##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 30, 2006
 OR
 o
    
    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 001-08769
 R. G. BARRY CORPORATION
  OHIO
    
    31-4362899(State or other jurisdiction
    
    (IRS Employerof incorporation or organization)
    
    Identification Number)
 13405 Yarmouth Road NW, Pickerington, Ohio
    
    43147(Address of principal executive offices)
    
    (Zip Code)
 614-864-6400
 NOT APPLICABLE
  þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
  o þ




---



TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONITEM 1  FINANCIAL STATEMENTSITEM 2  Managements Discussion and Analysis of Financial Condition and Results of OperationsITEM 3  Quantitative and Qualitative Disclosures About Market RiskITEM 4  Controls and ProceduresPART II  OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESINDEX TO EXHIBITSEX-31.1EX-31.2EX-32.1    Table of Contents  
  
  
 December 30, 2006
    
    

July
1, 2006(unaudited)ASSETS:Cash and cash equivalents
    
    $
    14,843
    
    
    $
    988Accounts receivable (less allowances of
$10,010 and $2,180, respectively)
    
    
    13,703
    
    
    
    6,683Assets held for disposal
    
    
    
    
    
    
    20Inventory
    
    
    12,172
    
    
    
    25,977Deferred income taxes
    
    
    8,697
    
    
    
    Prepaid expenses
    
    
    853
    
    
    
    1,141Total current assets
    
    
    50,268
    
    
    
    34,809Property, plant and equipment, at cost
    
    
    11,714
    
    
    
    11,214Less accumulated depreciation and amortization
    
    
    9,145
    
    
    
    8,795Net property, plant and equipment
    
    
    2,569
    
    
    
    2,419Deferred income taxes
    
    
    4,746
    
    
    
    Other assets
    
    
    3,065
    
    
    
    3,216Total assets
    
    $
    60,648
    
    
    $
    40,444LIABILITIES AND SHAREHOLDERS EQUITY:Short-term notes payable
    
    
    2,304
    
    
    
    2,200Current installments of long-term debt
    
    
    364
    
    
    
    395Accounts payable
    
    
    4,860
    
    
    
    9,085Accrued expenses
    
    
    5,336
    
    
    
    7,136Total current liabilities
    
    
    12,864
    
    
    
    18,816Long-term debt, excluding current installments
    
    
    331
    
    
    
    439Accrued retirement costs and other
    
    
    11,517
    
    
    
    12,193Total liabilities
    
    
    24,712
    
    
    
    31,448Shareholders equity:Preferred shares, $1 par value per share
Authorized 3,775 Class A shares,
225 Series I Junior Participating Class A Shares,
and 1,000 Class B Shares, none issued
    
    
    
    
    
    
    Common shares, $1 par value per share
Authorized 22,500 shares; issued and outstanding
10,041 and 10,017 shares, respectively
(excluding treasury shares of 1,000 and 969,
respectively)
    
    
    10,041
    
    
    
    10,017Additional capital in excess of par value
    
    
    13,408
    
    
    
    13,192Accumulated other comprehensive loss
    
    
    (4,262
    )
    
    
    (4,353
    )Retained earnings (deficit)
    
    
    16,749
    
    
    
    (9,860
    )Net shareholders equity
    
    
    35,936
    
    
    
    8,996Total liabilities and shareholders equity
    
    $
    60,648
    
    
    $
    40,444
 Page 2




---



##### Table of Contents



Thirteen weeks ended
    
    
    Twenty-six weeks endedDecember
30,
    
    
    December 31,
    
    
    December 30,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005(unaudited)
    
    
    (unaudited)
    
    
    (unaudited)
    
    
    (unaudited)Net sales
    
    $
    40,866
    
    
    $
    36,843
    
    
    $
    78,396
    
    
    $
    72,279Cost of sales
    
    
    25,318
    
    
    
    20,564
    
    
    
    47,657
    
    
    
    41,676Gross profit
    
    
    15,548
    
    
    
    16,279
    
    
    
    30,739
    
    
    
    30,603Selling, general and administrative expenses
    
    
    8,788
    
    
    
    10,537
    
    
    
    17,249
    
    
    
    19,884Gain on disposal of land
    
    
    (878
    )
    
    
    
    
    
    
    (878
    )
    
    
    Restructuring and asset impairment (credit) charges
    
    
    (2
    )
    
    
    740
    
    
    
    72
    
    
    
    1,269Operating profit
    
    
    7,640
    
    
    
    5,002
    
    
    
    14,296
    
    
    
