UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC  20549





FORM
10-Q




x           Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934




For the
quarterly period ended October 30, 2010





 ̈           Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934





For the
transition period from   
to





Commission
File Number: 001-05893





FREDERICK’S OF HOLLYWOOD
GROUP INC.


(Exact
name of Registrant as specified in its charter)





New York
              
              13-5651322(State
      or other jurisdiction of
              
              (I.R.S.
      Employerincorporation
      or organization)
              
              Identification
      Number)1115 Broadway, New York, NY
              
              10010(Address
      of principal executive offices)
              
              (Zip
      Code)





Registrant’s
telephone number, including area code (212) 798-4700





N/A





(Former
name, former address, and former fiscal year, if changed since last
report.)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.




Yes x          No   ̈




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).




Yes   ̈          No   ̈




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




Large
      accelerated filer   ̈
              Accelerated
      filer   ̈Non-accelerated
      filer   ̈
              Smaller
      reporting company  x


(do not
check if a smaller reporting company)




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)




Yes   ̈          No  x




The
number of common shares outstanding on December 10, 2010 was
38,421,972.





FREDERICK’S
OF HOLLYWOOD GROUP INC.


QUARTERLY
REPORT ON FORM 10-Q


TABLE
OF CONTENTS





PagePART
      I.
                          Financial
      InformationItem
      1.
                          Financial
      Statements
                          3Consolidated
      Balance Sheets at October 30, 2010 (Unaudited) and July 31, 2010
      (Audited)
                          3Consolidated
      Statements of Operations (Unaudited) for the Three Months Ended October
      30, 2010 and October 24, 2009
                          4Consolidated
      Statements of Cash Flows (Unaudited) for the Three Months Ended October
      30, 2010 and October 24, 2009
                          5Notes
      to Consolidated Unaudited Financial Statements
                          6 –
      12Item
      2.
                          Management’s
      Discussion and Analysis of Financial Condition
      and Results of Operations
                          13
      – 22Item
      3.
                          Quantitative
      and Qualitative Disclosures About Market Risk
                          22Item
      4.
                          Controls
      and Procedures
                          23PART
      II.
                          Other
      InformationItem
      1.
                          Legal
      Proceedings
                          23Item
      1A.
                          Risk
      Factors
                          23Item
      6.
                          Exhibits
                          23Signatures
                          24


2


PART  I. 
 FINANCIAL INFORMATION


Item
1.  Financial Statements





FREDERICK’S
OF HOLLYWOOD GROUP INC.


CONSOLIDATED
BALANCE SHEETS


(In
Thousands, Except Share Data)





October
      30,
                            
                            
                            July
      31,2010
                            
                            
                            2010(Unaudited)
                            
                            
                            (Audited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                            
                            $
                            491
                            
                            
                            $
                            536Restricted
      cash
                            
                            
                            2,302
                            
                            
                            
                            4,660Accounts
      receivable
                            
                            
                            1,786
                            
                            
                            
                            1,127Income
      tax receivable
                            
                            
                            76
                            
                            
                            
                            127Merchandise
      inventories
                            
                            
                            11,195
                            
                            
                            
                            10,951Prepaid
      expenses and other current assets
                            
                            
                            3,435
                            
                            
                            
                            2,298Deferred
      income tax assets
                            
                            
                            681
                            
                            
                            
                            875Current
      assets of discontinued operations
                            
                            
                            2,844
                            
                            
                            
                            4,185Total
      current assets
                            
                            
                            22,810
                            
                            
                            
                            24,759PROPERTY
      AND EQUIPMENT, Net
                            
                            
                            12,751
                            
                            
                            
                            13,861INTANGIBLE
      AND OTHER ASSETS
                            
                            
                            19,353
                            
                            
                            
                            19,392LONG-TERM
      ASSETS OF DISCONTINUED OPERATIONS
                            
                            
                            -
                            
                            
                            
                            960TOTAL
      ASSETS
                            
                            $
                            54,914
                            
                            
                            $
                            58,972LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIES:Revolving
      credit facility
                            
                            $
                            3,000
                            
                            
                            $
                            3,269Accounts
      payable and other accrued expenses
                            
                            
                            17,540
                            
                            
                            
                            20,198Deferred
      revenue from gift cards
                            
                            
                            1,778
                            
                            
                            
                            1,781Current
      liabilities of discontinued operations
                            
                            
                            2,327
                            
                            
                            
                            2,041Total
      current liabilities
                            
                            
                            24,645
                            
                            
                            
                            27,289DEFERRED
      RENT AND TENANT ALLOWANCES
                            
                            
                            4,926
                            
                            
                            
                            4,926TERM
      LOAN
                            
                            
                            7,112
                            
                            
                            
                            7,002OTHER
                            
                            
                            57
                            
                            
                            
                            70DEFERRED
      INCOME TAX LIABILITIES
                            
                            
                            7,917
                            
                            
                            
                            8,377TOTAL
      LIABILITIES
                            
                            
                            44,657
                            
                            
                            
                            47,664COMMITMENTS
      AND CONTINGENCIES (NOTE 6)
                            
                            
                            -
                            
                            
                            
                            -SHAREHOLDERS’
      EQUITY:Preferred
      stock, $.01 par value – authorized, 10,000,000 shares at October 30, 2010
      and July 31, 2010; issued and outstanding, none at October 30, 2010 and
      July 31, 2010
                            
                            
                            -
                            
                            
                            
                            -Common
      stock, $.01 par value – authorized, 200,000,000 shares at October 30, 2010
      andJuly
      31, 2010; issued and outstanding, 38,326,913 shares at October 30, 2010
      and 38,343,199 shares at July 31, 2010
                            
                            
                            383
                            
                            
                            
                            383Additional
      paid-in capital
                            
                            
                            87,073
                            
                            
                            
                            86,977Accumulated
      deficit
                            
                            
                            (77,199
                            )
                            
                            
                            (75,969
                            )Accumulated
      other comprehensive loss
                            
                            
                            -
                            
                            
                            
                            (83
                            )TOTAL
      SHAREHOLDERS’ EQUITY
                            
                            
                            10,257
                            
                            
                            
                            11,308TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
                            
                            $
                            54,914
                            
                            
                            $
                            58,972





See notes
to consolidated unaudited financial statements.


3


FREDERICK’S
OF HOLLYWOOD GROUP INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)


(In
Thousands, Except Per Share Amounts)





Three Months EndedOctober
      30,
                
                
                October
      24,2010
                
                
                2009Net
      sales
                
                $
                28,617
                
                
                $
                31,114Cost
      of goods sold, buying and occupancy
                
                
                17,148
                
                
                
                20,156Gross
      profit
                
                
                11,469
                
                
                
                10,958Selling,
      general and administrative expenses
                
                
                11,342
                
                
                
                13,210Operating
      income (loss)
                
                
                127
                
                
                
                (2,252
                )Interest
      expense, net
                
                
                399
                
                
                
                361Loss
      from continuing operations before income tax provision
                
                
                (272
                )
                
                
                (2,613
                )Income
      tax provision
                
                
                25
                
                
                
                16Net
      loss from continuing operations
                
                
                (297
                )
                
                
                (2,629
                )Net
      loss from discontinued operations, net of tax (benefit)/provision of
      ($266) and $8 for the three months ended October 30, 2010 and October 24,
      2009, respectively
                
                
                (933
                )
                
                
                (1,707
                )Net
      loss
                
                
                (1,230
                )
                
                
                (4,336
                )Less:
      Preferred stock dividends
                
                
                -
                
                
                
                119Net
      loss applicable to common shareholders
                
                $
                (1,230
                )
                
                $
                (4,455
                )Basic
      and diluted net loss per share from continuing operations
                
                $
                (.01
                )
                
                $
                (.10
                )Basic
      and diluted net loss per share from discontinued
operations
                
                
                (.02
                )
                
                
                (.07
                )Total
      basic and diluted net loss per share applicable to common
      shareholders
                
                $
                (.03
                )
                
                $
                (.17
                )Weighted
      average shares outstanding – basic and diluted
                
                
                38,349
                
                
                
                26,407





See notes
to consolidated unaudited financial statements.


4


FREDERICK’S
OF HOLLYWOOD GROUP INC.


