SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549




Form
      10-K




Annual
      Report Pursuant to Section 13 or 15(d) of




the
      Securities Exchange Act of 1934




For
      the
      fiscal year ended December 31, 2006




Commission
      File No. 0-23379




I.C.
      ISAACS & COMPANY, INC.




(Exact
      name of registrant as specified in charter)




**Delaware**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            **52-1377061**
              (IRS
                employer
              identification
                no.)**475
                10****th****Avenue, 9****th****Floor**
              **New
                York, NY 10018**
              (Address
                of principal executive office)
            **10018**
              (Zip
                code)





Registrant’s
      telephone number, including area code: **(646)
      459-2600**




Securities
      Registered Pursuant to Section 12(b) of the Act:




**None**




Securities
      Registered Pursuant to Section 12(g) of the Act:




Title
      of Class:




**Common
      Stock, $.0001 par value per share**




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.  ̈ Yes S No




Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act.  ̈




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. S Yes  ̈ No




Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not be contained, to the best
      of Registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-K or any amendment to
      this
      Form 10-K.  ̈ Yes S No




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
      accelerated filer  ̈   Accelerated
      filer  ̈  Non-accelerated
      filer S




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act).  ̈ Yes S No




The
      aggregate market value of the voting common stock held by non-affiliates of
      the
      Registrant as of the last business day of the Registrant’s most recently
      completed second fiscal quarter, at June 30, 2006, was approximately
      $71,987,910 based on the average closing price of the Common Stock as reported
      by the OTC Bulletin Board on that day. Solely for purposes of the foregoing
      calculation all of the Registrant's directors and officers are deemed to be
      affiliates. The Registrant does not have outstanding any non-voting common
      stock.




As
      of
      March 29, 2007, 12,282,618 shares of Common Stock were outstanding.




**Document
      Incorporated by Reference**




Portions
      of the proxy statement for the registrant’s 2007
      Annual Meeting of Stockholders are incorporated by reference into Part III
      of
      this Annual Report on Form 10K.







Table
          of Contents


**I.C.
      ISAACS & COMPANY, INC.**





**FORM
      10-K**





**TABLE
      OF CONTENTS**





**Page****PART
                I**ITEM
                1.
            BUSINESS
            4ITEM
                1A
            RISK
                FACTORS
            10ITEM
                1B
            UNRESOLVED
                STAFF COMMENTS
            14ITEM
                2.
            PROPERTIES
            14ITEM
                3.
            LEGAL
                PROCEEDINGS
            14ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS
            14**PART
                II**ITEM
                5.
            MARKET
                FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
                PURCHASES OF SECURITIES
            15ITEM
                6.
            SELECTED
                FINANCIAL DATA
            17ITEM
                7.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS
            18ITEM
                7A.
            QUANTITATIVE
&
QUALITATIVE
                DISCLOSURES ABOUT MARKET
                RISK
            27ITEM
                8.
            FINANCIAL
                STATEMENTS AND SUPPLEMENTARY DATA
            27ITEM
                9.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE
            27ITEM
                9A.
            CONTROLS
                AND PROCEDURES
            27ITEM
                9B.
            OTHER
                INFORMATION
            28**PART
                III***ITEM
                10.
            DIRECTORS,
                EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
            29*ITEM
                11.
            EXECUTIVE
                COMPENSATION
            29*ITEM
                12.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT AND RELATED STOCKHOLDER MATTERS
            29*ITEM
                13.
            CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS, AND
                DIRECTOR INDEPENDENCE
            29*ITEM
                14.
            PRINCIPAL
                ACCOUNTING FEES AND SERVICES
            29**PART
                IV**ITEM
                15.
            EXHIBITS,
                FINANCIAL STATEMENT SCHEDULES
            30SIGNATURES
            31________________________*Incorporated
                by reference to the Registrant’s Definitive Proxy Statement on Schedule
                14A (the “Proxy Statement”) prepared in connection with the 2007 Annual
                Meeting of Stockholders. The Proxy Statement will be filed no later
                than
                120 days after the end of the fiscal year covered by this Annual
                Report on
                Form 10-K.








2
 *Table
          of
          Contents*


"I.C.
      Isaacs" and "I.G. Design" are trademarks of I.C. Isaacs & Company, Inc. All
      other trademarks or service marks, including "Girbaud" and "Marithé and Francois
      Girbaud", appearing in this Annual Report on Form 10-K (the “Report”) are the
      property of their respective owners and are not the property of the Company.





The
        various companies that hold and license the Girbaud trademarks, and that
        engage
        in the design and licensing of Girbaud branded apparel, as well as the
        affiliates and associates of those companies, are hereinafter collectively
        referred to as “Girbaud.”







**IMPORTANT
      INFORMATION REGARDING FORWARD-LOOKING STATEMENTS**





*This
      Report contains forward-looking statements within the meaning of Section 27A
      of
      the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E
      of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
      Forward-looking statements, written, oral or otherwise made, include statements
      regarding the intent, belief or current expectations of the Company and its
      management, including the Company’s beliefs regarding the prominence of branded,
      licensed apparel, in general, and the Girbaud brand, in particular, in the
      Company’s future, the Company’s expectations regarding the renewal of its
      licenses for men’s and women’s sportswear and jeanswear by Girbaud, and its
      expectations that substantially all of its net sales will come from sales of
      Girbaud apparel, the Company’s beliefs regarding the relationship with its
      employees, the conditions of its facilities, the number of manufacturers capable
      of supplying the Company with products that meet the Company’s quality
      standards, the Company’s beliefs regarding its ordering flexibility as a result
      of transferring most of its production to Asia, the Company’s beliefs regarding
      the basis on which it competes for business, the Company’s environmental
      obligations and the Company’s expectations regarding its product offerings.
      Words such as "believes," "anticipates," "expects," "intends," "plans," and
      similar expressions are intended to identify forward-looking statements but
      are
      not the exclusive means of identifying such statements. Forward-looking
      statements are statements that are subject to a variety of risks and
      uncertainties, many of which are beyond the Company’s control and could cause
      actual results to differ materially from those contemplated in such
      forward-looking statements, including, though not limited to, the following
      specific risks and uncertainties: (i) changes in the marketplace for the
      Company’s products, including customer tastes, (ii) the introduction of new
      products or pricing changes by the Company’s competitors, (iii) changes in
      the economy both domestic and international, and (iv) termination of one or
      more of the Company’s agreements for use of the Girbaud brand name and images
      used in the manufacture and sale of the Company’s products. Existing and
      prospective investors are cautioned not to place undue reliance on these
      aforementioned forward-looking statements, as they apply only to the date
      hereof. Such forward looking statements do not purport to be predictions of
      future events or circumstances, and therefore, there can be no assurance that
      any forward-looking statement contained herein will prove to be accurate.
      Furthermore, the Company undertakes no obligation to update or revise the
      forward-looking statements contained in this Report whether as a result of
      new
      information, future events or circumstances or otherwise.*





***Access
      to Company Reports***





*Investors
      may read and copy any document that the Company files under the Securities
      and
      Exchange Act of 1934 (including annual reports on Form 10-K, quarterly reports
      on Form 10-Q, current reports on Form 8-K and all amendments to these reports)
      at the Securities and Exchange Commission (the “SEC”) Public Reference Room at
      100 F Street, NE, Washington, DC 20549. In addition, the SEC maintains an
      internet site at* *www.sec.gov* *that
      contains reports and other information regarding issuers that can be accessed
      electronically. The Company maintains a website at* *www.icisaacs.com* *that
      contains some of the more recent (but not all of the) 10-K, 10-Q and 8-K reports
      about the Company that may be found at the SEC’s website.*





3
 *Table
          of
          Contents*







**PART
      I**






**ITEM
      1. BUSINESS**






**Introduction**






I.C.
      Isaacs & Company, Inc. (“Isaacs”), together with its predecessors and
      subsidiaries, including I.C. Isaacs & Company L.P. (the “LP”), and Isaacs
      Design, Inc. (collectively the “Company”) is a designer and marketer of branded
      jeanswear and sportswear. Founded in 1913, the Company offers collections of
      men’s and women’s jeanswear and sportswear under the Marithé and François
      Girbaud designer brand (“Girbaud brand” or “Girbaud branded”) in the United
      States and Puerto Rico. The Girbaud brand is an internationally recognized
      designer label with a distinct European influence. Sales of Girbaud branded
      products accounted for all of the Company’s net sales in 2006, 2005 and 2004.




**Products**




The
      Company has positioned its Girbaud branded line with a broad assortment of
      products, styles and fabrications reflecting a contemporary European look.
      The
      Company markets a full collection of men’s jeanswear and sportswear under the
      Girbaud brand, including a broad array of bottoms, tops and outerwear. The
      Company also offers a women’s sportswear collection under the Girbaud brand,
      which also includes a wide assortment of bottoms, tops and outerwear. These
      collections are targeted to consumers who are seeking quality, fashionable
      products at competitive prices. Girbaud is an internationally recognized
      designer brand. The Company markets innovative European-inspired men’s and
      women’s jeanswear and sportswear collections under the Girbaud brand. The
      Company’s Girbaud branded collections include full lines of bottoms consisting
      of jeans and casual pants in a variety of fabrications, including denim, stretch
      denim, cotton twill and nylon, cotton t-shirts, polo shirts, knit and woven
      tops, sweaters, outerwear and leather sportswear. Reflecting contemporary
      European design, each of these collections is characterized by innovative
      styling and fabrication and is targeted to consumers ages 16 to 40. Estimated
      retail prices range from $29 to $39 for t-shirts, $49 to $100 for tops and
      bottoms, $60 to $128 for sweaters and $80 to $300 for outerwear.




**Customers
      and Sales**




The
      Company’s products are sold in approximately 1,900 specialty stores, specialty
      store chains and department stores. The Company’s Girbaud brand products are
      sold and marketed domestically under the direction of a 13 person sales force.
      The Company uses both sales representatives and distributors for the sale of
      its
      products. Sales representatives include employees of the Company as well as
      independent contractors. Each of the Company’s non-employee sales
      representatives has an agreement with the Company pursuant to which the sales
      representative serves as the sales representative of specified products of
      the
      Company within a specified territory. The Company does not have long-term
      contracts with any of its customers. Instead, its customers purchase the
      Company’s products pursuant to purchase orders and are under no obligation to
      continue to purchase the Company’s products.




The
      Company began marketing men’s sportswear under the Girbaud brand in early 1998
      and introduced a women’s sportswear collection under the Girbaud brand in the
      second quarter of 1998. The Company’s Girbaud men’s products are sold to
      approximately 1,350 stores in the United States and Puerto Rico, including
      major
      department stores such as Federated Department Stores, Dillard’s, Belk stores
      and Bon-Ton Stores, and many prominent specialty stores. The Company’s Girbaud
      women’s line is sold to approximately 550 stores. None of the Company’s
      customers accounted for 10% or more of sales in 2006, 2005 nor 2004. As of
      December 31, 2006 and 2005, the Company had one customer that represented 12.0%
      and 11.4% of accounts receivable, respectively.




4
 *Table
          of
          Contents*




**Design
      and Merchandising**




The
      Company’s designers and merchandisers are provided with the Girbaud collections
      from Europe twice a year and they collaborate with Marith é and
      Fran ç ois
      Girbaud and their staff in the development of the Company’s Girbaud branded
      product lines for sale in the United States. Merchandisers also regularly meet
      with sales management to gain additional market insight and further refine
      the
      products to be consistent with the needs of each of the Company’s markets. The
      Company’s in-house design and product development is carried out by
      merchandising departments in New York. Many of the Company’s products are
      developed using computer-aided design equipment, which allows designers to
      view
      and easily modify images of a new design. The Company currently has 15 people
      on
      the design staff in New York City. Design expenditures were approximately $3.1 million, $3.6 million and $3.1 million
      in
      2006, 2005 and 2004 respectively.




**Advertising
      and Marketing**




The
      Company communicates and reinforces the brand and image of its Girbaud products
      through creative and innovative advertising and marketing efforts. The Company’s
      advertising and marketing strategies are directed by its New York sales office
      and developed in collaboration with advertising agencies and with Girbaud’s
      European offices and Paris advertising agency. The Company’s advertising
      strategy is geared toward its youthful and contemporary consumers, whose
      lifestyles are influenced by music, sports and fashion. The Company’s
      advertising campaigns have evolved from trade magazines to a wide variety of
      media, including billboards, fashion magazines and special events. In 2006,
      2005
      and 2004, the Company continued to utilize advertising media to promote its
      products at moderate levels of spending. The Company is required to spend the
      greater of an amount equal to 3% of Girbaud net sales or $0.9 million in
      advertising and related expenses promoting the Girbaud brand products in each
      year of the terms of the Girbaud agreements. During each of the six years ended
      December 31, 2005, the amounts of advertising and related expenses incurred
      by
      the Company in marketing the Girbaud brand products were less than the amounts
      required under the agreements. In each of the various amendments to the men’s
      and women’s license agreements which were executed in 2002 - 2004, Latitude and
      the Company confirmed to one another that neither party was in default to the
      other in the performance of any of the obligations owed by either of them to
      the
      other. In March 2006, Latitude had also waived the Company’s failure to spend
      the minimum amounts required under the men’s and women’s license agreements in
      2005. In 2006, as a result of the amounts spent on advertising expenses as
      well
      as capital expenditures related to promoting the Girbaud brand, the Company
      was
      in compliance with these requirements under the licensing agreements. The
      Company’s advertising and promotional expenditures, including capitalized
      expenditures for show booths and stores fixtures, were approximately $2.8
      million, or 3.2% of net sales, in 2006, $1.6 million, or 1.9% of net sales,
      in
      2005 and $1.8 million, or 2.2% of net sales, in 2004.




**Product
      Sourcing**




*General*




The
      manufacturing and sourcing of the Company’s products in 2006 was predominately
      done by foreign independent contractors. Each of the Company’s independent
      contractors and independent buying agents has an agreement with the Company
      whereby it performs manufacturing or purchasing services for the Company on
      a
      non-exclusive basis. The Company evaluates its contractors frequently and
      believes that there are a number of manufacturers capable of producing products
      that meet the Company’s quality standards. The Company’s production requirements
      account for a significant portion of many of its contractors’ production
      capacity. The Company has the ability to terminate its arrangements with each
      of
      its contractors at any time. A change in suppliers, however, could cause a
      delay
      in manufacturing and a possible loss of sales, which could adversely affect
      operating results.




Virtually
      all of the Company’s sportswear products are produced by approximately 33
      different manufacturers in Asia, three manufacturers in South America and one
      manufacturer each in Africa and in North America. During 2006, Asia, South
      America, Africa and North America accounted for 68%, 23%,




5
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          of
          Contents*


2%
      and 7%
      of total unit production respectively. During 2006, one of the Company’s Asian
      contractors and one of its South American contractors accounted for
      approximately 45% and 18%, respectively, of the Company’s total unit production.
      No other manufacturer or contractor accounted for more then 10% of the Company’s
      total unit production in 2006. The Company has well established relationships
      with many of its contractors; however, it is not bound by any long term
      contracts or minimum purchase agreements. The Company retains independent buying
      agents in various countries in Asia and Africa to assist in selecting and
      overseeing independent manufacturers, sourcing fabric, trim and other materials
      and monitoring quotas. Independent buying agents also perform quality control
      functions on behalf of the Company, including inspecting materials and
      manufactured products prior to accepting delivery. The Company’s production,
      sourcing and merchandising staffs oversee fabric and product development,
      apparel manufacturing, price negotiation and quality control, as well as the
      research and development of new sources of supply. Purchasing from these
      contractors may require the Company to estimate sales and issue purchase orders
      for inventory in advance of receiving firm orders from its customers. A risk
      to
      the Company is that its estimates may differ from actual orders. If this
      happens, the Company may miss sales because it did not order enough, or it
      may
      be required to sell excess inventory at reduced prices.




The
      Company seeks to achieve the most efficient means for the timely delivery of
      its
      high quality products. With rare exceptions, the Company does not purchase
      fabrics but instead negotiates a finished garment price from its contractors
      in
      Asia. All of the Company’s products manufactured abroad are paid for in United
      States dollars. Accordingly, the Company does not engage in any currency hedging
      transactions.




**Warehousing
      and Distribution**




The
      Company services its customers utilizing a 70,000 square foot Company-owned
      and
      operated distribution center in Milford, Delaware. The Company has established
      a
      computerized "Warehouse Management System" with real-time internal tracking
      information and the ability to provide its customers with electronically
      transmitted "Advance Shipping Notices." The accuracy of shipments is increased
      by the ability to scan coded garments during the packing operation. This process
      also provides for computerized routing and customer invoicing. The vast majority
      of shipments are handled by UPS, common carriers or parcel post.




**Quality
      Control**




The
      Company’s quality control program is designed to ensure that all of the
      Company’s products meet its high quality standards. Visits are made by the
      Company’s agents to outside contractors to ensure compliance with the Company’s
      quality standards. Audits are also performed by quality control personnel at
      the
      Milford, Delaware distribution center on all categories of incoming merchandise.




All
      garments produced for the Company must be produced in accordance with the
      Company’s specifications. The Company’s import quality control program is
      designed to ensure that the Company’s products meet its high quality standards.
      The Company monitors the quality of fabrics prior to the production of garments
      and inspects prototypes of products before production runs are commenced. In
      some cases, the Company requires its agents or manufacturers to submit fabric
      to
      an independent, outside laboratory for testing prior to production. The Company
      requires each agent to perform both in-line and final quality control checks
      during and after production before the garments leave the contractor. Personnel
      from the Company’s New York office also visit factories to conduct these
      inspections.




**Backlog
      and Seasonality**




The
      Company's business is impacted by the general seasonal trends that are
      characteristic of the apparel and retail industries. In the Company's segment
      of
      the apparel industry, sales are generally higher in the first and third
      quarters. The Company generally receives orders for its products up to five
      months prior to the time the products are delivered to stores. The backlog
      of
      orders at any given time is affected by a


6
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number
      of
      factors, including weather conditions, scheduling of manufacturing and shipment
      of products. As the time of the shipment of products may vary from year to
      year,
      the results for any particular quarter may not be indicative of the results
      for
      the full year. The Company had unfilled orders of $14.1 million at
      December 31, 2006 compared to $17.4 million at December 31, 2005.




**Licenses
      and Other Rights Agreements**




*Girbaud**Domestic Licenses*




In
      November 1997, the Company entered into an exclusive license agreement (the
**“**Girbaud Men**’**s Agreement**”**)
      with Girbaud Design, Inc. and its affiliate Wurzburg Holding S.A.
      (**“**Wurzburg**”**) to manufacture and market men’s
      jeanswear, casual wear and outerwear under the Girbaud brand and certain related
      trademarks (the **“**Girbaud Marks**”**) in all
      channels of distribution in the United States, including Puerto Rico and the
      U.S. Virgin Islands. In March 1998, the Girbaud Men**’**s
      Agreement was amended and restated to include active influenced sportswear
      as a
      licensed product category and to name Latitude Licensing Corp. as the licensor
      (**“**Latitude**”**). Also in March 1998, the
      Company entered into an exclusive license agreement (the
**“**Girbaud Women’s Agreement**”** and, together with
      the Girbaud Men’s Agreement, the **“**Girbaud
      Agreements**”**) with Latitude to manufacture and market women’s
      jeanswear, casual wear and outerwear, including active influenced sportswear,
      under the Girbaud Marks in all channels of distribution in the United States,
      including Puerto Rico and the U.S. Virgin Islands.




The
        terms of the Girbaud Agreements were to expire at the end of 2007. In November
        2006, the Company notified the licensor of its election to extend the terms
        of
        both of the Girbaud Agreements through the end of 2011. The Girbaud Agreements
        generally allow the Company to use the Girbaud Marks on apparel designed
        by or
        for the Company or based on designs and styles previously associated with
        the
        Girbaud brand, subject to quality control by Latitude over the final designs
        of
        the products, marketing and advertising material and manufacturing premises.
        The
        Girbaud Agreements provide that they may be terminated by Latitude upon the
        occurrence of certain events, including, but not limited to, a breach by
        the
        Company of certain obligations under the Girbaud Agreements that remain uncured
        following certain specified grace periods.




Under
        the Girbaud Men’s Agreement, as amended the Company is required to make royalty
        payments to Latitude in an amount equal to 6.25% of the Company’s net sales of
        regular licensed merchandise and 3.0% in the case of certain irregular and
        closeout licensed merchandise. The Company is obligated to pay the greater
        of
        actual royalties earned or minimum guaranteed annual royalties of $3,000,000
        through 2011. On a monthly basis during the term, the Company is obligated
        to
        pay 8.3% of the minimum guaranteed royalties for that year. On a quarterly
        basis
        during the term, the Company is required to pay the amount that the actual
        royalties exceed the total minimum guaranteed royalties for that quarter.
        The
        Company is required to spend the greater of an amount equal to 3% of Girbaud
        men’s net sales or a minimum of $500,000 in advertising and related expenses
        promoting the men’s Girbaud brand products in each year through the term of the
        Girbaud Men’s Agreement. The Company has agreed to increase the minimum annual
        amount of these expenditures under the Girbaud Men’s Agreement by $200,000 in
        each of the years 2007, 2008 and 2009 (see the previous discussion under
        “Advertising and Marketing”).




Under
      the
      Girbaud Women’s
      Agreement, as amended, the Company is required to make royalty payments to
      Latitude in an amount equal to 6.25% of net sales of regular licensed
      merchandise and 3.0% of certain irregular and closeout licensed merchandise.
      The
      Company is obligated to pay the greater of actual royalties earned or minimum
      guaranteed annual royalties of $1,500,000 through 2011. On a monthly basis
      during the term, the Company is obligated to pay 8.3% of the minimum guaranteed
      royalties for that year. On a yearly basis, the Company is required to pay
      the
      amount that the actual royalties exceed the total minimum guaranteed royalties
      for that year. The
      Company is required to spend the greater of an amount equal to 3% of Girbaud
      women’s net sales or a minimum of $400,000 in advertising and related expenses
      promoting the wome n’s
      Girbaud brand products in each year through the term of the Girbaud
      Wome n’s
      Agreement.  The
      Company has agreed to increase the minimum annual amount of these expenditures
      under




7
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the
      Girbaud Women’s Agreement by $200,000 in each of the years 2007, 2008 and 2009
      (see the previous discussion under “Advertising and Marketing”). In
      addition, over the term of the Girbaud Wome n’s
      Agreement, the Company is required to contribute $190,000 per year to Latitude’s
      advertising and promotional expenditures for the Girbaud brand.




The
      Company is obligated to pay a minimum of $9.1 million during 2007 in the form
      of
      minimum royalty payments, fashion show expenses and advertising and promotional
      expenses pursuant to the Girbaud Agreements and in subordinated note payments.
      In 2007, the Company expects that substantially all of its net sales will come
      from apparel manufactured under the licenses granted pursuant to the Girbaud
      Agreements.