    9,450Other income
    
    
    51
    
    
    
    156
    
    
    
    96
    
    
    
    295Interest expense, net
    
    
    (269
    )
    
    
    (348
    )
    
    
    (555
    )
    
    
    (649
    )Income from continuing operations, before
income tax
    
    
    7,422
    
    
    
    4,810
    
    
    
    13,837
    
    
    
    9,096Income tax expense (benefit)
    
    
    (12,889
    )
    
    
    29
    
    
    
    (12,772
    )
    
    
    55Earnings from continuing operations
    
    $
    20,311
    
    
    $
    4,781
    
    
    $
    26,609
    
    
    $
    9,041Earnings (loss) from discontinued operations
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    22Net earnings
    
    $
    20,311
    
    
    $
    4,779
    
    
    $
    26,609
    
    
    $
    9,063Earnings per common share: continuing operationsBasic
    
    $
    2.02
    
    
    $
    0.48
    
    
    $
    2.65
    
    
    $
    0.91Diluted
    
    $
    1.96
    
    
    $
    0.46
    
    
    $
    2.57
    
    
    $
    0.88Earnings per common share: discontinued operationsBasic
    
    
    
    
    
    
    nm
    
    
    
    
    
    
    
    nmDiluted
    
    
    
    
    
    
    nm
    
    
    
    
    
    
    
    nmEarnings per common share: totalBasic
    
    $
    2.02
    
    
    $
    0.48
    
    
    $
    2.65
    
    
    $
    0.92Diluted
    
    $
    1.96
    
    
    $
    0.46
    
    
    $
    2.57
    
    
    $
    0.88Average number of common shares outstandingBasic
    
    
    10,040
    
    
    
    9,918
    
    
    
    10,030
    
    
    
    9,898Diluted
    
    
    10,384
    
    
    
    10,340
    
    
    
    10,358
    
    
    
    10,271
 Page 3




---



##### Table of Contents



Twenty-six weeks endedDecember 30, 2006
    
    
    December 31, 2005(unaudited)Operating activities:Net earnings
    
    $
    26,609
    
    
    $
    9,063Earnings from discontinued operations
    
    
    
    
    
    
    22Earnings from continuing operations
    
    
    26,609
    
    
    
    9,041Adjustments to reconcile net earnings to net cash
provided by operating activities:Depreciation and amortization of property,
plant and equipment
    
    
    259
    
    
    
    272Deferred income tax benefit
    
    
    (13,443
    )
    
    
    Stock-based compensation expense
    
    
    288
    
    
    
    Loss on disposal of property, plant and equipment
    
    
    11
    
    
    
    132Gain on disposal of land
    
    
    (878
    )
    
    
    Changes in:Accounts receivable
    
    
    (6,981
    )
    
    
    (6,817
    )Inventory
    
    
    13,900
    
    
    
    3,860Prepaid expenses and other
    
    
    461
    
    
    
    124Accounts payable
    
    
    (4,254
    )
    
    
    (1,377
    )Accrued expenses
    
    
    (1,898
    )
    
    
    3,340Accrued retirement costs and other, net
    
    
    (676
    )
    
    
    (1,913
    )Net cash provided by continuing operations
    
    
    13,398
    
    
    
    6,662Net cash provided by discontinued operations
    
    
    
    
    
    
    22Net cash provided by operating activities
    
    
    13,398
    
    
    
    6,684Investing activities:Purchases of property, plant and equipment
    
    
    (412
    )
    
    
    (242
    )Proceeds from the disposal of property, plant and equipment
    
    
    887
    
    
    
    4Net cash provided by (used in) investing activities
    
    
    475
    
    
    
    (238
    )Financing activities:Additions to short-term notes
    
    
    54
    
    
    
    Repayment of short-term and long-term debt
    
    
    (109
    )
    
    
    (4,147
    )Proceeds from common shares issued
    
    
    21
    
    
    
    182Net cash used in financing activities
    
    
    (34
    )
    
    
    (3,965
    )Effect of exchange rates on cash
    
    
    16
    
    
    
    19Net increase in cash
    
    
    13,855
    
    
    
    2,500Cash at the beginning of the period
    
    
    988
    
    
    
    1,029Cash and cash equivalents at the end of the period
    
    $
    14,843
    
    
    $
    3,529Supplemental cash flow disclosures:Interest paid
    
    $
    585
    
    
    $
    685Income taxes paid
    
    
    273
    
    
    