CONSOLIDATED  STATEMENTS
OF CASH FLOWS


(Unaudited)


(In
Thousands)





Three
      Months EndedOctober
      30,
              
              
              October
      24,2010
              
              
              2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (1,230
              )
              
              $
              (4,336
              )Net
      loss from discontinued operations
              
              
              (933
              )
              
              
              (1,707
              )Net
      loss from continuing operations
              
              
              (297
              )
              
              
              (2,629
              )Adjustments
      to reconcile net loss from continuing operations to net cash used in
      operating activities:Depreciation
      and amortization
              
              
              842
              
              
              
              1,084Issuance
      of common stock for directors’ fees
              
              
              19
              
              
              
              12Stock-based
      compensation expense
              
              
              77
              
              
              
              191Amortization
      of deferred financing costs
              
              
              34
              
              
              
              30Non-cash
      interest on long-term debt – related party
              
              
              -
              
              
              
              202Non-cash
      interest on term loan
              
              
              110
              
              
              
              -Amortization
      of deferred rent and tenant allowances
              
              
              -
              
              
              
              151Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (659
              )
              
              
              (163
              )Merchandise
      inventories
              
              
              (284
              )
              
              
              (2,735
              )Prepaid
      expenses and other current assets
              
              
              (810
              )
              
              
              (821
              )Income
      tax receivable
              
              
              51
              
              
              
              79Other
      assets
              
              
              5
              
              
              
              112Accounts
      payable and other accrued expenses
              
              
              (2,583
              )
              
              
              1,357Deferred
      revenue from gift cards
              
              
              (3
              )
              
              
              (13
              )Net
      cash used in operating activities of discontinued
    operations
              
              
              (2,748
              )
              
              
              (2,402
              )Net
      cash used in operating activities
              
              
              (6,246
              )
              
              
              (5,545
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
              
              
              (19
              )
              
              
              (283
              )Net
      cash provided by (used in) investing activities of discontinued
      operations
              
              
              4,219
              
              
              
              (32
              )Net
      cash provided by (used in) investing activities
              
              
              4,200
              
              
              
              (315
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      borrowings under revolving credit facility
              
              
              (269
              )
              
              
              3,686Cash
      transferred out of a restricted account
              
              
              4,660
              
              
              
              -Cash
      transferred into a restricted account
              
              
              (2,302
              )
              
              
              -Proceeds
      on bridge facility
              
              
              -
              
              
              
              2,000Repayment
      of capital lease obligation
              
              
              (13
              )
              
              
              -Payment
      of deferred financing costs
              
              
              (75
              )
              
              
              (75
              )Net
      cash provided by financing activities
              
              
              2,001
              
              
              
              5,611NET
      DECREASE IN CASH AND CASH EQUIVALENTS
              
              
              (45
              )
              
              
              (249
              )CASH
      AND CASH EQUIVALENTS:Beginning
      of period
              
              
              536
              
              
              
              555End
      of period
              
              $
              491
              
              
              $
              306SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during period for:Interest
              
              $
              192
              
              
              $
              150Taxes
              
              $
              5
              
              
              $
              24





See notes
to consolidated unaudited financial statements.


5


FREDERICK’S
OF HOLLYWOOD GROUP INC.


NOTES
TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS




1.
            ORGANIZATION
      AND BASIS OF PRESENTATION




Description of
Business –Frederick’s of Hollywood Group Inc. (the “Company”),
through its subsidiaries, sells women’s intimate apparel and related products
under its proprietary Frederick’s of Hollywood® brand
predominantly through U.S. mall-based specialty stores, which are referred to as
“Stores,” and through its catalog and website at www.fredericks.com,
which are referred to collectively as “Direct.”




During
the fourth quarter of fiscal year 2010, the Company made a strategic decision to
divest its wholesale division due to continuing losses and in order to
focus on its core retail operations.  On October 27, 2010, the Company
completed the sale of substantially all of the assets of the wholesale
division, except cash and accounts receivable and certain other
assets, to Dolce Vita Intimates LLC (“Dolce Vita”).  These operations
are classified herein as discontinued operations (See Note 3).




Fiscal
Year – The Company’s fiscal year is the 52- or 53-week period ending on
the last Saturday in July. References to the three months ended October 30, 2010
and October 24, 2009 or the first quarter of fiscal years 2011 and 2010 refer to
the thirteen-week periods ended October 30, 2010 and October 24, 2009,
respectively.  References to fiscal years 2011 and 2010 refer to the
52-week period ending July 30, 2011 and the 53-week period ended July 31, 2010,
respectively.




Interim Financial
Information – In the opinion of management, the accompanying
consolidated unaudited financial statements contain all adjustments (consisting
of normal recurring accruals) necessary to present fairly the Company’s
financial position as of October 30, 2010 and the results of operations and cash
flows for the three months ended October 30, 2010 and October 24,
2009.




The
information set forth in these consolidated financial statements is unaudited
except for the July 31, 2010 consolidated balance sheet data.  These
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information, the
instructions to Form 10-Q, and Rule 10-01 of Regulation S-X.  Accordingly,
they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements.  The results of operations for the three months ended
October 30, 2010 are not necessarily indicative of the results to be expected
for the full year.  This Form 10-Q should be read in conjunction with the
Company’s audited consolidated financial statements and accompanying notes for
the year ended July 31, 2010 included in the Company’s 2010 Annual Report on
Form 10-K filed with the Securities and Exchange Commission (“SEC”) on October
25, 2010.




2.
            SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES




Revenue
Recognition–The
Company records revenue at the point of sale for Stores and at the time of
estimated receipt by the customer for Direct sales.  Outbound shipping
charges billed to customers are included in net sales.  The Company records
an allowance for estimated returns from its customers in the period of sale
based on prior experience.  At October 30, 2010 and July 31, 2010, the
allowance for estimated returns was $862,000 and $868,000, respectively. 
If actual returns are greater than expected, additional sales allowances may be
recorded in the future.  Retail sales are recorded net of sales taxes
collected from customers at the time of the transaction.




The
Company records other revenues for shipping revenues, as well as for commissions
earned on direct sell-through programs, on a net basis as the Company acts as an
agent on behalf of the related vendor.  For the three months ended October
30, 2010 and October 24, 2009, total other revenues recorded in net sales in the
accompanying consolidated unaudited statements of operations were $1,660,000 and
$1,758,000, respectively.




Gift
certificates and gift cards sold are carried as a liability and revenue is
recognized when the gift certificate or card is redeemed.  Customers may
receive a store credit in exchange for returned goods, which is carried as a
liability until redeemed.  To date, the Company has not recognized any
revenue associated with breakage from gift certificates, gift cards or store
credits because they do not have expiration dates.


6




Merchandise
Inventories – Store inventories are valued at the lower of cost or market
using the retail inventory first-in, first-out (“FIFO”) method, and Direct
inventories are valued at the lower of cost or market, on an average cost basis
that approximates the FIFO method.  Store and Direct inventories consist
entirely of finished goods. Freight costs are included in inventory and vendor
promotional allowances are recorded as a reduction in inventory cost. 
These inventory methods inherently require management judgments and estimates,
such as the amount and timing of permanent markdowns to clear unproductive or
slow-moving inventory, which may impact the ending inventory valuations and
gross margins.  Markdowns are recorded when the sales value of the
inventory has diminished.  Factors considered in the determination of
permanent markdowns include current and anticipated demand, customer
preferences, age of the merchandise and fashion trends.  The Company
reserves for the difference between the cost of inventory and the estimated
market value based upon assumptions about future demand, market conditions and
the age of the inventory.  If actual market conditions are less favorable
than those projected by management, additional inventory reserves may be
required.  Historically, management has found its inventory reserves to be
appropriate, and actual results generally do not differ materially from those
determined using necessary estimates.  Inventory reserves were $140,000 at
October 30, 2010 and $278,000 at July 31, 2010.




Deferred Catalog
Costs–
Deferred catalog costs represent direct-response advertising that is capitalized
and amortized over its expected period of future benefit.  The capitalized
costs of the advertising are amortized over the expected revenue stream
following the mailing of the respective catalog, which is generally three
months.  The realization of the deferred catalog costs are also evaluated
as of each balance sheet date by comparing the capitalized costs for each
catalog, on a catalog by catalog basis, to the probable remaining future net
revenues.  Direct-responseadvertising
costs of $2,191,000 and $1,488,000 are included in prepaid expenses and other
current assets in the accompanying consolidated balance sheets at October 30,
2010 and July 31, 2010, respectively. Management believes that they have
appropriately determined the expected period of future benefit as of the date of
the Company’s consolidated financial statements.  However, should actual
sales results differ from expected sales, deferred catalog costs may be written
off on an accelerated basis.  Direct-response advertising expense for the
three months ended October 30, 2010 and October 24, 2009 were $1,791,000 and
$2,111,000, respectively.




Impairment of
Long-Lived Assets – The Company reviews long-lived assets, including
property and equipment and its amortizable intangible assets, for impairment
whenever events or changes in circumstances indicate that the carrying value of
an asset may not be recoverable based on undiscounted cash flows.  If
long-lived assets are impaired, an impairment loss is recognized and is measured
as the amount by which the carrying value exceeds the estimated fair value of
the assets.




The
estimation of future undiscounted cash flows from operating activities requires
significant estimates of factors that include future sales growth and gross
margin performance.  Management believes they have appropriately determined
future cash flows and operating performance; however, should actual results
differ from those expected, additional impairment may be required.  No
impairment was recorded for the three months ended October 30, 2010 and October
24, 2009 related to these long-lived assets.




Intangible
Assets– The
Company has certain intangible assets that consist of trademarks, principally
the Frederick’s of Hollywood trade name and domain names.  Management has
determined the trademarks and domain names to have indefinite lives. Applicable
accounting literature requires the Company not to amortize indefinite life
intangible assets, but to test those intangible assets for impairment annually
and between annual tests when circumstances or events have occurred that may
indicate a potential impairment has occurred. No impairment was recorded for the
three months ended October 30, 2010 and October 24, 2009 related to these
intangible assets.




Accounting for
Stock-Based Compensation – The Company measures and recognizes
compensation expense for all share-based payment awards to employees and
directors based on estimated fair values on the grant date.  The Company
recognizes the expense on a straight-line basis over the requisite vesting
period.