*Licensor* *Ownership*




In
        2002, Textile Investment International S.A. (“Textile”), an affiliate of
        Latitude, acquired 666,667 shares of common stock, preferred stock which
        it
        converted into 3,300,000 shares of common stock and a note payable issued
        by the
        Company, from a former licensor. As a result of those transactions, Textile
        and
        Wurzburg, together which owned 582,500 shares of the Company’s common stock
        prior to the transactions, own approximately 37% of the common stock of the
        Company outstanding as of the date of filing of this
        Report.




**Credit
      Control**




The
      Company manages its own credit and collection functions and has never used
      a
      factoring service or outside credit insurance. During 2006, the Company sold
      to
      approximately 1,100 accounts throughout the United States and Puerto Rico.
      All
      of the functions necessary to service this large volume of accounts are handled
      by the Company’s in-house credit department in Baltimore, Maryland. The Company
      extends credit to its customers. Accordingly, the Company may have significant
      risk in collecting accounts receivable from its customers. The Company has
      credit policies and procedures that it uses to minimize exposure to credit
      losses. The Company currently employs five people in its credit department
      and
      believes that managing its own credit gives it unique flexibility as to which
      customers the Company should sell and how much business the Company should
      do
      with each. The Company obtains and periodically updates information regarding
      the financial condition and credit histories of customers. The Company’s
      collection personnel evaluate this information and, if appropriate, establish
      a
      line of credit. Credit personnel track payment activity for each customer using
      customized computer software and directly contact customers with receivable
      balances outstanding beyond 30 days. If these collection efforts are
      unsuccessful, the Company may discontinue merchandise shipments until the
      outstanding balance is paid. Ultimately, the Company may engage an outside
      collection organization to collect past due accounts. Timely contact with
      customers has been effective in minimizing the Company’s credit losses.




**Competition**




The
      apparel industry is highly competitive and fragmented. The Company competes
      against numerous apparel brands and distributors.




Principal
      competitive factors include:




·
            developing
                quality products with consistent fits, finishes, fabrics and
                style;


·
            anticipating
                and responding in a timely manner to changing consumer
                demands;


·
            providing
                compelling value in products for the
                price;


·
            continuing
                to generate competitive margins and inventory turns for retail customers
                by providing timely delivery; and


·
            providing
                strong effective marketing support.




The
      Company believes its competitive strengths lie in the quality of its design
      and
      its ability to provide compelling value for products.







8
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**Management
      Information Systems**




The
      Company believes that information processing is essential to maintaining its
      competitive position. The Company’s systems provide, among other things,
      comprehensive order processing, production, accounting and management
      information for the marketing, selling, production and distribution functions
      of
      the Company’s business. The Company’s software programs allow it to track, among
      other things, orders, production schedules, inventory and sales of its products.
      The programs include centralized management information systems, which provide
      the various operating departments with financial, sales, inventory and
      distribution related information. T he
      Company is able to ship orders received via electronic data interchange, from
      inventory on hand, to certain customers within 24 to 72 hours from the time
      of
      order receipt.




**Employees**




As
      of the
      date of filing of this Report, the Company had approximately 110 full time
      employees. The Company is not a party to any labor agreements, and none of
      its
      employees is represented by a labor union. The Company considers its
      relationship with its employees to be good and has not experienced any material
      interruption of its operations due to labor disputes.




**Environmental
      Matters**




The
      Company is subject to federal, state and local laws, regulations and ordinances
      that (i) govern activities or operations that may have adverse
      environmental effects (such as emissions to air, discharges to water, and the
      generation, handling, storage and disposal of solid and hazardous wastes) or
      (ii) impose liability for the costs of clean up or other remediation of
      contaminated property, including damages from spills, disposals or other
      releases of hazardous substances or wastes, in certain circumstances without
      regard to fault. Certain of the Company’s operations routinely involve the
      handling of chemicals and waste, some of which are or may become regulated
      as
      hazardous substances. The Company has not incurred any significant expenditures
      or liabilities for environmental matters. Although the Company believes that
      its
      environmental obligations will not have a material adverse effect on its
      financial condition or results of operations, environmental compliance matters
      are subject to inherent risks and uncertainties.





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**ITEM**
            **1A.
              RISK FACTORS**





An
      investment in the Company’s common stock involves risks. Investors should read
      and carefully consider the following risk factors in addition to all other
      information in this Report before making an investment in the Company’s common
      stock.




**Because
      the Company has a history of fluctuating operating results, it can not assure
      prospective investors that it will operate profitably or will generate positive
      cash flow in the future** *.*




Although
      the Company has operated profitably since the end of 2003 that has not always
      been the case. During the five year period ended December 31, 2003, it incurred
      aggregate losses of approximately $37,000,000. The Company’s operating results
      in the future may be subject to significant fluctuations due to many factors
      not
      within the Company’s control, such as demand for the Company’s products, and the
      level of competition and general economic, political and business conditions
      (both domestically and internationally) and seasonal fluctuations.




**If
      the Company fails to identify and respond appropriately to changing consumer
      demands and fashion trends, consumer acceptance of its products could be
      adversely affected and that could have a material adverse effect on the
      Company’s financial condition and results of operations** *.*





The
      apparel industry is highly competitive, fragmented and subject to rapidly
      changing consumer demands and preferences. The Company believes that its success
      depends in large part upon its ability to anticipate, gauge and respond to
      changing consumer demands and fashion trends in a timely manner and upon the
      continued appeal to consumers of the Girbaud brand name. The Company competes
      with numerous apparel manufacturers and distributors, many of which have greater
      financial resources than the Company possesses. The Company’s products also
      compete with a substantial number of designer and non-designer lines. Although
      the level and nature of competition differ among the Company’s product
      categories, the Company believes that it competes primarily on the basis of
      brand image, design quality and value pricing. Increased competition by existing
      and future competitors could result in reductions in sales or prices of the
      Company’s products, which could have a material adverse effect on the Company’s
      financial condition and results of operations. In addition, there is no
      assurance that the Company will be able to introduce competitive lines of
      Girbaud branded or other products or that such products will achieve market
      acceptance. The apparel industry historically has been subject to substantial
      cyclical variations, and a recession in the general economy or uncertainties
      regarding future economic prospects that affect consumer spending habits could
      have a material adverse effect on the Company’s financial condition or results
      of operations.




**The
      Company is completely dependent upon licenses granted to it by an affiliate
      of
      the Company’s controlling stockholders for all of the revenues that it
      generates. The Company’s inability to renew those licenses upon terms that it
      would consider to be commercially reasonable could place it in a materially
      adverse position financially and operationally.**





The
      Company’s business is completely dependent upon the Company’s use of the Girbaud
      brand names and images, which are in turn dependent upon the existence and
      continuation of two license agreements granted to it by Latitude. Latitude
      is an
      affiliate of Wurzburg and Textile. Those two companies, which are wholly owned
      by François Girbaud and Marithé Bachellerie, collectively own approximately 37%
      of the Company’s common stock. The Company’s licenses for use of the Girbaud
      brand names and images are limited to certain specified products in the United
      States, Puerto Rico and the U.S. Virgin Islands, extended through December
      31,
      2011. There can be no assurance that the Company will be able to retain the
      right to use the Girbaud brand names and images or enter into comparable
      arrangements upon the expiration of the current agreements. In addition, each
      of
      the Company’s Girbaud license agreements contains provisions that, under certain
      circumstances (not all of which are under the Company’s control), could permit
      Latitude to terminate the agreements. Such provisions include, among other
      things (i) a default that continues beyond the specified grace period in the
      payment of certain amounts payable under the applicable agreement and (ii)
      the
      failure to comply with the covenants contained in the applicable agreement.
      Any
      termination of these agreements would result in loss of the Company’s rights
      to




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 *Table
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use
      the
      Girbaud brand names and images and would have a material adverse effect on
      the
      Company’s financial condition and results of operations.




**Because
      the Company extends credit to its customers, it is subject to the risks inherent
      in ordering and paying for goods before it receives any payment from customers
      for the goods.**





The
      Company extends credit to its customers based on an evaluation of each
      customer's financial condition and credit history and, due to growth, continues
      to experience increases in the amount of the Company’s outstanding accounts
      receivable. In 2006 and 2005, the Company’s allowance for doubtful accounts was
      $0.7 million each year. Its accounts receivable write-offs as a percentage
      of
      net sales during each of those periods were 0.5% and 0.8%, respectively. There
      can be no assurance that the Company’s credit losses will continue at these
      levels. The failure to accurately assess the credit risk from the Company’s
      customers, changes in overall economic conditions and other factors could cause
      the Company’s credit losses to increase, which could have a material adverse
      effect on the Company’s financial condition or results of
      operations.




**The
      Company’s dependence on unaffiliated manufacturers for the production of all of
      the products that it sells makes it susceptible to financial and
      customer-related problems that could arise from shipment delays and product
      quality issues.**





All
      of
      the Company’s manufacturing and sourcing needs are currently met through foreign
      independent contractors. The Company currently contracts with approximately
      38
      manufacturers in 10 countries. The Company does not have long-term contracts
      with any manufacturers and most of those manufacturers supply the Company on
      a
      non-exclusive basis pursuant to purchase orders. During
      2006, Asia, South America, Africa and North America accounted for 68%, 23%,
      2%
      and 7% of total unit production respectively. During 2006, one of the Company’s
      Asian contractors and one of its South American contractors accounted for
      approximately 45% and 18%, respectively, of the Company’s total unit production.
      No other manufacturer or contractor accounted for more then 10% of the Company’s
      total unit production in 2006. The
      inability of a manufacturer to ship the Company’s products in a timely manner or
      to meet the Company’s quality standards could adversely affect the Company’s
      ability to deliver products to its customers in a timely manner. Delays in
      delivery caused by manufacturing delays, disruption in services of delivery
      carriers or other factors could result in cancellations of orders, refusals
      to
      accept deliveries or reductions in purchase prices, any of which could have
      a
      material adverse effect on the Company’s financial condition or results of
      operations.




**The
      Company’s complete reliance on foreign sourcing of its goods also subjects it to
      financial and customer-related problems that could arise from trade disputes
      and
      disruptions in the countries in which the Company’s contractors are
      located.**





The
      Company’s operations may be affected adversely by political instability
      (resulting in the disruption of trade with the countries in which its
      contractors are located), the imposition of additional regulations relating
      to
      imports, the imposition of additional duties, tariffs and other charges on
      imports, significant fluctuations in the value of the dollar against foreign
      currencies or restrictions on the transfer of funds. Such factors have not
      previously had a material adverse effect on the Company’s financial condition or
      results of operations, but there can be no assurance that such will remain
      the
      case in the future.




The
      Company’s imported products are subject to U.S. customs duties, which comprise a
      material portion of the cost of the merchandise. A substantial increase in
      customs duties could have a material adverse effect on the Company’s financial
      condition or results of operations. The United States or the countries in which
      the Company’s products are produced may, from time to time, impose new quotas,
      duties, tariffs or other restrictions, or adversely adjust prevailing quota,
      duty or tariff levels, any of which could have a material adverse effect on
      the
      Company’s financial condition or results of operations.




The
      Company’s policy is to notify the Company’s independent manufacturers, through
      the Company’s agents, of the expectation that such manufacturers operate in
      compliance with applicable laws and regulations. While the Company’s policies
      promote ethical business practices and the Company’s staff




11
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periodically
      visits and monitors the operations of its independent manufacturers, the Company
      does not control such manufacturers or their labor practices. The violation
      of
      labor or other laws by an independent manufacturer or the divergence of an
      independent manufacturer's labor practices from those generally accepted as
      ethical in the United States could have a material adverse effect on the
      Company’s financial condition or results of operations.




**The
      seasonality of the Company’s business, periodic changes in customer tastes and
      quarterly fluctuations in the Company’s sales require it to make predictions
      about consumer demands for the Company’s products that can turn out to be wrong.
      The Company’s financial condition can be materially adversely affected when that
      occurs.**





The
      Company’s business is subject to significant seasonal and quarterly fluctuations
      that are characteristic of the apparel and retail industries. The Company’s
      backlog of orders and overall results of operations may fluctuate from quarter
      to quarter as a result of, among other things, variations in the timing of
      product orders by customers, weather conditions that may affect purchases at
      the
      wholesale and retail levels, the amount and timing of shipments, advertising
      and
      marketing expenditures and increases in the number of employees and overhead
      needed to support growth. In the Company’s segment of the apparel industry,
      sales are generally higher in the first and third quarters. The Company’s
      ability in predicting customer acceptance or consumer demand for its products,
      if inaccurate, might result in significant, unrecoupable expenditures on
      inventory that could materially adversely affect the Company’s financial
      condition or its operating results.




**Because
      the Company is effectively controlled by two stockholders affiliated with the
      Company’s licensor, it may be difficult for the Company’s other investors to
      influence or implement changes in governance and control of the
      company.**





Würzburg
      and Textile, both of whom are affiliated with Latitude, the company that has
      licensed the Company’s use of the Girbaud trademarks, brand names and images,
      beneficially own an aggregate of approximately 37% of the Company’s outstanding
      common stock. Such concentration of ownership, together with the anti-takeover
      effects of certain provisions of the Company’s Amended and Restated Certificate
      of Incorporation (the “Restated Certificate”) and Amended and Restated By-laws
      (the “Restated By-laws”), may have the effect of delaying or preventing a change
      in control of the company.




**Various
      anti-takeover provisions of the Company’s Restated Certificate of Incorporation
      and Restated By-laws may impact upon an investor’s ability to maximize his
      investment in the Company’s common stock.**





The
      Company’s Restated Certificate and Restated By-laws include provisions that may
      have the effect of discouraging a non-negotiated takeover of the Company and
      preventing certain changes of control. These provisions, among other things
      (i)
      permit the Company’s board of directors (the “Board of Directors”), without
      further stockholder approval, to issue up to 5.0 million shares of preferred
      stock with rights and preferences determined by the Board of Directors at the
      time of issuance, (ii) require a 66.7% vote of the Company’s stockholders to
      approve any amendment, addition or termination of the Restated By-laws and
      (iii)
      restrict the ability of stockholders to call special meetings of the
      stockholders, nominate individuals for election to the Board of Directors or
      submit stockholder proposals. The provisions of the Restated Certificate and
      the
      Restated By-laws may, therefore, have the effect of inhibiting stockholders’
ability to realize the maximum value for their shares of common stock that
      might
      otherwise be realized because of a merger or other event affecting the control
      of the company.




**The
      Company’s stock may be a penny stock. Trading of the Company’s stock may be
      restricted by the Securities and Exchange Commission’s (the “SEC’s”) penny stock
      regulations which may limit a stockholder’s ability to buy and sell the
      Company’s stock.**






The
      price
      of the Company’s stock has traded above and below $5.00 per share during most of
      the past several years and has fallen within the SEC’s definition of a penny
      stock. The SEC has adopted Rule




12
 *Table
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15g-9
      which generally defines “penny stock” to be any equity security that has a
      market price (as defined) less than $5.00 per share or an exercise price of
      less
      than $5.00 per share, subject to certain exceptions. As of the date of filing
      of
      this Report, the Company’s securities are covered by the penny stock rules,
      which impose additional sales practice requirements on broker-dealers who sell
      to persons other than established customers and “accredited investors”. The term
“accredited investor” refers generally to institutions with assets in excess of
      $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual
      income exceeding $200,000 or $300,000 jointly with their spouse. The penny
      stock
      rules require a broker-dealer, prior to a transaction in a penny stock not
      otherwise exempt from the rules, to deliver a standardized risk disclosure
      document in a form prepared by the SEC which provides information about penny
      stocks and the nature and level of risks in the penny stock market. The
      broker-dealer also must provide the customer with current bid and offer
      quotations for the penny stock, the compensation of the broker-dealer and its
      salesperson in the transaction and monthly account statements showing the market
      value of each penny stock held in the customer’s account. The bid and offer
      quotations, and the broker-dealer and salesperson compensation information,
      must
      be given to the customer orally or in writing prior to effecting the transaction
      and must be given to the customer in writing before or with the customer’s
      confirmation. In addition, the penny stock rules require that prior to a
      transaction in a penny stock not otherwise exempt from these rules, the
      broker-dealer must make a special written determination that the penny
      stock is a suitable investment for the purchaser and receive the
      purchaser’s written agreement to the transaction. These disclosure requirements
      may have the effect of reducing the level of trading activity in the secondary
      market for the stock that is subject to these penny stock rules. Consequently,
      these penny stock rules may affect the ability of broker-dealers to trade the
      Company’s securities. The Company believes that, in the past, the penny stock
      rules have discouraged investor interest in and have limited the marketability
      of the Company’s common stock.




**The
      National Association of Securities Dealers (the “NASD”) sales practice
      requirements may also limit a stockholder’s ability to buy and sell the
      Company’s stock.**




In
      addition to the “penny stock” rules described above, the NASD has adopted rules
      that require that in recommending an investment to a customer, a broker-dealer
      must have reasonable grounds for believing that the investment is suitable
      for
      that customer. Prior to recommending speculative low priced securities to their
      non-institutional customers, broker-dealers must make reasonable efforts to
      obtain information about the customer’s financial status, tax status, investment
      objectives and other information. Under interpretations of these rules, the
      NASD
      believes that there is a high probability that speculative low priced securities
      will not be suitable for at least some customers. The NASD requirements make
      it
      more difficult for broker-dealers to recommend that their customers buy the
      Company’s common stock, which may limit the stockholder’s ability to buy and
      sell the Company’s stock and have an adverse effect on the market for the
      Company’s shares.




**Trading
      on the OTC Bulletin Board may be sporadic because it is not a stock exchange,
      and stockholders may have difficulty reselling their
      shares.**




The
      Company’s common stock is quoted on the OTC Bulletin Board. Trading in stock
      quoted on the OTC Bulletin Board is often thin and characterized by wide
      fluctuations in trading prices, due to many factors that may have little to
      do
      with the Company’s operations or business prospects. Moreover, the OTC Bulletin
      Board is not a stock exchange, and trading of securities on the OTC Bulletin
      Board is often more sporadic than the trading of securities listed on a
      quotation system like Nasdaq or a stock exchange like the New York Stock
      Exchange.




**Investors
      may experience dilution of their ownership interests and the Company’s stock
      price may be adversely affected due to its future issuance of common or
      preferred stock, or securities that are convertible into, exchangeable for
      or
      exercisable for shares of common or preferred stock.**




The
      Company may in the future issue previously authorized and unissued securities,
      resulting in the dilution of the ownership interests of its present
      stockholders. The Company is currently authorized to issue 50 million shares
      of
      common stock and 5 million shares of preferred stock with such
      designations,




13
 *Table
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preferences
      and rights as may be determined by the Company’s board of directors. As of the
      date of filing of this Report, 12,282,618 shares of common stock were
      outstanding. In addition, the Company reserved:




·  2,200,000
      shares of common stock for issuance pursuant to the Company’s Amended and
      Restated Omnibus Stock Plan, of which 733,233 shares have been issued, 1,191,367
      shares underlie outstanding options and 275,400 shares remain available for
      future grants, and




·  450,000
      shares of common stock for issuance pursuant to the Company’s 2005 Non-Employee
      Directors Stock Option Plan, none of which have been issued and options to
      purchase 225,000 shares are outstanding and 225,000 shares remain available
      for
      future grants.




The
      potential issuance of additional shares of the Company’s common and preferred
      stock, as well as securities convertible into, exchangeable for or exercisable
      for shares of the Company’s common or preferred stock, may create downward
      pressure on the trading price of the Company’s common stock. The Company may
      also issue additional shares of common stock or other securities that are
      convertible into, exchangeable for or exercisable for common or preferred stock
      in connection with the hiring of personnel, future acquisitions, future
      issuances of the Company’s securities for capital raising purposes or for other
      business purposes. Future sales of substantial amounts of the Company’s common
      or preferred stock, or the perception that sales could occur, could have a
      material adverse effect on the price of the Company’s common stock.




Other
      factors that could cause the Company’s actual results to differ materially from
      those predicted include, but are not limited to, the Company’s ability to obtain
      capital to fund any growth or expansion plans; the Company’s ability to hire and
      retain key personnel; changes in laws and regulations, including changes in
      accounting standards, tax statutes or regulations, environmental and land use
      regulations; uncertainties of litigation; and labor strikes or other work
      interruptions.




**ITEM
      1B.**  **UNRESOLVED
      STAFF COMMENTS**




None.




**ITEM
      2.**  **PROPERTIES**




Certain
      information concerning the Company’s principal facilities is set forth below:





**Location**
            **Leased
                or**
              **Owned**
            **Use**
            **Approximate
                Area**
              **in
                Square Feet**Baltimore,
                MD
            Owned
            Administrative
                and Office Facilities
            40,000New
                York, NY
            Leased
                though 2014
            Executive
                Management, Sales, Merchandising, Marketing and Sourcing
            13,500Milford,
                DE
            Owned
            Distribution
                Center
            70,000





The
      Company believes that its existing facilities are well maintained and in good
      operating condition. See "ITEM 1. Business—Warehousing and Distribution".




**ITEM
      3.**  **LEGAL
      PROCEEDINGS**




None.




**ITEM
      4.**  **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
      HOLDERS**




None.




14
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**PART
      II**







**ITEM
      5.**  **MARKET
      FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
      MATTERS AND ISSUER PURCHASE OF SECURITIES**






The
      market for the Company’s common stock is not an exchange but is the OTC Bulletin
      Board, an established quotation service regulated by the NASD. As of the date
      of
      filing of this Report, the Company had approximately 1,000 beneficial holders
      of
      its common stock.






Shares
      of
      the Company’s common stock are traded on the OTC Bulletin Board under the ticker
      symbol “ISAC.OB”. The
      reported last sale price of the common stock on the OTC
      Bulletin Board on
      March 30, 2007 was $2.05. The table below sets forth the high and low bid
      prices of the Company’s common stock for the periods indicated, as quoted by the
      OTC Bulletin Board Research Service. Such quotations reflect inter-dealer
      prices, without retail markup, markdown or commission, and may not represent
      actual transactions.




**Quarter
                Ended**
            
            
            **High**
            
            
            **Low**
            
            
            **High**
            
            
            **Low****2006**
            **2005**March
                31
            
            $
            6.80
            
            $
            4.40
            
            $
            8.33
            
            $
            3.98June
                30
            
            $
            6.20
            
            $
            4.50
            
            $
            8.00
            
            $
            5.50September
                30
            
            $
            6.20
            
            $
            4.70
            
            $
            6.95
            
            $
            5.13December
                31
            
            $
            6.20
            
            $
            4.01
            
            $
            5.25
            
            $
            4.00




The
      Company anticipates that all of its earnings will be retained for the
      foreseeable future for use in the operation of its business. Any future
      determination as to the payment of dividends will be at the discretion of the
      Company’s Board of Directors and will depend upon the Company’s results of
      operations, financial condition, restrictions in its credit facilities and
      other
      factors deemed relevant by the Board of Directors.