    23
 Page 4




---



##### Table of Contents



R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form 10-Q
for the thirteen-week and twenty-six-week periods ended December 30, 2006 and December 31, 2005
(dollar amounts in thousands, except per share data)
 Basis of Presentation
      Stock-Based Compensation
 Shared-Based Payment Accounting for Stock Issued to Employees Accounting for Certain Transactions
Involving Stock Compensation, an interpretation of APB No. 25
 Page 5




---



##### Table of Contents



R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form 10-Q
for the thirteen-week and twenty-six-week periods ended December 30, 2006 and December 31, 2005
(dollar amounts in thousands, except per share data)
 Accounting for Stock-Based Compensation
     Thirteen weeks endedDecember 30, 2006Expected dividend yield
    
    0%Expected volatility
    
    60%Risk-free interest rate
    
    4.57%Expected life-ISO grants
    
    5 years
   Page 6




---



##### Table of Contents



R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form 10-Q
for the thirteen-week and twenty-six-week periods ended December 30, 2006 and December 31, 2005
(dollar amounts in thousands, except per share data)
 Thirteen weeks ended
    
    
    Twenty-six weeks endedDecember 31, 2005
    
    
    December 31, 2005Net earnings:As reported
    
    $
    4,779
    
    
    $
    9,063Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method for
all awards, net of
related tax effect
    
    
    (240
    )
    
    
    (385
    )Pro forma
    
    $
    4,539
    
    
    $
    8,678Net earnings per share:Basic  as reported
    
    $
    0.48
    
    
    $
    0.92Basic  pro forma
    
    $
    0.46
    
    
    $
    0.88Diluted  as reported
    
    $
    0.46
    
    
    $
    0.88Diluted  pro forma
    
    $
    0.44
    
    
    $
    0.84
    Number of
    
    Number of
    
    Weighted-common shares
    
    common shares
    
    averagesubject to ISOs
    
    subject to NQs
    
    exercise priceOutstanding at July 1, 2006
    
    
    556,100
    
    
    
    552,800
    
    
    $
    5.27Granted
    
    
    5,000
    
    
    
    
    
    
    $
    7.25Exercised
    
    
    (6,000
    )
    
    
    (50,000
    )
    
    $
    2.69Expired/Cancelled
    
    
    (24,600
    )
    
    
    
    
    
    $
    4.04Outstanding at December 30, 2006
    
    
    530,500
    
    
    
    502,800
    
    
    $
    5.45Options exercisable at December 30, 2006
    
    
    410,100
    
    
    
    349,500
 Page 7




---



##### Table of Contents



R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form 10-Q
for the thirteen-week and twenty-six-week periods ended December 30, 2006 and December 31, 2005
(dollar amounts in thousands, except per share data)
  Grant DateShares
    
    
    Fair ValueNonvested at July 1, 2006
    
    
    106,200
    
    
    $
    6.18Granted
    
    
    10,800
    
    
    $
    7.25Vested
    
    
    
    
    
    
    Forfeited
    
    
    (11,000
    )
    
    $
    6.18Nonvested at December 30, 2006
    
    
    106,000
    
    
    $
    6.29
  Income Taxes
  December 30,
    
    
    December 31,2006
    
    
    2005Computed expected tax expense
    
    $
    4,705
    
    
    $
    3,101State income taxes benefit, net of federal income taxes
    
    
    412
    
    
    
    488Foreign income tax rate difference
    
    
    
    
    
    
    1Change in valuation allowance
    
    
    (18,273
    )
    
    
    (4,420
    )Expiration of state net operating loss carry-forward
    
    
    
    
    
    
    472Effect of liquidation of Mexico-based subsidiaries
    
    
    146
    
    
    
    303Effect of state tax rate revision on deferred tax
asset and liability valuation
    
    
    (147
    )
    
    
    Other, net
    
    
    385
    
    
    
    112Total expense (benefit)
    
    
    (12,772
    )
    
    
    57Total expense allocated to discontinued operations
    
    
    
    
    
    
    2Total expense (benefit) on continuing operations
    
    $
    (12,772
    )
    
    $
    55
 , Accounting for Income Taxes
 Page 8




---



##### Table of Contents



R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form 10-Q
for the thirteen-week and twenty-six-week periods ended December 30, 2006 and December 31, 2005
(dollar amounts in thousands, except per share data)
     Net Earnings Per Common Share
  Page 9




---



##### Table of Contents



R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form 10-Q
for the thirteen-week and twenty-six-week periods ended December 30, 2006 and December 31, 2005
(dollar amounts in thousands, except per share data)
  Thirteen weeks ended
    
