |             | 35         |         |       | — |   | 35 |   |
| Dividends on  common stock ($0.26 per share)          |       | —                                                         |       | —       |       |             | —     |         |       | (2,856 | ) | (2,856 | ) |
| Net income                                                 |       | —                                                         |       | —       |       |             | —     |         |       | 8,614 |   | 8,614 |   |
| Balance,  April 30, 2005                              |       | 11,220,376                                                     |       | 67,750       |       |             | (246       | )            |       | 20,371 |   | 87,875 |   |
| Stock issued under employee stock purchase plan            |       | 8,450                                                          |       | 87           |       |             | —     |         |       | — |   | 87 |   |
| Exercise of stock  options                                 |       | 140,118                                                        |       | 765          |       |             | —     |         |       | — |   | 765 |   |
| Tax benefit on  exercise of stock options                  |       | —                                                         |       | 282          |       |             | —     |         |       | — |   | 282 |   |
| Repurchase of  common stock                                |       | (885,541                                                       | )          | (10,723      | )          |             | —     |         |       | — |   | (10,723 | ) |
| Deferred  compensation relating to restricted stock grants |       | (7,334                                                         | )          | (120         | )          |             | 120        |         |       | — |   | — |   |
| Amortization of  deferred compensation                     |       | —                                                         |       | —       |       |             | 65         |         |       | — |   | 65 |   |
| Dividends on  common stock ($1.62 per share)          |       | —                                                         |       | —       |       |             | —     |         |       | (17,714 | ) | (17,714 | ) |
| Net income                                                 |       | —                                                         |       | —       |       |             | —     |         |       | 6,349 |   | 6,349 |   |
| Balance, April 30,  2006                              |       | 10,476,069                                                     |       | $            | 58,041     |             |       | $            | (61        | ) |   | $ | 9,006 |   | $ | 66,986 |   |
|                                                            |            |                                                                |            |              |            |                  |            |              |            |  |  |  |  |  |  |  |  |

 

See accompanying notes.

29

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**CUTTER & BUCK INC.**

**Consolidated Statements of Cash Flows**

| ** **                                                                         | ** ** | **Year Ended April 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| *** ***                                                                       | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| *** ***                                                                       | ** ** | ***(in thousands)***               | ** ** |
| **Operating activities:**                                                     |       |                                    |       |   |   |   |   |
| Net income                                                                         |       | $                                       | 6,349      |   | $ | 8,614 |   | $ | 7,931 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                    |       |   |   |   |   |
| Depreciation                                                                       |       | 2,875                                   |       | 2,904 |   | 4,179 |   |
| Tax benefit on exercise of stock options                                           |       | 282                                     |       | 1,459 |   | 236 |   |
| Deferred income taxes                                                              |       | 320                                     |       | 365 |   | 822 |   |
| Amortization of deferred compensation                                              |       | 65                                      |       | 35 |   | 37 |   |
| Deferred gain on sale and leaseback of capital  assets                             |       | —                                  |       | (10 | ) | (72 | ) |
| Loss on disposals of furniture and equipment                                       |       | 71                                      |       | — |   | 164 |   |
| Noncash restructuring and asset impairment charges                                 |       | —                                  |       | — |   | (363 | ) |
| Changes in assets  and liabilities:                                                |       |                                    |       |   |   |   |   |
| Accounts receivable, net                                                           |       | (1,179                                  | )          | 1,003 |   | 2,194 |   |
| Inventories, net                                                                   |       | (261                                    | )          | (3,460 | ) | 12,601 |   |
| Prepaid expenses and other assets                                                  |       | (215                                    | )          | 75 |   | 2,695 |   |
| Accounts payable, accrued liabilities and other  liabilities                       |       | 737                                     |       | (66 | ) | (8,871 | ) |
| Income taxes receivable/payable                                                    |       | 831                                     |       | (2,136 | ) | 1,217 |   |
| Net cash provided  by operating activities                                         |       | 9,875                                   |       | 8,783 |   | 22,770 |   |
| **Investing  activities:**                                                         |       |                                    |       |   |   |   |   |
| Purchases of  furniture and equipment                                              |       | (2,640                                  | )          | (3,348 | ) | (1,702 | ) |
| Purchases of  short-term investments                                               |       | (59,406                                 | )          | (91,023 | ) | (44,885 | ) |
| Maturities of  short-term investments                                              |       | 75,923                                  |       | 80,144 |   | 26,933 |   |
| Net cash provided by (used in) investing activities                                |       | 13,877                                  |       | (14,227 | ) | (19,654 | ) |
| **Financing  activities:**                                                         |       |                                    |       |   |   |   |   |
| Issuance of  common stock                                                          |       | 852                                     |       | 3,643 |   | 658 |   |
| Payment of  dividends                                                              |       | (17,714                                 | )          | (2,856 | ) | (538 | ) |
| Repurchases of  common stock                                                       |       | (10,723                                 | )          | (2,749 | ) | (583 | ) |
| Principal  payments under capital lease obligations                                |       | (111                                    | )          | (557 | ) | (1,802 | ) |
| Net cash used in financing activities                                              |       | (27,696                                 | )          | (2,519 | ) | (2,265 | ) |
| Net increase (decrease) in cash and cash equivalents                               |       | (3,944                                  | )          | (7,963 | ) | 851 |   |
| Cash and cash equivalents, beginning of period                                     |       | 11,752                                  |       | 19,715 |   | 18,864 |   |
| Cash and cash  equivalents, end of period                                          |       | $                                       | 7,808      |   | $ | 11,752 |   | $ | 19,715 |   |
| Supplemental  information:                                                         |       |                                    |       |   |   |   |   |
| Cash paid during the year for interest                                             |       | $                                       | 9          |   | $ | 38 |   | $ | 155 |   |
| Cash paid during the year for income taxes                                         |       | $                                       | 2,124      |   | $ | 4,441 |   | $ | 30 |   |
| Noncash financing and  investing activities:                                       |       |                                    |       |   |   |   |   |
| Deferred  compensation for issuance of restricted stock                            |       | $                                       | (120       | ) | $ | 281 |   | $ | — |   |

 

See accompanying notes.

30

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**CUTTER & BUCK INC.**

**Notes to Consolidated Financial Statements**

**Note 1. Description of theBusiness and Summary of Significant Accounting Policies**

**Description of theBusiness and Basis of Presentation**

Cutter & Buck Inc. (the “Company”) designsand markets upscale sportswear and outerwear, primarily through wholesalechannels. Through the end of April 2003, the Company also operatedCompany-owned retail stores. These stores were closed by April 30, 2003,and are presented as discontinued operations in the consolidated financialstatements (see Note 13). The Company has two wholly-owned subsidiaries, Cutter &Buck Direct LLC and Cutter & Buck (Europe) B.V. Cutter & BuckDirect LLC was formed during fiscal 2006 to develop and manage a direct toconsumer catalog and website business. Cutter & Buck (Europe) B.V.ceased operations in fiscal 2002 and is in the process of winding up itsaffairs and dissolving. The accompanying consolidated financial statementsinclude the accounts of the Company and these wholly-owned subsidiaries. Allsignificant intercompany accounts and transactions have been eliminated.

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. Actual results could differfrom those estimates.

