UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

**FORM 10-Q**/A****Amendment
No. 1 ****

|(Mark
      One)                                                                                         
|---------------------------------------------------------------------------------------------------------
|[ X
      ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
|                                                                                                         
|For the quarterly
      period ended:                                                                    
|or                                                                                                       

|[ ]
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934
|--------------------------------------------------------------------------------------------------------
|For the
      transition period from:                                                                   

|Commission File
      Number: | 0-13851
|----------------------------- | -------

|NITCHES, INC.                                                       
|--------------------------------------------------------------------
|(Exact name of registrant as specified in its charter)              
|                                                                    
|California                                                          
|(State or
      other jurisdiction of incorporation or organization)
|                                                                    
|10280 Camino Santa Fe, San Diego,
      California                  
|(Address of
      principal executive offices)                      
|                                                                    
|(858)625-2633                                                       
|(Registrant's telephone number, including area code)                

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

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.        Yes [X] No [ ]

Indicate by check mark whether the
registrant 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 [X]
|--------------------------------- | --------------------------- | --------------------------------

|Indicate by
      check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). |               
|---------------------------------------------------------------------------------------------------------------------------- | --------------
|                                                                                                                             | Yes [ ] No [X]
|As of April 12,
      2007 the registrant had 5,253,507 shares of common stock
      outstanding.                            |               

---

EXPLANATORY NOTE

We filed our Quarterly Report on Form 10-Q for the period ended February
28, 2007 with the Securities and Exchange Commission on April 12, 2007 (the
"Original Filing"). We are filing this Amendment No. 1 on Form 10-Q/A for the
period ended February 28, 2007 ("Amendment No. 1") to make certain revisions to
"Item 1. Financial Statements" related to the following:

(i) We are amending our disclosure with respect to our acquisition of
Saguaro LLC to allocate the purchase price to the value of the trademarks
acquired, rather than to goodwill. At the time of the acquisition, Saguaro's
only assets were the trademarks "Saguaro" and "Saguaro West." The effect of this
revision is to decrease the dollar amount ascribed to "goodwill" for the period
ended February 28, 2007 from $5,344,000 to $2,620,000 and to increase the dollar
amount ascribed to "other intangibles" from $3,733,000 to $6,457,000, and other
related adjustments.

(ii) After filing the Original Filing we reevaluated our methodology for
recognizing and reporting stock-based compensation expense in accordance with
Statement of Financial Accounting Standards No. 123R (revised 2004),
"Share-Based Payment." On August 21, 2007, we determined that due to the
immediate vesting of 25% of all of the options granted during the period, we
must recognize an expense equal to 25% of the fair value of the options granted
in such period, rather than expensing these amounts ratably over the first year
of the term of the options. As such, we are revising our disclosure with respect
to stock-based compensation to reflect a revised stock-based compensation cost
of approximately $301,000 for the six months ended February 28, 2007, which we
previously reported as $119,000, and other related adjustments. This had the
effect of increasing overall selling, general and administrative expenses for
the period by $182,000 and increasing our net loss for the period by the same
amount. Our audit committee has discussed this matter with our independent
accountants.

Although this Amendment No. 1 only revises the disclosures in "Item 1.
Financial Statements" of the Original Filing that are affected by the above
discussed changes, we have presented our complete Quarterly Report on Form 10-Q
with this Amendment No. 1.

Pursuant to the rules of the Securities and Exchange Commission, we have
included currently-dated certifications from our chief executive and financial
officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of
2002.

Except as otherwise specifically noted, all information contained herein
is as of February 28, 2007 and does not reflect events or changes that have
occurred subsequent to that date.Accordingly, this Amendment No. 1
should be read in conjunction with our other filings made with the Securities
and Exchange Commission subsequent to the filing of the Original Filing. The
filing of this Amendment No. 1 shall not be deemed an admission that the
Original Filing when made included any untrue statement of a material fact or
omitted to state a material fact necessary to make a statement not misleading.