The value
of each stock option is estimated on the date of grant using the Black-Scholes
option-pricing model.  The fair value generated by the Black-Scholes model
may not be indicative of the future benefit, if any, that may be received by the
option holder.  There were no options granted during the three months ended
October 30, 2010 or October 24, 2009.




Income
Taxes – Income taxes are accounted for under an asset and liability
approach that requires the recognition of deferred income tax assets and
liabilities for the expected future consequences of events that have been
recognized in the Company’s financial statements and income tax returns. 
The Company provides a valuation allowance for deferred income tax assets when
it is considered more likely than not that all or a portion of such deferred
income tax assets will not be realized.


7




Fair Value of
Financial Instruments– The Company’s
management believes the carrying amounts of cash and cash equivalents, accounts
receivable, the revolving credit facility, accounts payable and accrued expenses
approximate fair value due to their short maturity.




The
valuation techniques required by applicable accounting literature are based upon
observable and unobservable inputs.  Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect internal
market assumptions. These two types of inputs create the following fair value
hierarchy:




·
            Level
      1 – Quoted prices in active markets for identical assets or
      liabilities.




·
            Level
      2 – Observable inputs other than Level 1 prices such as quoted prices for
      similar assets or liabilities, quoted prices in markets that are not
      active, or other inputs that are observable or can be corroborated by
      observable market data for substantially the full term of the related
      asset or liabilities.




·
            Level
      3 – Unobservable inputs that are supported by little or no market activity
      and that are significant to the fair value of assets or
      liabilities.




The use
of observable market inputs (quoted market prices) is required when measuring
fair value and requires Level 1 quoted prices to be used to measure fair value
whenever possible. The fair value of the Company’s Term Loan (defined below)
approximates its carrying value at October 30, 2010 and is classified within
Level 3 of the fair value hierarchy (see Note 5).




Supplemental
Disclosure of Cash Flow Information– The
Company had outstanding accounts payable and accrued expenses of $0 at October
30, 2010 and July 31, 2010, and $99,000 and $20,000 at October 24, 2009 and July
25, 2009, respectively, related to purchases of property and equipment. 
During the three months ended October 24, 2009, the Company accrued dividends of
$119,000 on its Series A 7.5% Convertible Preferred Stock (“Series A Preferred
Stock”).  During the fourth quarter of fiscal year 2010, the Company
completed a conversion of its Series A Preferred Stock.  Accordingly, there
was no dividend accrued during the three months ended October 30,
2010.




During
the three months ended October 30, 2010, a fire damaged one of the Company’s
stores, which resulted in a write-off of the fixed assets and inventory
contained in the store.  As the Company anticipates that it will receive an
insurance recovery that will be no less than the carrying value of the assets in
the store, it established a receivable for the carrying value of the damaged
assets.  Accordingly, a non-cash reduction of fixed assets of $287,000 and
inventory of $40,000 was offset by a noncash increase to prepaid expenses and
other current assets of $327,000 for the three months ended October 30,
2010.




Recently Issued
Accounting Updates– There
have been no recently issued accounting updates that had a material impact on
the Company’s consolidated unaudited financial statements for the three months
ended October 30, 2010 or that are expected to have an impact in the
future.




3.
            DISCONTINUED
      OPERATIONS




During
the fourth quarter of fiscal year 2010, the Company made a strategic decision to
divest the wholesale division to focus on its core retail operations. 
Therefore, the Company reclassified its consolidated financial statements to
reflect the divesting of the wholesale division and to segregate the revenues,
costs and expenses, assets and liabilities and cash flows of this
business.  The net operating results, net assets and liabilities, and net
cash flows of the wholesale division have been reported as “discontinued
operations” in the accompanying consolidated financial statements.




Revenues
from discontinued operations were $3,421,000 and $6,094,000 for the three months
ended October 30, 2010 and October 24, 2009, respectively.  Net loss from
discontinued operations before recording a gain on the sale of the wholesale
division was approximately $2,003,000 for the three months ended October 30,
2010, and $1,707,000, net of a tax provision of $8,000 for the three months
ended October 24, 2009.




On
October 27, 2010, the Company entered into and consummated the transactions
contemplated by an Asset Purchase Agreement (the “Purchase Agreement”) with
Dolce Vita, pursuant to which the Company sold to Dolce Vita substantially all
of the assets of the wholesale division, except cash and accounts receivable and
certain other assets.


8




The
assets were purchased for an aggregate purchase price of approximately
$4,469,000, subject to adjustment as provided in the Purchase Agreement. 
$250,000 of the purchase price was placed in escrow in order to provide a fund
for the payment of any adjustment to the purchase price and any indemnification
claims made by the parties after the closing of the transaction.  The
Company recorded a gain of approximately $1,070,000 as a result of the sale,
which is net of approximately $225,000 earned by Avalon Securities Ltd., the
Company’s investment banking firm, upon consummation of the transaction. 
Pursuant to the Purchase Agreement, the Company agreed to provide certain
transition services to be reimbursed by Dolce Vita for a limited period of time
after the closing of the transaction.




The
current liabilities of the discontinued operations are comprised of accounts
payable and accrued expenses.  The components of the assets of the
discontinued operations at October 30, 2010 and July 31, 2010 consist of the
following (in thousands):




October 30,
                    2010
                
                
                July 31,
                    2010Accounts
      receivable, net
                
                $
                1,981
                
                
                $
                1,452Purchase
      price held in escrow
                
                
                250
                
                
                
                -In-transit
      inventory receivable from Dolce Vita
                
                
                613
                
                
                
                -Merchandise
      inventories, net
                
                
                -
                
                
                
                2,733Current
      assets of discontinued operations
                
                $
                2,844
                
                
                $
                4,185Intangible
      assets, net
                
                $
                -
                
                
                $
                915Property
      and equipment
                
                
                -
                
                
                
                45Long-term
      assets of discontinued operations
                
                $
                -
                
                
                $
                960




4.
            ACCOUNTS
      PAYABLE AND OTHER ACCRUED EXPENSES




Accounts
payable and other accrued expenses at October 30, 2010 and July 31, 2010 consist
of the following (in thousands):




October 30,
                    2010
                  
                  
                  July 31,
                    2010Accounts
      payable and accrued expenses:Accounts
      payable
                  
                  $
                  11,376
                  
                  
                  $
                  13,332Accrued
      payroll and benefits
                  
                  
                  491
                  
                  
                  
                  1,035Accrued
      vacation
                  
                  
                  1,088
                  
                  
                  
                  1,308Return
      reserves
                  
                  
                  947
                  
                  
                  
                  946Accrued
      rent
                  
                  
                  44
                  
                  
                  
                  51Sales
      and other taxes payable
                  
                  
                  773
                  
                  
                  
                  687Miscellaneous
      accrued expense and other
                  
                  
                  2,821
                  
                  
                  
                  2,839Total
                  
                  $
                  17,540
                  
                  
                  $
                  20,198




5.
            FINANCING
      AGREEMENTS




Revolving
Credit Facility




The
Company and certain of its subsidiaries (collectively, the “Borrowers”) have a
senior credit facility, as amended (the “Facility”) with Wells Fargo Retail
Finance II, LLC (“Wells Fargo”), which matures on January 28, 2012.  The
Facility originally was for a maximum amount of $50 million comprised of a $25
million line of credit with a $15 million sub-limit for letters of credit, and
up to an additional $25 million commitment in increments of $5 million at the
option of the Company so long as the Company is in compliance with the terms of
the Facility.  The Facility also originally was secured by a first priority
security interest in all of the Borrowers’ assets.


9




The
actual amount of credit available under the Facility is determined using
measurements based on the Company’s receivables, inventory and other
measures.  The applicable percentages used in calculating the borrowing
base under the Facility were reduced on March 16, 2010 in connection with the
closing of a private placement by the Company to accredited investors of
2,907,051 shares of common stock at $1.05 per share, raising total gross
proceeds of approximately $3,052,000.  Interest is payable monthly, in
arrears, at the Wells Fargo prime rate plus 175 basis points for “Base Rate”
loans and at LIBOR plus 300 basis points for “LIBOR Rate” loans.  There
also is a fee of 50 basis points on any unused portion of the
Facility.




On
November 4, 2008, the Company utilized the accordion feature under the Facility
to increase the borrowing limit from $25 million to $30 million.  In
utilizing the accordion feature, the Company’s minimum availability reserve
increased by $375,000 (7.5% of the $5,000,000 increase) to $2,250,000 (7.5% of
the $30,000,000) and the Company incurred a one-time closing fee of
$12,500.




On
September 21, 2009, the Facility was amended to provide for a $2.0 million
bridge facility at an annual interest rate of LIBOR plus 10% (“Bridge Loan”), to
be repaid upon the earlier of December 7, 2009 and the consummation of a
financing in which the Company received net proceeds of at least $4.9
million.  On October 23, 2009, the Facility was further amended to extend
the December 7, 2009 repayment date to August 1, 2010 and to reduce the net
proceeds that the Company was required to receive to an aggregate of $4.4
million.




On July
30, 2010, the Company repaid the Bridge Loan with proceeds from the Term Loan
described below.  In connection therewith, the Facility was amended to,
among other things, (i) reduce the line of credit commitment from $25 million to
$20 million and (ii) provide for the Facility to be secured by a second priority
interest in all of the Borrowers’ intellectual property and a first priority
security interest in substantially all of the Borrowers’ other
assets.