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

**Third-Party OverseasProduction**

**TheCompany’s products are produced by third parties outside the United States.During fiscal 2006, we used factories in 13 countries, primarily Thailand andIndia, in which 48% and 16%, respectively, of our total 2006 productionoccurred. 79% of the Company’s production occurs in Asian countries and 36% ofthe Company’s production occurs in two factories in Thailand. Althoughmanagement believes that it could identify and qualify alternative factories ifneeded, the loss of production contracts with, or the overall productioncapacity of these factories could have a material adverse effect on theCompany.**

**Concentrations ofCredit Risk**

The Company sells itsproducts to approved customers on an open account basis, subject to establishedcredit limits, cash in advance, or cash on delivery terms. The company issubject to credit risk on the majority of its receivables. These receivablesare geographically disbursed, primarily throughout the United States, as wellas in Europe and other foreign countries where formal licensing or distributoragreements exist.

**Cash Equivalentsand Short-Term Investments**

The Company invests in interest-bearing U.S.Government and high-quality corporate debt instruments. The Company considersinvestments with maturities of 90 days or less at purchase to be cashequivalents. Investments with maturities greater than 90 days, but less thanone-year, at purchase are recorded as short-term investments.

At April 30, 2006,the Company’s short-term investments are classified as held-to-maturity. TheCompany has the intent and ability to hold the securities to maturity. Theinvestment portfolio is carried at amortized cost, which approximates fairmarket value. Management regularly reviews the carrying value of investments inorder to identify and record losses, if any, when events and circumstancesindicate that 

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declinesin the fair value of investments below amortized cost are other-than-temporary.Declines in fair market value below amortized cost were not material as of April 30,2006 (see Note 2).

**Accounts Receivable**

The Company extends creditto customers in the normal course of business, subject to established creditlimits. The Company’s trade customers are principally corporate accounts, golfpro shops and resorts, and specialty retail stores. Accounts receivable, net,in the consolidated balance sheets, consists of amounts due from customers netof allowances for doubtful accounts and reserves for returns and salesallowances. The allowance for doubtful accounts is determined by evaluatingindividual customer receivables, based on contractual terms, and reviewingthe  customer’s financial condition andcredit history, along with current economic conditions. Accounts receivable arewritten-off if a customer declares bankruptcy or if our third-party collectionagency determines that it has exhausted all collection efforts and a receivableis uncollectible. The reserves for returns and sales allowances are determinedby an analysis of the historical rate of returns and sales allowances.

**Inventories**

Inventories, which arepredominantly finished goods, are valued at the lower of cost or market, withcost determined under the weighted average method. A detailed analysis ofinventory is performed on a quarterly basis to identify slow-moving andout-of-season merchandise. The net realizable value of this merchandise isestimated based upon disposition plans and historical experience. Additionally,we reserve a portion of our seasonal lines as it is received based on ourhistorical rate of product that ultimately is sold below cost due to incompletecolor and sizing runs. A valuation allowance is established to reduce thecarrying amount of slow-moving merchandise to its estimated net realizablevalue.

**Samples**

**The Companycapitalizes the costs of merchandise samples that relate to goods to be sold infuture selling seasons. These samples are amortized on a straight-line basisover the respective selling seasons of six months. The amortization of samplesis charged to selling expenses.**

**Furniture andEquipment**

Furniture and equipmentare stated at historical cost less accumulated depreciation. Depreciation iscalculated on a straight-line basis over the estimated useful lives of therelated assets. Computer software and hardware are generally depreciated overthree to five years. Furniture and fixtures are generally depreciated over fiveyears. Machinery and equipment are generally depreciated over five to sevenyears. Sales fixtures are generally depreciated over five years. Leaseholdimprovements are depreciated over the lesser of the lease term or the estimatedeconomic useful life of the asset, generally five to ten years. Furniture andequipment acquired under capital leases are amortized on a straight-line basis overthe lesser of the lease term or the estimated economic useful life of theasset.

**Long-Lived Assets**

The carrying values oflong-lived assets are reviewed for impairment whenever events or changes incircumstances indicate that such carrying values may not be recoverable. TheCompany does not perform a periodic assessment of assets for impairment in theabsence of such information or indicators. Currently, management has noindication of any events or circumstances that would significantly impair anyof its long-lived assets, primarily furniture and equipment. Impairmentcharges, if any, would be recorded as an impairment charge for the excess ofthe carrying value of an asset over its estimated fair value, as 

32

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determinedbased upon estimates of future cash flows, third-party valuation, or othermeasures deemed appropriate for the circumstances.

**Deferred Rent**

Pursuant to Statement ofFinancial Accounting Standards No. 13, *Accounting for Leases*,the Company accounts for lease expense and sublease income on a straight-linebasis over the terms of the related leases. This accounting generally resultsin a deferred asset (for the sublease income) and a deferred liability (for thelease expense) recorded on the balance sheet. Prior to fiscal 2006, the Companynetted the deferred asset and liability and reported the net amount as acurrent liability. At the beginning of fiscal 2006, the Company began reportingthe deferred asset ($1.3 million) and the deferred liability ($1.4 million) asseparate items on the balance sheet in other long-term assets and otherlong-term liabilities, respectively. The prior year amounts, a $1.4 millionlong-term asset and a $1.4 million long-term liability, have been reclassifiedto conform to the current year presentation.

**Income Taxes**

The Company accounts forincome taxes using the liability method, whereby deferred tax assets andliabilities are determined based on differences between financial reporting andtax bases of assets and liabilities measured using enacted tax rates and laws thatwill be in effect when the differences are expected to reverse. A valuationallowance is provided for deferred tax assets if it is more likely than notthat the balance of these assets will not be fully realizable.

**Fair Value ofFinancial Instruments**

The fair value of theCompany’s financial instruments, including its capital lease obligations,accounts receivable, and accounts payable approximated their carrying amount asof April 30, 2006 and 2005.

**Revenue Recognition**

Revenue, net of promotional discounts and rebates, isgenerally recognized at the time the product is shipped to the customer. Theterms and conditions of sales agreements specify that possession and risk ofloss pass to customers when the product is delivered to a third-party carrier.However, in cases where goods are shipped to customers prior to thecontractually agreed ship date, revenue is not recognized until the date thegoods were initially contracted to be shipped. There is generally no right toreturn for wholesale customers, other than for defective or mis-shippedproducts. Under certain circumstances, the Company does accept returns fromwholesale customers as part of stock rotations, but such accommodations aremade under limited pre-established programs or on a case-by-case basis. Salesdirectly to consumers via our catalog and website are unconditionallyguaranteed. An allowance for estimated sales returns is provided as a reductionto sales when the related revenue is recorded. For certain golf tournaments,product is shipped on a consignment basis. Revenue for these sales isrecognized, not when the product is shipped, but when the customer sells theproduct to end consumers.

The Company offers certainsales incentives, including cash rebates, which are recorded as reductions tonet sales, and free product, which are recorded as cost of goods sold. Aliability for these sales incentives is recorded at the time the sale is madeas either a deduction to revenue or an increase to cost of goods sold, asappropriate. Some incentives are earned upon customers achieving certain salesmilestones or sales growth. Although, these incentives are due to customersonly if and when the sales targets are achieved, the Company accrues aliability for the estimated incentives to be earned ratably over all of acustomer’s projected sales on a customer by customer basis.