---

PART I - FINANCIAL
INFORMATION

ITEM1. Financial Statements

NITCHES, INC. AND
SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS

|                                                                                    | February 28 ,
      2007 |            | August 31,
      2006
|----------------------------------------------------------------------------------- | ------------------------ | ---------- | ---------------------
|ASSETS                                                                              | (Unaudited )             |            |                      
|Current assets:                                                                     |                          |            |                      
|Cash and
      cash equivalents                                                     | $                        | 200,000    |                      
|Receivables:                                                                        |                          |            |                      
|Due
      from factor, net                                                          |                          | 10,072,000 |                      
|Trade accounts, net                                                                 |                          | 150,000    |                      
|Due
      from affiliates and employees                                             |                          | 22,000     |                      
|Total receivables                                                                   |                          | 10,244,000 |                      
|                                                                                   
|Inventories, less allowances                                                        |                          | 10,639,000 |                      
|Deferred
      income taxes, current                                                |                          | 587,000    |                      
|Other current assets                                                                |                          | 714,000    |                      
|Total current
      assets                                                          |                          | 22,384,000 |                      
|                                                                                   
|Property and equipment, net                                                         |                          | 76,000     |                      
|Goodwill                                                                            |                          | 2,620,000  |                      
|Intangibles, net                                                                    |                          | 6,457,000  |                      
|Other
      assets                                                                  |                          | 28,000     |                      
|                                                                                    | $                        | 31,565,000 |                      
|                                                                                   
|LIABILITIES
      AND SHAREHOLDERS' EQUITY                                          |                          |            |                      
|Current liabilities:                                                                |                          |            |                      
|Due to
      factor                                                                 | $                        | 10,345,000 |                      
|Accounts payable                                                                    |                          | 6,009,000  |                      
|Accrued
      expenses                                                              |                          | 954,000    |                      
|Note payable                                                                        |                          | -          |                      
|Income taxes payable                                                                |                          | 635,000    |                      
|Total current liabilities                                                           |                          | 17,943,000 |                      
|                                                                                   
|Long term liabilities:                                                              |                          |            |                      
|Deferred income taxes,
      non-current                                            |                          | 644,000    |                      
|                                                                                   
|Shareholders' equity:                                                               |                          |            |                      
|Series A
      preferred stock, $100 par value; 25,000,000 shares
      authorized, |                          |            |                      
|8,820 shares issued and outstanding                                                 |                          | 882,000    |                      
|Common stock, no par value; 50,000,000 shares
      authorized;                     |                          |            |                      
|5,253,507 shares issued and outstanding
      (4,653,507 - August 31, 2006)         |                          | 7,873,000  |                      
|Additonal
      Paid-in-Capital                                                     |                          | 301,000    |                      
|Retained earnings                                                                   |                          | 3,922,000  |                      
|Total shareholders' equity                                                          |                          | 12,978,000 |                      
|                                                                                    | $                        | 31,565,000 |                      

The accompanying notes are an integral
part of these financial statements.

---

NITCHES, INC. AND
SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)

|                                                   | Three Months Ended |             | Six Months Ended
|-------------------------------------------------- | ------------------ | ----------- | ----------------
|                                                   | February 28,       |             | February 28,    
|                                                   | 2007               |             | 2006            
|Net sales                                          | $                  | 14,274,000  |                 
|Cost of goods
      sold                           |                    | 10,506,000  |                 
|Gross profit                                       |                    | 3,768,000   |                 
|Selling, general
      and administrative expenses |                    | 4,536,000   |                 
|Income (loss) from operations                      |                    | (768,000)   |                 
|Interest
      expense                             |                    | (247,000    | )               
|Other income                                       |                    | -           |                 
|Loss from equity
      investment                  |                    | -           |                 
|Income (loss) before income taxes                  |                    | (1,015,000) |                 
|Provision
      (benefit) for income taxes         |                    | (485,000)   |                 
|Net income (loss)                                  | $                  | (530,000)   |                 
|Earnings (loss)
      per weighted average share   |                    |             |                 
|Basic                                              | $                  | (0.10       | )               
|Diluted                                            | $                  | (0.10       | )               
|Weighted average common shares outstanding         |                    |             |                 
|Basic                                              |                    | 5,253,507   |                 
|Diluted                                            |                    | 5,391,230   |                 

The accompanying notes are an integral
part of these financial statements.