In
connection with the amendments to the Facility described above, the Company
incurred a one-time amendment fee of $150,000, one half of which was paid in
connection with the September 2009 amendment to the Facility and the remainder
was paid during the three months ended October 30, 2010 following the repayment
of the Bridge Loan.




As of
October 30, 2010, the Company had $1,000,000 outstanding under the Facility at a
LIBOR Rate of 3.27% and $2,000,000 outstanding under the Facility at a LIBOR
Rate of 3.29%.  For the three months ended October 30, 2010, borrowings
under the Facility peaked at $5,698,000 and the average borrowing during the
period was approximately $4,295,000.  In addition, at October 30, 2010, the
Company had $1,422,000 of outstanding letters of credit under the
Facility.




As of
October 24, 2009, the Company had $12,931,000 outstanding under the Facility at
a rate of 5.0% and $2,000,000 outstanding under the Bridge Loan at a rate of
10.25%.  For the three months ended October 24, 2009, borrowings under the
Facility (excluding the Bridge Loan) peaked at $14,231,000 and the average
borrowing during the period was approximately $11,407,000.  In addition, at
October 24, 2009, the Company had $1,334,000 of outstanding letters of credit
under the Facility.




The
Facility contains customary representations and warranties, affirmative and
restrictive covenants and events of default.  The restrictive covenants
limit the Company’s ability to create certain liens, make certain types of
borrowings and investments, liquidate or dissolve, engage in mergers,
consolidations, significant asset sales and affiliate transactions, dispose of
inventory, incur certain lease obligations, make capital expenditures, pay
dividends, redeem or repurchase outstanding equity and issue capital
stock.  In lieu of financial covenants, fixed charge coverage and overall
debt ratios, the Company also is required to maintain specified minimum
availability reserves. At October 30, 2010, the Company was in compliance with
the Facility’s covenants and minimum availability reserve
requirements.




Term
Loan




On July
30, 2010, the Borrowers entered into a financing agreement (“Hilco Financing
Agreement”) with the lending parties from time to time a party thereto and Hilco
Brands, LLC, as lender and also as arranger and agent (“Hilco”).  The Hilco
Financing Agreement provides for a term loan in the aggregate principal amount
of $7,000,000 (“Term Loan”).  From the Term Loan proceeds, $2,000,000 was
used to repay the Bridge Loan with the balance to be available to the Borrowers
for additional working capital.


10




One-half
of the principal amount of the Term Loan, together with accrued interest, is
payable by the Borrowers on July 30, 2013 (“Initial Maturity Date”) and the
other half of the principal amount of the Term Loan, together with accrued
interest, is payable on July 30, 2014 (“Maturity Date”).  The Term Loan
bears interest at a fixed rate of 9.0% per annum (“Regular Interest”) and an
additional 6.0% per annum compounded annually (“PIK Interest”).  Regular
Interest is payable quarterly, in arrears, on the first day of each calendar
quarter, commencing on October 1, 2010 and at maturity.  PIK Interest is
payable on the Initial Maturity Date and the Maturity Date, with the Borrowers
having the right, at the end of any calendar quarter, to pay all or any portion
of the then accrued PIK Interest.




For the
three months ended October 30, 2010, the Company recorded interest expense of
approximately $268,000, which is comprised of approximately $158,000 of Regular
Interest and approximately $110,000 of PIK Interest.




The Term
Loan is secured by a first priority security interest in all of the Borrowers’
intellectual property and a second priority security interest in substantially
all of the Borrowers’ other assets, all in accordance with the terms and
conditions of a Security Agreement between the Borrowers and Hilco entered into
concurrently with the Hilco Financing Agreement.  Also, concurrently with
the Hilco Financing Agreement, Hilco and Wells Fargo entered into an
Intercreditor Agreement, acknowledged by the Borrowers, setting forth, among
other things, their respective rights and obligations as to the collateral
covered by the Security Agreement.  The obligations of the Borrowers’ under
the Hilco Financing Agreement are also guaranteed by a wholly-owned subsidiary
of the Company that is not a Borrower under the Hilco Financing
Agreement.




The Hilco
Financing Agreement and other loan documents contain customary representations
and warranties, affirmative and negative covenants and events of default
substantially similar to those contained in the Facility, except that the Hilco
Financing Agreement contains a debt service coverage ratio covenant, which
becomes effective commencing for the fiscal year ending July 30, 2011.  The
restrictive covenants limit the Borrowers’ ability to create certain liens, make
certain types of borrowings and investments, liquidate or dissolve, engage in
mergers, consolidations, significant asset sales and affiliate transactions,
dispose of inventory, incur certain lease obligations, make capital
expenditures, pay dividends, redeem or repurchase outstanding equity and issue
capital stock.  At October 30, 2010, the Company was in compliance with the
Term Loan’s covenants. The Company paid a one-time fee of $280,000 in connection
with the closing of the Term Loan.




Management
believes the estimated fair value of the Term Loan approximates its carrying
value of $7,112,000 at October 30, 2010 because the transaction was consummated
on July 30, 2010 and there have not been changes to the Company’s business in
the subsequent three months that would suggest adjustments to the credit
worthiness of the Company. However, the sale of the unprofitable wholesale
division could improve the Company’s borrowing ability in future periods and
therefore impact the estimated fair value of the Term Loan.




6.
            COMMITMENTS
      AND CONTINGENCIES




The
Company is involved from time to time in litigation incidental to its
business.  The Company believes that the outcome of such litigation will
not have a material adverse effect on its results of operations or financial
condition.




7.
            NET
      LOSS PER SHARE




The
Company’s calculations of basic and diluted net loss per share applicable to
common shareholders are as follows (in thousands, except per share
amounts):




Three
      Months EndedOctober
      30,
                  
                  
                  October
      24,2010
                  
                  
                  2009Net
      loss from continuing operations
                  
                  $
                  (297
                  )
                  
                  $
                  (2,748
                  )(a)Net
      loss from discontinued operations
                  
                  
                  (933
                  )
                  
                  
                  (1,707
                  )Total
      net loss applicable to common shareholders
                  
                  $
                  (1,230
                  )
                  
                  $
                  (4,455
                  )Basic
      and diluted weighted average number of shares outstanding
                  
                  
                  38,349
                  
                  
                  
                  26,407Basic
      and diluted net loss per share from continuing operations
                  
                  $
                  (0.01
                  )
                  
                  $
                  (0.10
                  )Basic
      and diluted net loss per share from discontinued
operations
                  
                  
                  (0.02
                  )
                  
                  
                  (0.07
                  )Total
      basic and diluted net loss per share applicable to common
      shareholders
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.17
                  )





(a)           Includes
Series A preferred stock dividends of $119.


11




There
were 189,000 and 248,000 potentially dilutive shares that were not included in
the computation of diluted net loss per share for the three months ended October
30, 2010 and October 24, 2009, respectively, since their effect would be
anti-dilutive.




For the
three months ended October 30, 2010, there were 1,785,000 shares of common stock
issuable upon exercise of stock options and 4,679,000 shares of common stock
issuable upon the exercise of warrants that also were not included in the
computation of diluted net loss per share since the exercise prices of these
instruments exceeded the average market price of the common stock during the
period.




For the
three months ended October 24, 2009, there were 1,646,000 shares of common stock
issuable upon exercise of stock options, 598,000 shares of common stock issuable
upon the exercise of warrants and 1,512,000 shares of common stock issuable upon
the conversion of the Company’s Series A Preferred Stock that also were not
included in the computation of diluted net loss per share since the respective
exercise and conversion prices of these instruments exceeded the average market
price of the common stock during the period.


12


ITEM
      2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




Forward-Looking
Statements




When used in this Form 10-Q of
Frederick’s of Hollywood Group Inc. (the “Company,” “we,” “us,” “our” or
“Frederick’s”) and in our future filings with the Securities and Exchange
Commission (“SEC”), the words or phrases “will likely result,” “management
expects” or “we expect,” “will continue,” “is anticipated,” “estimated” or
similar expressions are intended to identify “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of 1995. 
Readers are cautioned not to place undue reliance on any such forward-looking
statements, each of which speaks only as of the date made.  We have no
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statements.




Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. 
These risks are included in “Item 1: Business,” “Item 1A: Risk Factors” and
“Item 7: Management’s Discussion and Analysis of Financial Condition and Results
of Operations” of our Form 10-K for the year ended July 31, 2010.  In
assessing forward-looking statements contained herein, readers are urged to
carefully read those statements.  Among the factors that could cause actual
results to differ materially are: competition; business conditions and industry
growth; rapidly changing consumer preferences and trends; general economic
conditions; working capital needs; continued compliance with government
regulations; loss of key personnel; labor practices; product development;
management of growth; increases of costs of operations or inability to meet
efficiency or cost reduction objectives; timing of orders and deliveries of
products; and foreign government regulations and risks of doing business
abroad.