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**Cost of Sales**

Cost of sales includes theexpenses incurred to acquire and produce inventory for sale, including productcosts, inbound freight costs, import costs, and embroidery costs, as well asreserves for slow-moving and out-of-fashion merchandise. Inbound freight,import and embroidery costs totaled approximately $22.2 million, $17.0 million,and $16.7 million for the years ended April 30, 2006, 2005, and 2004,respectively. Purchasing and receiving costs, warehousing costs, and othercosts of distribution are included in selling, general and administrativeexpenses and totaled $6.2 million, $6.2 million, and $6.1 million for the yearsended April 30, 2006, 2005 and 2004, respectively.

**Advertising**

Catalogs and point ofpurchase displays are recorded as prepaid expenses until delivered to customersor the season to which they relate has passed, whichever is sooner. All otheradvertising costs, including media buys, direct mail, sponsorships, andcooperative advertising are expensed at the time the advertising takes placeor, in the case of sponsorships, as performance is received. Advertising costsincluded in prepaid expenses totaled $521,000 and $294,000 as of April 30,2006 and 2005, respectively. Advertising expense is included within selling,general and administrative expenses and totaled $4.9 million, $2.3 million and$1.7 million for the years ended April 30, 2006, 2005, and 2004,respectively.

**Stock-BasedCompensation**

The Company accounts for its share-based paymentsusing the intrinsic value method prescribed in Accounting Principles BoardOpinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” andrelated interpretations. The Company has elected to apply the disclosure-onlyprovisions of Statement of Financial Accounting Standards (“SFAS”) No. 123,“Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accountingfor Stock-based Compensation—Transition and Disclosure.” Compensation expensefor stock options is recognized over the vesting period of the grant based onthe excess, if any, of the market price of the Company’s common stock at thedate of grant over the stock option exercise price. Under the Company’s plans,stock options are generally granted at fair market value on the date of grant.

In December 2004, the Financial AccountingStandards Board issued SFAS No. 123(R), Share-Based Payment, which is arevision of SFAS No. 123 and supercedes APB No. 25. SFAS No. 123(R) requiresall share-based payments to employees, including grants of employee stockoptions, to be recognized in the income statement based on their fair values.Pro forma disclosure will no longer be a permitted alternative. The Companywill adopt SFAS No. 123(R) as of the beginning of its fiscal 2007using the “modified prospective” method of adoption. Under the modifiedprospective method, compensation cost is recognized, beginning with theeffective date, based on the requirements of SFAS No. 123(R) for allshare-based payments granted after the effective date and based on therequirements of SFAS No. 123 for all awards granted prior to the effectivedate that remain unvested on the effective date.

Based upon the unrecognized portion of the fair valueof options outstanding as of April 30, 2006, the adoption of SFAS No. 123(R) isnot anticipated to have a significant impact on our results of operations orour overall financial position. However, the impact of adoption of SFAS No. 123(R) onfuture periods cannot be predicted at this time because it will depend onlevels of share-based payments granted in the future.

34

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Ifcompensation costs for stock-based compensation had been recognized based onthe fair value method, the pro forma amounts of the Company’s net income andnet earnings per share would have been as follows:

| ** **                                                                                                                        | ** ** | **Year Ended April 30,**                             | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **2006**                                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| *** ***                                                                                                                      | ** ** | ***(in thousands, except per  share amounts)*** | ** ** |
| Net income, as  reported                                                                                                          |       | $                                                                   | 6,349      |   | $ | 8,614 |   | $ | 7,931 |   |
| Add employee  stock-based compensation expense, net of tax, as reported                                                           |       | 40                                                                  |       | 24 |   | 24 |   |
| Deduct total  stock-based employee compensation expense, net of tax, determined under the  fair value based method for all awards |       | (210                                                                | )          | (631 | ) | (1,511 | ) |
| Pro forma net  income                                                                                                             |       | $                                                                   | 6,179      |   | $ | 8,007 |   | $ | 6,444 |   |
| Earnings per  share:                                                                                                              |       |                                                                |       |   |   |   |   |
| Basic—as reported                                                                                                            |       | $                                                                   | 0.58       |   | $ | 0.79 |   | $ | 0.74 |   |
| Basic—pro forma                                                                                                              |       | $                                                                   | 0.57       |   | $ | 0.73 |   | $ | 0.60 |   |
| Diluted—as reported                                                                                                          |       | $                                                                   | 0.57       |   | $ | 0.75 |   | $ | 0.71 |   |
| Diluted—pro forma                                                                                                            |       | $                                                                   | 0.55       |   | $ | 0.70 |   | $ | 0.58 |   |

 

Thefair value for each option grant was estimated at the date of grant using theBlack-Scholes option pricing model, with the following weighted-average assumptions.The dividend yield was assumed to be 0.0% until the fourth quarter of fiscal2004, when the Board of Directors first authorized a quarterly dividend.

| ** **                                    | ** ** | **Year Ended April 30,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free  interest rate                      |       | 4.4                                     | %          | 3.5 | % | 2.6 | % |
| Volatility                                    |       | 56                                      | %          | 61 | % | 57 | % |
| Dividend yield                                |       | 2.5                                     | %          | 2.1 | % | 0.1 | % |
| Expected option  life                         |       | 5 years                                 |       | 5 years |   | 5 years |   |
| Weighted average  fair value of option grants |       | $                                       | 5.53       |   | $ | 6.03 |   | $ | 2.42 |   |
|                                               |            |                                         |            |  |  |  |  |  |  |  |

 

**Note 2. Short-termInvestments**

Short-terminvestments held-to-maturity as of April 30, 2006 and 2005, consisted ofU.S. Treasuries and other government agency debt and U.S. corporate debtsecurities with maturity dates within one year of the purchase date (amortizedcost includes the initial purchase amount plus accrued interest of $51,000 and$96,000 as of April 30, 2006 and 2005, respectively):

| ** **               | ** ** | **April 30,**   | ** ** |
|--------------------------|------------|----------------------|------------|
| ** **               | ** ** | **2006**             | ** ** | **2005** | ** ** |
| ** **               | ** ** | ***(in thousands)*** | ** ** |
| Amortized cost           |       | $                    | 12,365     |   | $ | 28,927 |   |
| Gross unrealized  gains  |       | —               |       | — |   |
| Gross unrealized  losses |       | (13                  | )          | (21 | ) |
| Estimated fair value     |       | $                    | 12,352     |   | $ | 28,906 |   |

 

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**Note 3. Property andLeases**

Furnitureand equipment consisted of the following:

| ** **                                      | ** ** | **April 30,**   | ** ** |
|-------------------------------------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2006**             | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | ***(in thousands)*** | ** ** |
| Computer software                               |       | $                    | 7,152      |   | $ | 6,496 |   |
| Computer hardware                               |       | 4,657                |       | 4,045 |   |
| Furniture and  fixtures                         |       | 4,486                |       | 4,727 |   |
| Machinery and  equipment                        |       | 3,556                |       | 3,625 |   |
| Sales fixtures                                  |       | 2,868                |       | 2,799 |   |
| Leasehold  improvements                         |       | 1,279                |       | 1,171 |   |
|                                            |       | 23,998               |       | 22,863 |   |
| Less accumulated  depreciation and amortization |       | (17,570              | )          | (16,129 | ) |
|                                            |       | $                    | 6,428      |   | $ | 6,734 |   |

 

The Company had no equipment leased under capitalleases as of April 30, 2006. The total cost of leased equipmentcapitalized at April 30, 2005 was $1.1 million with related accumulatedamortization of $1.0 million.