---

NITCHES, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENT OF CHANGES IN
SHAREHOLDERS EQUITY(Unaudited)

Six Months EndedFebruary 28,2007
    
    2006Preferred stockBalance,
      beginning of period
    $
    882,000
    
    $
    -Preferred stock issued
    
    -
    
    
    882,000Balance, end of period
    
    882,000
    
    
    882,000Common stock and paid-in capitalBalance,
      beginning of period
    
    5,143,000
    
    
    1,495,000Common stock issued
    
    2,730,000
    
    
    918,000Stock-based compensation expense
    
    301,000
    
    
    -Balance, end of
      period
    
    8,174,000
    
    
    2,413,000Retained earningsBalance,
      beginning of period
    
    3,233,000
    
    
    2,765,000Net income
    
    689,000
    
    
    565,000Balance, end of period
    
    3,922,000
    
    
    3,330,000Total
      stockholders' equity
    $
    12,978,000
    
    $
    6,625,000


The accompanying notes are an integral
part of these financial statements.

---

NITCHES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS(Unaudited)

|                                                        | Six Months Ended
|------------------------------------------------------- | ----------------
|                                                        | February 28,    
|                                                        | 2007            
|Net income                                              | $               
|Cash flows from
      operating activities:             |                 
|Depreciation and amortization                           |                 
|Non-cash
      stock option compensation expense        |                 
|Loss from investment in unconsolidated subsidiary       |                 
|(Increase)
      decrease in receivables                |                 
|Decrease in refundable income taxes                     |                 
|Decrease
      in inventories                           |                 
|Increase in other assets                                |                 
|Decrease
      in accounts payable and accrued expenses |                 
|Increase in income taxes payables                       |                 
|Decrease
      in deferred income taxes, non-current    |                 
|Net cash provided (used) by operating
      activities  | $               
|                                                       
|Cash flows from investing activities:                   |                 
|Acquisition cost of transaction                         |                 
|Capital expenditures                                    |                 
|Cash
      (used) acquired in transaction               |                 
|Net cash provided (used) by investing
      activities  | $               
|                                                       
|Cash flows provided by financing activities:            |                 
|Advances
      from factor                              | $               
|Payment of loan payable                                 | $               
|Net
      cash provided by financing activities         | $               
|                                                       
|Net increase (decrease) in cash and cash equivalents    |                 
|                                                       
|Cash and cash equivalents at beginning of period        |                 
|Cash and cash
      equivalents at end of period        | $               
|                                                       
|Supplemental disclosures of cash flow information:      |                 
|Cash paid during the period:                            |                 
|Interest                                                | $               
|Income taxes                                            |                 
|                                                       
|Non-cash investing activity:                            |                 
|Acquisition of subsidiaries                             |                 
|Common stock issued                                     | $               
|Series A preferred stock issued                         |                 
|                                                        | $               

The accompanying notes are an integral
part of these financial statements.

---

NITCHES, INC. AND
SUBSIDIARIESNotes to Condensed
Consolidated Financial Statements