On
      May 15, 1997, the Board of Directors of the Company and the Company’s
      stockholders adopted the 1997 Omnibus Stock Plan (the "Plan"). The Plan was
      amended and restated pursuant to authority granted by the Company’s stockholders
      at the 2003 annual meeting of stockholders to increase the shares of common
      stock that may be issued with respect to awards granted under the Plan to an
      aggregate of 2.2 million shares. The Plan is administered by the
      Compensation Committee of the Board of Directors (the “Compensation Committee”).
      Participation in the Plan is open to all employees, officers, directors and
      consultants of the Company or any of its affiliates, as may be selected by
      the
      Compensation Committee from time to time. The Plan allows for stock options,
      stock appreciation rights, stock awards, phantom stock awards and performance
      awards to be granted. The Compensation Committee will determine the prices,
      vesting schedules, expiration dates and other material conditions upon which
      such awards may be exercised. As of December 31, 2006, options to purchase
      1,191,367 shares remained outstanding with a weighted average exercise price
      of
      $2.20 per share. Through December 31, 2006, options to purchase 733,233
      shares had been exercised at a weighted average exercise price of $1.99 per
      share. As of December 31, 2006, options to purchase 275,400 shares remained
      available for future grants. The issuance of such stock options was exempt
      from
      the registration requirements of the Securities Act, pursuant to
      Section 4(2) thereunder. The Company filed a Registration Statement on
      Form S-8 on July 29, 2004 to register the shares of its common stock
      issuable pursuant to awards granted under the Plan.




In
      April
      2005, the Board
      of
      Directors of the Company and the Company’s stockholders adopted the Non-Employee
      Directors Stock Option Plan (the “Directors Plan”), whereby immediately
      following each
      annual meeting of the Company, each non-employee directors receive automatic
      grants of options to purchase common stock in amounts that are specified by
      such
      plan. The exercise prices of all options granted under the Directors Plan are
      fixed at 100% of the market price of the common stock on each automatic grant
      date. The Company has reserved 450,000 shares of common stock for issuance
      under
      the Directors Plan. Options to purchase 225,000 shares of common stock with
      a
      weighted average exercise price of $5.69 per share were
      granted under the Directors Plan through December 31, 2006. All of the options
      were outstanding and unexercised at December 31, 2006.




15
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Prior
      to
      2003, the Company granted warrants to purchase 500,000 shares of the Company’s
      common stock for $0.75 per share to Textile. In 2005, Textile assigned these
      warrants to an unaffiliated entity. In December 2005, this unaffiliated entity
      exercised its right to purchase 250,000 and, in accordance with the net issuance
      formula contained in the warrants and in lieu of paying $0.75 per share, gave
      up
      the right to purchase 43,605 shares and received 206,395 shares in the
      transaction based upon a closing price of $4.30 per share on the exercise date.
      In December 2006, this unaffiliated entity notified the Company it was
      exercising its right to purchase the remaining 250,000 shares. The exercise
      was
      completed in January 2007 at which time, in accordance with the net issuance
      formula contained in the warrants and in lieu of paying $0.75 per share, the
      unaffiliated entity gave up the right to purchase 41,667 shares and received
      208,333 shares in the transaction based upon a closing price of $4.50 per share
      on the notification date. There were outstanding warrants to purchase 250,000
      shares of common stock at each of December 31, 2006 and 2005.











16
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**ITEM
      6. SELECTED FINANCIAL DATA**




The
      selected financial data set forth below has been derived from the consolidated
      financial statements of the Company and the related notes thereto. The statement
      of operations data for the years ended December 31, 2006, 2005 and 2004 and
      the balance sheet data as of December 31, 2006 and 2005 are derived from
      the consolidated financial statements of the Company, included elsewhere herein,
      which have been audited by BDO Seidman, LLP, independent registered public
      accountants. The statement of operations data for the years ended
      December 31, 2003 and 2002 and the balance sheet data as of
      December 31, 2004, 2003 and 2002 are derived from the consolidated
      financial statements of the Company, which have been audited but are not
      contained herein. The following selected financial data should be read in
      conjunction with the Company’s consolidated financial statements and the related
      notes thereto and "Management’s Discussion and Analysis of Financial Condition
      and Results of Operations," which are included elsewhere herein.




**As
                of December 31,****2006**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002****Balance
                Sheet Data:**
            
            **(in
                thousands)**Working
                capital
            
            $
            15,151
            
            $
            13,086
            
            $
            8,595
            
            $
            4,578
            
            $
            6,154Total
                assets
            
            
            28,809
            
            
            27,143
            
            
            27,833
            
            
            20,090
            
            
            22,448Total
                debt
            
            
            5,493
            
            
            4,620
            
            
            6,781
            
            
            10,782
            
            
            11,588Stockholders’
                equity
            
            
            17,068
            
            
            13,144
            
            
            12,154
            
            
            5,547
            
            
            7,242





**Year
                Ended December 31,****2006**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002****Statement
                of Operations Data:**
            
            **(in
                thousands except per share data)**Net
                sales
            
            $
            82,236
            
            $
            83,289
            
            $
            80,649
            
            $
            64,305
            
            $
            63,521Cost
                of sales
            
            
            48,945
            
            
            49,070
            
            
            49,583
            
            
            43,706
            
            
            41,776Gross
                profit
            
            
            33,291
            
            
            34,219
            
            
            31,066
            
            
            20,599
            
            
            21,745Operating
                expenses
            
            
            27,249
            
            
            28,550
            
            
            25,243
            
            
            21,409
            
            
            26,012Operating
                income (loss)
            
            
            6,042
            
            
            5,669
            
            
            5,823
            
            
            (810
            )
            
            (4,267
            )Interest,
                net and other expenses
            
            
            (621
            )
            
            (436
            )
            
            (703
            )
            
            (885
            )
            
            (696
            )Income
                (loss) from continuing operations before income taxes
            
            
            5,421
            
            
            5,233
            
            
            5,120
            
            
            (1,695
            )
            
            (4,963
            )Income
                tax (expense) benefit, net
            
            
            (2,814
            )
            
            1,178
            
            
            1,045
            
            
            —
            
            
            —Net
                income (loss)
            
            $
            2,607
            
            $
            6,411
            
            $
            6,165
            
            $
            (1,695
            )
            $
            (4,963
            )Basic
                net income (loss) per share
            
            $
            0.22
            
            $
            0.55
            
            $
            0.55
            
            $
            (0.15
            )
            $
            (0.61
            )Basic
                weighted average common shares outstanding
            
            
            12,020
            
            
            11,729
            
            
            11,264
            
            
            11,135
            
            
            8,160Diluted
                net income (loss) per share
            
            $
            0.21
            
            $
            0.48
            
            $
            0.46
            
            $
            (
                0.15
            )
            $
            (0.61
            )Diluted
                weighted average common shares outstanding
            
            
            12,692
            
            
            13,397
            
            
            13,355
            
            
            11,135
            
            
            8,160




Basic
      and
      diluted loss per share were the same for 2003 and 2002 as dilutive securities
      were excluded from the computation of net loss per share because their inclusion
      would have been anti-dilutive.


17
 *Table
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**ITEM
      7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND
      RESULTS OF OPERATIONS**




The
      following discussion and analysis should be read in conjunction with the
      "Selected Financial Data" and the Company’s consolidated financial statements
      and the related notes thereto, which are included elsewhere in this Report.




**Executive
      Overview**




The
        Company, which operates in one business segment, is a designer and marketer
        of
        branded jeanswear and sportswear. The Company offers collections of Girbaud
        branded jeanswear and sportswear for men and women in the United States,
        Puerto
        Rico and the U.S. Virgin Islands. The Girbaud brand is an internationally
        recognized designer label with a distinct European influence. The Company
        has
        positioned its Girbaud brand line with a broad assortment of products, styles
        and fabrications reflecting a contemporary European look. The Company markets
        a
        full collection of men’s and women’s jeanswear and sportswear under the Girbaud
        brand, including a broad array of bottoms, tops and outerwear. The Company
        focuses its efforts on the Girbaud brand exclusively which provided all of
        the
        Company’s net sales in 2006, 2005 and 2004. The Company reported net income of
        $2.6 million, $6.4 million and $6.2 million during the years ended December
        31,
        2006, 2005 and 2004, respectively.




On
      January 1, 2006, the Company began to recognize the fair value of share-based
      payments made to employees and to non-employee directors under the provisions
      of
      Statement of Financial Accounting Standards (“SFAS”) 123(R).  In
      periods prior to January 1, 2006, pursuant to Accounting Principles Board
      Opinion 25, the Company was not required to recognize any compensation expense
      with regard to the stock -based compensation grants it had made. (See
      Note 7-Equity Awards and Stock-Based Compensation, in the accompanying
      notes to consolidated financial statements included in Part IV, Item 15 of
      this
      Report.)  The Company recognized $0.9 million of stock compensation expense
      in the year ended December 31, 2006 and no stock compensation expense was
      recognized in 2005.




Until
      2004, the Company maintained a valuation allowance equal to the deferred tax
      asset, thereby recognizing a net deferred tax asset of zero. Starting in 2004,
      and continuing through the first three quarters of 2006, the Company began
      to
      recognize a net deferred tax asset based on the Company’s evaluation that it
      would, at that time, more likely then not generate future taxable income to
      utilize the net operating loss (“NOL”) for income tax purposes. Therefore, the
      Company recognized net income tax benefits of $1,178,000 and $1,045,000 for
      2005
      and 2004, respectively. During the completion of our 2006 audit in the
      first quarter of 2007, based on a review of operating results to date, as well
      as the forecast of remaining 2007 net income, it was determined that the more
      likely than not conditions for recognition of the deferred tax asset were not
      met. Accrodingly as of December 31, 2006, the Company recorded an adjustment
      to
      the valuation allowance equal to the full amount of the previously recognized
      deferred tax asset of $3.5 million. This resulted in the Company recognizing
      net
      income tax expense of $2.8 million in 2006.




**Critical
      Accounting Policies and Estimates**




The
      Company’s significant accounting policies are more fully described in its
      Summary of Accounting Policies set forth in the Company’s consolidated financial
      statements and the notes thereto, which accompany this Report. The preparation
      of financial statements in conformity with accounting principles generally
      accepted in the United States requires management to make estimates and
      assumptions in certain circumstances that affect amounts reported in the
      accompanying financial statements and related notes. In preparing these
      financial statements, management has made its best estimates and judgments
      of
      certain amounts included in the financial statements, giving due consideration
      to materiality. The Company does not believe there is a great likelihood that
      materially different amounts would be reported related to the accounting
      policies described below; however, application of these accounting policies
      involves the exercise of judgment and the use of assumptions as to future
      uncertainties and, as a result, actual results could differ from these
      estimates.




18
 *Table
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The
      Company evaluates the adequacy of its allowance for doubtful accounts at the
      end
      of each quarter. In performing this evaluation, the Company analyzes the payment
      history of its significant past due accounts, subsequent cash collections on
      these accounts and comparative accounts receivable aging statistics. Based
      on
      this information, along with consideration of the general strength of the
      economy, the Company develops what it considers to be a reasonable estimate
      of
      the uncollectible amounts included in accounts receivable. This estimate
      involves significant judgment by the management of the Company. Actual
      uncollectible amounts may differ from the Company’s estimate.




Revenue
      is recognized upon the transfer of title and risk of ownership to customers.
      Revenue is recorded net of discounts and net of provisions for estimated returns
      and allowances. On
      a
      seasonal basis, the Company negotiates price adjustments with its retail
      customers as sales incentives. The Company accrues the cost of such adjustments
      on an ongoing basis considering actual price adjustments **,** historical trends, projected seasonal results and an evaluation of current
      economic conditions. These costs, which have been recorded as a reduction to
      net
      revenue, were $1.9 million, $3.7 million and $3.8 million for the years ended
      December 31, 2006, 2005 and 2004, respectively.




Shipping
      and handling fees billed to customers are classified in net sales in the
      consolidated statements of operations. Shipping and handling costs incurred
      are
      classified in distribution and shipping in the consolidated statements of
      operations.




The
      Company includes in cost of goods sold all costs and expenses related to
      obtaining merchandise incurred prior to the receipt of finished goods at the
      Company’s distribution facilities. These costs include, but are not limited to,
      product cost, inbound freight charges, purchasing and receiving costs,
      inspection costs, warehousing costs and internal transfer costs, as well as
      insurance, duties, brokers’ fees and consolidators’ fees. The Company includes
      in selling, general and administrative expenses costs incurred subsequent to
      the
      receipt of finished goods at its distribution facilities, such as the cost
      of
      picking and packing goods for delivery to customers. In addition, selling,
      general and administrative expenses include product design costs, selling and
      store service costs, marketing expenses and general and administrative
      expenses.




The
      Company estimates inventory markdowns based on customer orders sold below its
      inventory cost that will be shipped in the following period and estimates an
      amount for similar unsold inventory at period end. The Company analyzes recent
      sales and gross margins on unsold inventory in further estimating inventory
      markdowns. These specific markdowns are reflected in cost of sales and the
      related gross margins at the conclusion of the appropriate selling season.
      This
      estimate involves significant judgment by the management of the Company. Actual
      gross margins on sales of excess inventory may differ from the Company’s
      estimate.




The
      Company is using the Black-Scholes option-pricing model to value compensation
      expense associated with equity awards (i.e., options and warrants). The expected
      term of equity awards granted is derived using a simplified method using an
      average of the vesting term and the contractual term. The risk-free interest
      rate is based on the U.S. Treasury rates at the date of grant. The forfeiture
      rate is based on past turnover experience of the Company. Expected volatility
      is
      based on the historical volatility of the Company’s stock.




19
 *Table
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          Contents*




**Results
      of Operations**




**Year
                Ended December 31,****2006**
            
            
            **2005**
            
            
            **2004**Net
                sales
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of sales
            
            
            59.5
            %
            
            58.9
            %
            
            61.5
            %Gross
                profit
            
            
            40.5
            %
            
            41.1
            %
            
            38.5
            %Selling
                expenses
            
            
            12.7
            %
            
            13.0
            %
            
            12.9
            %License
                fees
            
            
            6.6
            %
            
            6.1
            %
            
            6.6
            %Distribution
                and shipping expenses
            
            
            3.0
            %
            
            2.6
            %
            
            2.5
            %General
                and administrative expenses
            
            
            10.9
            %
            
            10.3
            %
            
            9.3
            %Litigation
                settlement
            
            
            —
            
            
            2.2
            %
            
            —Operating
                income
            
            
            7.3
            %
            
            6.9
            %
            
            7.2
            %





**Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005**




*Net
      Sales and Gross Profit.*




Net
      sales
      decreased 1.3% to $82.2 million in 2006 from $83.3 million in 2005.
      Net sales of the Girbaud men's product line increased $1.3 million, or 1.9%,
      to
      $70.6 million, while net sales of the Girbaud women's product line decreased
      $2.4 million, or 17.1%, to $11.6 million.




Gross
      profit decreased 2.6% to $33.3 million in 2006 from $34.2 million in 2005.
      Gross margin, or gross profit as a percentage of net sales, decreased to 40.5%
      from 41.1% over the same period.




Gross
      units sold increased 2.3% to 4.4 million units in 2006 compared to 4.3 million
      units in 2005. Gross sales (sales before adjustment for returns and allowances)
      decreased 3.5% to $87.9 million in 2006 compared to $91.1 million in 2005.
      The
      related gross margins on these sales (unadjusted for returns and allowances)
      decreased $2.1 million to $36.4 million in 2006 from $38.5 million in 2005.
      Returns and allowances decreased to 6.4% of gross sales in 2006 from 8.6% in
      2005 mainly as a result of a decrease in negotiated sales incentive price
      adjustments provided to department store customers ($1.9 million in 2006
      compared to $3.7 million in 2005). The decrease in price adjustments was
      directly related to the decrease in sales to departments stores ($11.1 million
      in 2006 compared to $16.3 million in 2005) as the Company exited from lesser
      performing department store locations.




The
      main
      contributing factors affecting gross sales, gross profit and gross margin were
      as follows:






·
            **Sales
                of goods sold at regular prices (including in season promotional
                discounts)**-
                Sales of goods sold at regular prices decreased $5.5 million to $77.5
                million in 2006 (from $83.0 million in 2005). Gross profit margin
                on these
                sales (before adjustments for returns and allowances) was 46.2% in
                2006
                compared to 48.4% in 2005.






·
            **Sales
                of goods sold at off-price liquidations****to discount retail stores**-
                Sales of goods sold atoff-price
                liquidationsincreased $2.3 million to $10.4 million in 2006 (from $8.1 million
                in
                2005). Gross profit margin on these sales (before adjustments for
                returns
                and allowances) was 5.3% in 2006 compared to a loss percentage of
                -19.9%
                in 2005.




*Selling,
      License, Distribution and Shipping, General and Administrative and Litigation
      Settlement Expenses.*




Operating
      expenses decreased 4.9% to $27.2 million in 2006 from $28.6 million in 2005.
      As
      a percentage of net sales, operating expenses decreased to 33.2% from 34.2%
      over
      the same period. As the result of the settlement of an arbitration
      proceeding commenced against the
      Company by a former




20
 *Table
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executive,
      the Company recorded as operating expense a $1.8 million charge during 2005.
      This decrease in operating expenses was partially offset by higher shipping
      expenses, license fees and administrative expenses.




Selling
      expenses decreased $0.4 million to $10.4 million in 2006 from $10.8 million
      in
      2005. Sales
      department expense decreased to $2.5 million in 2006 from $2.7 million in the
      2005 as a result of reduced sales department personnel. Commission
      expense increased to $3.1 million in 2006 compared to $2.9 million in 2005.
      The
      Company had reorganized its commission structure for department store and
      off-price sales effectively changing the associated compensation from salary
      and
      bonus to a commission method. Design expense decreased to $3.1million in 2006
      compared to $3.6 million in 2005 primarily as a result of a decrease in sample
      expenses partially offset by increased personnel costs. Advertising and
      promotional related expenses remained relatively unchanged at $1.6 million
      in
      2006 and 2005.




License
      fees increased $0.3 million to $5.4 million in 2006 from $5.1 million in 2005.
      As a percentage of net sales, license fees increased to 6.6% in 2006 compared
      to
      6.1% in 2005. The increases in license fees were primarily due to the overall
      increase in men’s product sales, thereby increasing the related licensing fee
      while the overall decrease in women’s product sales did not reduce the minimum
      royalties owed by the Company.




Distribution
      and shipping increased $0.3 million to $2.5 million in 2006 from $2.2 million
      in
      2005 as a result of higher shipping expenses associated with the increase in
      units shipped. General and administrative expenses increased 4.7% to $9.0
      million in 2006 from $8.6 million in 2005. The
      increase was mainly attributable to the recognition of $0.9 million in stock
      option expense and salary expense partially offset by decreases in professional
      fees and bad debt expenses.




*Interest
      Expense.*




Interest
      expense increased to $0.6 million in 2006 from $0.4 million in 2005 as a result
      of increased borrowings under the Company’s revolving credit facility.




*Income
      Taxes.*




Until
      2004, the Company maintained a valuation allowance equal to the deferred tax
      asset, thereby recognizing a net deferred tax asset of zero. Starting in 2004,
      and continuing through the first three quarters of 2006, the Company began
      to
      recognize a net deferred tax asset based on the Company’s evaluation that it
      would, at that time, more likely then not generate future taxable income to
      utilize the NOL for income tax purposes. Therefore, the Company recognized
      net
      income tax benefits of $1,178,000 and $1,045,000 for 2005 and 2004,
      respectively.  During the completion of our 2006 audit in the first
      quarter of 2007, based on a review of operating results to date, as well as
      the
      forecast of remaining 2007 net income, it was determined that the more likely
      than not conditions for recognition of the deferred tax asset were not met.
      Accrodingly as of December 31, 2006, the Company recorded an adjustment to
      the
      valuation allowance equal to the full amount of the previously recognized
      deferred tax asset of $3.5 million. This resulted in the Company recognizing
      net
      income tax expense of $2.8 million in 2006.




**Year
      Ended December 31, 2005 Compared to Year Ended December 31,
      2004**




*Net
      sales and gross profit.*




Net
      sales increased 3.3% to $83.3 million in 2005 from $80.6 million in
      2004. Net sales of the Girbaud men's product line increased $3.5 million, or
      5.3%, to $69.3 million, while net sales of the Girbaud women's product line
      decreased $0.8 million, or 5.4%, to $14.0 million. Gross profit increased 10.0%
      to $34.2 million in 2005 from $31.1 million in 2004. Gross margin, or gross
      profit as a percentage of net sales, increased to 41.1% from 38.5% over the
      same
      period.




21
 *Table
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          Contents*




Gross
      units sold increased to 4.3 million units in 2005 compared to 3.6 million units
      in 2004. Gross sales (sales before adjustment for returns and allowances)
      increased 3.3% to $91.1 million in 2005 compared to $88.2 million in 2004.
      The
      related gross margins on these sales (unadjusted for returns and allowances)
      increased $0.9 million to $38.6 million in 2005 from $37.7 million in 2004.
      Returns and allowances decreased to 8.6% of gross sales in 2005 from 9.1% in
      the
      2004.




The
      main
      contributing factors affecting gross sales, gross profit and gross margin were
      as follows:




·
            **Sales
                of goods sold at regular prices****(including
                in season promotional discounts)**-
                Sales of goods sold at regular prices increased $0.2 million to $83.0
                million in 2005 (from $82.8 million in 2004). Gross profit margin
                on these
                sales (before adjustments for returns and allowances) was 48.4% in
                2005
                compared to 47.3% in 2004.




·
            **Sales
                of goods sold at off-price liquidations****to
                discount retail stores**-
                Sales of goods sold atoff-price
                liquidationsincreased $2.7 million to $8.1 million in 2005 (from $5.4 million
                in
                2004). Gross profit margin on these sales (before adjustments for
                returns
                and allowances) was a loss percentage of -19.9% in 2005 compared
                to a loss
                percentage of -28.1% in 2004.




*Selling,
      License, Distribution and Shipping, General and Administrative and Litigation
      Settlement Expenses.*




Operating
      expenses increased 13.1% to $28.5 million in 2005 from $25.2 million in 2004.
      As
      a percentage of net sales, operating expenses increased to 34.2% from 31.3%
      over
      the same period. As the result of the settlement of an arbitration
      proceeding commenced against the
      Company by a former executive, the Company recorded as operating expense a
      $1.8
      million charge during 2005. The remaining increase in operating expenses
      resulted primarily from higher selling expenses, higher shipping expenses
      associated with the increase in units shipped, and an increase in administrative
      expenses. These increases were partially offset by a decrease in license fees
      which primarily resulted from the increase in off-price discount sales.