Our
History




We are a
New York corporation incorporated on April 10, 1935.  On January 28, 2008,
we consummated a merger with FOH Holdings, Inc., a privately-held Delaware
corporation (“FOH Holdings”), whereby FOH Holdings became our wholly-owned
subsidiary.  FOH Holdings is the parent company of Frederick’s of
Hollywood, Inc.  Upon consummation of the merger, we changed our name from
Movie Star, Inc. to Frederick’s of Hollywood Group Inc.




Following
the merger and through the fiscal year ended July 31, 2010, we conducted our
business through two operating divisions representing two distinct business
reporting segments:  the multi-channel retail division, which includes
our retail stores, catalogs and website operations, and the wholesale division,
which included our wholesale operations in the United States and
Canada.




During
the fourth quarter of fiscal year 2010, we made a strategic decision to divest
our wholesale division due to continuing losses and in order to focus on our
core retail operations.  On October 27, 2010, we completed the sale of
substantially all of the assets of the wholesale division to Dolce Vita
Intimates LLC.  This decision was driven by a number of factors. 
These factors include, but are not limited to, a dramatic reduction in our
business with Walmart, which historically represented a significant portion of
our wholesale business.  This reduction was primarily the result of Walmart
producing its own merchandise, selecting competing vendors, and shifting its
focus to product categories that differed from the products Walmart historically
purchased from us.  We also lost a significant amount of business from
other retail customers that began producing products themselves and selecting
vendors with branding capabilities.




The
wholesale division’s operations are classified as discontinued operations for
all periods presented in the consolidated financial statements appearing
elsewhere in this report.  Unless otherwise noted, the wholesale division
is generally not discussed in this report.




Overview




Through
our subsidiaries, we sell women’s intimate apparel and related products under
our proprietary Frederick’s of
Hollywood® brand
predominantly through U.S. mall-based Frederick’s of Hollywood specialty retail
stores, which are referred to as “Stores,” and through our catalog and website
at www.fredericks.com,
which are referred to collectively as “Direct.”  As of October 30,
2010, we operated 126 Frederick’s of Hollywood stores
nationwide.


13




The
popularity of the Frederick’s
of Hollywood brand among consumers has enabled us to initiate a strategy
during fiscal year 2010 to leverage our brand and expand our product offerings
and channels of distribution by entering into product licensing
agreements.  Our licensed merchandise categories currently include
swimwear, sexy Halloween costumes, jewelry, accessories, bed and bath items and
beach towels.  Certain swimwear styles are currently available through our
website and catalog.  Select Frederick’s of Hollywood stores are currently
carrying licensed products, with a more extensive roll out to additional stores
during Summer 2011.




Operating
Initiatives




Our efforts remain focused on
continuing to implement changes in our business strategy as described below that
we believe over time will both increase revenues and reduce costs.  Some of
these initiatives have had an immediate impact on our operating results and we
expect that others will take more time.  However, we cannot be certain that
these initiatives will be successful.  These key initiatives
include:




·
            Developing
      the Frederick’s of Hollywood brand into a sexy lifestyle
      brand.




o
            Current product licensing
      arrangements.During the fourth quarter of fiscal year 2010,
      we entered into four separate multi-year licensing agreements with
      licensees to manufacture, distribute and market swimwear, sexy Halloween
      costumes, jewelry and accessories under the Frederick’s of Hollywood®
      brand.  During the first quarter of fiscal year 2011, we entered into
      an additional multi-year licensing agreement with a licensee to
      manufacture, distribute and market bedding items, beach towels and bath
      items.  In addition to selling these products through our retail
      stores, catalog and website, these agreements provide an economical and
      efficient opportunity for us to access a broad distribution network of
      retailers.  During fiscal year 2011, we have been and will continue
      to work closely with our licensees to assist them in coordinating their
      product offerings.




o
            Future licensing
      initiatives.In addition to currently licensed product
      categories, we will continue to partner with companies capable of
      providing high quality products and a strong distribution network that
      will help us to advance as one of the premier sexy lifestyle brands. 
      Other domestic and international licensing opportunities include intimate
      apparel, fragrances, shoes, headwear and handbags.  We also are
      exploring opportunities with international partners to expand in areas
      such as South Korea, the Middle East, Brazil, Japan, China and
      Canada.




·
            Continuing
      to Evolve our Catalog and Website
  Operations




o
            Catalog.Due to a
      combination of rising paper, production and mailing costs and our website
      being the primary source of Direct customer orders, our catalog operations
      have been evolving over the past few years to serve as a medium to drive
      traffic to our website and stores rather than as a revenue
      generator.  We have been steadily reducing catalog circulation after
      testing various cost effective alternatives such as targeted emails,
      postcards and smaller-sized catalogs called “persona books” that are
      more personalized and tailored to the recipients’ purchasing
      behaviors.  With positive customer response rates, the page count of
      our full-sized catalogs has been reduced and complemented by a series of
      persona books featuring merchandise that can be purchased both in stores
      and on the website.  Persona books are supported by targeted emails,
      post cards and folios.  We expect to replace all of our full-sized
      catalogs with persona books beginning in the third quarter of fiscal
      year 2011.




o
            eCommerce.  As our
      catalog operations have evolved, we have been able to reduce catalog costs
      and reallocate resources to our website and online marketing
      efforts.  During fiscal year 2011, we intend to continue to increase
      our online presence and drive more traffic to the website through search,
      affiliate and social media advertising and shopping comparison site
      optimization.  We also are focused on increasing visitors’ time spent
      on the website by further enhancing functionality and content, and
      improving the customer experience through initiatives such as customer
      product reviews, mobile friendly site access and adding rich media to
      provide customers with more robust product
  views.


14




Critical
Accounting Policies and Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires the appropriate
application of certain accounting policies, many of which require estimates and
assumptions about future events and their impact on amounts reported in the
financial statements and related notes.  Since future events and their
impact cannot be determined with certainty, the actual results will inevitably
differ from our estimates.  Such differences could be material to the
financial statements.




Management
believes that the application of accounting policies, and the estimates
inherently required by the policies, are reasonable.  These accounting
policies and estimates are constantly re-evaluated, and adjustments are made
when facts and circumstances dictate a change.  Historically, management
has found the application of accounting policies to be appropriate, and actual
results generally do not differ materially from those determined using necessary
estimates.




Our
accounting policies are more fully described in Note 2 to the consolidated
unaudited financial statements contained elsewhere in this report. Management
has identified certain critical accounting policies that are described
below.




Our most significant areas of
estimation and assumption are:




·
            determination
      of the appropriate amount and timing of markdowns to clear unproductive or
      slow-moving retail inventory and overall inventory
      obsolescence;




·
            estimation
      of future cash flows used to assess the recoverability of long-lived
      assets, including trademarks;




·
            estimation
      of expected customer merchandise
returns;




·
            estimation
      of the net deferred income tax asset valuation allowance;
    and




·
            estimation
      of deferred catalog costs and the amount of future benefit to be derived
      from the catalogs.




Revenue Recognition –We
record revenue at the point of sale for Stores and at the time of estimated
receipt by the customer for Direct sales.  Outbound shipping charges billed
to customers are included in net sales.  We record an allowance for
estimated returns from our customers in the period of sale based on prior
experience.  At October 30, 2010 and July 31, 2010, the allowance for
estimated returns was $862,000 and $868,000, respectively.  If actual
returns are greater than expected, additional sales allowances may be recorded
in the future.Historically,
management has found its return reserve to be appropriate, and actual results
generally do not differ materially from those determined using necessary
estimates.




Merchandise Inventories –
Store inventories are valued at the lower of cost or market using the retail
inventory first-in, first-out (“FIFO”) method, and Direct inventories are valued
at the lower of cost or market, on an average cost basis that approximates the
FIFO method.  Store and Direct inventories consist entirely of finished
goods. Freight costs are included in inventory and vendor promotional allowances
are recorded as a reduction in inventory cost.  These inventory methods
inherently require management judgments and estimates, such as the amount and
timing of permanent markdowns to clear unproductive or slow-moving inventory,
which may impact the ending inventory valuations and gross margins. 
Markdowns are recorded when the sales value of the inventory has
diminished.  Factors considered in the determination of permanent markdowns
include current and anticipated demand, customer preferences, age of the
merchandise and fashion trends.  We reserve for the difference between the
cost of inventory and the estimated market value based upon assumptions about
future demand, market conditions and the age of the inventory.  If actual
market conditions are less favorable than those projected by management,
additional inventory reserves may be required.  Historically, management
has found its inventory reserves to be appropriate, and actual results generally
do not differ materially from those determined using necessary estimates. 
Inventory reserves were $140,000 at October 30, 2010 and $278,000 at July 31,
2010.


15




Deferred Catalog Costs –
Deferred catalog costs represent direct-response advertising that is capitalized
and amortized over its expected period of future benefit.  The capitalized
costs of the advertising are amortized over the expected revenue stream
following the mailing of the respective catalog, which is generally three
months.  The realization of the deferred catalog costs are also evaluated
as of each balance sheet date by comparing the capitalized costs for each
catalog, on a catalog by catalog basis, to the probable remaining future net
revenues.  Direct-responseadvertising
costs of $2,191,000 and $1,488,000 are included in prepaid expenses and other
current assets in the accompanying consolidated balance sheets at October 30,
2010 and July 31, 2010, respectively.  Management believes that they have
appropriately determined the expected period of future benefit as of the date of
the Company’s consolidated financial statements.  However, should actual
sales results differ from expected sales, deferred catalog costs may be written
off on an accelerated basis.  Direct-response advertising expense for the
three months ended October 30, 2010 and October 24, 2009 were $1,791,000 and
$2,111,000, respectively.