The Company leases its office facilities, adistribution center, and certain office equipment under operating leases, mostof which contain renewal options. Total rent expense, prior to reductions fromsublease rentals, amounted to $4.0 million, $3.8 million and $3.7 million forthe years ended April 30, 2006, 2005, and 2004, respectively. Included inthese amounts is additional rent for common area maintenance and other buildingoperating expenses totaling $0.7 million, $0.6 million, and $0.3 million forthe years ended April 30, 2006, 2005, and 2004, respectively. The Companysub-leases unused space within its distribution center. Sublease rentals, whichare recorded as a reduction to rent expense, amounted to $1.2 million for theyear ended April 30, 2006, and $1.1 million for each of the years ended April 30,2005 and 2004.

Futureminimum obligations, by year and in the aggregate, under noncancelableoperating leases with initial or remaining terms of one year or more consistedof the following at April 30, 2006:

| ** **                              | ** ** | **Operating**             | ** ** |
|-----------------------------------------|------------|---------------------------|------------|
| **Year Ended April 30,** | ** ** | ** **                | ** ** | **Leases** | ** ** |
| *** ***                            | ** ** | ***(in thousands)*** | ** ** |
| 2007                                    |       |                      | $          | 3,582 |   |   |
| 2008                                    |       |                      | 3,779      |   |   |
| 2009                                    |       |                      | 3,786      |   |   |
| 2010                                    |       |                      | 3,857      |   |   |
| 2011                                    |       |                      | 2,784      |   |   |
| Thereafter                              |       |                      | 1,385      |   |   |
| Minimum lease obligations               |       |                      | 19,173     |   |   |
| Less sublease  obligations              |       |                      | (5,272     | ) |   |
| Total minimum  lease obligations        |       |                      | $          | 13,901 |   |   |
|                                         |            |                           |            |  |  |  |  |  |

 

36

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**Note 4. AccruedLiabilities**

Accruedliabilities consists of the following:

| ** **                                      | ** ** | **April 30,**   | ** ** |
|-------------------------------------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2006**             | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | ***(in thousands)*** | ** ** |
| Accrued salaries  and related expenses          |       | $                    | 1,448      |   | $ | 1,744 |   |
| Accrued sales  incentives                       |       | 1,052                |       | 1,112 |   |
| Accrued sales  commissions                      |       | 927                  |       | 881 |   |
| Accrued  professional fees                      |       | 868                  |       | 321 |   |
| Accrued operating  expenses                     |       | 585                  |       | 1,225 |   |
| Accrued excise  and franchise taxes             |       | 435                  |       | 1,032 |   |
| Accrued  restructuring and restatement expenses |       | 320                  |       | 1,053 |   |
| Other accrued  expenses                         |       | 299                  |       | 374 |   |
|                                            |       | $                    | 5,934      |   | $ | 7,742 |   |

 

**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, andprofitability of $5 million per year. Additionally, capital expenditures arelimited to $4.0 million per fiscal year. The company is in compliance with allterms and covenants of this agreement. On April 30, 2006, letters ofcredit outstanding against this line of credit totaled approximately $2.1million and there were no working capital advances outstanding.

**Note 6. Income Taxes**

Theprovision for income taxes on continuing operations consisted of the following:

| ** **             | ** ** | **Year Ended April 30,** | ** ** |
|------------------------|------------|-----------------------------------------|------------|
| ** **             | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| *** ***           | ** ** | ***(in thousands)***               | ** ** |
| Current tax provision  |       |                                    |       |   |   |   |   |
| Federal                |       | $                                       | 3,048      |   | $ | 4,372 |   | $ | 91 |   |
| State                  |       | 63                                      |       | (599 | ) | 31 |   |
|                   |       | 3,111                                   |       | 3,773 |   | 122 |   |
| Deferred tax provision |       | 320                                     |       | 365 |   | 822 |   |
|                   |       | $                                       | 3,431      |   | $ | 4,138 |   | $ | 944 |   |

 

In fiscal 2005, the Company completed a study of itsstate tax liabilities, resulting in an overall reduction in the accrual forstate taxes of $225,000 and a reclassification of $425,000 of state taxliabilities from income taxes to sales and franchise tax liabilities. As aresult, current state income tax expense for fiscal 2005 includes a reductionof $650,000.

In fiscal 2004, the uncertainty surrounding theultimate realizability of the Company’s long term deferred tax assets,primarily net operating loss carryforwards, was removed and the Companyreversed the valuation allowance against those assets.

37

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Theprovision for income taxes on continuing operations differs from the amount oftax determined by applying the federal statutory rate for the followingreasons:

| ** **                                            | ** ** | **Year Ended April 30,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                            | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| *** ***                                          | ** ** | ***(in thousands)***               | ** ** |
| Tax provision at  federal statutory tax rate          |       | $                                       | 3,325      |   | $ | 4,364 |   | $ | 2,968 |   |
| State income tax  provision (benefit)                 |       | 96                                      |       | (371 | ) | 236 |   |
| Reconciliation of  tax provision to income tax return |       | (6                                      | )          | (24 | ) | (783 | ) |
| Valuation  allowance                                  |       | —                                  |       | — |   | (1,186 | ) |
| Other                                                 |       | 16                                      |       | 169 |   | (291 | ) |
|                                                  |       | $                                       | 3,431      |   | $ | 4,138 |   | $ | 944 |   |

 

Significantcomponents of the Company’s deferred tax assets and liabilities are as follows:

| ** **                                              | ** ** | **April 30,**        | ** ** |
|---------------------------------------------------------|------------|---------------------------|------------|
| ** **                                              | ** ** | **2006**                  | ** ** | **2005** | ** ** |
| *** ***                                            | ** ** | ***(in thousands)*** | ** ** |
| Deferred income tax  assets:                            |       |                      |       |   |   |
| Unicap                                                  |       | $                         | 949        |   | $ | 1,166 |   |
| Reserve for inventory obsolescence                      |       | 711                       |       | 433 |   |
| Restructuring accrual                                   |       | 661                       |       | 780 |   |
| Deferred rent- leases                                   |       | 499                       |       | 462 |   |
| Reserves for doubtful accounts, returns and  allowances |       | 423                       |       | 615 |   |
| Other                                                   |       | 259                       |       | 439 |   |
| Total deferred  income tax assets                       |       | 3,502                     |       | 3,895 |   |
| Deferred income  tax liabilities:                       |       |                      |       |   |   |
| Depreciation                                            |       | (507                      | )          | (660 | ) |
| Deferred rent- subleases                                |       | (437                      | )          | (479 | ) |
| Prepaid expenses and other                              |       | (301                      | )          | (179 | ) |
| Total deferred  income tax liabilities                  |       | (1,245                    | )          | (1,318 | ) |
| Net deferred  income tax assets                         |       | $                         | 2,257      |   | $ | 2,577 |   |

 

**Note 7. Shareholders’Equity**

**Stock RepurchaseProgram**

In2004, the Company had authorized a stock repurchase program to repurchase up to$6.0 million in company common stock. In July 2005, the board ofdirectors approved an increase in the stock repurchase program to provide forup to $10.0 million of additional repurchases beyond the $4.2 millionrepurchased through July 5, 2005, bringing the total repurchaseauthorization since inception of the program to $14.2 million.The Company repurchased 885,541 and 215,100 shares of common stock underits Stock Repurchase Program during fiscal 2006 and 2005, respectively. Subsequentto year end, the Company has utilized the remaining repurchase authorization of$154,000, bringing the total number of shares repurchased under the program to1,170,052 at a total cost of $14,208,000. There are no current plans toauthorize additional repurchases at this time.