Selling
      expenses increased $0.4 million to $10.8 million in 2005 primarily as a result
      of higher design expenses and commissions. Design expense increased to $3.6
      million in 2005 compared to $3.1 million in 2004 primarily as a result of
      increased personnel costs and sample expense. Commission expense increased
      to
      $2.9 million in 2005 compared to $2.8 million in 2004 as a result of greater
      net
      sales. Advertising and promotional related expenses decreased to $1.6 million
      in
      2005 compared to $1.8 million in 2004.




License
      fees decreased $0.2 million to $5.1 million in 2005 from $5.3 million in 2004.
      As a percentage of net sales, license fees decreased to 6.1% in 2005 compared
      to
      6.6% in 2004. The decrease in license fees as a percentage of net sales was
      primarily due to the increase in product sales of in-season
      promotional prices and off-price liquidations which
      generate lower license fees than sales of regular priced merchandise.
      Distribution and shipping increased $0.2 million to $2.2 million in 2005 from
      $2.0 million in 2004 as a result of higher shipping expenses associated with
      the
      increase in units shipped. General and administrative expenses increased 14.7%
      to $8.6 million in 2005 from $7.5 million in 2004. The increase was mainly
      attributable to an increase in provisions provided for bad debt and additional
      legal expenses associated with the arbitration. The provision for doubtful
      accounts was $1.0 million in 2005 compared to $0.5 million in 2004. Legal fees
      were $0.8 million in 2005 compared to $0.4 million in 2004.




*Operating
      Income.*




Operating
      income remained relatively unchanged at $5.7 million in 2005 compared to $5.8
      million in 2004 as the increase in gross profit was offset by the increase
      in selling,
      distribution, general and administrative expenses *.*




22
 *Table
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          Contents*




*Interest
      Expense.*




Interest
      expense decreased to $0.4 million in 2005 from $0.7 million in 2004 as a result
      of decreased borrowings under the Company’s revolving credit facility as a
      result of the Company’s ability to finance its operations through internally
      generated funding.




*Income
      Taxes.*




As
      of December 31, 2005, the Company had net operating loss carryforwards of
      approximately $34.7 million, which begin to expire in 2014. In years prior
      to
      2004, no tax benefit was recognized due to the uncertainty of the Company’s
      ability to generate future taxable income at that time. As a result of the
      income the Company generated in 2005 and 2004, the Company’s management
      reevaluated its net operating losses and the related valuation reserves and
      has
      recognized a net income tax benefit of $1.2 million in 2005.




**Liquidity
      and Capital Resources**




The
      Company has relied primarily on asset-based borrowings, trade credit and
      internally generated funds to finance its operations. Accounts receivable
      decreased $1.5 million and inventory increased $5.2 million during 2006.
      Accounts payable and accrued liabilities decreased $2.9 million during 2006.
      Cash and cash equivalents held by the Company decreased to $0.5 million at
      December 31, 2006 compared to $0.9 million at December 31, 2005 while its
      working capital increased to $15.2 million at December 31, 2006 from $13.1
      million at December 31, 2005.




*Cash
      Flow.*




Cash
      flow
      provided by operations in 2006 was minimal compared to cash provided by
      operations of $2.7 million in 2005. The decrease in 2006 was due primarily
      to
      the increases in inventory offset by decreases in accounts receivable plus
      the
      decreases in accounts payable and other liabilities.




Cash
      used
      in investing activities totaled $1.0 million in 2006 and was mainly for show
      booths and store fixtures to promote the Girbaud brand compared to $1.3 million
      in 2005 which was mainly due to capital improvements associated with the new
      offices and showrooms in New York. Cash provided by financing activities totaled
      $0.5 million in 2006 compared to cash used in financing activities of
      $1.5 million in 2005. In 2006, cash provided by financing activities
      primarily resulted from net borrowings under the revolving line of credit of
      $3.4 million and cash received on issuance of common stock of $0.1 million
      partially offset by principal payments on long term debt of $2.5 million and
      a
      decrease in overdrafts of $0.4 million.




*Credit
      Facilities*




On
        December 30, 2004, the Company entered into a three year credit facility
        (the
“Credit Facility”) with Wachovia Bank, National Association (“Wachovia”). The
        Credit Facility provides that the Company may borrow, using as collateral,
        up to
        85% of eligible accounts receivable and a portion of eligible inventory,
        both as
        defined by the Credit Facility. Borrowings under the Credit Facility may
        not
        exceed $25.0 million, including outstanding letters of credit which are limited
        to $8.0 million at any one time. There were approximately $0.8 million of
        outstanding letters of credit at December 31, 2006. The Company’s availability
        at December 31, 2006 was approximately $6.4 million. The Credit Facility accords
        to the Company the right, at its election, to borrow these amounts as either
        Prime Rate Loans or LIBOR Loans. Prime Rate Loans bear interest at the prime
        rate plus the applicable margin in effect from time to time. LIBOR Loans
        are
        limited to three in total, must be a minimum of $1,000,000 each and in integral
        multiples of $500,000 in excess of that amount, and bear interest at the
        LIBOR
        rate plus the applicable margin in effect from time to time. The applicable
        margins, as defined by the Credit Facility, fluctuate from 0.00% to 0.75%
        for
        the Prime Rate Loans and 2.00% to 2.75% for LIBOR Loans. The applicable margins
        are inversely affected by fluctuations in the amount of “excess availability” -
        the




23
 *Table
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unused
      portion of the amount available under the facility - which are in staggered
      increments from less than $2.5 million to $7.5 million. The Prime Rate and
      the
      LIBOR Rate were 8.25% and 5.314%, respectively, at December 31, 2006. All the
      amounts borrowed under the Credit Facility at December 31, 2006 were Prime
      Rate
      Loans, and the effective rate was 8.25% at that time. The Credit Facility also
      required the Company to comply with certain covenants expressed as fixed charge
      coverage ratios and tangible liability to net worth ratios. As collateral
      security for its obligations under the Credit Facility, Isaacs and the LP
      granted a first priority security interest in all of their respective assets
      to
      Wachovia. The
      Company can not assure its investors with regard to its ability to comply with
      its covenant obligations under the Credit Facility in the future.




On
      May 6,
      2002, Textile,
      an affiliate of Latitude, the
      licensor of the Company, acquired
      a note that the Company had issued to a former licensor. On May 21, 2002,
      Textile exchanged that note for an amended and restated note in the amount
      of
      $6,557,909 bearing interest at the rate of 8% per annum (the “Replacement
      Note”). The Replacement Note, which subordinated Textile’s rights under the note
      to the rights of the holder of a revolving line of credit in existence prior
      to
      the Credit Facility with Wachovia, deferred the original note’s principal
      payments and extended the maturity date of the note until December 31, 2007.
      In
      connection with the execution of the Credit Facility, the Replacement Note
      was
      further amended and restated to subordinate Textile’s rights to the rights of
      Wachovia under the Credit Facility (the “Amended and Restated Replacement Note”
and together with the Replacement Note, the “Textile Notes”). Pursuant to the
      subordination provisions of the Textile Notes, the Company was obligated to
      defer the payments that otherwise would have been due thereunder during each
      calendar quarter commencing with the quarter ended December 31, 2002 and
      continuing through March 31, 2005. The obligations under the Textile Notes
      have
      been classified as current or long-term based upon the respective original
      due
      dates of the quarterly payments specified in the Replacement Note or the Amended
      and Restated Replacement Note, as the case may be. Accordingly, each deferred
      quarterly payment has been classified as current even though the payment thereof
      may not be made until a future year. Payments under the Textile Notes totaled
      $3,510,000 in principle and interest payments in 2006. As of December 31, 2006,
      total principle payments and accrued interest payments due on the Textile Notes
      were $2,103,461 and $533,004, respectively.




The
      Company had principle and interest payments currently due and payable on the
      Textile Notes totaling $670,000 and $240,000 as of December 31, 2006 and January
      31, 2007, respectively.  The Company assessed its ability to comply with
      the Credit Facility’s covenants in each month of the first quarter of 2007 and
      has determined that if it were to make these payments, it would not be in
      compliance with the Credit Facility covenants in the first quarter of
      2007.  Therefore, in anticipation of this noncompliance, the Company did
      not make the December and January scheduled payments.  This may constitute
      a default of the Textile Notes and a cross default of the Credit Facility. 
The Company has asked both Textile and Wachovia to waive these covenants. 
Failure to reach an agreement may adversely affect the Company’s ability to
      finance its operations.




The
      Company extends credit to its customers. Accordingly, the Company may have
      significant risk in collecting accounts receivable from its customers. The
      Company has credit policies and procedures that it uses to minimize exposure
      to
      credit losses. The Company’s collection personnel regularly contact customers
      with receivable balances outstanding beyond 30 days to expedite collection.
      If
      these collection efforts are unsuccessful, the Company may discontinue
      merchandise shipments until the outstanding balance is paid. Ultimately, the
      Company may engage an outside collection organization to collect past due
      accounts. Timely contact with customers has been effective in minimizing its
      credit losses. In 2006 and 2005, the Company’s account receivable write-offs
      were $0.4 million and $0.5 million, respectively, and as a percentage of
      net sales were 0.5% and 0.6%, respectively.




24
 *Table
          of
          Contents*


The
      Company had the following contractual obligations and commercial commitments
      as
      of December 31, 2006:





**Schedule
                of contractual obligations:****Payments
                Due By Period****Total**
            
            
            **Less
                than 1 year**
            
            
            **1-3
                years**
            
            
            **4-5
                years**
            
            
            **After
                5 years**Revolving
                line of credit
            
            $
            3,389,656
            
            $
            3,389,656
            
            $
            —
            
            $
            —
            
            $
            —Long-term
                debt (*)
            
            
            2,728,690
            
            
            2,728,690
            
            
            —
            
            
            —
            
            
            —Operating
                leases
            
            
            3,870,976
            
            
            471,881
            
            
            890,058
            
            
            967,029
            
            
            1,542,008Employment
                agreements
            
            
            1,267,000
            
            
            992,000
            
            
            275,000
            
            
            —
            
            
            —Girbaud
                license obligations
            
            
            22,500,000
            
            
            4,500,000
            
            
            9,000,000
            
            
            9,000,000
            
            
            —Girbaud
                fashion shows
            
            
            1,575,000
            
            
            375,000
            
            
            600,000
            
            
            600,000
            
            
            —Girbaud
                creative & advertising fees
            
            
            950,000
            
            
            190,000
            
            
            380,000
            
            
            380,000
            
            
            —Promotional
                expense license requirement
            
            
            5,700,000
            
            
            1,300,000
            
            
            2,600,000
            
            
            1,800,000
            
            
            —Total
                contractual cash obligations
            
            $
            41,981,322
            
            $
            13,947,227
            
            $
            13,745,058
            
            $
            12,747,029
            
            $
            1,542,008(*)
                Includes principal and accrued interest payments due as of December
                31,
                2006 as well as interest to accrue through the maturity date of the
                note
                payable.








**Schedule
                  of commercial commitments:****Amount
                  of Commitment Expiration per Period****Total**
              
              
              **Less
                  than 1 year**
              
              
              **1-3
                  years**
              
              
              **4-5
                  years**
              
              
              **After
                  5 years**Line
                  of credit****(including
                  letters of credit)**(*)**
              
              $
              25,000,000
              
              $
              25,000,000
              
              $
              —
              
              $
              —
              
              $
              —Total
                  commercial commitments
              
              $
              25,000,000
              
              $
              5,000,000
              
              $
              —
              
              $
              —
              
              $
              —**(*)**At
                December 31, 2006, the Company had borrowings of $3.4 million under
                the
                Credit Facility and had outstanding letters of credit of approximately
                $0.8 million.






The
      Company believes that current levels of cash and cash equivalents ($0.5 million
      at December 31, 2006) together with cash from operations and funds available
      under its Credit Facility will be sufficient to meet its capital requirements
      for the next 12 months.




**Inflation**




The
      Company does not believe that the relatively moderate rates of inflation
      experienced in the United States over the last year have had a significant
      effect on its net sales or profitability. Although higher rates of inflation
      have been experienced in a number of foreign countries in which the Company’s
      products are manufactured, the Company does not believe that they have had
      a
      material effect on the Company’s net sales or profitability.




25
 *Table
          of
          Contents*


**Recent
      Accounting Pronouncements**




In
      March
      2006, the Financial Accounting Standards Board (the “FASB”) issued
“SFAS” No. 156, “ *Accounting
      for Servicing of Financial Assets—an amendment of SFAS No. 140* ”.
      This
      Statement amends FASB Statement No. 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities,* with
      respect to the accounting for separately recognized servicing assets and
      servicing liabilities. The Company does not have any servicing assets or
      liabilities; therefore it believes there will be no material impact on its
      financial condition, results of operations or cash flows.




In
      June
      2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for
      Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,"
      which establishes that the financial statement effects of a tax position taken
      or expected to be taken in a tax return are to be recognized in the financial
      statements when it is more likely than not, based on the technical merits,
      that
      the position will be sustained upon examination. FIN 48 is effective for fiscal
      years beginning after December 15, 2006. The Company is evaluating its tax
      positions and does not believe FIN 48 will have a material impact on its
      financial statements




In
      September 2006, the FASB issued SFAS 157, *Fair
      Value Measurements.* This
      Statement defines fair value, establishes a framework for measuring fair value
      in generally accepted accounting principles (GAAP), and expands disclosures
      about fair value measurements. This Statement applies under other accounting
      pronouncements that require or permit fair value measurements, the FASB having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this Statement does not require
      any
      new fair value measurements. However, for some entities, the application of
      this
      Statement will change current practice. This statement is effective for fiscal
      years beginning after November 15, 2007, and interim periods within those fiscal
      years. The Company is evaluating the impact, if any, SFAS 157 will have on
      its
      financial condition or results of operations.




In
      September 2006, the FASB issued SFAS158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans* .
      Statement 158 will require the Company to show the funded status of its pension
      and retiree health care plans as a prepaid asset or accrued liability, and
      to
      show the net deferred and unrecognized gains and losses related to the
      retirement plans, net of tax, as part of accumulated other comprehensive income
      in shareholders’ equity. Previously, the net deferred and unrecognized gains and
      losses were netted in the prepaid asset or accrued liability recorded for the
      retirement plans. The Company adopted the balance sheet provisions of Statement
      158, as required, at December 31, 2006. The Company adjusted the liability
      of
      $1.6 million as of December 31, 2006 with the adjustment decreasing accumulated
      other comprehensive loss by $0.3 million in 2006.




In
      September 2006, the SEC issued SAB No. 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* (“SAB
      108”), which provides interpretive guidance on the consideration of the effects
      of prior year misstatements in quantifying current year misstatements for the
      purpose of a materiality assessment. SAB 108 requires financial statement errors
      to be quantified using both balance sheet and income statement approaches and
      an
      evaluation on whether either approach results in quantifying a misstatement
      that, when all relevant quantitative and qualitative factors are considered,
      is
      material. The Company adopted SAB 108 and there was not a significant impact
      on
      the financial statements.




On
      February 15, 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      This
      Statement permits companies and not-for-profit organizations to make a one-time
      election to carry eligible types of financial assets and liabilities at fair
      value, even if fair value measurement is not required under GAAP. Statement
      159
      is effective for fiscal years beginning after November 15, 2007. The Company
      does not believe that it will adopt the provisions of this Statement.




26
 *Table
          of
          Contents*




**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**




The
      Company's principal market risk results from changes in floating interest rates
      on short-term debt. The Company does not use interest rate swap agreements
      to
      mitigate the risk of adverse changes in the prime interest rate. The impact
      of a
      100 basis point change in interest rates affecting the Company's short-term
      debt
      would not be material to the Company’s income, cash flow or working capital. The
      Company does not hold long-term interest sensitive assets and therefore is
      not
      exposed to interest rate fluctuations for its assets. The Company does not
      hold
      or purchase any derivative financial instruments for trading purposes.




**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
      DATA**




The
      consolidated financial statements of the Company and the report of the
      independent registered public accounting firm thereon are set forth on pages
      F-1 through
      F-24 hereof .




**ITEM
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
      ACCOUNTING AND
      FINANCIAL DISCLOSURE**




None.




**ITEM
      9A. CONTROLS AND PROCEDURES**




In
      accordance with management’s responsibilities for establishing and maintaining
      adequate internal control over the Company’s financial reporting, the Company
      maintains disclosure controls and procedures that are designed to provide
      reasonable assurance that:




·
            information
                required to be disclosed in the Company’s Exchange Act reports


§
            is
                recorded, processed, summarized and reported within the time periods
                specified in the SEC’s rules and
                forms,


§
            is
                accumulated and communicated to the Company’s management, including its
                Chief Executive Officer and Chief Financial Officer, as appropriate,
                to
                allow timely decisions regarding required
                disclosure;


·
            the
                Company’s transactions are properly
                authorized;


·
            the
                Company’s assets are safeguarded against unauthorized or improper use;
                and


·
            the
                Company’s transactions are properly recorded and
                reported,




all
      to
      permit the preparation of the Company’s financial statements in conformity with
      generally accepted accounting principles.




The
      Company conducted an evaluation, under the supervision and with the
      participation of the Company’s management, including its Chief Executive Officer
      (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design
      and operation of the Company’s disclosure controls and procedures as of the end
      of the period covered by this Report on Form 10-K. Among other matters, the
      Company sought by that evaluation to determine whether there were any
      significant deficiencies or material weaknesses in the Company’s disclosure
      controls and procedures, and whether it had identified any acts of fraud
      involving personnel who have a significant role in the implementation of those
      controls and procedures.




Based
      upon that evaluation, the Company’s CEO and CFO have concluded that, the
      Company’s disclosure controls and procedures were effective to provide
      reasonable assurance that information required to be disclosed in the Company’s
      Exchange Act reports is recorded, processed, summarized and reported within
      the
      time periods specified by the SEC, and that material information relating to
      the
      Company and its consolidated subsidiaries is made known to management, including
      the Company’s CEO and CFO,




27
 *Table
          of
          Contents*


particularly
      during the period when the Company’s periodic reports are being
      prepared.




In
      the
      course of reviewing our financial statements for the three and nine month
      periods ended September 30, 2006, our auditors noted a deficiency in our control
      structure. A control deficiency exists when the design or operation of a control
      does not allow management or employees, in the normal course of performing
      their
      assigned functions, to prevent or detect misstatements on a timely basis. A
      significant deficiency is a control deficiency, or combination of control
      deficiencies, that adversely affects our ability to initiate, authorize, record,
      process, or report financial data reliably in accordance with generally accepted
      accounting principles such that there is a more than remote likelihood that
      a
      misstatement of our financial statements that is more than inconsequential
      will
      not be prevented or detected by application of our internal control procedures
      and processes.




The
      significant deficiency noted by our auditors concerned incomplete communication
      of information between the Compensation Committee of the Company’s Board and
      management regarding the completion of the process pertaining to two small
      option awards granted to two non-executive employees in prior periods. As a
      result of the failure to transmit necessary information to the appropriate
      parties within the Company so as to permit the timely and accurate recording
      and
      reporting of those two option grants, those two awards were not properly
      accounted for in the periods in which they were granted.




Management
      and the Compensation Committee implemented new procedures designed to ensure
      that all information regarding the approval of stock-based compensation awards
      is communicated by the Committee to the Company in a manner designed to permit
      the timely and accurate recording and reporting of all such awards.




Based
      upon the limited number of option grants that had been made, the relatively
      small size of all but a few of those grants and the Compensation Committee’s
      determination that the list of all outstanding stock based compensation awards
      was complete as of September 30, 2006, our auditors concluded that the
      deficiency was not pervasive and that the impact of the recording and reporting
      errors involving the two option grants in question was not material. Management
      has also concluded that the deficiency was not pervasive and that the impact
      of
      the recording and reporting errors involving the two option grants in question
      was not material.




As
      discussed above, there have been changes in the Company’s internal control over
      financial reporting during the period covered by this report that have affected,
      or are reasonably likely to affect, our internal control over financial
      reporting. However, as noted, the Company does not believe that those changes
      are material.




**ITEM
      9B. OTHER INFORMATION**







None.







28
 *Table
          of
          Contents*





**PART
      III**







**ITEM
      10.**  **DIRECTORS,
      EXECUTIVE OFFICERS AND COROPORATE GOVERNANCE**




Information
      required by this Item is incorporated by reference from the Company’s Definitive
      Proxy Statement prepared in connection with the 2007 Annual Meeting of
      Stockholders (the “Proxy Statement”).




**ITEM
      11.**  **EXECUTIVE
      COMPENSATION**




Information
      required by this Item is incorporated by reference from the Proxy Statement.




**ITEM
      12.**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND MANAGEMENT
      AND RELATED MATTERS**




Information
      required by this Item is incorporated by reference from the Proxy Statement.




**ITEM
      13.**  **CERTAIN
      RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR
      INDEPENDENCE**




Information
      required by this Item is incorporated by reference from the Proxy Statement.




**ITEM
      14.** **PRINCIPAL
      ACCOUNTING FEES AND SERVICES**




Information
      required by this Item is incorporated by reference from the Proxy Statement.




29
 *Table
          of
          Contents*





**PART
      IV**





**ITEM
      15. EXHIBITS, FINANCIAL STATEMENT
      SCHEDULES**





(a)1.
            Financial
                Statements. The following financial statements, related notes and
                the
                Report of Independent Registered Public Accounting Firm, are included
                in
                response to Item 15 hereof:





**Index
      to Consolidated Financial
      Statements**


**Page**Report
                of Independent Registered Public Accounting
                Firm
            F-1Consolidated
                Balance Sheets at December 31, 2006 and
                2005
            F-2Consolidated
                Statements of Operations for the
                years ended December 31, 2006, 2005 and 2004
            F-3Consolidated
                Statements of Stockholders’ Equity
                for the years ended December 31, 2006, 2005 and 2004
            F-4Consolidated
                Statements of Cash Flows for the years ended December 31, 2006, 2005
                and
                2004
            F-5Summary
                of Accounting
                Policies
            F-6
                to F-10Notes
                to Consolidated Financial Statements
            F-11
                to F-23








(a)2.
            Financial
                Statements Schedules. The following is a list of all financial statements
                schedules filed herewith:





Schedule
      II-Valuation and Qualifying
      Accounts





Schedules
                other than those listed above have been omitted because they are
                not
                required or are not applicable, or the required information has been
                included in the Consolidated Financial Statements or the Notes
                thereto.