1. Description of Business:

Nitches,
Inc. and subsidiaries ("we," "our," "us," or the "Company") is a wholesale
importer and distributor of clothing and home décor products manufactured to our
specifications and distributed in the United States under our brand labels and
retailer-owned private labels. We distribute clothing primarily in three
categories: womens sleepwear and loungewear, womens sportswear and outerwear,
and mens casual wear and performance apparel. We market sleepwear and
loungewear under the following brands: Princesse tam tam®, Derek Rose®, Crabtree
& Evelyn®, Disney Couture®, The Anne Lewin® Collection, The Bill Blass®
Lifestyle Collection, The Claire Murray® Collection and Gossard®. We market
womens sportswear and outerwear under the following brands: Adobe Rose®,
Country Tease®, Saguaro® and Southwest Canyon®. We market mens casual wear and
performance apparel under the following brands: Nat Nast®, Newport Blue®,
Dockers®, The Skins Game®, and ZOIC®. We distribute home décor products under
the Bill Blass® and Newport Blue® brands. We sell our branded products to better
department stores, specialty boutiques, moderate department stores, and national
and regional discount department stores and chains. We also develop and
manufacture private label products for many leading retailers and catalogs.

2. Condensed Financial Statements:

The
accompanying unaudited consolidated financial statements have been prepared in
accordance with the rules and regulations of the United States Securities and
Exchange Commission ("SEC") for Form 10-Q. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States of
America have been condensed or omitted pursuant to such rules and regulations.
These consolidated financial statements should be read in conjunction with our
consolidated financial statements and related notes contained in our Annual
Report on Form 10-K for the year ended August 31, 2006. In the opinion of our
management, all adjustments considered necessary for a fair presentation have
been included in the interim period. Operating results for the six months ended
February 28, 2007 are not necessarily indicative of the results that may be
expected for the fiscal year ending August 31, 2007 or any future period.

3. Earnings Per share:

We calculate
earnings per share in accordance with SFAS No. 128 "Earnings per Share". Basic
earnings per common share is computed by dividing income available to common
shareholders by the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings per common share is computed by
dividing income available to common shareholders by the weighted-average number
of shares of common stock outstanding during the period increased to include the
number of additional shares issuable upon the exercise of outstanding stock
options, warrants or other convertible instruments. The dilutive effect of
outstanding options is reflected in diluted earnings per share by application of
the treasury stock method. Under the treasury stock method, an increase in the
fair market value of our common stock can result in a greater dilutive effect
from outstanding options. Additionally, the exercise of employee stock options
can result in a greater dilutive effect on earnings per share.

The
following table sets forth the computation of basic and diluted earnings per
share (in thousands, except net income and per share amounts):

Three Months Ended
    
    Six Months EndedFebruary 28,
    
    February 28,2007
    
    2006
    
    2007
    
    2006Numerator:Net
      income(net loss)
    $
    (530,000)
    
    
    $
    45,000
    
    $
    689,000
    
    $
    565,000Denominator:Weighted
      average shares outstanding
    
    5,253,507
    
    
    
    4,053,507
    
    
    5,077,816
    
    
    3,895,385Dilutive effect of options
    
    137,723
    
    
    
    -
    
    
    122,908
    
    
    -Denominator for diluted earnings per share
    
    5,391,230
    
    
    
    4,053,507
    
    
    5,200,724
    
    
    3,895,385Basic earnings (loss) per share
    $
    (0.10
    )
    
    $
    0.01
    
    $
    0.14
    
    $
    0.15Diluted earnings
      (loss) per share
    $
    (0.10
    )
    *
    $
    0.01
    
    $
    0.13
    
    $
    0.15 * Diluted loss per share is not reported
due to the anti-dilutive effect of options on the basic loss per
share.


---

NITCHES, INC. AND
SUBSIDIARIESNotes to Condensed
Consolidated Financial Statement (continued)

4.Inventories:

February
      28,
    
    August 31,2007
    
    2006Fabric and trim
    
    $
    268,000
    
    
    $
    222,000Work in progress
    
    
    985,000
    
    
    
    2,939,000Finished goods
    
    
    9,773,000
    
    
    
    9,651,000Markdown allowances
    
    
    (387,000
    )
    
    
    (388,000
    )$
    10,639,000
    
    
    $
    12,424,000


5.Trade accounts
receivable:

Pursuant to
the terms of an agreement between us and a factor, and a separate agreement
between our subsidiary Designer Intimates, Inc., and the factor, we sell a
majority of our trade accounts receivable to the factor on a pre-approved,
non-recourse basis. The price at which the accounts are sold is the invoice
amount reduced by the factor commission (0.3% of the invoice amount) and all
selling discounts. For accounts sold to the factor without recourse, the factor
is responsible for collection, assumes all credit risk, and obtains all of the
rights and remedies against our customers. For such accounts, payment is due
from the factor upon the earlier of the payment of the receivable to the factor
by the customer, or the maturity of the receivable (generally 180 days from the
date of shipment to the customer). As of February 28, 2007, $10.3 million of our
trade accounts receivable were non-recourse receivables due from the factor.