**Dividends**

During fiscal 2006, theCompany paid dividends totaling $17,714,000 ($1.62 per share), which consist ofa $1.34 per share special dividend and aggregate quarterly dividends totaling$.28 per share. During fiscal 2005, the Company paid quarterly dividendstotaling $2,856,000 ($.26 per share).

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**Stock Plans**

The Company has stock awards available for grant undertwo plans that provide for the granting of options, stock, or stockappreciation rights to employees and officers of the Company. There are 376,760awards available for future issuance as of April 30, 2006, primarily underthe 2000 Stock Plan, which generally provides for equal vesting over afour-year period. Some of the plans limit the types and quantities of theawards. Of the awards available for future issuance as of April 30, 2006,the plans limit the remaining number of available stock grants to 69,611 andthe remaining number of available stock appreciation rights to 308,563. Optionsunder the plans expire after 10 years and have been granted at fair value onthe date of grant.

The Company also has aStock Bonus Plan that permits eligible employees receiving cash bonuses toelect to receive shares of Restricted Stock of the Company in lieu of all or aportion of their cash bonus. As of April 30, 2006, 1,025 awards remainavailable for issuance under this plan.

*Options*

Asummary of Company stock option activity and related information is as follows:

| ** **                  | ** ** | **Year Ended April 30,** | ** ** |
|-----------------------------|------------|-----------------------------------------|------------|
| ** **                  | ** ** | **2006**                                | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                  | ** ** | ** **                              | ** ** | **Wtd Avg** | ** ** | ** ** | ** ** | **Wtd Avg** | ** ** | ** ** | ** ** | **Wtd Avg** | ** ** |
| ** **                  | ** ** | ** **                              | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                  | ** ** | **Options**                             | ** ** | **Price** | ** ** | **Options** | ** ** | **Price** | ** ** | **Options** | ** ** | **Price** | ** ** |
| Balance,  beginning of year |       | 803,651                                 |       |   | $ | 8.13 |   |   | 1,471,163 |   |   | $ | 6.45 |   |   | 1,486,535 |   |   | $ | 7.03 |   |   |
| Granted                     |       | 774,588                                 |       |   | 7.59 |   |   | 144,500 |   |   | 12.86 |   |   | 410,000 |   |   | 4.91 |   |   |
| Exercised                   |       | (140,118                                | )          |   | 5.46 |   |   | (655,292 | ) |   | 5.46 |   |   | (157,923 | ) |   | 3.75 |   |   |
| Canceled                    |       | (785,127                                | )          |   | 8.58 |   |   | (156,720 | ) |   | 7.83 |   |   | (267,449 | ) |   | 8.77 |   |   |
| Balance, end of  year       |       | 652,994                                 |       |   | $ | 7.27 |   |   | 803,651 |   |   | $ | 8.13 |   |   | 1,471,163 |   |   | $ | 6.45 |   |   |
| Exercisable at end of  year |       | 638,664                                 |       |   | $ | 7.21 |   |   | 620,832 |   |   | $ | 7.62 |   |   | 909,334 |   |   | $ | 7.35 |   |   |

 

In October 2005, certain stock plan amendmentswere approved by shareholders to allow for certain adjustments to employeestock-based compensation awards to offset the economic impact of the $1.34special dividend. Under the accounting prescribed by APB No. 25 and FASBinterpretation No. 44, *“Accounting for CertainTransactions involving Stock Compensation”*, no compensation cost wasrecorded in the Company’s financial statements as a result of thismodification, which was deemed to be an equity restructuring. Included in theabove table, are 683,155 options cancelled pursuant to the modification with aweighted average exercise price of $8.34 and the related 760,423 optionsgranted at a weighted average exercise price of $7.50. Excluding the effects ofthis modification, 14,165 options were granted during fiscal 2006 at a weightedaverage exercise price of $12.55.

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Thefollowing information is provided for options outstanding and exercisable atApril 30, 2006:

| ** **                                  | ** ** | **Outstanding** | ** ** | **Exercisable**           | ** ** |
|---------------------------------------------|------------|-----------------|------------|---------------------------|------------|
| ** **                                  | ** ** | ** **      | ** ** | **Weighted Average** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                  | ** ** | ** **      | ** ** | **Remaining**             | ** ** | ** ** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                  | ** ** | ** **      | ** ** | **Contractual**           | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| **Range of Exercise Prices** | ** ** | ** **      | ** ** | **Options**               | ** ** | **Life** | ** ** | **Price** | ** ** | **Options** | ** ** | **Price** | ** ** |
| $2.97 - $3.42                               |       | 115,094         |       |                      | 6.4        |   |   |   | $ | 3.25 |   |   | 115,094 |   |   | $ | 3.25 |   |   |
|   3.58  -   3.58        |       | 114,411         |       |                      | 7.0        |   |   |   | 3.58 |   |   | 114,411 |   |   | 3.58 |   |   |
|   4.09  -   7.07        |       | 125,419         |       |                      | 6.2        |   |   |   | 5.69 |   |   | 125,419 |   |   | 5.69 |   |   |
|   7.13  - 10.33                   |       | 125,851         |       |                      | 2.8        |   |   |   | 8.97 |   |   | 114,721 |   |   | 8.89 |   |   |
| 10.53 - 12.39                               |       | 113,110         |       |                      | 4.9        |   |   |   | 11.68 |   |   | 109,910 |   |   | 11.68 |   |   |
| 12.62 - 15.12                               |       | 59,109          |       |                      | 6.2        |   |   |   | 13.56 |   |   | 59,109 |   |   | 13.56 |   |   |
|                                        |       | 652,994         |       |                      | 5.5        |   |   |   | 7.27 |   |   | 638,664 |   |   | 7.21 |   |   |
|                                             |            |                 |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Restricted Stock*

Under terms of theemployment agreement with its former CEO, the Company awarded a restrictedstock grant of 20,000 shares of common stock in December 2004 with agrant-date fair value of $14.05 per share. Under terms of the employmentagreement with its President, the Company awarded a restricted stock grant of6,000 shares of common stock in January 2006 with a grant-date fair valueof $11.32 per share. Both of these awards were to be issued in equal thirds oneach twelve month anniversary of continuous service to the Company. Upon hisresignation, 13,334 shares of the former CEO’s award were forfeited. TheCompany has recorded deferred compensation related to restricted stock of$61,000 as of April 30, 2006. This amount will be amortized on astraight-line basis over the remaining 32 months of the vesting period for thePresident’s award. Compensation expense relating to all restricted stock awardswas $65,000, $35,000 and $37,000 for the years ended April 30, 2006, 2005and 2004, respectively.