(a)3.
            Exhibits
                (numbered in accordance with Item 601 of
                Regulation S-K).




The
      exhibits listed on the accompanying Exhibit index are filed as part of this
      Report.
















30
 *Table
          of
          Contents*




**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.





I.C.
                ISAACS & COMPANY , INC.
              (REGISTRANT)By:
            */s/
                Peter J. Rizzo*Peter
                J. Rizzo
              Chief
                Executive OfficerDate:
                April 2, 2007





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.





Signature     Title      Date





** */s/
      Peter J. Rizzo*   Chief
      (Principal) Executive Officer,


Peter
      J.
      Rizzo    Chairman
      of the Board    April
      2,
      2007




*/s/
      Gregg A. Holst*   Executive
      Vice President,


Gregg
      A.
      Holst   Chief
      (Principal) Financial Officer   April
      2,
      2007





*/s/
      Olivier Bachellerie*   Director      April
      2, 2007


Olivier
      Bachellerie





Director


René
      Faltz





*/s/
      Neal
      J. Fox*    Director      April
      2,
      2007


Neal
      J.
      Fox





Director


François
      Girbaud




*/s/
      Jon
      Hechler*   Director      April 2, 2007


Jon
      Hechler





Director


John
      McCoy
      II





*/s/
      Robert S.
      Stec*      Director              April
      2, 2007


Robert
      S.
      Stec













31
 
 Index
          to Consolitated Financial
          Statements




**Report
      of Independent Registered Public Accounting
      Firm**







Board
      of
      Directors and Stockholders


I.C.
      Isaacs & Company, Inc.


New
      York,
      New York




We
      have
      audited the accompanying consolidated balance sheets of I.C. Isaacs &
Company, Inc. as of December 31, 2006 and 2005 and the related consolidated
      statements of operations, stockholders’ equity, and cash flows for each of the
      three years in the period ended December 31, 2006. We have also audited the
      schedule listed in the accompanying index. These financial statements and
      schedule are the responsibility of the Company’s management. Our responsibility
      is to express an opinion on these financial statements and schedule based on
      our
      audits.




We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements and schedule are free of material misstatement. The
      Company is not required to have, nor were we engaged to perform, an audit of
      its
      internal control over financial reporting. Our
      audits included consideration of internal control over financial reporting
      as a
      basis for designing audit procedures that are appropriate in the circumstances,
      but not for the purpose of expressing an opinion on the effectiveness of the
      Company’s internal control over financial reporting. Accordingly, we express no
      such opinion. An audit also includes examining, on a test basis, evidence
      supporting the amounts and disclosures in the financial statements and schedule,
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall presentation of the financial
      statements and schedule. We believe that our audits provide a reasonable basis
      for our opinion.




In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of I.C. Isaacs & Company,
      Inc. at December 31, 2006 and 2005, and the results of its operations and its
      cash flows for each of the three years in the period ended December 31,
      2006 **,** in
      conformity with accounting principles generally accepted in the United States
      of
      America.




Also,
      in
      our opinion, the schedule presents fairly, in all material respects, the
      information set forth therein.




As
      discussed in Note 7, effective January 1, 2006, the Company adopted Statement
      of
      Financial Accounting Standards No. 123(R), *Share-Based
      Payment* .




BDO
        Seidman, LLP
  Bethesda,
      Maryland


March 29,
      2007







F-1
 *Index
          to Consolidated Financial
          Statements*













**I.C.
      Isaacs &
Company, Inc.**


**Consolidated
      Balance Sheets**


**December
                  31,****2006**
              
              
              **2005****Assets**CurrentCash,
                  including temporary investments of $77,000 and $561,000
              
              $
              524,544
              
              $
              943,422Accounts
                  receivable, less allowance for doubtful
                accounts
                  of $725,000 and $700,000 (Note 3)
              
              
              13,268,014
              
              
              14,829,496Inventories
                  (Notes 1 and 3)
              
              
              10,492,169
              
              
              5,287,483Deferred
                  tax asset, current (Note 5)
              
              
              —
              
              
              2,517,000Prepaid
                  expenses and other
              
              
              1,004,170
              
              
              404,151Total
                  current assets
              
              
              25,288,897
              
              
              23,981,552Property,
                  plant and equipment, at cost, less accumulated depreciation and
                  amortization (Note 2)
              
              
              3,233,047
              
              
              2,838,627Other
                  assets
              
              
              287,258
              
              
              322,656$
              28,809,202
              
              $
              27,142,835**Liabilities
                  and Stockholders’ Equity**CurrentOverdrafts
              
              $
              7,582
              
              $
              447,001Current
                  maturities of revolving line of credit (Note 3)
              
              
              3,389,656
              
              
              —Current
                  maturities of long-term debt (Note 3)
              
              
              2,103,461
              
              
              2,893,128Accounts
                  payable
              
              
              2,831,185
              
              
              2,063,521Accrued
                  expenses and other current liabilities (Note 4)
              
              
              1,806,383
              
              
              5,492,104Total
                  current liabilities
              
              
              10,138,267
              
              
              10,895,754Long-term
                  debt (Note 3)
              
              
              —
              
              
              1,726,466Minimum
                  pension liability (Note 9)
              
              
              1,603,000
              
              
              1,377,000Commitments
                  and contingencies (Notes 3, 8 and 9)**Stockholders’
                  Equity**(Notes 6 and 7)Preferred
                  stock; $.0001 par value; 5,000,000 shares authorized, none
                  outstanding
              
              
              —
              
              
              —Common
                  stock; $.0001 par value; 50,000,000 shares authorized; 13,250,994
                  and
                  13,173,194 shares issued; 12,074,285 and 11,996,485 shares
                  outstanding
              
              
              1,325
              
              
              1,317Additional
                  paid-in capital
              
              
              45,302,162
              
              
              44,294,782Accumulated
                  deficit
              
              
              (20,606,681
              )
              
              (23,213,613
              )Accumulated
                  other comprehensive loss (Note 9)
              
              
              (5,306,000
              )
              
              (5,616,000
              )Treasury
                  stock, at cost (1,176,709 shares)
              
              
              (2,322,871
              )
              
              (2,322,871
              )Total
                  stockholders’ equity
              
              
              17,067,935
              
              
              13,143,615$
              28,809,202
              
              $
              27,142,835





















See
      accompanying summary of accounting policies and notes to consolidated financial
      statements.


F-2
 *Index
          to Consolidated Financial
          Statements*


**I.C.
      Isaacs & Company, Inc.**


**Consolidated
      Statements of Operations**





**Years
                  Ended December 31,****2006**
              
              
              **2005**
              
              
              **2004**Net
                  sales
              
              $
              82,235,994
              
              $
              83,288,935
              
              $
              80,649,394Cost
                  of sales
              
              
              48,945,372
              
              
              49,070,145
              
              
              49,583,094Gross
                  profit
              
              
              33,290,622
              
              
              34,218,790
              
              
              31,066,300Operating
                  expensesSelling
              
              
              10,381,649
              
              
              10,834,335
              
              
              10,412,502License
                  fees (Note 8)
              
              
              5,403,846
              
              
              5,114,319
              
              
              5,330,523Distribution
                  and shipping
              
              
              2,457,342
              
              
              2,247,450
              
              
              1,968,214General
                  and administrative
              
              
              9,005,533
              
              
              8,603,793
              
              
              7,531,809Litigation
                  settlement
              
              
              —
              
              
              1,750,000
              
              
              —Total
                  operating expenses
              
              
              27,248,370
              
              
              28,549,897
              
              
              25,243,048Operating
                  income
              
              
              6,042,252
              
              
              5,668,893
              
              
              5,823,252Other
                  income (expense)Interest,
                  net of interest income, of $11,580, $4,994 and $6,543
              
              
              (627,917
              )
              
              (435,882
              )
              
              (729,068
              )Other,
                  net
              
              
              6,364
              
              
              238
              
              
              26,195Total
                  other expense
              
              
              (621,553
              )
              
              (435,644
              )
              
              (702,873
              )Income
                  from continuing operations
              
              
              5,420,699
              
              
              5,233,249
              
              
              5,120,379Income
                  tax (expense) benefit
              
              
              (2,813,767
              )
              
              1,178,000
              
              
              1,045,000Net
                  income
              
              $
              2,606,932
              
              $
              6,411,249
              
              $
              6,165,379Basic
                  net income per share
              
              $
              0.22
              
              $
              0.55
              
              $
              0.55Basic
                  weighted average shares outstanding
              
              
              12,020,454
              
              
              11,729,305
              
              
              11,264,483Diluted
                  net income per share
              
              $
              0.21
              
              $
              0.48
              
              $
              0.46Diluted
                  weighted average shares outstanding
              
              
              12,692,345
              
              
              13,397,202
              
              
              13,355,300















See
      accompanying summary of accounting policies and notes to consolidated financial
      statements.






F-3
 *Index
          to Consolidated Financial
          Statements*


**I.C.
      Isaacs & Company, Inc.**


**Consolidated
      Statements of Stockholders’
Equity**


**Common
                  Stock Shares**
              
              
              **Common
                  Stock Amount**
              
              
              **Additional
                  Paid In Capital**
              
              
              **Accumulated
                  Deficit**
              
              
              **Accumulated
                  Other Comprehensive Loss**
              
              
              **Treasury
                  Stock**
              
              
              **Total**Balance,
                  at December 31, 2003
              
              
              12,311,366
              
              $
              1,231
              
              $
              43,658,853
              
              $
              (35,790,241
              )
              $
              —
              
              $
              (2,322,871
              )
              $
              5,546,972Net
                  Income
              
              
              —
              
              
              —
              
              
              —
              
              
              6,165,379
              
              
              —
              
              
              —
              
              
              6,165,379Issuance
                  of common stock
              
              
              479,433
              
              
              48
              
              
              441,783
              
              
              —
              
              
              —
              
              
              —
              
              
              441,831Balance,
                  at December 31, 2004
              
              
              12,790,799
              
              
              1,279
              
              
              44,100
                  636
              
              
              (29,624,862
              )
              
              —
              
              
              (2,322,871
              )
              
              12,154,182Comprehensive
                  Income:Net
                  Income
              
              
              —
              
              
              —
              
              
              —
              
              
              6,411,249
              
              
              —
              
              
              —
              
              
              6,411,249Recognition
                  of minimum pension liability (Note 9)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (5,616,000
              )
              
              —
              
              
              (5,616,000
              )Total
                  Comprehensive Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              795,249Issuance
                  of common stock associated with exercise of stock options
              
              
              176,000
              
              
              18
              
              
              194,166
              
              
              —
              
              
              —
              
              
              —
              
              
              194,184Issuance
                  of common stock associated with exercise of stock warrants
              
              
              206,395
              
              
              20
              
              
              (20
              )
              
              —
              
              
              —
              
              
              —
              
              
              —Balance,
                  at December 31, 2005
              
              
              13,173,194
              
              
              1,317
              
              
              44,294,782
              
              
              (23,213,613
              )
              
              (5,616,000
              )
              
              (2,322,871
              )
              
              13,143,615Comprehensive
                  Income:Net
                  Income
              
              
              —
              
              
              —
              
              
              —
              
              
              2,606,932
              
              
              —
              
              
              —
              
              
              2,606,932Adjustment
                  to minimum pension liability (Note 9)
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              310,000
              
              
              —
              
              
              310,000Total
                  Comprehensive Income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2,916,932Stock
                  based compensation expense
              
              
              —
              
              
              —
              
              
              901,800
              
              
              —
              
              
              —
              
              
              —
              
              
              901,800Issuance
                  of common stock associated with exercise of stock options
              
              
              77,800
              
              
              8
              
              
              105,580
              
              
              —
              
              
              —
              
              
              —
              
              
              105,588Balance,
                  at December 31, 2006
              
              
              13,250,994
              
              $
              1,325
              
              $
              45,302,162
              
              $
              (20,606,681
              )
              $
              (5,306,000
              )
              $
              (2,322,871
              )
              $
              17,067,935
















See
      accompanying summary of accounting policies and notes to consolidated financial
      statements.




F-4
 *Index
          to Consolidated Financial
          Statements*


**I.C.
      Isaacs & Company, Inc.**


**Consolidated
      Statements of Cash Flows**





**Years
                Ended December 31,****2006**
            
            
            **2005**
            
            
            **2004**Operating
                ActivitiesNet
                income
            
            $
            2,606,932
            
            $
            6,411,249
            
            $
            6,165,379Adjustments
                to reconcile net income to net cash provided by operating
                activitiesProvision
                for doubtful accounts
            
            
            445,153
            
            
            1,016,475
            
            
            370,387Write-off
                of accounts receivable
            
            
            (420,153
            )
            
            (632,475
            )
            
            (329,387
            )Provision
                for sales returns and discounts
            
            
            3,503,259
            
            
            4,198,983
            
            
            4,088,959Sales
                returns and discounts
            
            
            (3,907,328
            )
            
            (3,885,776
            )
            
            (3,578,959
            )Valuation
                allowance-deferred tax asset
            
            
            2,517,000
            
            
            (1,324,000
            )
            
            (1,193,000
            )Depreciation
                and amortization
            
            
            621,388
            
            
            567,156
            
            
            641,095Stock-based
                compensation
            
            
            901,800
            
            
            —
            
            
            —(Increase)
                decrease in assetsAccounts
                receivable
            
            
            1,940,551
            
            
            (5,510,980
            )
            
            (695,613
            )Inventories
            
            
            (5,204,686
            )
            
            3,029,954
            
            
            (4,462,706
            )Prepaid
                expenses and other
            
            
            (600,019
            )
            
            105,352
            
            
            (440,827
            )Other
                assets
            
            
            8,938
            
            
            74,993
            
            
            308,155Increase
                (decrease) in liabilitiesAccounts
                payable
            
            
            767,664
            
            
            (1,034,442
            )
            
            2,058,062Accrued
                expenses and other current liabilities
            
            
            (3,685,721
            )
            
            (307,470
            )
            
            3,276,321Minimum
                pension liability
            
            
            536,000
            
            
            —
            
            
            —Cash
                provided by operating activities
            
            
            30,778
            
            
            2,709,019
            
            
            6,207,866Investing
                ActivitiesCapital
                expenditures
            
            
            (989,348
            )
            
            (1,291,090
            )
            
            (1,858,489
            )Cash
                used in investing activities
            
            
            (989,348
            )
            
            (1,291,090
            )
            
            (1,858,489
            )Financing
                ActivitiesOverdrafts
            
            
            (439,419
            )
            
            447,001
            
            
            (197,441
            )Net
                borrowings (payments) on revolving line of credit
            
            
            3,389,656
            
            
            (223,283
            )
            
            (4,001,002
            )Principal
                payments on long-term debt
            
            
            (2,516,133
            )
            
            (1,938,314
            )
            
            —Issuance
                of common stock
            
            
            105,588
            
            
            194,184
            
            
            441,831Cash
                on deposit to secure letter of credit
            
            
            —
            
            
            —
            
            
            (250,000
            )Deferred
                financing costs
            
            
            —
            
            
            —
            
            
            (79,379
            )Cash
                provided by (used in) financing activities
            
            
            539,692
            
            
            (1,520,412
            )
            
            (4,085,991
            )(Decrease)
                increase in cash and cash equivalents
            
            
            (418,878
            )
            
            (102,483
            )
            
            263,386Cash
                and Cash Equivalents, at beginning of year
            
            
            943,422
            
            
            1,045,905
            
            
            782,519Cash
                and Cash Equivalents, at end of year
            
            $
            524,544
            
            $
            943,422
            
            $
            1,045,905














See
      accompanying summary of accounting policies and notes to consolidated financial
      statements.


F-5
 *Index
          to Consolidated Financial
          Statements*


**I.C.
      Isaacs & Company, Inc.**


**Summary
      of Accounting Policies**





**Basis
      of Presentation**




The
      consolidated financial statements include the accounts of I. C. Isaacs &
Company, Inc. ("ICI"), I.C. Isaacs & Company, L.P. ("LP"), Isaacs Design,
      Inc. ("Design") and I.C. Isaacs Far East Ltd. (collectively the "Company").
      I.C.
      Isaacs Far East Ltd. did not have any significant revenue or expenses in 2006,
      2005 or 2004. All intercompany balances and transactions have been eliminated.




**Business
      Description**




The
      Company, which operates in one business segment, is a designer and marketer
      of
      branded jeanswear and sportswear. The Company offers collections of jeanswear
      and sportswear for men and women under the Marithé and François Girbaud brand
      (“Girbaud brand”) in the United States, Puerto Rico and the U.S. Virgin Islands.
      The Girbaud brand is an internationally recognized designer label with a
      distinct European influence. The Company has positioned its Girbaud brand line
      with a broad assortment of products, styles and fabrications, reflecting a
      contemporary European look. The Company markets a full collection of men’s and
      women’s jeanswear and sportswear under the Girbaud brand, including a broad
      array of bottoms, tops and outerwear.




**Risks
      and Uncertainties**




The
      apparel industry is highly competitive. The Company competes with many
      companies, including larger, well-capitalized companies that have sought to
      increase market share through massive consumer advertising and price reductions.
      The Company continues to experience increased competition from many established
      and new competitors at both the department store and specialty store channels
      of
      distribution. The Company continues to redesign its jeanswear and sportswear
      lines in an effort to be competitive and compatible with changing consumer
      tastes. Also, the Company has developed and implemented marketing initiatives
      to
      promote its Girbaud brand. A risk to the Company is that such a strategy may
      lead to continued pressure on profit margins. In the past several years, many
      of
      the Company’s competitors have switched much of their apparel manufacturing from
      the United States to foreign locations, such as Mexico, the Dominican Republic
      and throughout Asia. As competitors lower production costs, it gives them
      greater flexibility to lower prices. Over the last several years, the Company
      also switched its production to contractors outside the United States in order
      to reduce costs. Since 2001, the Company has imported substantially all its
      inventory as finished goods from contractors in Asia, Africa and South and
      North
      America. This shift in purchasing requires the Company to estimate sales and
      issue purchase orders for inventory well in advance of receiving firm orders
      from its customers. A risk to the Company is that its sales estimates may differ
      from actual orders. If this happens, the Company may miss sales because it
      did
      not order enough inventory, or it may have to sell excess inventory at reduced
      prices. The Company faces other risks inherent in the apparel industry. These
      risks include changes in fashion trends and related consumer acceptance and
      the
      continuing consolidation in the retail segment of the apparel industry. The
      Company’s ability, or inability, to manage these risk factors could influence
      future financial and operating results.




**Use
      of Estimates**




The
      preparation of financial statements in accordance with generally accepted
      accounting principles requires management to make certain estimates and
      assumptions, particularly regarding valuation of accounts receivable and
      inventory, recognition of liabilities, valuation of stock-bsed compensation
      expense associated with equity awards and disclosure of contingent assets and
      liabilities at the date of the financial statements. Actual results could differ
      from those estimates.





F-6
 *Index
          to Consolidated Financial
          Statements*


**Concentration
      of Credit Risk**




Financial
      instruments that potentially expose the Company to concentrations of credit
      risk
      consist primarily of trade accounts receivable. The Company’s customer base is
      not concentrated in any specific geographic region, but is concentrated in
      the
      retail industry. For the years ended December 31, 2006, 2005 and 2004, sales
      to
      no one customer exceeded 10% of net sales. The Company establishes an allowance
      for doubtful accounts based upon factors surrounding the credit risk of specific
      customers, historical trends and other information. The Company’s account
      receivable write-offs as a percentage of net sales were 0.5%, 0.8% and 0.4%
      for
      the years ended December 31, 2006, 2005 and 2004, respectively.




The
      Company is also subject to concentrations of credit risk with respect to its
      cash and cash equivalents, which the Company minimizes its credit risk by
      placing these funds with high-quality institutions. The Company is exposed
      to
      credit losses in the event of nonperformance by the counterparties to letter
      of
      credit agreements, but it does not expect any financial institutions to fail
      to
      meet their obligation given their high credit rating.




**Revenue
      Recognition**




Revenue
      is recognized upon the transfer of title and risk of ownership to customers.
      Net
      revenue is recorded net of discounts and net of provisions for estimated returns
      and allowances on a historical basis. On a seasonal basis, the Company
      negotiates price adjustments with its retail customers as sales incentives.
      The
      Company accrues the cost of such adjustments on an ongoing basis considering
      actual price adjustments **,** historical trends, projected seasonal results and an evaluation of current
      economic conditions. These costs, which have been recorded as a reduction to
      net
      revenue, were $1,900,000, $3,710,000 and $3,777,000 for the years ended December
      31, 2006, 2005 and 2004, respectively.




Shipping
      and handling fees billed to customers are classified in net sales in the
      consolidated statements of operations. Shipping and handling costs incurred
      are
      classified in distribution and shipping in the consolidated statements of
      operations.




**Inventory,
      Cost of Goods Sold and Operating Expenses**




Inventories
      are stated at the lower of cost or market. Inventory cost is determined by
      the
      first-in, first-out (“FIFO”) method. The Company includes in inventory costs and
      cost of goods sold all costs and expenses related to obtaining merchandise
      incurred prior to the receipt of finished goods at the Company’s distribution
      facilities. These costs include, but are not limited to, product cost, inbound
      freight charges, purchasing and receiving costs, inspection costs, warehousing
      costs and internal transfer costs, as well as insurance, duties, brokers’ fees
      and consolidators’ fees. The Company did not experience abnormal amounts of idle
      facility expense, freight, handling costs, or excessive spoilage which required
      treatment as current period charges in 2006, 2005 nor 2004.




The
      Company includes in selling, general and administrative expenses costs incurred
      subsequent to the receipt of finished goods at its distribution facilities,
      such
      as the cost of picking and packing goods for delivery to customers. In addition,
      selling, general and administrative expenses include product design costs,
      selling and store service costs, marketing expenses and general and
      administrative expenses.




**Property,
      Plant and Equipment**




Property,
      plant and equipment are stated at cost. Depreciation is computed over the
      estimated useful lives of the assets by the straight-line method. Leasehold
      improvements are amortized using the shorter of the straight-line method over
      the life of the lease or the estimated useful life of the improvement.


F-7
 *Index
          to Consolidated Financial
          Statements*


**Asset
      Impairment**




The
      Company periodically evaluates the carrying value of long-lived assets when
      events and circumstances warrant such a review. The carrying value of a
      long-lived asset is considered impaired when the anticipated undiscounted cash
      flow from such asset is separately identifiable and is less than the carrying
      value. In that event, a loss is recognized based on the amount by which the
      carrying value exceeds the fair market value of the long-lived asset. Fair
      market value is determined primarily using the anticipated cash flows discounted
      at a rate commensurate with the risk involved.