    
    Twenty-six weeks endedDecember 30,
    
    
    December 31,
    
    
    December 30,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Numerator:Net earnings
    
    $
    20,311
    
    
    $
    4,779
    
    
    $
    26,609
    
    
    $
    9,063Denominator:Weighted average common
shares outstanding
    
    
    10,040
    
    
    
    9,918
    
    
    
    10,030
    
    
    
    9,898Effect of potentially dilutive
securities: employee stock
options and RSUs
    
    
    344
    
    
    
    422
    
    
    
    328
    
    
    
    373Weighted average common shares
outstanding, assuming dilution
    
    
    10,384
    
    
    
    10,340
    
    
    
    10,358
    
    
    
    10,271Basic earnings per common share
    
    $
    2.02
    
    
    $
    0.48
    
    
    $
    2.65
    
    
    $
    0.92Diluted earnings per common share
    
    $
    1.96
    
    
    $
    0.46
    
    
    $
    2.57
    
    
    $
    0.88
 Inventories
  December 30, 2006
    
    
    July 1, 2006Raw materials
    
    $
    688
    
    
    $
    724Work in process
    
    
    255
    
    
    
    174Finished goods
    
    
    11,229
    
    
    
    25,079Total inventory
    
    $
    12,172
    
    
    $
    25,977
  Restructuring and Asset Impairment Charges
  Page 10




---



##### Table of Contents



R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form 10-Q
for the thirteen-week and twenty-six-week periods ended December 30, 2006 and December 31, 2005
(dollar amounts in thousands, except per share data)
 Non-CashWrite-Offs &As of
    
    
    Charges in
    
    
    Estimate
    
    
    Paid in
    
    
    As ofJuly 1, 2006
    
    
    Fiscal 2007
    
    
    Adjustments
    
    
    Fiscal 2007
    
    

December
30, 2006Employee separations
    
    $
    335
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    334
    
    
    $
    Other exit costs
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    40
    
    
    
    Noncancelable lease costs
    
    
    2,909
    
    
    
    1
    
    
    
    32
    
    
    
    2,942
    
    
    
    Total restructuring costs
    
    $
    3,244
    
    
    $
    41
    
    
    $
    31
    
    
    $
    3,316
    
    
    $
    
 Segment Information
  Thirteen weeks ended
    
    NorthDecember 30, 2006
    
    America
    
    Europe
    
    TotalNet sales
    
    $
    39,527
    
    
    $
    1,339
    
    
    $
    40,866Income from continuing operations,
before income taxes
    
    
    7,302
    
    
    
    120
    
    
    
    7,422
 Thirteen weeks ended
    
    NorthDecember 31, 2005
    
    America
    
    Europe
    
    TotalNet sales
    
    $
    35,710
    
    
    $
    1,133
    
    
    $
    36,843Income from continuing operations,
before income taxes
    
    
    4,823
    
    
    
    (13
    )
    
    
    4,810
 Twenty-six weeks ended
    
    NorthDecember 30, 2006
    
    America
    
    Europe
    
    TotalNet sales
    
    $
    74,818
    
    
    $
    3,578
    
    
    $
    78,396Income from continuing operations,
before income taxes
    
    
    13,607
    
    
    
    230
    
    
    
    13,837Total Assets
    
    
    57,185
    
    
    
    3,463
    
    
    
    60,648
 Twenty-six weeks ended
    
    NorthDecember 31, 2005
    
    America
    
    Europe
    
    TotalNet sales
    
    $
    69,013
    
    
    $
    3,266
    
    
    $
    72,279Income from continuing operations,
before income taxes
    
    
    9,036
    
    
    
    60
    
    
    
    9,096Total Assets
    
    
    38,662
    
    
    
    3,169
    
    
    
    41,831
 Page 11




---



##### Table of Contents



R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form 10-Q
for the thirteen-week and twenty-six-week periods ended December 30, 2006 and December 31, 2005
(dollar amounts in thousands, except per share data)
 Employee Retirement Plans
    Thirteen weeks ended
    
    
    Twenty-six weeks endedDecember 30,
    
    
    December 31,
    
    
    December 30,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Service cost
    
    $
    19
    
    
    $
    
    
    
    $
    38
    
    
    $
    Interest cost
    
    
    445
    
    
    
    549
    
    
    
    889
    
    
    
    1,098Expected return on plan assets
    
    
    (370
    )
    
    
    (462
    )
    
    
    (740
    )
    
    
    (924
    )Net amortization
    
    
    104
    
    
    
    64
    
    
    