*Non-employee StockOptions*

In January 2001,under the terms of an endorsement agreement, the Company granted an option topurchase 60,000 shares of Company Common Stock. These options are fully vestedand expire in September 2007.

**Note 8. EarningsPer Share**

Basic earnings per share is based on the weightedaverage number of common shares outstanding. Diluted earnings per share isbased on the weighted average number of common shares and equivalentsoutstanding, except when inclusion of these items would be antidilutive. Commonshare equivalents included in the computation of diluted earnings per sharerepresent the restricted stock grants to the Company’s former CEO and currentPresident and the net shares issuable upon assumed exercise of outstandingstock options. As of April 30, 2006, 2005, and 2004, 141,000, 152,000 and425,000 outstanding stock options, respectively, were excluded from thecalculation of diluted earnings per share because the exercise prices exceededthe average market value of the common shares.

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

| ** **                                             | ** ** | **Year Ended April 30,**                                                     | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
| *** ***                                           | ** ** | **2006**                                                                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| *** ***                                           | ** ** | ***(in thousands, except share and per share amounts)*** | ** ** |
| Numerator for basic and  diluted earnings per share:   |       |                                                                                        |       |   |   |   |   |
| Income from continuing operations                      |       | $                                                                                           | 6,349      |   | $ | 8,614 |   | $ | 7,785 |   |
| Denominator for  basic earnings per share:             |       |                                                                                        |       |   |   |   |   |
| Weighted average common shares                         |       | 10,908,910                                                                                  |       | 10,923,188 |   | 10,704,517 |   |
| Dilutive effect  of employee stock options and awards  |       | 263,550                                                                                     |       | 512,506 |   | 457,592 |   |
| Denominator for  diluted earnings per share            |       | 11,172,460                                                                                  |       | 11,435,694 |   | 11,162,109 |   |
| Basic earnings per share from continuing operations    |       | $                                                                                           | 0.58       |   | $ | 0.79 |   | $ | 0.73 |   |
| Diluted earnings per  share from continuing operations |       | $                                                                                           | 0.57       |   | $ | 0.75 |   | $ | 0.70 |   |

 

**Note 9. DefinedContribution Plan**

The Company has a salarydeferral 401(k) plan covering substantially all of its employees. The planallows eligible employees to contribute a percentage of their pretax earningsannually, subject to limitations imposed by the Internal Revenue Service. TheCompany matches 50% of employee contributions up to the first 3% ofcompensation that was deferred by an employee. The plan also allows the Companyto contribute an amount at its discretion. The Company contributed $176,000,$169,000 and $211,000 for the years ended April 30, 2006, 2005, and 2004,respectively.

**Note 10. Litigation**

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

The Company had acomplaint against Genesis Insurance Company (“Genesis”), originally filed inthe United States District Court for the Western District of Washington (“DistrictCourt”), alleging that Genesis’ 2002 attempt to rescind the Company’s primaryDirectors’ and Officers’ liability insurance was unlawful, and sought damagesresulting from Genesis’ breaches of contract and the duty of good faith andfair dealing. In February 2004, the District Court entered an Ordergranting Genesis’ motions for summary judgment and, accordingly, the Company’sclaims against Genesis were dismissed by the District Court. The Companyappealed the District Court’s decision to the United States Circuit Court ofAppeals for the Ninth Circuit (“Court of Appeals”). In August 2005, theCourt of Appeals affirmed the decision of the District Court in favor ofGenesis and, therefore, the Company filed a petition for rehearing with theCourt of Appeals seeking to have the Court of Appeals reconsider certainportions of its decision. In October 2005, the Court of Appeals denied theCompany’s petition for rehearing, effectively ending this lawsuit.

**Note 11. RestatementExpenses**

In fiscal 2002, the Company restated certain financialstatements for irregularities and errors. The Company settled several lawsuitsand a Securities and Exchange Commission investigation of the Company arisingfrom the circumstances underlying the restatement. The restatement has been completedand the Company does not anticipate it will incur any additional legal or otherprofessional service costs in connection with this matter.

41

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Restatement expenses amounted to approximately $5.0million for the year ended April 30, 2004. Included in this total areapproximately $3.5 million of legal and professional fees and $1.2 million ofretention bonuses for certain key employees. Retention bonuses totaled $1.9million, the majority of which was paid out in the fourth quarter of fiscal2004.

Restatement expenses amounted to approximately $0.4million for the year ended April 30, 2005, primarily for legal and otherprofessional service costs incurred in connection with the indemnification offormer officers and the ongoing lawsuit against Genesis Insurance Company.

As discussed in Note 10,the remaining lawsuit related to the restatement ended in October 2005.Previously, the Company had determined that it was probable that an insurancepremium would need to be repaid to Genesis. Based on the court’s decision,management determined that it is not probable the Company will be required torepay the premium for the policy in question. During fiscal 2006, the Companyreversed amounts that had been recorded for this liability ($535,000)  and reduced the estimate of legal expenses($113,000) relating to this matter.

**Note 12. RestructuringLiability**

As aresult of a restructuring plan adopted in 2002, the Company has a liabilityrecorded for its remaining contractual lease payments due for excess warehousecapacity, net of estimated sublease payments. Currently, all of the excesscapacity is being subleased and management believes it will continue to besubleased through the end of the Company’s lease term in 2011. For the yearended April 30, 2006, activity in the accrued liability account consistedof the following:

| ** **                 | ** ** | **Balance at**       | ** ** | **Subsequent** | ** ** | **Subsequent** | ** ** | **Balance at** | ** ** | **Due**         | ** ** | **Due**         | ** ** |
|----------------------------|------------|---------------------------|------------|----------------|------------|----------------|------------|---------------------|------------|-----------------|------------|-----------------|------------|
| ** **                 | ** ** | **April 30,**        | ** ** | **Accruals,**  | ** ** | **(Payments)** | ** ** | **April 30,**  | ** ** | **Within**      | ** ** | **After**       | ** ** |
| ** **                 | ** ** | **2005**                  | ** ** | **Net**        | ** ** | **Receipts**   | ** ** | **2006**            | ** ** | **1 Year** | ** ** | **1 Year** | ** ** |
| *** ***               | ** ** | ***(in thousands)*** | ** ** |
| Lease obligations          |       |                      | $          | 9,340          |       |           |       | $                   | —     |            |       |            | $          | (1,418 | ) |   |   | $ | 7,922 |   |   | $ | 1,419 |   | $ | 6,503 |   |
| Estimated  sublease income |       |                      | (7,125     | )              |       |           | —     |                |       |            | 1,098      |            |       |   | (6,027 | ) |   | (1,099 | ) | $ | (4,928 | ) |
|                       |       |                      | $          | 2,215          |       |           |       | $                   | —     |            |       |            | $          | (320 | ) |   |   | $ | 1,895 |   |   | $ | 320 |   | $ | 1,575 |   |

 

**Note 13. DiscontinuedRetail Operations**

Revenues and expenses associated with retail storeoperations have been presented as discontinued retail operations in the income statementfor the year ended April 30, 2004, which was the last year of any activityrelated to these operations. The closure of the Company-owned retail stores wascompleted in fiscal 2003 so there were no revenues or net income from thediscontinued retail operations during fiscal 2004.