**Equity
      Awards and Stock-Based Compensation**




Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      SFAS 123(R), using the modified prospective transition method. The results
      of
      prior periods have not been restated. Under this method, the Company recognizes
      compensation expense for all stock-based payments granted after January 1,
      2006
      and prior to, but not yet vested as of January 1, 2006, in accordance with
      SFAS
      123(R). Prior to the adoption of SFAS 123(R), the Company accounted for
      stock-based payments under Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB 25”) and accordingly, the
      Company was not required to recognize compensation expense for options granted
      that had an exercise price equal to the market value of the underlying common
      stock on the date of grant.




Determining
      the appropriate fair value model and calculating the fair value of stock-based
      payment awards require the input of highly subjective assumptions, including
      the
      expected life of the stock-based payment awards and stock price volatility.
      The
      Company utilizes the Black-Scholes option-pricing model to value compensation
      expense. The assumptions used in calculating the fair value of stock-based
      payment awards represent management’s best estimates, but the estimates involve
      inherent uncertainties and the application of management’s judgment. If factors
      change and, as a result, management utilizes different assumptions, stock-based
      compensation expense could be materially different in the future. (See Note
      7 **-** Equity
      Awards and Stock-Based
      Compensation to
      the
      consolidated financial statements for further discussions on stock-based
      compensation).




**Advertising
      Costs**




Direct
      advertising costs included in selling expenses are expensed as incurred and
      were
      $642,267, $475,152 and $749,908 for the years ended December 31, 2006, 2005
      and
      2004 respectively. These costs are included in the promotional license
      requirement discussed in Note 8.




**Cash
      Equivalents**




For
      purposes of the statements of cash flows, all temporary investments purchased
      with a maturity of three months or less are considered to be cash equivalents.




**Income
      Taxes**




The
      Company accounts for income taxes in accordance with Statement of Financial
      Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
      SFAS 109, deferred taxes are determined using the liability method which
      requires the recognition of deferred tax assets and liabilities based on
      differences between the financial statement and the income tax basis using
      presently enacted tax rates.




**Fair
      Value of Financial Instruments**




Financial
      instruments of the Company include cash and cash equivalents, accounts
      receivable, short-term investments and long-term and short-term debt.  Fair
      values of cash and cash equivalents, accounts receivable, short-term investments
      and short-term debt approximate cost due to the short period of




F-8
 *Index
          to Consolidated Financial
          Statements*


time
      to
      maturity.  Based upon the current borrowing rates available to the Company,
      estimated fair values of long-term debt approximate their recorded amounts.




**Net
      Income or Loss Per Share**




Net
      income or loss per share is based on the weighted average number of shares
      of
      common stock and dilutive common stock equivalents outstanding. Basic loss
      per
      share includes no dilution and is computed by dividing income available to
      common shareholders by the weighted average number of common shares outstanding
      for the period. In 2006, 2005 and 2004, diluted income per share reflects the
      potential dilution of securities that could share in the earnings of the
      Company. Weighted average diluted common stock equivalents were 671,891,
      1,667,897 and 2,090,817 for 2006, 2005 and 2004 respectively (See Footnote
      7 -
      Equity Awards and Stock Compensation Expense).




**Comprehensive
      Income**




The
      Company
      has adopted the provisions of Statement No. 130, “Reporting Comprehensive
      Income” (See Footnote 9 - Retirement Plan).







**Recent
      Accounting Pronouncements**




In
      March
      2006, the Financial Accounting Standards Board (the “FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 156, “ *Accounting
      for Servicing of Financial Assets—an amendment of SFAS No. 140* ”.
      This
      Statement amends FASB Statement No. 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities,* with
      respect to the accounting for separately recognized servicing assets and
      servicing liabilities. The Company does not have any servicing assets or
      liabilities; therefore it believes there will be no material impact on its
      financial condition, results of operations or cash flows.




In
      June
      2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for
      Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,"
      which establishes that the financial statement effects of a tax position taken
      or expected to be taken in a tax return are to be recognized in the financial
      statements when it is more likely than not, based on the technical merits,
      that
      the position will be sustained upon examination. FIN 48 is effective for fiscal
      years beginning after December 15, 2006. The Company is evaluating its tax
      positions and does not believe FIN 48 will have a material impact on its
      financial statements.




In
      September 2006, the FASB issued SFAS 157, *Fair
      Value Measurements.* This
      Statement defines fair value, establishes a framework for measuring fair value
      in generally accepted accounting principles (GAAP), and expands disclosures
      about fair value measurements. This Statement applies under other accounting
      pronouncements that require or permit fair value measurements, the FASB having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this Statement does not require
      any
      new fair value measurements. However, for some entities, the application of
      this
      Statement will change current practice. This statement is effective for fiscal
      years beginning after November 15, 2007, and interim periods within those fiscal
      years. The Company is evaluating the impact, if any, SFAS 157 will have on
      its
      financial condition or results of operations.




In
      September 2006, the FASB issued SFAS 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement
      Plans* .
      SFAS
      158 will require the Company to show the funded status of its pension and
      retiree health care plans as a prepaid asset or accrued liability, and to show
      the net deferred and unrecognized gains and losses related to the retirement
      plans, net of tax, as part of accumulated other comprehensive income in
      shareholders’ equity. Previously, the net deferred and unrecognized gains and
      losses were netted in the prepaid asset or accrued liability recorded for the
      retirement plans. The Company adopted the balance sheet provisions of Statement
      158, as required, at December 31, 2006. The Company adjusted the liability
      of
      $1.6 million as of December 31, 2006 with the adjustment decreasing accumulated
      other comprehensive loss by $0.3 million in 2006.




F-9
 *Index
          to Consolidated Financial
          Statements*




In
      September 2006, the SEC issued SAB No. 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* (“SAB
      108”), which provides interpretive guidance on the consideration of the effects
      of prior year misstatements in quantifying current year misstatements for the
      purpose of a materiality assessment. SAB 108 requires financial statement errors
      to be quantified using both balance sheet and income statement approaches and
      an
      evaluation on whether either approach results in quantifying a misstatement
      that, when all relevant quantitative and qualitative factors are considered,
      is
      material. The Company adopted SAB 108 and there was not a significant impact
      on
      the financial statements.




On
      February 15, 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial
      Liabilities* .
      This
      Statement permits companies and not-for-profit organizations to make a one-time
      election to carry eligible types of financial assets and liabilities at fair
      value, even if fair value measurement is not required under GAAP. SFAS 159
      is
      effective for fiscal years beginning after November 15, 2007. Early adoption
      is
      permitted if the decision to adopt the standard is made after the issuance
      of
      the Statement but within 120 days after the first day of the fiscal year of
      adoption, provided no financial statements have yet been issued for any interim
      period and provided the requirements of Statement 157, Fair Value Measurements,
      are adopted concurrently with SFAS 159. The Company does not believe that it
      will adopt the provisions of this Statement.
























F-10
 *Index
          to Consolidated Financial
          Statements*





**Notes
      to Consolidated Financial Statements**





**1.
      Inventories**




Inventories
                  consist of the following:
              
              **December
                  31,****2006**
              
              
              **2005**Work-in-process
              
              $
              1,106,770
              
              $
              1,115,107Finished
                  goods
              
              
              9,385,399
              
              
              4,172,376$
              10,492,169
              
              $
              5,287,483









**2.
      Property, Plant and Equipment**





Property,
                plant and equipment consists of the following:
            
            **December
                31,**
            **Estimated**
              **Useful**
              **Lives****2006**
            
            
            **2005**Land
            
            $
            149,160
            
            $
            149,160Buildings
                and improvements
            
            
            1,262,892
            
            
            1,262,892
            
            18
                yearsMachinery,
                equipment and fixtures
            
            
            4,921,497
            
            
            4,699,117
            
            5-7
                yearsLeasehold
                improvements and other
            
            
            6,813,723
            
            
            6,046,741
            
            various13,147,272
            
            
            12,157,910Less
                accumulated depreciation and amortization
            
            
            9,914,225
            
            
            9,319,283$
            3,233,047
            
            $
            2,838,627





Depreciation
      and amortization expense for 2006, 2005 and 2004 totaled $621,388, $567,156
      and
      $641,095, respectively.





**3.
      Long-term Debt**




Long-term
                  debt consists of the following:
              
              **December
                  31, 2006****2006**
              
              
              **2005**Revolving
                  line of credit (a)
              
              $
              3,389,656
              
              $
              —Notes
                  payable (b)
              
              
              2,103,461
              
              
              4,619,594Total
              
              
              5,493,117
              
              
              4,619,594Less
                  current maturities of revolving line of credit
              
              
              3,389,656
              
              
              —Less
                  current maturities of long-term debt
              
              
              2,103,461
              
              
              2,893,128$
              —
              
              $
              1,726,466




**(a)**
            On
                December 30, 2004, the Company entered into a three year credit facility
                (the “Credit Facility”) with Wachovia Bank, National Association
                (“Wachovia”). The Credit Facility provides that the Company may borrow,
                using as collateral, up to 85% of eligible accounts receivable and
                a
                portion of eligible inventory, both as defined by the Credit Facility.
                Borrowings under the Credit Facility may not exceed $25.0 million
                including outstanding letters of credit which are limited to $8.0
                million
                at any one time. There were approximately $0.8 million of outstanding
                letters of credit at December 31, 2006. The Credit Facility accords
                to the
                Company the right, at its election, to borrow these amounts as either
                Prime Rate Loans or LIBOR Loans. Prime Rate Loans bear interest at
                the
                prime rate plus the applicable margin in effect from time to time.
                LIBOR
                Loans are limited to three in total, must be a minimum of $1,000,000
                each
                and in integral multiples of $500,000 in excess of that amount, and
                bear
                interest


F-11
 *Index
          to Consolidated Financial
          Statements*


at
      the LIBOR rate
      plus the applicable margin in effect from time to time. The applicable margins,
      as defined by the Credit Facility, fluctuate from 0.00% to 0.75% for the Prime
      Rate Loans and 2.00% to 2.75% for the LIBOR Loans. The applicable margins are
      inversely affected by fluctuations in the amount of “excess availability” - the
      unused portion of the amount available under the Credit Facility - which are
      in
      staggered increments from less then $2.5 million to $7.5 million. The Prime
      Rate
      and the LIBOR Rate were 8.25% and 5.314%, respectively, at December 31, 2005.
      All the amounts borrowed under the Credit Facility at December 31, 2006 were
      Prime Rate Loans and the effective rate was 8.75% at that time. The Credit
      Facility also requires the Company to comply with certain covenants expressed
      as
      fixed charge coverage ratios and tangible liability to net worth ratios. As
      collateral security for its obligations under the Credit Facility, ICI and
      the
      LP granted a first priority security interest in all of their respective assets
      to Wachovia. The
      Company paid $79,379 as a facility fee to Wachovia in connection with the
      consummation of the Credit Facility. That fee is deferred and is being amortized
      over the life of the Credit Facility. The Company amortized $26,480 of these
      fees in each of the years 2006 and 2005.




Average
      short-term borrowings and the related interest rates are as follows:




**Year
                Ended December 31,****2006**
            
            
            
            **2005**Borrowings
                under revolving line of credit
            
            $
            3,389,656
            
            
            $
            —Weighted
                average interest rate
            
            
            9.20
            %
            
            
            6.95
            %Maximum
                month-end balance during year
            
            $
            9,792,000
            
            
            $
            1,879,000Average
                month-end balance during year
            
            $
            4,409,000
            
            
            $
            1,048,000








**(b)**
            On
                May 6, 2002,Textile
                Investment International S.A. (“Textile”), an affiliate ofLatitude
                Licensing Corp. (“Latitude”),the
                licensor of the Company,acquired
                a note that the Company had issued to a former licensor. On May 21,
                2002,
                Textile exchanged that note for an amended and restated note bearing
                interest at the rate of 8% per annum, (the “Replacement Note”), which
                subordinated Textile’s rights under the note to the rights of Congress
                under the Credit Agreement, deferred the original note’s principal
                payments and extended the maturity date of the note until December
                31,
                2007. In connection with the execution of the Credit Facility, the
                Replacement Note was further amended and restated to subordinate
                Textile’s
                rights to the rights of Wachovia under the Credit Facility (the “Amended
                and Restated Replacement Note” and together with the Replacement Note, the
                “Textile Notes”). Pursuant to the subordination provisions of the Textile
                Notes, the Company was obligated to defer the payments, both principle
                and
                interest, that otherwise would have been due thereunder during each
                calendar quarter commencing with the quarter ended December 31, 2002
                and
                continuing through March 31, 2005. Also, pursuant to the provisions
                of the
                Textile Notes, the non-payment and deferral of those payments did
                not
                constitute a default thereunder.The
                obligations under the Textile Notes have been classified as
                currentor
                long-term based upon the respective original due dates of the quarterly
                payments specified in the Replacement Note or the Amended and Restated
                Replacement Note, as the case may be. Accordingly, each deferred
                quarterly
                payment has been classified as current even though the payment thereof
                may
                not be paid until a future year. Payments under the Textile Note
                totaled
                $3,510,000 in principal and interest in 2006.At
                December 31, 2006, all subordinated debt maturities of $2,103,461are
                classified as current liabilities.







The
      Company had principle and interest payments currently due and payable on the
      Textile Notes totaling $670,000 and $240,000 as of December 31, 2006 and January
      31, 2007, respectively.  The Company assessed its ability to comply with
      the Credit Facility’s covenants in each month of the first quarter of 2007 and
      has determined that if it were to make these payments, it would not be in
      compliance with the Credit Facility covenants in the first quarter of
      2007.  Therefore, in anticipation of this noncompliance, the Company did
      not make the




F-12
 *Index
          to Consolidated Financial
          Statements*




December
      and January scheduled payments.  This may constitute a default of the
      Textile Notes and a cross default of the Credit Facility.  The Company has
      asked both Textile and Wachovia to waive these covenants.  Failure to reach
      an agreement may adversely affect the Company’s ability to finance its
      operations.






**4.
      Accrued Expenses**


Accrued
                  expenses consist of the following:
              
              **December
                  31,****2006**
              
              
              **2005**Accrued
                  interest
              
              $
              533,004
              
              $
              1,312,134Accrued
                  rent expense
              
              
              212,289
              
              
              166,603Accrued
                  professional fees & legal
              
              
              190,723
              
              
              289,769Accrued
                  compensation & related withholdings
              
              
              189,309
              
              
              159,885Management
                  & selling bonuses
              
              
              175,000
              
              
              470,047Property
                  taxes
              
              
              165,394
              
              
              318,607Royalties
                  & other licensor obligations (Note 8)
              
              
              135,152
              
              
              771,537Sales
                  commissions payable
              
              
              107,500
              
              
              157,039Customer
                  credit balances
              
              
              98,012
              
              
              60,224Litigation
                  settlement
              
              
              —
              
              
              1,750,000Other
              
              
              —
              
              
              36,259$
              1,806,383
              
              $
              5,492,104









**5.
      Income Taxes**






Deferred
      income taxes reflect the net effects of temporary differences between the
      carrying amounts of assets and liabilities for financial and income tax
      reporting purposes. As of December 31, 2006 and 2005, the Company has net
      operating loss carryforwards for income tax reporting purposes of approximately
      $32,130,000 and $34,706,000, respectively, which represent deferred tax assets
      of approximately $12,630,000 and $13,633,000, respectively. These net operating
      losses begin to expire in 2014.




Until 2004, the Company maintained a valuation allowance equal to the deferred
      tax asset, thereby recognizing a net deferred tax asset of zero. Starting in
      2004, and continuing through the first three quarters of 2006, the Company
      began
      to recognize a net deferred tax asset based on the Company’s evaluation that it
      would, at that time, more likely then not generate future taxable income to
      utilize the NOL for income tax purposes. Therefore, the Company recognized
      net
      income tax benefits of $1,178,000 and $1,045,000 for 2005 and 2004,
      respectively.




During
      the completion of our 2006 audit in the first quarter of 2007, based on a
      review of operating results to date, as well as the forecast of remaining 2007
      net income, it was determined that the more likely than not conditions for
      recognition of the deferred tax asset were not met. Accrodingly as of December
      31, 2006, the Company recorded an adjustment to the valuation allowance equal
      to
      the full amount of the previously recognized deferred tax asset of $3.5 million.
      This resulted in the Company recognizing net income tax expense of $2.8 million
      in 2006.




F-13
 *Index
          to Consolidated Financial
          Statements*









Significant
              items comprising the Company's deffered tax assets are as
              follows:
            
            **December
                31,**2006
            
            
            2005Net
                operating loss carry forwards
            
            $
            12,630,000
            
            $
            13,633,000Minimum
                pension liability
            
            
            2,295,000
            
            
            2,206,000Depreciation
                and amortization
            
            
            644,000
            
            
            806,000Alternative
                minimum tax credits
            
            
            346,000
            
            
            272,000Allowance
                for doubtful accounts
            
            
            285,000
            
            
            216,000Accrued
                interest payable
            
            
            213,000
            
            
            523,000Capital
                loss carryforwards
            
            
            163,000
            
            
            163,000Deferred
                rent payments
            
            
            84,000
            
            
            65,000Inventory
                valuation
            
            
            83,000
            
            
            51,000Bonus
                accrual
            
            
            69,000
            
            
            255,000State
                tax accrual
            
            
            65,000
            
            
            106,000Litigation
                settlement and accrued severance
            
            
            —
            
            
            735,000Other
            
            
            21,000
            
            
            67,00016,898,000
            
            
            19,098,000Valuation
                allowance
            
            
            (16,898,000
            )
            
            (16,581,000
            )Net
                deferred tax asset
            
            $
            —
            
            $
            2,517,000




**Year
                Ended December 31,**A
              reconciliation between the statutory and effective tax rates is as
              follows:
            
            **2006**
            ****
            ****
            ****
            **2005**
            ****
            ****
            ****
            **2004**Federal
                statutory rate
            
            34.0
            %
            
            
            34.0
            %
            
            
            34.0
            %State
                and local taxes, net of federal benefit
            
            6.0
            
            
            
            4.5
            
            
            
            4.0Permanent
                differences
            
            5.2
            
            
            
            (4.0
            )
            
            
            2.0Alternative
                minimum taxes
            
            2.0
            
            
            
            2.0
            
            
            
            2.0(Benefit)
                expense of valuation allowance
            
            5.7
            
            
            
            (59.0
            )
            
            
            (62.4
            )51.9
            %
            
            
            (22.5
            )%
            
            
            (20.4
            )%




The
                  net tax expense (benefit) is derived from the following
                  components:
              
              **Year
                  Ended December 31, 2006**Federal
              
              
              **State**
              
              
              **Total**Current
                  tax expense
              
              $
              110,000
              
              $
              187,000
              
              $
              297,000Deferred
                  tax expense
              
              
              2,139,000
              
              
              378,000
              
              
              2,517,000Net
                  income tax expense
              
              $
              2,249,000
              
              $
              565,000
              
              $
              2,814,000**Year
                  Ended December 31, 2005****Federal**
              
              
              **State**
              
              
              **Total**Current
                  tax expense
              
              $
              146,000
              
              $
              —
              
              $
              146,000Deferred
                  tax benefit
              
              
              (1,054,000
              )
              
              (270,000
              )
              
              (1,324,000
              )Net
                  income tax benefit
              
              $
              (908,000
              )
              $
              (270,000
              )
              $
              (1,178,000
              )**Year
                  Ended December 31, 2004****Federal**
              
              
              **State**
              
              
              **Total**Current
                  tax expense
              
              $
              148,000
              
              $
              —
              
              $
              148,000Deferred
                  tax benefit
              
              
              (950,000
              )
              
              (243,000
              )
              
              1,193,000Net
                  income tax benefit
              
              $
              (908,000
              )
              $
              (243,000
              )
              $
              (1,045,000
              )







F-14
 *Index
          to Consolidated Financial
          Statements*


**6.
      Stockholders’** **Equity**




The
      Company currently holds 1,176,709 of common stock shares in its treasury at
      a
      cost of $2,322,871.






**7.
      Equity Awards and** **Stock-Based
      Compensation**






*Omnibus
      Stock Option Plan*




Under
        the Company’s Amended and Restated Omnibus Stock Plan (the “Company Plan”), the
        Company may grant qualified and nonqualified stock options, stock appreciation
        rights, restricted stock or performance awards, payable in cash or shares
        of
        common stock, to selected employees. The Company reserved 2,200,000 shares
        of
        common stock for issuance under the Company Plan. Options to purchase 85,000,
        205,000 and 135,000 shares of common stock were granted in 2006, 2005 and
        2004,
        respectively. Options to purchase 10,000, 372,650 and 180,000 shares of common
        stock were terminated in 2006, 2005 and 2004, respectively. During 2006,
        2005
        and 2004, options to purchase 77,800, 176,000 and 479,433 shares of common
        stock
        were exercised, respectively, and the Company was paid $105,588, $194,184
        and
        $441,831 in connection therewith. There were outstanding options to purchase
        1,191,367, 1,194,167 and 1,537,817 shares of common stock at December 31,
        2006,
        2005 and 2004 respectively. These options have a maximum term ranging from
        5 to
        10 years from the date of grant.




*Non-employee
      Directors Stock Option Plan*




In
      April
      2005, the Board
      of
      Directors of the Company and the Company’s stockholders adopted the Non-Employee
      Directors Stock Option Plan (the “Directors Plan”), whereby immediately
      following each annual meeting of the Company, each non-employee directors
      receive automatic grants of options to purchase common stock in amounts that
      are
      specified by such plan. The exercise prices of all options granted under the
      Directors Plan are fixed at 100% of the market price of the common stock on
      each
      automatic grant date. The Company has reserved 450,000 shares of common stock
      for issuance under the Directors Plan. Options to purchase 105,000 and 120,000
      shares of common stock were granted in 2006 and 2005, respectively, all of
      which
      were fully vested at the time of issuance. There were outstanding options to
      purchase 225,000 and 120,000 shares of common stock at December 31, 2006 and
      2005, respectively. These options have a maximum term of 10 years from the
      date
      of grant.




*Warrants*




Prior
      to
      2003, the Company granted warrants to purchase 500,000 shares of the Company’s
      common stock for $0.75 per share to Textile. In 2005, Textile assigned these
      warrants to an unaffiliated entity. In December 2005, this unaffiliated entity
      exercised its right to purchase 250,000 and, in accordance with the net issuance
      formula contained in the warrants and in lieu of paying $0.75 per share, gave
      up
      the right to purchase 43,605 shares and received 206,395 shares in the
      transaction based upon a closing price of $4.30 per share on the exercise date.
      In December 2006, this unaffiliated entity notified the Company it was
      exercising its right to purchase the remaining 250,000 shares. The exercise
      was
      completed in January 2007 at which time, in accordance with the net issuance
      formula contained in the warrants and in lieu of paying $0.75 per share, the
      unaffiliated entity gave up the right to purchase 41,667 shares and received
      208,333 shares in the transaction based upon a closing price of $4.50 per share
      on the notification date. There
      were outstanding warrants to purchase 250,000 shares of common stock at December
      31, 2006 and 2005.