Impairment of Long-Lived
Assets – We review long-lived assets, including property and equipment
and our amortizable intangible assets, for impairment whenever events or changes
in circumstances indicate that the carrying value of an asset may not be
recoverable based on undiscounted cash flows.  If long-lived assets are
impaired, an impairment loss is recognized and is measured as the amount by
which the carrying value exceeds the estimated fair value of the
assets.




The
estimation of future undiscounted cash flows from operating activities requires
significant estimates of factors that include future sales growth and gross
margin performance.  Management believes they have appropriately determined
future cash flows and operating performance; however, should actual results
differ from those expected, additional impairment may be required.  No
impairment was recorded for the three months ended October 30, 2010 and October
24, 2009 related to these long lived assets.




Intangible Assets– We have
certain intangible assets that consist of trademarks, principally the
Frederick’s of Hollywood trade name and domain names. Management has determined
the trademarks and domain names to have indefinite lives. Applicable accounting
literature requires us not to amortize indefinite life intangible assets, but to
test those intangible assets for impairment annually and between annual tests
when circumstances or events have occurred that may indicate a potential
impairment has occurred. No impairment was recorded for the three months ended
October 30, 2010 and October 24, 2009 related to these intangible
assets.




Income Taxes– Income taxes
are accounted for under an asset and liability approach that requires the
recognition of deferred income tax assets and liabilities for the expected
future consequences of events that have been recognized in our financial
statements and income tax returns.  We provide a valuation allowance for
deferred income tax assets when it is considered more likely than not that all
or a portion of such deferred income tax assets will not be
realized.




Results
of Operations




Management
considers certain key indicators when reviewing our results of operations and
liquidity and capital resources.  One key operating metric is the
performance of comparable store sales, which are the net merchandise sales of
stores that have been open at least one complete year.  Because our results
of operations are subject to seasonal variations, retail sales are reviewed
against comparable store sales for the similar period in the prior year.  A
material factor that we consider when reviewing sales is the gross profit
percentage.  We also consider our selling, general and administrative
expenses as a key indicator in evaluating our financial performance. 
Inventory and our outstanding borrowings are the main indicators we consider
when we review our liquidity and capital resources, particularly the size and
age of the inventory. We review all of our key indicators against the prior year
and our operating projections in order to evaluate our operating performance and
financial condition.


16




The
following table sets forth each specified item as a dollar amount and as a
percentage of net sales in each fiscal period, and should be read in conjunction
with the consolidated unaudited financial statements included elsewhere in this
report (in thousands, except for percentages, which percentages may not add due
to rounding):




Three
      Months EndedOctober
      30, 2010
                
                
                October
      24, 2009Net
      sales
                
                $
                28,617
                
                
                
                100.0
                %
                
                $
                31,114
                
                
                
                100.0
                %Cost
      of goods sold, buying and occupancy
                
                
                17,148
                
                
                
                60.0
                %
                
                
                20,156
                
                
                
                64.8
                %Gross
      profit
                
                
                11,469
                
                
                
                40.0
                %
                
                
                10,958
                
                
                
                35.2
                %Selling,
      general and administrative expenses
                
                
                11,342
                
                
                
                39.6
                %
                
                
                13,210
                
                
                
                42.5
                %Operating
      income (loss)
                
                
                127
                
                
                
                0.4
                %
                
                
                (2,252
                )
                
                
                (7.2
                )%Interest
      expense, net
                
                
                399
                
                
                
                1.4
                %
                
                
                361
                
                
                
                1.2
                %Loss
      from continuing operations before income tax provision
                
                
                (272
                )
                
                
                (1.0
                )%
                
                
                (2,613
                )
                
                
                (8.4
                )%Income
      tax provision
                
                
                25
                
                
                
                0.0
                %
                
                
                16
                
                
                
                0.0
                %Net
      loss from continuing operations
                
                
                (297
                )
                
                
                (1.0
                )%
                
                
                (2,629
                )
                
                
                (8.4
                )%Net
      loss from discontinued operations, net of tax
      benefit/provision
                
                
                (933
                )
                
                
                (3.3
                )%
                
                
                (1,707
                )
                
                
                (5.5
                )%Net
      loss
                
                
                (1,230
                )
                
                
                (4.3
                )%
                
                
                (4,336
                )
                
                
                (13.9
                )%Less:
      Preferred stock dividends
                
                
                -
                
                
                
                
                
                
                
                119Net
      loss applicable to common shareholders
                
                $
                (1,230
                )
                
                
                
                
                
                $
                (4,455
                )




Net
Sales




Net sales
for the three months ended October 30, 2010 decreased to $28,617,000 as compared
to $31,114,000 for the three months ended October 24, 2009, and were as follows
(in thousands):




Three Months EndedOctober 30,
                        2010
                    
                    
                    October 24,
                        2009
                    
                    
                    DecreaseStores
                    
                    $
                    18,436
                    
                    
                    $
                    20,395
                    
                    
                    $
                    (1,959
                    )Direct
      (catalog and website)
                    
                    
                    10,181
                    
                    
                    
                    10,719
                    
                    
                    
                    (538
                    )Total net sales
                    
                    $
                    28,617
                    
                    
                    $
                    31,114
                    
                    
                    $
                    (2,497
                    )




Total
store sales for the three months ended October 30, 2010 decreased by $1,959,000,
or 9.6%, as compared to the three months ended October 24, 2009. 
Comparable store sales for the three months ended October 30, 2010 decreased by
$1,371,000, or 7.0%, as compared to the three months ended October 24,
2009.  This decrease was due to a decrease in consumer spending resulting
from the severe economic downturn of the regional economies in states where our
stores are concentrated, including California, Nevada and Florida.  We also
had fewer promotions during the three months ended October 30, 2010 as compared
to the same period in the prior year, which resulted from having lower inventory
levels.




Direct
sales for the three months ended October 30, 2010 decreased by $538,000, or
5.0%, as compared to the three months ended October 24, 2009. The decrease
resulted from not mailing a Summer Clearance catalog during Summer 2010 due to
our lower inventory levels and our continued efforts to reduce costs.  This
catalog, which was mailed in Summer 2009, consisted mainly of discounted
merchandise.


17




Gross
Profit




Gross
margin (gross profit as a percentage of net sales) for the three months ended
October 30, 2010 was 40.0% as compared to 35.2% for the three months ended
October 24, 2009.  The largest contributors to the increase in gross margin
were the following:




·
            Product
      costs as a percentage of sales decreased by 3.8 percentage points for the
      three months ended October 30, 2010 as compared to the three months ended
      October 24, 2009.  The higher product margin was due to markdown
      assistance that we received from our vendors in the three months ended
      October 30, 2010, which we did not receive in the same period in the prior
      year.  In addition, there was a reduction in markdowns in the three
      months ended October 31, 2010 due to fewer promotions offered as compared
      to the same period in the prior
year.




·
            Buying
      costs, which consist of payroll and benefits for design, buying and
      merchandising personnel, decreased by $510,000 for the three months ended
      October 30, 2010 as compared to the three months ended October 24,
      2009.  As a percentage of sales, buying costs decreased by 1.5
      percentage points for the three months ended October 30, 2010 as compared
      to the same period in the prior year.  This decrease was primarily
      attributable to head count reductions, which resulted from streamlining
      the buying and merchandising
departments.




Selling,
General and Administrative Expenses




Selling,
general and administrative expenses for the three months ended October 30, 2010
decreased by $1,868,000 to $11,342,000, or 39.6% of sales, from $13,210,000, or
42.5% of sales, for the three months ended October 24, 2009. This decrease is
primarily attributable to the following:




·
            Store
      selling, general and administrative expenses decreased by $1,014,000 to
      $5,010,000 for the three months ended October 30, 2010 from $6,024,000 for
      the same period in the prior year.  This decrease was primarily due
      to decreases in (i) salaries and salary-related costs of $588,000, (ii)
      telephone costs of $145,000 and (iii) credit card fees of $117,000. 
      The decrease in salaries and salary-related costs is the result of lower
      store coverage requirements and a reduction in head count as compared to
      the same period in the prior year.  The lower telephone costs were
      the result of the cancellation of a telephone contract that required us to
      maintain a more expensive connection between our stores and our retail
      division corporate office.  The decrease in credit card fees was due
      to lower sales in our stores for the current period as compared to the
      same period in the prior year.




·
            Direct
      selling, general and administrative expenses decreased by $464,000 to
      $3,532,000 for the three months ended October 30, 2010 from $3,996,000 for
      the same period in the prior year.  This decrease was primarily due
      to not printing the Summer Clearance catalog in Summer 2010, which
      resulted in a lower catalog expense of $200,000 compared to the same
      period in the prior year.  We also mailed fewer postcards during the
      three months ended October 30, 2010 as compared to the same period in the
      prior year, which resulted in a $76,000 cost
  savings.




Interest
Expense, Net




For the
three months ended October 30, 2010, net interest expense was $399,000 as
compared to $361,000 for the three months ended October 24, 2009.  The
increase resulted from a higher interest rate on the Term Loan, partially offset
by lower borrowings under the revolving credit facility.