The gain on disposal and net income from discontinuedoperations for the year ended April 30, 2004, were as follows:

| ** **                                      | ** ** | **Year Ended**          | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **April 30, 2004** | ** ** |
| *** ***                                    | ** ** | ***(in thousands)***    | ** ** |
| Gain on disposal                                |       |                         | $          | 231 |   |   |
| Income tax  expense                             |       |                         | (85        | ) |   |
| Net gain on disposal                            |       |                         | 146        |   |   |
| Net income from  discontinued retail operations |       |                         | $          | 146 |   |   |

 

**Note 14. Segment Information**

Cutter & Buck essentially has one productcategory, upscale sportswear and outerwear under the Cutter & Buckbrand name. Our target market for this product is upper-income men and womenover the 

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age of 35 who appreciatethe value of high quality apparel. 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 units sell the same product,except for certain licensees which may design certain products or styles thatare unique to their territories. Our inventory is designed, purchased, handled,and distributed in the same manner for all business units by central overheaddepartments. The costs of these departments are not allocated to the businessunits. We do not allocate any assets to business units.

Corporate business unit sales are primarily topromotional product distributors. Golf business unit sales are to pro shops orat tournaments. Specialty Retail business unit sales are to clothing retailers,department stores, and college and professional team apparel stores. Salesthrough these wholesale business units are aggregated and reported as ourwholesale segment as they each have similar economic characteristics.

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

Ourwholesale segment has comprised more than 90% of our consolidated net salessince the closure of our company-owned retail stores in fiscal 2003. In fiscal2006, net sales of the Direct to Consumer business unit increased substantially.Therefore, we have reevaluated our reporting segments. We have included thefollowing information regarding our wholesale and other operating segments. Theaggregated net sales and gross profit of our wholesale and other operatingsegments for the last three fiscal years are as follows:

| **Year Ended April 30,** | ** ** | ** **                                             | ** ** | **2006** | ** ** | **%**  | ** ** | **2005** | ** ** | **%**  | ** ** | **2004** | ** ** | **%**  | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------|------------|----------|------------|--------|------------|----------|------------|--------|------------|----------|------------|--------|------------|
| *** ***                            | ** ** | ***(in thousands except percentages)*** | ** ** |
| Wholesale                               |       | $                                                      | 118,821    |     | 90.5       |   | $          | 118,856  |       | 93.9   |       | $        | 120,028    |   | 93.5       |   |
| All other                               |       | 12,477                                                 |       | 9.5      |       | 7,704  |       | 6.1      |       | 8,346  |       | 6.5      |       |
| Net Sales                               |       | $                                                      | 131,298    |     |       |   | $          | 126,560  |       |   |       | $        | 128,374    |   |       |   |
| Wholesale                               |       | $                                                      | 54,937     |     | 46.2       |   | $          | 57,351   |       | 48.3   |       | $        | 54,107     |   | 45.1       |   |
| All other                               |       | 4,729                                                  |       | 37.9     |       | 3,255  |       | 42.2     |       | 4,483  |       | 53.7     |       |
| Gross Profit                            |       | $                                                      | 59,666     |     | 45.4       |   | $          | 60,606   |       | 47.9   |       | $        | 58,590     |   | 45.6       |   |

 

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

| **Year Ended April 30,**                | ** ** | ** **                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------------------------------------------|------------|---------------------------|------------|----------|------------|----------|------------|----------|------------|
| *** ***                                           | ** ** | ***(in thousands)*** | ** ** |
| Total segment  gross profit                            |       | $                         | 59,666     |     | $          | 60,606   |       | $        | 58,590     |   |
| Operating  expenses                                    |       | (51,047                   | )          | (48,532  | )          | (49,983  | )          |
| Net interest  income                                   |       | 1,161                     |       | 678      |       | 122      |       |
| Income from continuing operations  before income taxes |       | $                         | 9,780      |     | $          | 12,752   |       | $        | 8,729      |   |

 

**Note 15. SelectedQuarterly Financial Data (unaudited)**

Thefollowing quarterly information is unaudited. In the opinion of management, allmaterial adjustments necessary to present fairly the results of operations ofthe Company, for the periods presented, have been made. All such adjustmentswere of a normal, recurring nature.

| **2006 Quarter Ended** | ** ** | ** **                                                              | ** ** | **Jul. 31, 2005** | ** ** | **Oct. 31, 2005** | ** ** | **Jan. 31, 2006** | ** ** | **Apr. 30, 2006** | ** ** |
|----------------------------------|------------|-------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| *** ***                     | ** ** | ***(in thousands, except per share amounts)*** | ** ** |
| Net sales                        |       |                                                                    | $          | 29,741                      |       |                        |       | $                           | 33,669     |                        |       |   | $ | 31,247 |   |   |   | $ | 36,641 |   |   |
| Cost of sales                    |       |                                                                    | 15,696     |                        |       |                        | 18,651     |                        |       |                        | 17,472     |   |   |   | 19,813 |   |   |
| Gross profit                     |       |                                                                    | $          | 14,045                      |       |                        |       | $                           | 15,018     |                        |       |   | $ | 13,775 |   |   |   | $ | 16,828 |   |   |
| Total operating expenses         |       |                                                                    | $          | 11,099                      |       |                        |       | $                           | 13,986     |                        |       |   | $ | 13,374 |   |   |   | $ | 12,588 |   |   |
|                             |       |                                                                    |       |                        |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Net income                       |       |                                                                    | $          | 2,102                       |       |                        |       | $                           | 891        |                        |       |   | $ | 481 |   |   |   | $ | 2,875 |   |   |
| Basic earnings per share:        |       |                                                                    | $          | 0.19                        |       |                        |       | $                           | 0.08       |                        |       |   | $ | 0.04 |   |   |   | $ | 0.27 |   |   |
| Diluted earnings per  share:     |       |                                                                    | $          | 0.18                        |       |                        |       | $                           | 0.08       |                        |       |   | $ | 0.04 |   |   |   | $ | 0.27 |   |   |

 

| **2005 Quarter Ended**    | ** ** | ** **                                                              | ** ** | **Jul. 31, 2004** | ** ** | **Oct. 31, 2004** | ** ** | **Jan. 31, 2005** | ** ** | **Apr. 30, 2005** | ** ** |
|-------------------------------------|------------|-------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| *** ***                        | ** ** | ***(in thousands, except per share amounts)*** | ** ** |
| Net sales                           |       |                                                                    | $          | 31,899                      |       |                        |       | $                           | 35,538     |                        |       |   | $ | 24,220 |   |   |   | $ | 34,903 |   |   |
| Cost of sales                       |       |                                                                    | 16,147     |                        |       |                        | 18,399     |                        |       |                        | 13,272     |   |   |   | 18,136 |   |   |
| Gross profit                        |       |                                                                    | $          | 15,752                      |       |                        |       | $                           | 17,139     |                        |       |   | $ | 10,948 |   |   |   | $ | 16,767 |   |   |
| Total operating expenses            |       |                                                                    | $          | 10,793                      |       |                        |       | $                           | 12,568     |                        |       |   | $ | 11,695 |   |   |   | $ | 13,476 |   |   |
|                                |       |                                                                    |       |                        |       |                        |       |                        |       |                        |       |   |   |   |   |   |   |
| Net income (loss)                   |       |                                                                    | $          | 3,250                       |       |                        |       | $                           | 2,915      |                        |       |   | $ | (384 | ) |   |   | $ | 2,833 |   |   |
| Basic earnings (loss) per share:    |       |                                                                    | $          | 0.30                        |       |                        |       | $                           | 0.27       |                        |       |   | $ | (0.04 | ) |   |   | $ | 0.25 |   |   |
| Diluted earnings (loss)  per share: |       |                                                                    | $          | 0.29                        |       |                        |       | $                           | 0.26       |                        |       |   | $ | (0.04 | ) |   |   | $ | 0.25 |   |   |