F-15
 *Index
          to Consolidated Financial
          Statements*


**A
      summary of equity awards outstanding and exercisable as of December 31, 2006,
      2005 and 2004 is as follows:**




**Equity
                  awards outstanding at December 31, 2006**
              **Equity
                  awards exercisable at December 31, 2006****Range
                  of****Exercise****Prices**
              
              
              **Number**
                **Outstanding**
              
              
              **Weighted**
                **Average**
                **Remaining**
                **Life
                  (years)**
              
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**
              **Number****Exercisable**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price**$0.48
                  to $0.95
              
              
              868,367
              
              
              3.59
              
              $
              0.816
              860,034
              $
              0.816$1.06
                  to $4.40
              
              
              463,000
              
              
              4.09
              
              $
              3.039
              226,333
              $
              2.346$5.60
                  to $7.70
              
              
              335,000
              
              
              8.29
              
              $
              5.873
              256,667
              $
              5.766$0.48
                  to $7.70
              
              
              1,666,367
              
              
              4.68
              
              $
              2.451
              1,343,034
              $
              2.020


**Equity
                awards outstanding at December 31, 2005**
            **Equity
                awards exercisable at December 31, 2005****Range
                of****Exercise****Prices**
            
            
            **Number**
              **Outstanding**
            
            
            **Weighted**
              **Average**
              **Remaining**
              **Life
                (years)**
            
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            **Number****Exercisable**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**$0.48
                to $0.95
            
            
            934,167
            
            
            4.48
            
            $
            0.826
            917,500
            $
            0.816$1.06
                to $4.40
            
            
            405,000
            
            
            2.86
            
            $
            2.863
            195,000
            $
            2.346$5.60
                to $7.70
            
            
            225,000
            
            
            8.77
            
            $
            5.947
            120,000
            $
            5.766$0.48
                to $7.70
            
            
            1,564,167
            
            
            5.23
            
            $
            2.090
            1,232,500
            $
            2.020





**Equity
                awards outstanding at December 31, 2004**
            **Equity
                awards exercisable at December 31, 2004****Range
                of****Exercise****Prices**
            
            
            **Number****Outstanding**
            
            
            **Weighted****Average****Remaining****Life
                (years)**
            
            **Weighted****Average****Exercise****Price**
            **Number****Exercisable**
            
            **Weighted****Average****Exercise****Price**$0.48
                to $0.95
            
            
            1,262,667
            
            
            5.70
            $
            0.802
            975,167
            $
            0.766$1.06
                to $4.40
            
            
            775,150
            
            
            4.97
            $
            1.796
            665,150
            $
            1.577$0.48
                to $7.70
            
            
            2,037,817
            
            
            5.42
            $
            1.180
            1,640,317
            $
            1.095




The
      intrinsic value of the outstanding equity awards at December 31, 2006, 2005
      and
      2004 was $4,626,000, $6,351,000 and $3,016,000, respectively. The aggregate
      intrinsic value of the exercisable outstanding equity awards at December 31,
      2006, 2005 and 2004 was $4,305,000, $5,774,000 and $2,567,000, respectively.
      The
      weighted average remaining life of the exercisable outstanding equity awards
      at
      December 31, 2006, 2005 and 2004 was approximately 4.4, 4.8 and 5.4 years,
      respectively.




F-16
 *Index
          to Consolidated Financial
          Statements*




**The
                following table summarizes equity award activity in 2004, 2005 and
                2006:**
            
            
            **Number
                of**
              **Equity
                Awards**
            
            
            **Weighted
                Average Exercise Price**
              **Per
                Equity Award**Equity
                awards outstanding at December 31, 2003
            
            
            2,562,250
            
            $
            1.010Granted
            
            
            135,000
            
            
            2.702Exercised
            
            
            (479,433
            )
            
            0.918Forfeited
            
            
            (180,000
            )
            
            0.592Equity
                awards outstanding at December 31, 2004
            
            
            2,037,817
            
            $
            1.180Granted
            
            
            325,000
            
            
            5.471Exercised
            
            
            (382,395
            )
            
            0.913Forfeited
            
            
            (416,255
            )
            
            1.357Equity
                awards outstanding at December 31, 2005
            
            
            1,564,167
            
            $
            2.090Granted
            
            
            190,000
            
            
            5.115Exercised
            
            
            (77,800
            )
            
            1.131Forfeited
            
            
            (10,000
            )
            
            6.950Equity
                awards outstanding at December 31, 2006
            
            
            1,666,367
            
            $
            2.451Equity
                awards exercisable at December 31, 2006
            
            
            1,343,034
            
            $
            2.020








*Stock-Based
      Compensation*




Under
      the
      modified prospective method of SFAS No. 123(R), compensation expense of
      $901,800 was recognized during 2006. This includes compensation expense for
      all
      stock-based payments granted prior to, but not yet vested as of January 1,
      2006,
      based on the grant date fair value estimated in accordance with the original
      provisions of SFAS No. 123(R) and compensation expense for all stock based
      payments granted after January 1, 2006 based on the grant date fair value
      estimated in accordance with the provisions of SFAS No. 123(R). The
      Company’s financial results for the prior periods have not been restated. As a
      result of adopting SFAS No. 123(R) in 2006, the Company’s net income for
      2006 was $901,800 lower than if it had continued to account for stock-based
      compensation under APB 25 as it did for the same periods in 2005.




Consistent
      with the valuation method used for the disclosure-only provisions of SFAS No.
      123, the Company is using the Black-Scholes option-pricing model to value
      compensation expense associated with equity awards (i.e. options and warrants).
      The expected term of equity awards granted is derived using a simplified method
      by using an average of the vesting term and the contractual term. The risk-free
      interest rate is based on the U.S. Treasury rates at the date of grant. The
      forfeiture rate is based on past turnover experience of the Company. Expected
      volatility is based on the historical volatility of the Company’s stock. The
      Company records stock compensation expense over the vesting period, which is
      generally three years under the Company Plan, or at the grant date for options
      that vest immediately as provided under the Directors Plan. As of December
      31,
      2006, the Company had approximately $757,000 of unrecognized compensation
      expense that is expected to be recognized over a weighted average period of
      approximately 0.9 years. That expectation does not take into account the
      potential effects of equity awards that may be granted in subsequent
      periods.




F-17
 *Index
          to Consolidated Financial
          Statements*




**Summary
                  of assumptions used in the valuation of compensation
                  expense:**
              
              
              **2006**
              
              
              **2005**
              
              
              **2004**Expected
                  volatility
              
              
              110%-120
              %
              
              120
              %
              
              120
              %Risk
                  free interest rates
              
              
              4.1%
                  - 5.2
              %
              
              4.3%
                  - 4.5
              %
              
              2.6%
                  - 4.5
              %Expected
                  lives in years
              
              
              3.3
                  - 5.0
              
              
              4.0
                  - 6.5
              
              
              3.5
                  - 6.5Expected
                  forfeiture rate
              
              
              3.5
              %
              
              5.0
              %
              
              5.0
              %Weighted
                  average grant fair value per option
              
              $
              4.03
              
              $
              4.57
              
              $
              2.35Grant
                  date fair value of awards
              
              $
              765,202
              
              $
              1,485,710
              
              $
              317,151






Pro
      forma
      information for the years ended December 31, 2005 and 2004 has been presented
      below to reflect the impact of the adoption of SFAS No. 123(R) had the
      Company been required to adopt this standard for 2005 and 2004.




**Year
                ended December 31,****2005**
            
            
            **2004**Net
              income attributable to common stockholders, as reported
            $
            6,411,249
            
            $
            6,165,379Total
                stock-based employee compensation expense determined under the fair
                value
                based method for all awards
            
            (977,538
            )
            
            (286,187
            )Pro
                forma net income attributable to common stockholders
            $
            5,433,711
            
            $
            5,879,192Basic
                net income per common share,as
                reported
            $
            0.55
            
            $
            0.55Basic
                net income per common share,pro
                forma
            $
            0.46
            
            $
            0.52Diluted
                net income per common share,as
                reported
            $
            0.48
            
            $
            0.46Diluted
                net income per common share,pro
                forma
            $
            0.41
            
            $
            0.44




**8.
      Commitments and Contingencies**




*Operating
      Leases*




The
      Company rents real and personal property under leases expiring at various dates
      through 2014. Certain of the leases stipulate payment of real estate taxes
      and
      other occupancy expenses. Minimum annual rental commitments under noncancellable
      operating leases in effect at December 31, 2006 are summarized as follows:




**Showrooms
                & Office Space**
            
            **Office
                Equipment**
            
            **Total**2007
            
            $
            409,018
            
            $
            62,862
            
            $
            471,8802008
            
            
            419,244
            
            
            38,007
            
            
            457,2512009
            
            
            432,808
            
            
            —
            
            
            432,8082010
            
            
            477,545
            
            
            —
            
            
            477,5452011
            
            
            489,484
            
            
            —
            
            
            489,484Thereafter
            
            
            1,542,008
            
            
            —
            
            
            1,542,008$
            3,770,106
            
            $
            100,869
            
            $
            3,870,976





F-18
 *Index
          to Consolidated Financial
          Statements*


In
      July
      2004, the Company signed a 10 year lease to relocate its New York offices and
      showrooms. The Company will expense the rent payments on a straight line basis
      in accordance with the provisions of SFAS No. 13 “Accounting for Leases”
starting October 2004, the date the Company obtained access to the facility.
      Also, in connection with this lease, the Company has provided to the lessor
      a
      $250,000 letter of credit and has provided a deposit for this amount to the
      bank
      as security for this letter of credit. As the use of these funds is restricted,
      this deposit is classified as a non-current asset.





Total
                rent expense is as follows:
            
            **Year
                Ended December 31,****2006**
            
            **2005**
            
            **2004**Minimum
                rentals
            
            $
            519,665
            
            $
            504,526
            
            $
            386,345Other
                lease costs
            
            
            114,958
            
            
            116,497
            
            
            40,631$
            634,623
            
            $
            621,023
            
            $
            426,976





***Licenses***





*Girbaud
      Men’s Licensing Agreement*





The
      Company has entered into an exclusive license agreement with Latitude to
      manufacture and market men’s jeanswear, casual wear, outerwear and active
      influenced sportswear under the Girbaud brand and certain related trademarks
      in
      the United States, Puerto Rico and the U.S. Virgin Islands. The
      terms of the agreement
      were to expire at the end of 2007. In
      November 2006, the Company notified the Latitude of its election to extend
      the
      terms of agreement through the end of 2011. Under
      the
      agreement as amended, the Company is required to make royalty payments to the
      licensor in an amount equal to 6.25% of net sales of regular licensed
      merchandise and 3.0% of certain irregular and closeout licensed merchandise.
      The
      Company is obligated to pay the greater of actual royalties earned or minimum
      guaranteed annual royalties of $3,000,000 through 2007. The Company is required
      to spend the greater of an amount equal to 3% of Girbaud men’s net sales or
      $500,000 in advertising and related expenses promoting the men’s Girbaud brand
      products in each year through the term of the Girbaud men’s agreement. If
      Latitude mounts any fashion shows in the Company’s territory, the Company also
      is required to participate in up to two of such shows and to pay $75,000 to
      Latitude with respect thereto. The
      Company has agreed to increase the minimum annual amount of these expenditures
      under the men’s license agreement by $200,000 in each of the years 2007, 2008
      and 2009 in order to, among other things, facilitate and support a repositioning
      of the Girbaud brand for better store distribution.




*Girbaud
      Women’s Licensing Agreement*




The
      Company has entered into an exclusive license agreement with Latitude to
      manufacture and market women’s jeanswear, casual wear, and active influenced
      sportswear under the Girbaud brand and certain related trademarks in the United
      States, Puerto Rico and the U.S. Virgin Islands. The
      terms of the agreement
      were to expire at the end of 2007. In
      November 2006, the Company notified the Latitude of its election to extend
      the
      terms of the agreement through the end of 2011. Under
      the
      agreement as amended, the Company is required to make royalty payments to the
      licensor in an amount equal to 6.25% of net sales of regular licensed
      merchandise and 3.0% of certain irregular and closeout licensed merchandise.
      The
      Company is obligated to pay the greater of actual royalties earned or minimum
      guaranteed annual royalties of $1,500,000 through 2007. The Company is required
      to spend the greater of an amount equal to 3% of Girbaud women’s net sales or
      $400,000 in advertising and related expenses promoting the women’s Girbaud brand
      products in each year through the term of the Girbaud women’s agreement. If
      Latitude mounts any women’s fashion shows in the Company’s territory, the
      Company also is required to participate in up to two of such shows and to pay
      $75,000 to Latitude with respect thereto. The
      Company has agreed to increase the minimum annual amount of these expenditures
      under the women’s license agreement to $200,000 in each of the years 2007, 2008
      and 2009 in order to, among other things, facilitate and support a repositioning
      of the Girbaud brand for better store distribution. In
      addition, while the agreement is in




F-19
 *Index
          to Consolidated Financial
          Statements*




effect,
      the Company is required to pay $190,000 per year to the licensor for advertising
      and promotional expenditures related to the Girbaud brand.




During
        each of the six years ended December 31, 2005, the amounts of advertising
        and
        related expenses incurred by the Company in marketing the Girbaud brand products
        were less than the amounts required under the agreements. In each of the
        various
        amendments to the men’s and women’s license agreements that were executed in
        2002 - 2004, Latitude and the Company confirmed to one another that neither
        party was in default to the other in the performance of any of the obligations
        owed by either of them to the other. On March 29, 2006, Latitude also waived
        the
        Company’s failure to spend the minimum amounts required under the men’s and
        women’s license agreements in 2005. In 2006, the Company was in compliance with
        these requirements under the licensing agreements.




All
        2006
        and 2005 royalty payments were paid in full when due in those respective
        years.


Following
      is a schedule of the Company’s commitment obligations as of December 31,
      2006:





**Summary
                  schedule of commitments:**
              
              
              
              **Payments
                  Due By Period****Total**
              
              **Current**
              
              **1-3
                  years**
              
              **4-5
                  years**
              
              **After
                  5 years**Operating
                  leases
              
              $
              3,870,976
              
              $
              471,881
              
              $
              890,058
              
              $
              967,029
              
              $
              1,542,008Employment
                  agreements
              
              
              1,267,000
              
              
              992,000
              
              
              275,000
              
              
              —
              
              
              —Licensing
                  agreement fee obligations (*)
              
              
              22,500,000
              
              
              4,500,000
              
              
              9,000,000
              
              
              9,000,000
              
              
              —Licensing
                  agreement fashion show obligations (*)
              
              
              1,575,000
              
              
              375,000
              
              
              600,000
              
              
              600,000
              
              
              —Licensing
                  agreement creative & advertising fee obligations (*)
              
              
              950,000
              
              
              190,000
              
              
              380,000
              
              
              380,000
              
              
              —Promotional
                  expense license requirement (*)
              
              
              5,700,000
              
              
              1,300,000
              
              
              2,600,000
              
              
              1,800,000
              
              
              —Total
                  contractual obligations
              
              $
              35,862,976
              
              $
              7,828,881
              
              $
              13,745,058
              
              $
              12,747,029
              
              $
              1,542,008






*Employment
      Agreements*





The
      Company is party to employment agreements with three officers which provide
      for
      specified levels of compensation and certain other benefits. The agreements,
      which expire between 2007 and 2008, also provide for severance payments from
      the
      termination date through the expiration date under certain
      circumstances .




**9.
      Retirement Plan**





The
      Company sponsors a defined benefit pension plan that covers substantially all
      employees with more than one year of service. The Company’s policy is to fund
      pension costs accrued. Contributions to the plan reflect benefits attributed
      to
      employees’ service to date, as well as service expected to be earned in the
      future. The benefits are based on the number of years of service and the
      employee’s compensation during the three consecutive complete years of service
      prior to or including the year of termination of employment. Plan assets consist
      primarily of common stocks, fixed income securities and cash. The latest
      available actuarial valuation is as of December 31, 2006. In February 2007,
      the
      Company suspended the pension plan effective December 31, 2006. Therefore,
      no
      additional benefits for service will accrue after that date.





F-20
 *Index
          to Consolidated Financial
          Statements*


Pension
      expense for 2006, 2005 and 2004 was approximately $538,000, $398,000 and
      $446,000 respectively, and includes the following components:





**Years
                Ended December 31,****2006**
            
            
            **2005**
            
            
            **2004**Service
                cost of current period
            
            $
            117,000
            
            $
            77,000
            
            $
            60,000Interest
                on the above service cost
            
            
            7,000
            
            
            6,000
            
            
            4,000124,000
            
            
            83,000
            
            
            64,000Interest
                on the projected benefit obligation
            
            
            521,000
            
            
            520,000
            
            
            522,000Expected
                return on plan assets
            
            
            (556,000
            )
            
            (584,000
            )
            
            (556,000
            )Amortization
                of prior service cost
            
            
            —
            
            
            43,000
            
            
            43,000Amortization
                of loss
            
            
            449,000
            
            
            336,000
            
            
            373,000Pension
                cost
            
            $
            538,000
            
            $
            398,000
            
            $
            446,000





The
                following table sets forth the pension plan’s funded status and amounts
                recognized at December 31, 2006, 2005 and 2004:
            
            
            **Years
                Ended December 31,****2006**
            
            ****
            ****
            **2005**
            ****
            ****
            ****
            **2004**Vested
                benefits
            
            $
            8,553,000
            
            
            $
            8,727,000
            
            
            $
            6,704,000Nonvested
                benefits
            
            
            47,000
            
            
            
            26,000
            
            
            
            30,000Accumulated
                benefit obligation
            
            
            8,600,000
            
            
            
            8,753,000
            
            
            
            6,734,000Effect
                of anticipated future compensation levels and other events
            
            
            —
            
            
            
            (1,549,000
            )
            
            
            425,000Projected
                benefit obligation
            
            
            8,600,000
            
            
            
            7,204,000
            
            
            
            7,159,000Fair
                value of assets held in the plan
            
            
            6,997,000
            
            
            
            7,376,000
            
            
            
            7,438,000Deficit
                of projected benefit obligation over plan assets
            
            
            (1,603,000
            )
            
            
            172,000
            
            
            
            279,000Unrecognized
                net loss from past experience different from that assumed
            
            
            5,303,000
            
            
            
            4,067,000
            
            
            
            4,000,000Minimum
                liability adjustment
            
            
            (5,303,000
            )
            
            
            (5,616,000
            )
            
            
            —Unrecognized
                prior service cost
            
            
            —
            
            
            
            —
            
            
            
            43,000Net
                (minimum pension liability) prepaid periodic pension cost
            
            $
            (1,603,000
            )
            
            $
            (1,377,000
            )
            
            $
            4,322,000





With
      respect to the above table, the weighted average discount rate used to measure
      the projected benefit obligation and net (minimum pension liability) prepaid
      periodic pension cost was 5.75% for both 2006 and 2005 and 7.5% for 2004; the
      rate of increase in future compensation levels is 3%; and the expected long-term
      rate of return on assets is 8%. At December 31, 2006 and 2005, the accumulated
      benefit obligation exceeded the fair value of the pension plan’s assets which
      created a net minimum pension liability of $1,603,000 and $1,377,000 which
      is
      included as a non-current liability in the accompanying consolidated balance
      sheets. Prior to December 31, 2005, the fair value of the pension plan’s assets
      exceeded the accumulated benefit obligation and a net prepaid periodic pension
      cost of $4,322,000 was included in other assets in the consolidated balance
      sheets at December 31, 2004. To recognize the minimum pension liability, the
      Company recorded an adjustment of $310,000 and $5,616,000 as other comprehensive
      income in the fourth quarter of 2006 and 2005, respectively.


F-21
 *Index
          to Consolidated Financial
          Statements*





The
              following table sets forth the Pension Plan's change in benefit obligation
              for 2006 and 2005:
            Years
                Ended December 31,**2006**
            
            **2005**Benefit
                obligation at beginning of year
            $
            7,204,000
            
            $
            7,159,000Changes
                in assumptions
            
            2,142,000
            
            
            —Service
                cost
            
            124,000
            
            
            83,000Interest
                cost
            
            521,000
            
            
            520,000Benefits
                paid
            
            (834,000
            )
            
            (664,000
            )Actuarial
                loss
            
            132,000
            
            
            106,000Plan
                curtailment
            
            (689,000
            )
            
            —Benefit
                obligation at end of year
            $
            8,600,000
            
            $
            7,204,000





The
                following sets forth the pension plan’s change in plan assets for 2006 and
                2005:
            
            **Years
                Ended December 31,****2006**
            **2005**Fair
                value of plan assets at beginning of year
            $
            7,376,000
            $
            7,438,000Return
                on plan assets
            
            557,000
            
            584,000Employer
                contributions
            
            —
            
            315,000Benefits
                paid
            
            (834,000
            
            (664,000
            )Assets
                gain/(loss) deferred
            
            (102,000
            
            (297,000
            )Fair
                value of plan assets at end of year
            $
            6,997,000
            $
            7,376,000




The
      pension plan’s fiduciaries set investment policies and strategies for the trust.
      Long-term strategic investment objectives include preserving the funded status
      of the trust and balancing risk and return. The pension plan’s fiduciaries
      oversee the investment allocation process, which includes selecting investment
      managers, setting long-term strategic targets and monitoring asset allocations.
      Target allocation ranges are guidelines, not limitations, and occasionally
      plan
      fiduciaries will approve allocations above or below a target range.




**Years
                Ended December 31,**The
              following sets forth the pension plan’s change in plan assets for 2006 and
              2005:
            
            **2006**
            
            **2005**Equity
                Securities
            
            70
            %
            
            67
            %Debt
                Securities
            
            29
            %
            
            28
            %Cash
                Accounts
            
            1
            %
            
            5
            %100
            %
            
            100
            %





The
                following benefit payments, which reflect expected future services,
                as
                appropriate, are expected to be paid as follows:
            
            **Pension
                Benefits**2007
            $
            131,0002008
            
            169,0002009
            
            193,0002010
            
            205,0002011
            
            228,000Years
                2012-2015
            
            1,780,000$
            2,706,000





F-22
 *Index
          to Consolidated Financial
          Statements*


**10.
      Supplemental Disclosures of Cash Flow Information**





Cash
      paid
      during the year for interest amounted to $1,407,047, $259,771 and $295,077
      for
      2006, 2005 and 2004, respectively. Cash paid during 2006 and 2005 for income
      taxes amounted to $282,502 and $304,000. The Company did not make any income
      tax
      payments in 2004.