Trade
accounts receivable not sold to the factor remain in our custody and control and
we maintain all credit risk on those accounts as well as accounts which are sold
to the factor with recourse. The combined credit risk for non-factored and
recourse receivables as of February 28, 2007, totaled $629,000, of which
$162,000 had been collected by March 31, 2007.

Under the
terms of our agreement, we may request payment from the factor in advance of the
collection date or maturity. Any such advance payments are assessed an interest
charge through the collection date or maturity at the factors prime rate less
1.5% (one and one half percent) per annum. Our obligations with respect to
advances from the factor are limited to the interest charges thereon. Advance
payments are limited to a maximum of 85% (eighty-five percent) of eligible
accounts receivable and 50% (fifty percent) of eligible finished goods
inventory. The factoring agreement also provides for the issuance of irrevocable
letters of credit for our purchase of inventory in the normal course of our
business. Letters of credit are subject to a $12 million limit. All of our
assets collateralize the advances and letters of credit. Our chairman, who also
serves as our chief executive officer and chief financial officer, has also
provided a personal guaranty in connection with our factoring arrangement.

The status of our trade accounts
receivable and letters of credit are as follows:

February 28,
    
    August 31,2007
    
    2006Receivables assigned to factor:Non-recourse
    $
    10,306,000
    
    
    $
    10,472,000Recourse
    
    441,000
    
    
    
    168,000Allowance
      for customer credits and doubtful accounts
    
    (675,000
    )
    
    
    (583,000
    )Due from factor, net
    
    10,072,000
    
    
    
    10,057,000Non-factored accounts receivable
    
    188,000
    
    
    
    544,000Allowance for
      customer credits and doubtful accounts
    
    (38,000
    )
    
    
    (60,000
    )Trade accounts, net
    $
    150,000
    
    
    $
    484,000Due to factor
    $
    10,345,000
    
    
    $
    9,676,000Contingent liabilities for irrevocable letters of
      credit
    $
    3,114,000
    
    
    $
    6,086,000


---

NITCHES, INC. AND
SUBSIDIARIESNotes to Condensed
Consolidated Financial Statement (continued)

6. Dividends:

We did not
pay any cash dividends during the current period or the prior fiscal year. On
January 20, 2006 we issued a 200% stock dividend to our shareholders of record
as of January 3, 2006.

7. Significant Customers:

For the six
months ended February 28, 2007, sales to three separate customers accounted for
43.9% of our net sales. Sales to two separate customers accounted for 42.0% of
our net sales for the six months ended February 28, 2006. Sales to two customers
accounted for 47.5% of our net sales in the three months ended February 28,
2007. Two separate customers accounted for 22.5% of our net sales in the three
months ended February 28, 2006.

One customer
accounted for 22.7% of our trade receivable balance as of February 28, 2007. Two
customers accounted for 45.3% of our trade receivable balance as of February 28,
2006.