Income
Tax Provision




Our
effective tax rate is less than 1% for the three months ended October 30, 2010
and October 24, 2009.  Our income tax provision for the three months ended
October 30, 2010 and October 24, 2009 primarily represents minimum and net worth
taxes due in various states.  Due to the uncertainty of realization in
future periods, no tax benefit has been recognized on the net losses for these
periods.  Accordingly, a full valuation allowance has been established on
the current loss and all net deferred tax assets existing at the end of the
period, excluding the deferred tax liability related to our trademarks, which
have an indefinite life.


18




Discontinued
Operations




During
the fourth quarter of fiscal year 2010, we made a strategic decision to divest
our wholesale division due to continuing losses and in order to focus on our
core retail operations.  Our wholesale division’s operations are classified
as discontinued operations for all periods presented in the consolidated
financial statements appearing elsewhere in this report.  The loss from
discontinued operations, net of tax, was $933,000 for the three months ended
October 30, 2010 as compared to $1,707,000 for the same period in the prior
year.  This decrease in our loss was primarily due to a gain of
approximately $1,070,000 that we recorded as a result of the sale of our
wholesale division.  Revenues from discontinued operations decreased by
$2,673,000 to $3,421,000 for the three months ended October 30, 2010 from
$6,094,000 for the same period in the prior year.




Liquidity
and Capital Resources




Cash
Used in Operations




Net cash
used in operating activities for the three months ended October 30, 2010 was
$6,246,000, resulting primarily from the following:




·
            net
      losses for the three months ended October 30, 2010 of $297,000 from
      continuing operations and $933,000 from discontinued
      operations;




·
            an
      increase in accounts receivable of $659,000, which was primarily due to
      higher sales in the last week of October as compared to the last week of
      July.  Our accounts receivable is comprised primarily of commercial
      credit card receivables from companies such as Visa, MasterCard and
      American Express, which are generally received within a few days of the
      related transaction.  The higher sales in October are due to normal
      seasonal sales fluctuations;




·
            an
      increase in prepaid expenses and other current assets of $810,000, which
      resulted from an increase in our deferred catalog costs as of October 30,
      2010 as compared to July 31, 2010.  This increase is due to normal
      seasonal fluctuations;




·
            a
      decrease in accounts payable and other accrued expenses of $2,583,000,
      which resulted from our making more timely payments to our vendors for
      inventory and other services.




These decreases in cash flow were
partially offset by a non-cash expense of $842,000 for depreciation and
amortization.




Cash
Provided by Investing Activities




Cash
provided by investing activities for the three months ended October 30, 2010 was
$4,200,000, which resulted primarily from the proceeds of the sale of the
wholesale division’s assets of $4,219,000.




Cash
Provided by Financing Activities




Net cash
provided by financing activities for the three months ended October 30, 2010 was
$2,001,000, which resulted primarily from an inflow of $4,660,000 of cash that
was held in a restricted cash account as of July 31, 2010, partially offset by
$2,302,000 held in a restricted cash account at October 30, 2010.  The cash
held in a restricted account at October 30, 2010 resulted from the proceeds from
the sale of the wholesale division exceeding the amount of our variable rate
loan under our senior credit facility, as amended (“Facility”) with Wells Fargo
Retail Finance II, LLC (“Wells Fargo”) at October 30, 2010.  This
restricted cash will be used to pay down the variable rate loan as required and
to repay our LIBOR rate loans under the Facility on their respective maturity
dates. For a detailed description of the Facility, see the subsection below
entitled “Revolving Credit
Facility.”




Revolving
Credit Facility




We and
certain of our subsidiaries have the Facility with Wells Fargo, which matures on
January 28, 2012. The Facility originally was for a maximum amount of $50
million comprised of a $25 million line of credit with a $15 million sub-limit
for letters of credit, and up to an additional $25 million commitment in
increments of $5 million at our option so long as we are in compliance with the
terms of the Facility.  The Facility also originally was secured by a first
priority security interest in all of our assets.


19




The
actual amount of credit available under the Facility is determined using
measurements based on our receivables, inventory and other measures.  The
applicable percentages used in calculating the borrowing base under the Facility
were reduced on March 16, 2010 following the closing of the Private
Placement.  Interest is payable monthly, in arrears, at the Wells Fargo
prime rate plus 175 basis points for “Base Rate” loans and at LIBOR plus 300
basis points for “LIBOR Rate” loans.  There also is a fee of 50 basis
points on any unused portion of the Facility.




On November 4, 2008, the borrowers
utilized the accordion feature under the Facility to increase the borrowing
limit from $25 million to $30 million.  In utilizing the accordion feature,
our minimum availability reserve increased by $375,000 (7.5% of the $5,000,000
increase) to $2,250,000 (7.5% of the $30,000,000) and we incurred a one-time
closing fee of $12,500.




On
September 21, 2009, the Facility was amended to provide for a $2,000,000 bridge
facility at an annual interest rate of LIBOR plus 10% (the “Bridge Loan”), to be
repaid upon the earlier of December 7, 2009 and the consummation of a financing
in which we received net proceeds of at least $4,900,000.  On October 23,
2009, the Facility was further amended to extend the December 7, 2009 repayment
date to August 1, 2010 and to reduce the net proceeds that we were required
to receive to an aggregate of $4,400,000.




On July
30, 2010, we repaid the Bridge Loan with proceeds from the Term Loan described
below.  In connection therewith, the Facility was amended to, among other
things, (i) reduce the line of credit commitment from $25 million to $20 million
and (ii) provide for the Facility to be secured by a second priority interest in
all of our intellectual property and a first priority security interest in
substantially all of our other assets.




In
connection with the amendments to the Facility described above, we incurred a
one-time amendment fee of $150,000, one half of which was paid in connection
with the September 2009 amendment to the Facility and the remainder was paid
subsequent to the fiscal year ended July 31, 2010 following the repayment of the
Bridge Loan.




As of
October 30, 2010, the Company had $1,000,000 outstanding under the Facility at a
LIBOR Rate of 3.27% and $2,000,000 outstanding under the Facility at a LIBOR
Rate of 3.29%.  For the three months ended October 30, 2010, borrowings
under the Facility (including the Bridge Loan) peaked at $5,698,000 and the
average borrowing during the period was approximately $4,295,000.  In
addition, at October 30, 2010, we had $1,422,000 of outstanding letters of
credit under the Facility.




The
Facility contains customary representations and warranties, affirmative and
restrictive covenants and events of default.  The restrictive covenants
limit our ability to create certain liens, make certain types of borrowings and
investments, liquidate or dissolve, engage in mergers, consolidations,
significant asset sales and affiliate transactions, dispose of inventory, incur
certain lease obligations, make capital expenditures, pay dividends, redeem or
repurchase outstanding equity and issue capital stock.  In lieu of
financial covenants, fixed charge coverage and overall debt ratios, we also are
required to maintain specified minimum availability reserves. At October 30,
2010, we were in compliance with the Facility’s covenants and minimum
availability reserve requirements.




Term
Loan




On July
30, 2010, we and certain of our subsidiaries entered into a financing agreement
(“Hilco Financing Agreement”) with the lending parties from time to time a party
thereto and Hilco, as lender and also as arranger and agent.  The Hilco
Financing Agreement provides for a term loan in the aggregate principal amount
of $7,000,000 (“Term Loan”).  From the Term Loan proceeds, $2,000,000 was
used to repay the Bridge Loan with the balance to be available to us for
additional working capital.




One-half
of the principal amount of the Term Loan, together with accrued interest, is
payable by us on July 30, 2013 (“Initial Maturity Date”) and the other half of
the principal amount of the Term Loan, together with accrued interest, is
payable on July 30, 2014 (“Maturity Date”).  The Term Loan bears interest
at a fixed rate of 9.0% per annum (“Regular Interest”) and an additional 6.0%
per annum compounded annually (“PIK Interest”).  Regular Interest is
payable quarterly, in arrears, on the first day of each calendar quarter,
commencing on October 1, 2010 and at maturity.  PIK Interest is payable on
the Initial Maturity Date and the Maturity Date, with us having the right, at
the end of any calendar quarter, to pay all or any portion of the then accrued
PIK Interest.




For the
three months ended October 30, 2010, we recorded interest expense of
approximately $268,000, which is comprised of approximately $158,000 of Regular
Interest and approximately $110,000 of PIK Interest.


20




The Term
Loan is secured by a first priority security interest in all of our intellectual
property and a second priority security interest in substantially all of our
other assets, all in accordance with the terms and conditions of a Security
Agreement between us and Hilco entered into concurrently with the Hilco
Financing Agreement.  Also, concurrently with the Hilco Financing
Agreement, Hilco and Wells Fargo entered into an Intercreditor Agreement,
acknowledged by us, setting forth, among other things, their respective rights
and obligations as to the collateral covered by the Security Agreement. 
Our obligations under the Hilco Financing Agreement are also guarantied by one
of our wholly-owned subsidiaries that is not a borrower under the Hilco
Financing Agreement.