    213
    
    
    
    225Total pension expense
    
    $
    198
    
    
    $
    151
    
    
    $
    400
    
    
    $
    399
 Comprehensive income:
  Thirteen weeks ended
    
    
    Twenty-six weeks endedDecember 30,
    
    
    December 31,
    
    
    December 30,
    
    
    December 31,2006
    
    
    2005
    
    
    2006
    
    
    2005Net earnings
    
    $
    20,311
    
    
    $
    4,779
    
    
    $
    26,609
    
    
    $
    9,063Minimum pension liability
adjustment
    
    
    
    
    
    
    (2,005
    )
    
    
    
    
    
    
    (2,005
    )Foreign currency
translation adjustments
    
    
    72
    
    
    
    (28
    )
    
    
    91
    
    
    
    (31
    )Total comprehensive income
    
    $
    20,383
    
    
    $
    2,746
    
    
    $
    26,700
    
    
    $
    7,027
  December 30, 2006
    
    
    July 1, 2006Accumulated foreign currency translation adjustments
    
    $
    317
    
    
    $
    226Minimum pension liability, net of taxes
    
    
    (4,579
    )
    
    
    (4,579
    )Accumulated other comprehensive loss
    
    $
    (4,262
    )
    
    $
    (4,353
    )
 
 Page 12




---



##### Table of Contents



R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form 10-Q
for the thirteen-week and twenty-six-week periods ended December 30, 2006 and December 31, 2005
(dollar amounts in thousands, except per share data)
 Related Party Transactions:
   Contingent Liabilities
  Recently Issued Accounting Standards:
 Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement 109. Accounting for Income
Taxes.
 Page 13




---



##### Table of Contents



R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Under Item 1 of Part I of Form 10-Q
for the thirteen-week and twenty-six-week periods ended December 30, 2006 and December 31, 2005
(dollar amounts in thousands, except per share data)
 ,
Fair Value Measurements
 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132
(R), (
 Employers Accounting for Pensions
  Page 14




---



##### Table of Contents



Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995:
 Introduction
  Change in Fiscal Year End
   Results of Operations
  Page 15




---



##### Table of Contents



q
    
    a $1.2 million decrease in shipping expenses, which resulted primarily from our
improved efficiencies in handling and shipping product to customers;q
    
    a $153 thousand reduction in recruiting agency and relocation costs; andq
    
    a $125 thousand reduction in incentive bonus expense.
  q
    
    $134 thousand of share-based compensation expense, which resulted from the
implementation of SFAS No. 123 R, effective on January 1, 2006.
   
 Page 16




---



##### Table of Contents



q
    
    a $1.7 million reduction in shipping expenses, which resulted primarily from our
improved efficiencies in handling and shipping product to customers;
 q
    
    a $455 thousand one-time charge to earnings, recorded in the third quarter of
fiscal 2005, which represented the net present value of the obligation resulting from the
purchase from the mother of our chairman of all of her product designs and patent rights;q
    
    a $294 thousand reduction in recruiting agency and relocation costs; andq
    
    a $266 thousand reduction in incentive bonus expense.
  q
    
    $288 thousand of share-based compensation expense, which resulted from the
implementation of SFAS No. 123 R, effective on January 1, 2006.
      Page 17




---



##### Table of Contents



Looking ahead to the remainder of fiscal 2007 and beyond
     §
    
    Sustained innovation within our product lines;§
    
    Continuing efforts to strengthen our relationships with existing retailing partners and
to expand distribution of products into new retail channels;§
    
    Further enhancement of the image of our brands; and§
    
    Introduction of new licensed brands.
  Liquidity and Capital Resources
    §
    
We ended the second quarter of fiscal 2007 with $14.8 million in cash and cash
equivalents, compared to $3.5 million in cash at the end of the comparable quarter of
fiscal 2005, and $1.0 million in cash at the end of the 2006 transition period.§
    
Net accounts receivable increased to $13.7 million at the end of this fiscal years
second quarter from $12.0 million at the end of the comparable quarter of fiscal 2005. The
$1.7 million quarter-on-quarter increase in net accounts receivable primarily reflected the
impact of higher shipments experienced in the last month of the second quarter of fiscal
2007, compared to the same quarterly period of fiscal 2005. Net accounts receivable were
$6.7 million at the end of the 2006 transition period. The increase in net accounts
receivable of approximately $7.0 million from the end of the 2006 transition period to the
end of the second quarter of fiscal 2007 was principally due to the seasonality of our
business.
 Page 18