8. Acquisition of Saguaro LLC:

On October
24, 2006, we completed our acquisition of the Saguaro® mark and related
trademarks from Impex Inc., a leading manufacturer of branded and non-branded
specialty, western and private-label womens apparel. We paid consideration of
$3,030,000 to Impex in the form of 600,000 shares of our common stock valued at
$4.55 per share (based on the average closing price for our common stock for the
ten trading days between June 7 and June 20, 2006, inclusive) and a $300,000
promissory note. The purchase price of $3,030,000 was allocated to the
Saguaro® mark and related trademarks. Since January 2005, we had been manufacturing and
distributing Saguaro® apparel products to specialty and catalog retailers under
the terms of a strategic alliance with Impex. Under this alliance, we recorded
the revenue from such sales and remitted royalties and design fees to Impex as
part of our operating expenses.Royalty and design fees accrued and paid from September through December
2005 were approximately $183,000. Due to the closing of the Acquisition
Agreement, Nitches is not required to pay such fees to Impex as of January 1,
2006. Accordingly, profit margins for Saguaro® products are expected to
increase.

9. Stock-Based
Compensation

Adoption of SFAS 123R

Effective
September 1, 2006, we adopted SFAS No. 123R (revised 2004), "Share-Based
Payment", ("SFAS 123R") which establishes standards for the accounting of
transactions in which an entity exchanges its equity instruments for goods or
services, primarily focusing on accounting for transactions where an entity
obtains employee services in share-based payment transactions. SFAS 123R
requires a public entity to measure the cost of employee services received in
exchange for an award of equity instruments, including stock options, based on
the grant-date fair value of the award and to recognize it as compensation
expense over the period the employee is required to provide service in exchange
for the award, usually the vesting period. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107 (SAB 107) relating to SFAS 123R. We have applied the
provisions of SAB 107 in our adoption of SFAS 123R.

We adopted
SFAS 123R in conjunction with our issuance of stock options under our 2006
Equity Incentive Plan as approved by our shareholders on March 15, 2006. Our
first issuance of stock options under the plan occurred on September 1,
2006.

SFAS 123R
requires companies to estimate the fair value of share-based payment awards on
the date of grant using an option-pricing model. The value of the portion of the
award that is ultimately expected to vest is recognized as expense over the
requisite service periods in our Condensed Consolidated Statements of
Operations.

Compensation Costs

Results of
operations for the six months ended February 28, 2007 include stock-based
compensation costs of approximately $301,000comprised of employee stock option grants. We had no stock options
outstanding in the prior period.

The total fair value of options vested is $301,000. After recording
expense through February 28, 2007, there remains $904,000 of unrecognized
compensation costs related to unvested stock options to be recognized over the
next 3.6 years.

---

NITCHES, INC. AND
SUBSIDIARIESNotes to Condensed
Consolidated Financial Statement (continued)

All
stock-based compensation costs have been recorded to our selling, general and
administrative classification within our Condensed Consolidated Statements of
Operations.

Valuation of Stock Option Awards

We estimated
the fair value of each option award is estimated on the date of grant using the
Black-Scholes-Merton closed-form option valuation model that uses the
assumptions noted in the following table. All options granted have a maximum
term of ten years. As permitted by SAB 107, for the six months ended February
28, 2007, we utilized the shortcut approach to estimate the options expected
term of six years, which represents the period of time that options granted are
expected to be outstanding. We utilized this approach because the historical
share option exercise experience does not provide a reasonable basis upon which
to estimate an expected term. Expected volatilities are based on historical
volatility of the stock and were 64.6% for the three months ended November 30,
2006 and 65.5% for the three months ended February 28, 2007. The risk-free rate
for periods within the contractual life of the option is based on the U.S. 7
year Treasury yield in effect at the time of grant and was 4.68% . We have not
declared or paid dividends for more than 2 years and have no plans to do so in
the foreseeable future.