The Hilco
Financing Agreement and other loan documents contain customary representations
and warranties, affirmative and negative covenants and events of default
substantially similar to those contained in the Facility, except that the Hilco
Financing Agreement contains a debt service coverage ratio covenant, which
becomes effective commencing for the fiscal year ending July 30, 2011.  The
restrictive covenants limit our ability to create certain liens, make certain
types of borrowings and investments, liquidate or dissolve, engage in mergers,
consolidations, significant asset sales and affiliate transactions, dispose of
inventory, incur certain lease obligations, make capital expenditures, pay
dividends, redeem or repurchase outstanding equity and issue capital
stock.  At October 30, 2010, we were in compliance with the Term Loan’s
covenants.  We paid a one-time fee of $280,000 in connection with the
closing of the Term Loan.




Private
Placement




On March
16, 2010, we completed a private placement to accredited investors of 2,907,051
shares of common stock at $1.05 per share, raising total gross proceeds of
approximately $3,052,000 (“Private Placement”).  The investors in the
Private Placement also received two-and-a-half year Series A warrants to
purchase up to an aggregate of 1,162,820 shares of common stock at an exercise
price of $1.25 per share, and five-year Series B warrants to purchase up to an
aggregate of 1,162,820 shares of common stock at an exercise price of $1.55 per
share. Both warrants became exercisable on September 16, 2010.  We also
issued to Avalon Securities Ltd., the placement agent in the transaction, and
its designees, warrants to purchase an aggregate of 218,030 shares of common
stock at an exercise price of $1.21 per share.  Except for the exercise
price, these warrants are identical to the Series B warrants issued to investors
in the Private Placement.




Exchange
of Long-Term Debt – Related Party and Conversion of Series A Preferred
Stock




On May
18, 2010, we completed the transactions contemplated by the Debt Exchange and
Preferred Stock Conversion Agreement, dated as of February 1, 2010, with
accounts and funds managed by and/or affiliated with Fursa Alternative
Strategies LLC (collectively, “Fursa”).  At the closing, we issued to Fursa
an aggregate of 8,664,373 shares of common stock upon exchange of approximately
$14,285,000 of outstanding secured long-term debt (including accrued interest)
due to Fursa, and conversion of approximately $8,795,000 of Series A Preferred
Stock (including accrued dividends) owned by Fursa, representing all of the
outstanding shares of our Series A Preferred Stock, at an effective price of
approximately $2.66 per share.  We also issued to Fursa three, five and
seven-year warrants, each to purchase 500,000 shares of common stock (for an
aggregate of 1,500,000 shares of common stock) at exercise prices of $2.00,
$2.33 and $2.66 per share, respectively.  The transaction resulted in an
increase to shareholders’ equity of $23,080,000.




Future
Financing Requirements




For the
three months ended October 30, 2010, our working capital deficiency decreased by
$695,000 to $(1,835,000).  Our business continues to be effected by limited
working capital.  Management believes that its continued careful management
of working capital, together with the available borrowings under the Facility
and our projected operating cash flows, will be sufficient to cover our working
capital requirements and capital expenditures through the end of fiscal year
2011.  Our ability to achieve our fiscal year 2011 business plan is
critical to maintaining adequate liquidity.  There can be no assurance that
we will be successful in our efforts.




We expect
that our capital expenditures for fiscal year 2011 will be approximately
$1,500,000, primarily for improvements to our information technology systems,
expenditures to support our website initiatives, store refurbishment costs,
and other general corporate expenditures.


21




Off
Balance Sheet Arrangements




We are
not a party to any material off-balance sheet financing arrangements except
relating to open letters of credit as described in Note 5, “Financing Agreements,”
included in the notes to the consolidated unaudited financial statements
contained elsewhere in this report, and Note 9 to the consolidated audited
financial statements included in our Annual Report on Form 10-K for the year
ended July 31, 2010.




Effect
of New Accounting Standards




See Note 2, “Summary of Significant Accounting
Policies,” included in the notes to the consolidated unaudited financial
statements appearing elsewhere in this report for a discussion of recent
accounting developments and their impact on our consolidated unaudited financial
statements.  There have been no recently issued accounting updates that had
a material impact on our consolidated unaudited financial statements for the
three months ended October 30, 2010 or are expected to have an impact in the
future.




Seasonality
and Inflation




Our
business experiences seasonal sales patterns.  Sales and earnings typically
peak during the second and third fiscal quarters (November through April),
primarily during the holiday season in November and December, as well as the
Valentine’s Day holiday in the month of February.  As a result, we maintain
higher inventory levels during these peak selling periods.




We do not believe that our operating
results have been materially affected by inflation during the preceding three
years.  There can be no assurance, however, that our operating results will
not be affected by inflation in the future.




Imports




Transactions
with our foreign suppliers and our domestic suppliers that source products
internationally are subject to the risks of doing business outside of the United
States.  Our operations are subject to constraints imposed by agreements
between the United States and the foreign countries in which we do
business.  These agreements often impose quotas on the amount and type of
goods that can be imported into the United States from these countries. 
Such agreements also allow the United States to impose, at any time, restraints
on the importation of categories of merchandise that, under the terms of the
agreements, are not subject to specified limits.  Our products are also
subject to United States customs duties and, in the ordinary course of business,
we are from time to time subject to claims by the United States Customs Service
for duties and other charges.  The United States and the countries in which
our products are manufactured may, from time to time, impose new quotas, duties,
tariffs or other restrictions, or adversely adjust presently prevailing quotas,
duty or tariff levels, which could adversely affect our operations and our
ability to continue to import products at current or increased levels.  We
cannot predict the likelihood or frequency of any such events
occurring.




ITEM 3. – QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK




Interest
Rate Risks




We are
exposed to interest rate risk associated with our Facility. As of October 30,
2010 we had $1,000,000 outstanding under the Facility at a LIBOR Rate of 3.27%
and $2,000,000 outstanding under the Facility at a LIBOR rate of 3.29%. 
Interest accrues on outstanding borrowings under the Facility at an agreed to
reference rate, which was, at our election, either the Wells Fargo prime rate
plus 175 basis points (5.0% at October 30, 2010) or LIBOR plus 300 basis points.
 For the three months ended October 30, 2010, borrowings under the Facility
peaked at $5,698,000 and the average borrowing during the period was
approximately $4,295,000.  An increase or decrease in the interest rate by
100 basis points from the levels at October 30, 2010 would increase or decrease
annual interest expenses by approximately $47,000.




Foreign
Currency Risks




We buy products from a significant
number of domestic vendors who enter into purchase obligations outside of the
U.S.  All of our product purchase orders are negotiated and settled in U.S.
dollars.  Therefore, we have no exposure to foreign currency exchange
risks.  However, fluctuations in foreign currency rates could have an
impact on our future purchases.


22




ITEM
4. – CONTROLS AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures


Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in company reports filed or
submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms.  Disclosure
controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in company reports
filed or submitted under the Exchange Act is accumulated and communicated to
management, including our chief executive officer and chief financial officer,
as appropriate to allow timely decisions regarding required
disclosure.


As
required by Rules 13a-15 and 15d-15 under the Exchange Act, our chief executive
officer and chief financial officer performed an evaluation of the effectiveness
of the design and operation of our disclosure controls and procedures as of
October 30, 2010.  Based upon their evaluation, they concluded that our
disclosure controls and procedures were effective.


Internal
Control Over Financial Reporting


Our
internal control over financial reporting is a process designed by, or under the
supervision of, our chief executive officer and chief financial officer and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of our financial reporting and
the preparation of our financial statements for external purposes in accordance
with generally accepted accounting principles in the United States. 
Internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of our assets; provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of our financial statements in accordance with generally accepted
accounting principles in the United States, and that our receipts and
expenditures are being made only in accordance with the authorization of our
board of directors and management; and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on our financial
statements.


Changes
in Internal Control Over Financial Reporting


During
the three months ended October 30, 2010, there were no changes made in our
internal control over financial reporting (as such term is defined in Rule
13a-15(f) under the Exchange Act) that have materially effected, or are
reasonably likely to materially effect, our internal control over financial
reporting.




PART
II                     OTHER
INFORMATION




ITEM
1 – LEGAL PROCEEDINGS




We are involved from time to time in
litigation incidental to our business.  We believe that the outcome of such
litigation will not have a material adverse effect on our results of operations
or financial condition.




ITEM
1A – RISK FACTORS




There are no material changes from the
risk factors set forth in the “Risk Factors” section of our Annual Report on
Form 10-K filed with the SEC on October 25, 2010.  Please refer to this
section for disclosures regarding the risks and uncertainties in our
business.




ITEM
6 – EXHIBITS




Exhibit No.
              
              Description31.1
              
              Certification
      by Chief Executive Officer and Principal Executive
  Officer31.2
              
              Certification
      by Chief Financial Officer and Principal Accounting
  Officer32
              
              Section
      1350 Certification


23




SIGNATURES





Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned hereunto duly
authorized.





FREDERICK’S
      OF HOLLYWOOD GROUP INC.Date:
      December 13, 2010
                  By:
                  /s/ Thomas J. LynchTHOMAS
      J. LYNCHChief
      Executive Officer andPrincipal
      Executive OfficerDate:
      December 13, 2010
                  By:
                  /s/ Thomas RendeTHOMAS
      RENDEChief
      Financial Officer andPrincipal
      Accounting
Officer


24