---



##### Table of Contents



§
    
Net inventories at the second quarter-end of fiscal 2007, the comparable quarter-end of
fiscal 2005, and at the end of the 2006 transition period were $12.2 million, $19.1 million
and $26.0 million, respectively. The quarter-on-quarter decrease in inventories of $6.9
million occurred primarily in finished goods, and reflected the improvement in the timing
of receipt of product from our third-party suppliers and shipment of goods to our
customers, as well as the effect of lower levels of closeout inventory on hand at
quarter-end.§
    
Due to the reversal of our deferred tax valuation allowance noted earlier, which was
recorded during the reporting period, our current deferred income tax assets were $8.7
million at the end of the second quarter of fiscal 2007. We had maintained a full
valuation allowance against our deferred assets from the end of fiscal 2003 through the end
of the first quarter of fiscal 2007.§
    
We ended with no borrowings outstanding under our CIT ABL Facility in the second quarter
of fiscal 2007, the comparable quarter period of fiscal 2005, and the 2006 transition
period. The amount owed under the CIT ABL Facility, when applicable, is reported as
short-term notes payable. We ended the second quarter of fiscal 2007 with $2.3 million in
short-term notes payable, compared with $2.5 million at the end of the comparable period of
fiscal 2005, and $2.2 million at the end of the 2006 transition period. The short-term
notes payable at the end of the second quarter of fiscal 2007 was comprised of $2.2
million, borrowed against the cash surrender value of life insurance policies on our
chairman and $100 thousand in short-term borrowings by our Fargeot subsidiary.§
    
Accounts payable at the end of the second quarter of fiscal 2007 were $4.9 million,
compared to $5.0 million at the end of the comparable quarterly period of fiscal 2005 and
$9.1 million at the end of the 2006 transition period. The $4.2 million decrease in
accounts payable from the end of the 2006 transition period reflects the seasonal timing of
purchases and payments over this reporting quarter.§
    
We reported $5.3 million in accrued expenses at the end of the second quarter of fiscal
2007, compared to $7.4 million at the end of the comparable quarter of fiscal 2005, and
$7.1 million at the end of the 2006 transition period. The quarter-on-quarter decrease in
accrued expenses primarily reflected a reduction in reorganization lease loss and related
accruals of $1.4 million and lower payroll related accruals of $600 thousand. Compared to
the end of the 2006 transition period, the second quarter of fiscal 2007 accrual is lower
due primarily to a $3.2 million reduction in reorganization lease loss related accruals due
to the agreement reached with the landlord of our former distribution facility in Nuevo
Laredo, Mexico. This reduction was offset primarily by a $1.0 million increase in payroll
related accruals at the end of the second quarter of fiscal 2007.§
    
Capital expenditures during the second half of fiscal 2007 were $412 thousand, compared
with $242 thousand during the same six-month period of fiscal 2005. Capital expenditures
in both periods were funded from working capital and reflected a significantly lower level
of capital asset spending compared to years prior to fiscal 2005, when the Company operated
its own manufacturing plants. We expect future capital expenditures to be in line with the
current business model going forward.
 CIT Facilities
  Page 19




---



##### Table of Contents



Other Long-Term Indebtedness and Current Installments of Long-Term Debt
  Off-Balance Sheet Arrangements and Contractual Obligations
  Page 20




---



##### Table of Contents



Critical Accounting Policies and Use of Significant Estimates
   (a)
    