The following assumptions were
utilized for the calculations during the period:

Three months endedNovember
      30,
    
    February
      28,2006
    
    2007Expected life (in years)
    6
    
    6Expected
      volatility
    64.60%
    
    65.50%Risk-free interest rate
    4.68%
    
    4.50%Anticipated Dividend Yield
    0.00%
    
    0.00%Weighted-Average Grant-Date Fair Value
      ofOptions Granted
    $2.61
    
    $3.03Forfeiture Rate
    0.00%
    
    0.00%


Stock Option and Warrant Activity

Awards under
our 2006 Equity Incentive Plan may be granted to any of our employees, directors
or consultants or those of our affiliates. Awards may consist of stock options
(both incentive stock options and non-statutory stock options), stock awards,
stock appreciation rights and cash awards. As of February 28, 2007, options to
purchase 440,000 shares of common stock have been granted under this plan to
employees and all remain outstanding. In the first six months of fiscal 2007, we
granted options to purchase 440,000 shares of common stock under this plan at an
average exercise price of $4.35 per share. All options were issued with an
exercise price equal to the fair market value on the grant date.All options vest at a rate of 25% immediately
upon grant date and 75% ratably per month over the 36 month service period
commencing on the first anniversary of the grant date.

Summary of Stock Options

A summary of
options under our share-based compensation plan as of February 28, 2007, and the
activity during the six months then ended, are as follows:

Weighted-AverageRemainingWeighted-
    
    Contractual
    
    AggregateAverage
    
    Term
    
    IntrinsicShares
    
    Exercise Price
    
    (in Years)
    
    ValueOptions outstanding at August 31, 2006
    
    -
    
    -Options
      granted
    
    440,000
    
    $4.35Options exercised
    
    -
    
    -Options
      forfeited
    
    -
    
    -Options outstanding at February 28, 2007
    
    440,000
    
    $4.35
    
    9.6
    
    $458,000Options vested
      and exercisable at February 28, 2007
    
    110,000
    
    $4.35
    
    9.6
    
    $114,000


---

NITCHES, INC. AND
SUBSIDIARIESNotes to Condensed
Consolidated Financial Statement (continued)

10. Goodwill and Intangible Assets:

Goodwill and Other Intangible Assets
consisted of the following at February 28, 2007 and August 31, 2006:

February 28,
    
    August 31,2007
    
    2006Good will
    
    $
    2,620,000
    
    $
    2,620,000Intangibles not subject to amortization
    
    
    3,932,000
    
    
    902,000Intangibles subject to amortization
    
    
    2,791,000
    
    
    2,791,000Accumulated amortization
    
    
    (266,000)
    
    
    (150,000)Intangibles, net
    
    $
    6,457,000
    
    $
    3,543,000


Goodwill
represents the excess purchase price over the fair value of the net assets
acquired in connection with our acquisition of Designer Intimates, Inc., which is not subject to amortization. Intangibles not
subject to amortization are comprised of assets purchased in the acquisitions of
Designer Intimates, Inc. and Saguaro LLC, including trademarks that do not have
a finite life. In accordance with SFAS 142, these assets will be tested for
impairment on an annual basis and between annual tests in certain instances (see
Valuation of Goodwill, Long-lived Assets and Intangible Assets). Intangibles
subject to amortization includes the sleepwear license for Crabtree &
Evelyn, the customer lists of Designer Intimates and the home décor license for
Bill Blass. The estimated amortization expense for each of the ensuing years
through August 31, 2011 is $117,000, $234,000, $234,000, and $217,000
respectively. In accordance with SFAS 142 intangible assets that are subject to
amortization are reviewed for potential impairment whenever events or
circumstances indicate that carrying amounts may not be recoverable.

11. New Accounting Pronouncements:

The FASB did
not issue any new Statements of Financial Accounting Standards during the
current period that were applicable to us.

12. Adjustments to
Previously Issued Financial Statements

After filing our Quarterly Report for the quarter ended February 28,
2007, we reevaluated our methodology for recognizing and reporting stock-based
compensation expense in accordance with Statement of Financial Accounting
Standards No. 123R (revised 2004), "Share-Based Payment." On August 21, 2007, we
determined that due to the immediate vesting of 25% of all of the options
granted during the period, we must recognize an expense equal to 25% of the fair
value of the options granted in such period, rather than expensing these amounts
ratably over the first year of the term of the options. As such, the financial
statements included in this report have been revised from the financial
statements included in our previous filings relating to our quarter ended
February 28, 2007. Such revisions reflect a stock-based compensation cost of
approximately $301,000 for the six months ended February 28, 2007, which we
previously reported as $119,000.