Non-cash
                effect of recording minimum pension liability
            
            2006
            
            2005
            
            2004Adjustment
                (recognition) of minimum pension liability
            
            $
            310,000
            
            $
            (5,616,000
            )
            $
            —








**11.
                Quarterly Financial Data (Unaudited)**Summarized
                quarterly financial data for 2006 and 2005 is as follows:**Quarter****2006**
            ****
            ****
            **First**
            
            ****
            **Second**
            ****
            ****
            **Third**
            ****
            **Fourth**Net
                sales
            
            $
            21,263,117
            
            $
            24,040,540
            
            $
            21,276,299
            
            $
                15,656,038Gross
                profit
            
            
            9,066,413
            
            
            9,770,227
            
            
            8,764,467
            
            5,689,515Net
                income (loss) (1)
            
            
            2,544,032
            
            
            2,345,410
            
            
            2,099,885
            
            (4,382,395)Basic
                earnings per share (2)
            
            $
            0.21
            
            $
            0.20
            
            $
            0.17
            
            $
                (0.36)Diluted
                earnings per share (2)
            
            $
            0.20
            
            $
            0.19
            
            $
            0.17
            
            $
                ( 0.36)**Quarter****2005**
            
            
            **First**
            
            
            **Second**
            
            
            **Third**
            
            **Fourth**Net
                sales
            
            $
            23,701,942
            
            $
            21,749,284
            
            $
            20,296,262
            
            $
                17,541,447Gross
                profit
            
            
            9,951,014
            
            
            8,842,470
            
            
            8,796,480
            
            6,628,826Net
                income (loss)
            
            
            2,503,256
            
            
            2,019,873
            
            
            2,271,815
            
            (383,695)Basic
                earnings per share (2)
            
            $
            0.21
            
            $
            0.17
            
            $
            0.19
            
            $
                (0.03)Diluted
                earnings per share (2)
            
            $
            0.18
            
            $
            0.15
            
            $
            0.17
            
            $
                ( 0.03)







1.
            Until
                2004, the Company maintained a valuation allowance equal to the deferred
                tax asset, thereby recognizing a net deferred tax asset of zero.
                Starting
                in 2004, and continuing through the first three quarters of 2006,
                the
                Company began to recognize a net deferred tax asset based on the
                Company’s
                evaluation that it would, at that time, more likely then not generate
                future taxable income to utilize the NOL for income tax purposes.
                Therefore the Company recognized net income tax benefits of $1,178,000
                and
                $1,045,000 for 2005 and 2004 respectively. During the completion of
                our 2006 audit in the first quarter of 2007, based on a review of
                operating results to date, as well as the forecast of remaining 2007
                net
                income, it was determined that the more likely than not conditions
                for
                recognition of the deferred tax asset were not met. Accrodingly as
                of
                December 31, 2006, the Company recorded an adjustment to the valuation
                allowance equal to the full amount of the previously recognized deferred
                tax asset of $3.5 million. This resulted in the Company recognizing
                net
                income tax expense of $2.8 million in 2006.






2.
            Earnings
                (loss) per share calculations for each of the quarters are based
                on the
                weighted average shares outstanding for each period. Thesum
                of the quarters may not necessarily be equal to the full year earnings
                per
                share amounts.




F-23
 
 *Index
          to Consolidated Financial
          Statements*




**SCHEDULE
      II**




**I.
      C. Isaacs & Company,
      Inc.**


**Valuation
      and Qualifying Accounts**











**Description**
            
            **Balance
                Beginning of the Year**
            
            **Charged
                to Costs and Expenses**
            
            **Deduction**
            
            **Balance
                End of Year**Year
                Ended December 31, 2004Allowance
                for doubtful accounts
            
            $
            275,000
            
            $
            370,000
            
            $
            (329,000
            )
            $
            316,000Merchandise
                allowances
            
            
            1,161,000
            
            
            3,777,000
            
            
            (3,197,000
            )
            
            1,741,000Reserve
                for sales returns and discounts
            
            
            63,000
            
            
            4,089,000
            
            
            (3,579,000
            )
            
            573,000Year
                Ended December 31, 2005Allowance
                for doubtful accounts
            
            $
            316,000
            
            $
            1,016,000
            
            $
            (632,000
            )
            $
            700,000Merchandise
                allowances
            
            
            1,741,000
            
            
            3,710,000
            
            
            (4,278,000
            )
            
            1,173,000Reserve
                for sales returns and discounts
            
            
            573,000
            
            
            4,199,000
            
            
            (3,886,000
            )
            
            886,000Year
                Ended December 31, 2006Allowance
                for doubtful accounts
            
            $
            700,000
            
            $
            445,000
            
            $
            (420,000
            )
            $
            725,000Merchandise
                allowances
            
            
            1,173,000
            
            
            1,900,000
            
            
            (2,385,000
            )
            
            688,000Reserve
                for sales returns and discounts
            
            
            886,000
            
            
            3,503,000
            
            
            (3,907,000
            )
            
            482,000





F-24
 
 *Index
          to Consolidated Financial
          Statements*


**Exhibit
      Index**





Exhibit
                No.
            
            Description3.01
            
            Amended
                and Restated Certificate of Incorporation (a copy of which was filed
                with
                the Commission on October 3, 1997 as Exhibit 3.01 to the Company’s
                Registration Statement on Form S-1 (the “S-1 Registration Statement”), and
                is hereby incorporated herein by this reference).3.02
            
            Amended
                and Restated By-laws (a copy of which was filed as Exhibit 3.02 to
                the S-1
                Registration Statement, and is hereby incorporated herein by this
                reference).3.03
            
            Certificate
                of Designation of the Series A Convertible Preferred Stock of the
                Company
                (a copy of which was filed with the Commission on November 15, 1999
                as
                Exhibit 3.03 to the Company’s Quarterly Report on Form 10-Q for the
                quarter ended September 30, 1999, and is hereby incorporated herein
                by
                this reference).3.04
            
            Certificate
                of Amendment to the Certificate of Designation of the Series A Convertible
                Preferred Stock of the Company (a copy of which was filed with the
                Commission on April 2, 2001 as Exhibit 3.04 to the Company’s Annual Report
                on Form 10-K for the year ended December 31, 2000, and is hereby
                incorporated herein by this reference.3.05
            
            Second
                Certificate of Amendment to the Certificate of Designation of the
                Series A
                Convertible Preferred Stock of the Company (a copy of which was filed
                with
                the Commission on November 14, 2002 as Exhibit 3.05 to the Company’s
                Quarterly Report on Form 10-Q for the quarter ended September 30,
                2002
                (the “September 2002 10-Q”), and is hereby incorporated herein by this
                reference).3.06
            
            Certificate
                of Amendment of Amended and Restated Certificate of Incorporation
                (a copy
                of which was filed with the Commission on August 14, 2003 as Exhibit
                3.06
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
                30, 2003 (the “June 2003 10-Q”), and is hereby incorporated herein by this
                reference).4.01
            
            Specimen
                Common Stock Certificate (a copy of which was filed with the Commission
                on
                October 3, 1997 as Exhibit 4.01 to the S-1 Registration Statement
                on Form
                S-1 and is hereby incorporated herein by this reference).4.02
            
            Warrant
                No. 1 issued by the Company to Textile Investment International S.A.
                (“Textile”) for the purchase of 300,000 shares of Common Stock (a copy of
                which was filed with the Commission on November 14, 2002 as Exhibit
                4.02
                to the September 2002 10-Q, and is hereby incorporated herein by
                this
                reference).4.03
            
            Warrant
                No. 2 issued by the Issuer to Textile for the purchase of 200,000
                shares
                of Common Stock (a copy of which was filed as Exhibit 4.03 to the
                September 2002 10-Q, and is hereby incorporated herein by this
                reference).4.04
            
            Amended
                and Restated Omnibus Stock Plan as in effect on June 30, 2003 (a
                copy of
                which was filed as Exhibit 4.04 to the June 2003 10-Q, and is hereby
                incorporated herein by this reference).4.05
            
            2005
                Non-Employee Directors Stock Option Plan (a copy of which was filed
                with
                the Commission on August 11, 2005 as Exhibit 4.05 to Amendment No.
                1 to
                the Company’s Registration Statement on Form S-2 (the “S-2 Amendment”),
                and is hereby incorporated herein by this reference).10.01
            
            Form
                of Indemnification Agreement (a copy of which was filed as Exhibit
                10.09
                to the S-1 Registration Statement, and is hereby incorporated herein
                by
                this reference).10.02
            
            Girbaud
                Trademark License and Technical Assistance Agreement dated November
                1,
                1997 (a copy of which was filed with the Commission on November 26,
                1997
                as Exhibit 10.26 to Amendment No. 2 to the S-1 Registration Statement
                (“S-1 Amendment 2”), and is hereby incorporated herein by this
                reference).10.03
            
            Defined
                Benefit Pension Plan (a copy of which was filed with as Exhibit 10.27(a)
                to S-1 Amendment No. 2, and is hereby incorporated herein by this
                reference).10.04
            
            First
                Amendment to Defined Benefit Pension Plan (a copy of which was filed
                as
                Exhibit 10.27(b) to S-1 Amendment 2, and is hereby incorporated herein
                by
                this reference).10.05
            
            Girbaud
                Trademark License and Technical Assistance Agreement dated January
                15,
                1998 (a copy of which was filed with the Commission on March 27,
                1998 as
                Exhibit 10.26(a) to the Company’s Annual Report on Form 10-K for the year
                ended December 31, 1997 (the “1997 10-K”), and is hereby incorporated
                herein by this reference).10.06
            
            Girbaud
                Trademark License and Technical Assistance Agreement for Women's
                Collection dated March 4, 1998 (a copy of which was filed as Exhibit
                10.26(b) to the 1997 10-K, and is hereby incorporated herein by this
                reference).10.07
            
            Amendment
                No. 1 dated June 18, 1998 to Girbaud Trademark and Technical Assistance
                Agreement for Womens Collection (a copy of which was filed with the
                Commission on August 12, 1998 as Exhibit 10.32 to the Company’s Quarterly
                Report on Form 10-Q for the quarter ended June 30, 1998, and is hereby
                incorporated herein by this reference).10.08
            
            Amendment
                No. 1 dated November 12, 1998 to Trademark License and Technical
                Assistance Agreement for Mens Collections by and between I.C. Isaacs
&
                Co., L.P. and Latitude Licensing Corp. (a copy of which was filed
                with the
                Commission on March 30, 1999 as Exhibit 10.40 to the Company’s Annual
                Report on Form 10-K for the year ended December 31, 1998 (the “1998
                10-K”), and is hereby incorporated herein by this reference).10.09
            
            Amendment
                No. 2 dated November 12, 1998 to Trademark License and Technical
                Assistance Agreement for Womens Collections by and between I.C. Isaacs
                & Co., L.P. and Latitude Licensing Corp. (a copy of which was filed
                as
                Exhibit 10.41 to the 1998 10-K, and is hereby incorporated herein
                by this
                reference).10.10
            
            Executive
                Employment Agreement by and between I.C. Isaacs & Company, Inc. and
                Daniel Gladstone dated January 21, 1999 (a copy of which was filed
                as
                Exhibit 10.42 to 1998 10-K, and is hereby incorporated herein by
                this
                reference).10.11
            
            Amendment
                No. 1 dated March 4, 1998 to Trademark License and Technical Assistance
                Agreement for Mens Collections by and between the Company and Latitude
                Licensing Corp. (a copy of which was filed as Exhibit 10.56 to the
                1998
                10-K, and is hereby incorporated herein by this reference).10.12
            
            Amendment
                No. 3 dated December 23, 1998 to Trademark License and Technical
                Assistance Agreement for Womens Collections by and between the Company
                and
                Latitude Licensing Corp. (a copy of which was filed as Exhibit 10.57
                to
                the 1998 10-K, and is hereby incorporated herein by this
                reference).10.13
            
            Amendment
                No. 4 to the Trademark License and Technical Assistance Agreement
                Covering
                Womens Products dated August 2, 1999 (a copy of which was filed with
                the
                Commission on August 13, 1999 as Exhibit 10.60 to the Company’s Quarterly
                Report on Form 10-Q for the quarter ended June 30, 1999, and is hereby
                incorporated herein by this reference).10.14
            
            Amendment
                No. 2 dated June 21, 2000, to Trademark License and Technical Assistance
                Agreement Covering Mens Products dated January 15, 1998, by and between
                Latitude Licensing Corp. and I.C. Isaacs & Company L.P. 3.03 (a copy
                of which was filed with the Commission on August 14, 2000 as Exhibit
                10.75
                to the Company’s Quarterly Report on Form 10-Q for the quarter ended June
                30, 2000 (the “June 2000 10-Q”), and is hereby incorporated herein by this
                reference).10.15
            
            Amendment
                No. 5 dated June 21, 2000, to Trademark License and Technical Assistance
                Agreement Covering Womens Products dated January 15, 1998, by and
                between
                Latitude Licensing Corp. and I.C. Isaacs & Company L.P. (a copy of
                which was filed as Exhibit 10.76 to the June 2000 10-Q, and is hereby
                incorporated herein by this reference).10.16
            
            Amendment
                No.3 to Trademark License and Technical Assistance Agreement Covering
                Men’s Products Dated May 31, 2001 (a copy of which was filed with the
                Commission on April 1, 2002 as Exhibit 10.92 to the Company’s Annual
                Report on Form 10-K for the year ended December 31, 2001, and is
                hereby
                incorporated herein by this reference).10.17
            
            Amended
                and Restated Executive Employment Agreement dated April 17, 2002,
                by and
                between the Company and Eugene C. Wielepski (a copy of which was
                filed
                with the Commission on April 30, 2002 as Exhibit 10.94 to Amendment
                No. 1
                to the Company’s Annual Report on Form 10-K for the year ended December
                31, 2001 (the “2001 10-K Amendment”), and is hereby incorporated herein by
                this reference).10.18
            
            Amended
                and Restated Executive Employment Agreement dated April 17, 2002,
                by and
                between the Company and Daniel J. Gladstone (a copy of which was
                filed as
                Exhibit 10.95 to Amendment No. 1 to the 2001 10-K Amendment, and
                is hereby
                incorporated herein by this reference).10.19
            
            Amendment
                No. 4 dated October 2, 2002 to the Trademark License and Technical
                Assistance Agreement dated January 15, 2002 by and between Latitude
                Licensing Corp. and I.C. Isaacs & Company, L.P. (a copy of which was
                filed with the Commission on November 14, 2002 as Exhibit 10.102
                to the
                Company’s Quarterly Report on Form 10-Q for the quarter ended September
                30, 2002 (the “September 2002 10-Q”), and is hereby incorporated herein by
                this reference).10.20
            
            Amendment
                No. 6 dated October 2, 2002 to the Trademark License and Technical
                Assistance Agreement for Women’s Collections dated March 4, 1998 by and
                between Latitude Licensing Corp. and I.C. Isaacs & Company, L.P. (a
                copy of which was filed as Exhibit 10.103 to the September 2002 10-Q,
                and
                is hereby incorporated herein by this reference).10.21
            
            Amendment
                No. 7, dated March 31, 2003 to the Trademark License and Technical
                Assistance Agreement for Women’s Collections between Latitude Licensing
                Corp. and I.C. Isaacs & Company L.P. (a copy of which was filed with
                the Commission on April 4, 2003 as Exhibit 10.110 to the Company’s Annual
                Report on Form 10-K for the year ended December 31, 2002 (the “2002
                10-K”), and is hereby incorporated herein by this reference).10.22
            
            Amendment
                No. 5 dated March 31, 2003 to the Trademark License and Technical
                Assistance Agreement dated the 1st day of November 1997 by and between
                Latitude Licensing Corp. and I.C. Isaacs & Company L.P. (a copy of
                which was filed as Exhibit 10.111 to the 2002 10-K, and is hereby
                incorporated herein by this reference).10.23
            
            Amendment
                dated as of May 15, 2003 to the Amended and Restated Employment Agreement
                between I.C. Isaacs & Company, L.P. and Daniel J. Gladstone (a copy of
                which was filed with the Commission on May 15, 2003 as Exhibit 10.114
                to
                the Company's Quarterly Report on Form 10-Q for the quarter ended
                March
                31, 2003 (the “March 2003 10-Q”), and is hereby incorporated herein by
                this reference).10.24
            
            Amendment
                dated as of March 31, 2003 to the Amended and Restated Employment
                Agreement between I.C. Isaacs & Company, L.P. and Eugene C. Wielespki
                (a copy of which was filed as Exhibit 10.115 to the March 2003 10-Q,
                and
                is hereby incorporated herein by this reference).10.25
            
            Amendment
                No. 8, dated October 29, 2003 to the Trademark License and Technical
                Assistance Agreement for Womens Collections between Latitude Licensing
                Corp. and I.C. Isaacs & Company L.P. (a copy of which was filed with
                the Commission on November 14, 2003 as Exhibit 10.113 to the Company's
                Quarterly Report on Form 10-Q for the quarter ended September 30,
                2003
                (the “September 2003 10-Q”), and is hereby incorporated herein by this
                reference).10.26
            
            Amendment
                No. 6, dated October 29, 2003 to the Trademark License and Technical
                Assistance Agreement dated the 1st day of November 1997 by and between
                Latitude Licensing Corp. and I.C. Isaacs & Company L.P. (a copy of
                which was filed as Exhibit 10.114 to the September 2003 10-Q, and
                is
                hereby incorporated herein by this reference).10.27
            
            Amendment
                dated October 13, 2004 to the Executive Employment Agreement dated
                December 9, 2003 by and between I.C. Isaacs & Company, L.P. and Peter
                J. Rizzo (a copy of which was filed with the Commission as Exhibit
                10.120
                to the Company's Report on Form 8-K filed on October 22, 2004 (the
                “October 22, 2004 Form 8-K”), and is hereby incorporated herein by this
                reference).10.28
            
            Executive
                Employment Agreement made as of the 1st day of March 2004, by and
                between
                I.C. Isaacs & Company LP and Jesse de la Rama (a copy of which was
                filed as Exhibit 10.121 to the December 10, 2004 Form 8-K, and is
                hereby
                incorporated herein by this reference).10.29
            
            Loan
                and Security Agreement dated as of December 30, 2004 by and between
                I.C.
                Isaacs & Company, L.P. and Wachovia Bank, National Association (a copy
                of which was filed with the Commission as Exhibit 10.122 to the Company's
                Report on Form 8-K filed on January 6, 2005, and is hereby incorporated
                herein by this reference).10.30
            
            Amendment
                No. 7, dated December 16, 2004, to the Trademark License and Technical
                Assistance Agreement dated the 1st day of November 1997 by and between
                Latitude Licensing Corp. and I.C. Isaacs & Company L.P. (a copy of
                which was filed with the Commission on March 31, 2005 as Exhibit
                10.123 to
                the Company’s Annual Report on Form 10-K for the year ended December 31,
                2004 (the “2004 10-K”), and is hereby incorporated herein by this
                reference).10.31
            
            Amendment
                No. 9, dated December 16, 2004, to the Trademark License and Technical
                Assistance Agreement for Womens Collections dated March 4, 1998 by
                and
                between Latitude Licensing Corp. and I.C. Isaacs & Company L.P. (a
                copy of which was filed as Exhibit 10.124 to the 2004 10-K, and is
                hereby
                incorporated herein by this reference).10.32
            
            Assignment
                of warrant to purchase 300,000 shares of the Company’s common stock dated
                September 28th, 2004 by Textile Investment International S.A. to
                Rockbrook
                Investments SA., and consented to on April 13, 2005 by the Company
                (a copy
                of which was filed as Exhibit 99.01 to the S-2 Amendment, and is
                hereby
                incorporated herein by this reference).10.33
            
            Assignment
                of warrant to purchase 200,000 shares of the Company’s common stock dated
                September 28th, 2004 by Textile Investment International S.A. to
                Rockbrook
                Investments SA. , and consented to on April 13, 2005 by the Company
                (a
                copy of which was filed as Exhibit 99.02 to the S-2 Amendment, and
                is
                hereby incorporated herein by this reference).10.34
            
            Executive
                Employment Agreement dated December 19, 2005 between I.C. Isaacs
&
                Company L.P. and Gregg A. Holst (a copy of which was filed as Exhibit
                10.34 to the Company's Report on Form 8-K filed on December 29, 2005,
                and
                is hereby incorporated herein by this reference).10.35
            
            Amendment
                No. 8, dated March 29, 2006, to the Trademark License and Technical
                Assistance Agreement for Men’s Collections dated January 15, 1998 by and
                between Latitude Licensing Corp. and I.C. Isaacs & Company L.P. (a
                copy of which was filed as Exhibit 10.35 to the 2005 10-K, and is
                hereby
                incorporated herein by this reference).10.36
            
            Amendment
                No. 10, dated March 29, 2006, to the Trademark License and Technical
                Assistance Agreement for Womens Collections dated March 4, 1998 by
                and
                between Latitude Licensing Corp. and I.C. Isaacs & Company L.P. (a
                copy of which was filed as Exhibit 10.36 to the 2005 10-K, and is
                hereby
                incorporated herein by this reference).








10.37
            
            Executive
              Employment Agreement, dated December 9, 2003,
              by and between I.C. Isaacs & Company LP and Peter
              Rizzo.10.38
            
            Nonstatutory
                Stock Option Grant Agreement, dated
                December 6, 2004, by and between I.C. Isaacs & Company, Inc. and Jesse
                de la Rama.10.39
            
            Amendment,
                dated as of August 1, 2005, to the
                Employment Agreement, dated March 1, 2004, by and between I.C. Isaacs
                & Company LP and Jesse de la Rama10.40
            
            Nonstatutory
                Stock Option Grant Agreement, dated August
                1, 2005, by and between I.C. Isaacs & Company, Inc. and Jesse de la
                Rama.10.41
            
            Nonstatutory
              Stock Option Grant Agreement, dated
              December 27, 2005, by and between I.C. Isaacs & Company, Inc. and
              Gregg A. Holst.14.01
            
            Code
                of Ethics for Senior Financial Executives (a copy of which was filed
                as
                Exhibit 14.01 to the 2005 10-K, and is hereby incorporated herein
                by this
                reference).14.02
            
            Code
                of Ethics and Business Conduct (a copy of which was filed as Exhibit
                14.02
                to the 2005 10-K, and is hereby incorporated herein by this
                reference).21.01
            
            List
                of Subsidiaries (a copy of which was filed as Exhibit 21.01 to the
                S-2
                Amendment, and is hereby incorporated herein by this
                reference).23.01
            
            Consent
                of BDO Seidman, LLP31.01
            
            Certification
                Pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200231.02
            
            Certification
                Pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200232.01
            
            Certification
                Pursuant to Section 1350 of chapter 63 of
                Title 18 of the United States Code