    We recognize revenue when goods are shipped from our warehouses and other third-party
distribution locations, at which point our customers take ownership and assume risk of loss;
collection of the related receivable is probable; persuasive evidence of a sale arrangement
exists; and the sales price is fixed and determinable. In certain circumstances, we sell
products to customers under special arrangements, which provide for return privileges,
discounts, promotions and other sales incentives. At the time we recognize revenue, we reduce
our measurement of revenue by an estimated cost of potential future returns and allowable
retailer promotions and incentives, and recognize a corresponding reduction in reported trade
accounts receivable. These estimates have traditionally been, and continue to be, sensitive
to and dependent on a variety of factors including, but not limited to, quantities sold to our
customers and the related selling and marketing support programs; channels of distribution;
sell-through rates at retail; the acceptance of the styling of our products by consumers; the
overall economic environment; consumer confidence leading towards and through the holiday
selling season; and other related factors.Allowances established for returns were approximately $2 million, $4.4 million, and $900
thousand at the end of the second quarter of fiscal 2007, at the end of the comparable quarter
of fiscal 2005, and at the end of the 2006 transition period, respectively. The
quarter-on-quarter decrease of $2.4 million in return allowances in consistent with our current
business practice, which continues to be based on a more customer-centric sell-in approach,
collaborating more closely with our retailing partners to promote product sell-through during
the season, thus reducing future returns. During the second quarter of fiscal 2007 and the
comparable quarter of fiscal 2005, we recorded approximately $445 thousand and $150 thousand,
respectively, as the sales value of merchandise returned by customers. During the first half of
fiscal 2007 and the comparable six-month period of fiscal 2005, we recorded approximately $815
thousand and $241 thousand, respectively, as the sales value of merchandise returned by
customers. The quarterly and six-month period increases in the sales value of merchandise
returned were due to returns associated with spring 2006 merchandise from one customer, and
returns of branded merchandise from another, which transitioned to a private label program with
us.During the second quarter of fiscal 2007 and the comparable period of fiscal 2005, reductions in
sales for future returns were $1.0 million and $1.9 million, respectively. During the first
half of fiscal 2007 and the comparable twenty-six week period of fiscal 2005, reductions in
sales for future returns were $2.0 million and $4.4 million, respectively.Allowances for promotions and other sales incentives established at the end of the second
quarter of 2007 and the end of the comparable period of fiscal 2005 were approximately $8.0
million and $9.6 million, respectively, and $1.2 million at the end of the 2006 transition
period. The $1.6 million quarter-on-quarter decrease in promotions and sales incentives
allowances reflects primarily the impact of lower chargeback claims reserves due to better
execution of shipments during the second
 Page 21




---



##### Table of Contents



quarter of fiscal 2007 as compared to the same period in fiscal 2005 as well as the relative
timing of customer deductions taken during the reporting period.
 Charges to earnings for consumer promotion and sales incentive activities for the second quarter
of fiscal 2007 and the comparable period of fiscal 2005 were $5.3 million and $4.8 million,
respectively. Charges to earnings for consumer promotion and sales incentives for the first
half of fiscal 2007 and the comparable six-month period of fiscal 2005 were $9 million and $8.4
million, respectively. The increases in consumer promotion and sales incentives in the
comparative quarter and six-month periods were primarily due to a higher than expected level of
support provided to our retailing partners to stimulate sell-through during and after the 2006
holiday season. The increased support primarily resulted from warmer than expected weather
during the holiday season.We have been successful thus far in our initiatives of collaborating with our retail partners to
achieve mutually satisfactory sell-through rates by promoting goods in season, thus positively
impacting the level of returns. However, due to the continuing seasonal nature of our business,
it is possible that allowances for returns, promotions and other sales incentives, and the
related charges reported in our consolidated results of operations could be different than those
estimates noted above.
 (b)
    
    We value inventories using the lower of cost or market, based upon the first-in, first-out
(FIFO) costing method. We evaluate our inventories for any reduction in realizable value in
light of the prior selling season, the overall economic environment, and our expectations for
the upcoming selling seasons, and we record the appropriate write-downs based on this
evaluation. At the end of the second quarter of fiscal 2007 and the end of the comparable
quarter of fiscal 2005, we estimated the FIFO cost of a portion of our inventory exceeded the
estimated net realizable value of that inventory by $928 thousand and $1.4 million,
respectively, as compared with a similar estimate of $463 thousand at the end of the 2006
transition period. The primary reason for the quarter-on-quarter decrease in our estimate of
the FIFO cost of our inventories over the net realizable value of that inventory was the
reduction in our finished goods inventories at quarter-end. Inventory write-downs, recognized
as part of cost of sales for continuing operations, were $306 thousand and $761 thousand
during the second quarter of fiscal 2007 and the comparable quarter of fiscal 2005,
respectively. Inventory write-downs, recognized as part of cost of sales for continuing
operations, were $911 thousand and $1.2 million during the first half of fiscal 2007 and the
comparable six-month period of fiscal 2005. Similarly, the main reason for the
quarter-on-quarter and six-month decreases in inventory write-downs was a much lower level of
on-hand inventory at the end of second quarter of fiscal 2007.Approximately, $2.3 million and $2.4 million of inventory that had been previously written down
were sold during the second quarter of fiscal 2007 and the comparable period of fiscal 2005,
respectively. Similarly, $4.5 million and $4.6 million of inventory that had been previously
written down was sold during the first half of fiscal 2007 and the comparable six-month period
of fiscal 2005, respectively.
 (c)
    