 

44

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**SCHEDULEIIVALUATION AND QUALIFYING ACCOUNTS**

| ** **                                             | ** ** | **Balance**               | ** ** | **Charged to**     | ** ** | **Charged to** | ** ** | ** **     | ** ** | **Balance**     | ** ** |
|--------------------------------------------------------|------------|---------------------------|------------|-------------------------|------------|---------------------|------------|----------------|------------|-----------------|------------|
| ** **                                             | ** ** | **beg. of**          | ** ** | **revenue, costs** | ** ** | **other**           | ** ** | ** **     | ** ** | **end of** | ** ** |
| *** ***                                           | ** ** | **period**                | ** ** | **or expenses**    | ** ** | **accounts**        | ** ** | **Deductions** | ** ** | **period**      | ** ** |
| *** ***                                           | ** ** | ***(in thousands)*** | ** ** |
| Year Ended  April 30, 2006                        |       |                      |       |                    |       |                |       |           |       |            |       |   |   |   |   |   |   |
| Reserves and allowances  deducted from asset accounts: |       |                      |       |                    |       |                |       |           |       |            |       |   |   |   |   |   |   |
| Allowance for doubtful accounts                        |       | $                         | 313        |                    |       | $                   | 299        |           |       |            | $          | — |   |   |   | $ | (260 | )(A) |   | $ | 352 |   |
| Reserve for returns                                    |       | $                         | 830        |                    |       | $                   | 3,947      |           |       |            | $          | — |   |   |   | $ | (3,724 | )(B) |   | $ | 1,053 |   |
| Reserve for sales allowances                           |       | $                         | 627        |                    |       | $                   | 991        |           |       |            | $          | (343 | )(F) |   |   | $ | (951 | )(C) |   | $ | 324 |   |
| Reserve for inventory obsolescence                     |       | $                         | 1,157      |                    |       | $                   | 2,256      |           |       |            | $          | — |   |   |   | $ | (1,354 | )(D) |   | $ | 2,059 |   |
| Year Ended  April 30, 2005                        |       |                      |       |                    |       |                |       |           |       |            |       |   |   |   |   |   |   |
| Reserves and allowances  deducted from asset accounts: |       |                      |       |                    |       |                |       |           |       |            |       |   |   |   |   |   |   |
| Allowance for doubtful accounts                        |       | $                         | 705        |                    |       | $                   | (102       | )              |       |            | $          | — |   |   |   | $ | (290 | )(A) |   | $ | 313 |   |
| Reserve for returns                                    |       | $                         | 972        |                    |       | $                   | 2,898      |           |       |            | $          | — |   |   |   | $ | (3,040 | )(B) |   | $ | 830 |   |
| Reserve for sales allowances                           |       | $                         | 819        |                    |       | $                   | 2,463      |           |       |            | $          | — |   |   |   | $ | (2,655 | )(C) |   | $ | 627 |   |
| Reserve for inventory obsolescence                     |       | $                         | 697        |                    |       | $                   | 690        |           |       |            | $          | — |   |   |   | $ | (230 | )(D) |   | $ | 1,157 |   |
| Year Ended  April 30, 2004                        |       |                      |       |                    |       |                |       |           |       |            |       |   |   |   |   |   |   |
| Reserves and allowances  deducted from asset accounts: |       |                      |       |                    |       |                |       |           |       |            |       |   |   |   |   |   |   |
| Allowance for doubtful accounts                        |       | $                         | 1,541      |                    |       | $                   | (287       | )              |       |            | $          | — |   |   |   | $ | (549 | )(A) |   | $ | 705 |   |
| Reserve for returns                                    |       | $                         | 1,215      |                    |       | $                   | 3,122      |           |       |            | $          | — |   |   |   | $ | (3,365 | )(B) |   | $ | 972 |   |
| Reserve for sales allowances                           |       | $                         | 990        |                    |       | $                   | 2,290      |           |       |            | $          | — |   |   |   | $ | (2,461 | )(C) |   | $ | 819 |   |
| Reserve for inventory obsolescence                     |       | $                         | 1,056      |                    |       | $                   | 218        |           |       |            | $          | — |   |   |   | $ | (577 | )(D) |   | $ | 697 |   |
| Reserve for  deferred income tax assets                |       | $                         | 1,186      |                    |       | $                   | —     |           |       |            | $          | — |   |   |   | $ | (1,186 | )(E) |   | $ | — |   |

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(A)       Deductions consist ofwrite-offs of uncollectible accounts, net of recoveries.

(B)        Deductions consist ofcharges for sales returns and other credits allowed.

(C)        Deductions consist ofcharges for sales allowances.

(D)       Deductions consist ofinventory sold at a loss.

(E)        Deductions consist ofreversals of the valuation allowance for deferred income tax assets.

(F)         Rebates that are classifiedas an accrued liability in fiscal 2006.

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.
|                    | CUTTER & BUCK INC. (Registrant) |
|--------------------|------------------------------------------|
| June 30, 2006 | By:                                      | /s/ ERNEST R. JOHNSON |   |
|               |                                     | Ernest R. Johnson |
|               |                                     | *Chief Executive Officer* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

|  /s/ ERNEST R. JOHNSON |   | Chief Executive Officer and Director                    |   | June 30,  2006 |
|-----------------------------|--------|---------------------------------------------------------|--------|---------------------|
| Ernest R. Johnson           |   | (Principal Executive Officer)                           |   |                |
| /s/ MICHAEL GATS            |   | Chief Financial Officer  and Corporate                  |   | June 30,  2006 |
| Michael Gats                |   | Secretary (Principal Financial and Accounting  Officer) |   |                |
| /s/ DOUGLAS G. SOUTHERN     |   | Chairman of the Board                                   |   | June 30,  2006 |
| Douglas G. Southern         |   |                                                    |   |                |
| /s/ HENRY L. KOTKINS, JR.   |   | Director                                                |   | June 30,  2006 |
| Henry L. Kotkins, Jr.  |   |                                                    |   |                |
| /s/ LARRY C. MOUNGER        |   | Director                                                |   | June 30,  2006 |
| Larry C. Mounger            |   |                                                    |   |                |
| /s/ WHITNEY R. TILSON       |   | Director                                                |   | June 30,  2006 |
| Whitney R. Tilson           |   |                                                    |   |                |
| /s/ JAMES C. TOWNE          |   | Director                                                |   | June 30,  2006 |
| James C. Towne              |   |                                                    |   |                |

 

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