    We make an assessment of the amount of income taxes that will become currently payable or
recoverable for the just concluded period, and what deferred tax costs or benefits will become
realizable for income tax purposes in the future, as a consequence of differences between
results of operations as reported in conformity with U.S. GAAP, and the requirements of the
income tax codes existing in the various jurisdictions where we operate. In evaluating the
future benefits of deferred tax assets, we examine our capacity for refund of federal income
taxes due to our net operating loss carry-forward position, and our projections of future
profits. We recorded a valuation allowance when it was more likely than not that some portion
or all of our deferred tax assets would not be realized. Accordingly, beginning with year-end
fiscal 2003, we established a valuation allowance against the value of those deferred tax
assets. At that time, there was not sufficient historical assurance that future taxable
income would be generated to offset these deferred deductible items. Accordingly, we
established a valuation allowance against the net deferred tax assets in the amount of $18.3
million at the end of the 2006 transition period.This full valuation allowance reserve was maintained through the first quarter of fiscal 2007.
In the second quarter of fiscal 2007, the Company determined, based on the existence of
sufficient positive evidence, represented primarily by
 Page 22




---



##### Table of Contents



three years of cumulative income before restructuring charges, a valuation
allowance against net deferred tax assets was no longer required because it is more likely than
not that the Companys deferred tax assets will be realized in future periods. Accordingly, a
complete reversal of the valuation allowance was recognized in closing out the second quarter of
fiscal 2007. This action resulted in and accounts for substantially all of the net income tax
benefit of $12.8 million reflected in our results for the first half of fiscal 2007.In addition, we make ongoing assessments of income tax exposures that may arise at the federal,
state or local tax levels. As a result of these evaluations, any exposure deemed probable will
be quantified and accrued as tax expense during the period and reported in a tax contingency
reserve. Any identified exposures will be subjected to continuing assessment and estimates will
be revised accordingly as information becomes available to us. Our tax contingency reserve at
the end of the second quarter of fiscal 2007 was $500 thousand, representing an increase of $351
thousand for the period.
  Recently Issued Accounting Standards
  Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement 109. Accounting for Income
Taxes.
 ,
Fair Value Measurements
 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132
(R), (
 Page 23




---



##### Table of Contents



Employers Accounting for Pensions
  
  Market Risk Sensitive Instruments  Foreign Currency
  Market Risk Sensitive Instruments  Interest Rates
  
  Evaluation of Disclosure Controls and Procedures
  a.
    
    information required to be disclosed by the Company in this Quarterly Report on Form
10-Q and the other reports that it files or submits under the Exchange Act would be
accumulated and communicated to the Companys management, including its principal executive
officer and its principal financial officer, as appropriate to allow timely decisions
regarding required disclosure;
 Page 24




---



##### Table of Contents



b.
    
    information required to be disclosed by the Company in this Quarterly Report on Form
10-Q and the other reports that it files or submits under the Exchange Act would be
recorded, processed, summarized and reported within the time periods specified in the SECs
rules and forms; andc.
    
    the Companys disclosure controls and procedures are effective as of the end of the
quarterly period covered by this Quarterly Report on Form 10-Q to ensure that material
information relating to the Company is made known to them, particularly during the period
for which the periodic reports of the Company, including this Quarterly Report on Form
10-Q, are being prepared.
 Changes in Internal Control Over Financial Reporting
  
  
 Item 1. Legal Proceedings
   
 Item 1A. Risk Factors
  Our North America business, which is our primary business, is dependent on our ability to continue
sourcing products from outside North America.
  Page 25




---



##### Table of Contents



Our concentration of customers could have a material adverse effect on us, and our success is
dependent on the success of our customers.
   The seasonal nature of our business makes management more difficult, and severely reduces cash flow
and liquidity during certain parts of the year.
  Page 26




---



##### Table of Contents



The footwear industry is highly competitive.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  Page 27




---



##### Table of Contents



R. G. BARRY CORPORATION
RegistrantDate: February 12, 2007
    
    /s/ Daniel D. Viren

Daniel D. VirenSenior Vice President  Finance, Chief FinancialOfficer and Secretary(Principal Financial Officer)(Duly Authorized Officer)
 Page 28




---



##### Table of Contents



Exhibit No.
    
    Description
    
    Location31.1
    
    Rule 13a-14(a)/15d-14(a) Certification
(Principal Executive Officer)
    
    Filed herewith31.2
    
    Rule 13a-14(a)/15d-14(a) Certification
(Principal Financial Officer)
    
    Filed herewith32.1
    
    Section 1350 Certifications (Principal
Executive Officer and Principal Financial
Officer)
    
    Filed herewith
 Page 29