We are also amending our disclosure with respect to our acquisition of
Saguaro LLC to allocate the purchase price to the value of the trademarks
acquired, rather than to goodwill. At the time of the acquisition, Saguaro's
only assets were the trademarks "Saguaro" and "Saguaro West." The effect of this
revision is to decrease the dollar amount ascribed to "goodwill" for the period
ended February 28, 2007 from $5,344,000 to $2,620,000 and to increase the dollar
amount ascribed to "Intangibles, net" from $3,733,000 to $6,457,000 and other
related adjustments.

The following financial statement line items for the period ended
February 28, 2007 were affected by the adjustments discussed above:

---

Condensed Consolidated Balance Sheets (Unaudited)Three Months Ended February 28, 2007As Originally
    
    
    
    Effect ofReported
    
    **As Adjusted**
    
    ChangeASSETSTotal Current assets
    $
    22,384,000
    
    $
    22,384,000
    
    $
    -Property and equipment, net
    
    76,000
    
    
    76,000
    
    
    -Goodwill
    
    5,344,000
    
    
    2,620,000
    
    
    (2,724,000
    )Intangibles, net
    
    3,733,000
    
    
    6,457,000
    
    
    2,724,000Other assets
    
    28,000
    
    
    28,000
    
    
    -$
    31,565,000
    
    $
    31,565,000
    
    $
    -LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilitiesDue to factor
    $
    10,345,000
    
    $
    10,345,000
    
    $
    -Accounts payable
    
    6,009,000
    
    
    6,009,000
    
    
    -Accrued expenses
    
    954,000
    
    
    954,000
    
    
    -Note payable
    
    -
    
    
    -
    
    
    *-*Income taxes payable
    
    708,000
    
    
    635,000
    
    
    (73,000
    )Total current liabilities
    
    18,016,000
    
    
    17,943,000
    
    
    (73,000
    )Long term liabilities:Deferred income taxes, non-current
    
    644,000
    
    
    644,000
    
    
    -Shareholders' equity:Series A preferred stock, $100 par value;
      25,000,000shares authorized, 8,820 shares issued and
      outstanding
    
    882,000
    
    
    882,000
    
    
    -Common stock, no par value; 50,000,000
      sharesauthorized; 5,253,507 shares issued and
      outstanding(4,653,507 - August 31, 2006)
    
    7,873,000
    
    
    7,873,000
    
    
    -Additional Paid-in-Capital
    
    119,000
    
    
    301,000
    
    
    182,000Retained earnings
    
    4,031,000
    
    
    3,922,000
    
    
    (109,000
    )Total shareholders' equity
    
    12,905,000
    
    
    12,978,000
    
    
    73,000$
    31,565,000
    
    $
    31,565,000
    
    $
    -


---

|Consolidated Statements Operations (Unaudited)    
|--------------------------------------------------
|Three Months Ended February 28, 2007              
|                                                  
|                                                  
|Net Sales                                         
|Cost of goods
    sold                            
|Gross profit                                      
|Selling, general and
      administrative expenses
|Income (loss) from
    operations                 
|Interest
    expense                              
|Other income                                      
|Loss from equity
      investment                 
|Income (loss) before income
    taxes             
|Provision (benefit) for
      income taxes        
|Net income (loss)                                 
|Earnings (loss) per weighted
      average share  
|Basic                                             
|Diluted                                           
|Weighted average common shares
      outstanding  
|Basic                                             
|Diluted                                           

|****Consolidated
      Statements Operations
      (Unaudited)****
|------------------------------------------------------------------
|**Six Months Ended February 28,
      2007**                      
|                                                                  
|                                                                  
|Net Sales                                                         
|Cost of goods
    sold                                            
|Gross profit                                                      
|Selling, general and
      administrative expenses                
|Income (loss) from
    operations                                 
|Interest
    expense                                              
|Other income                                                      
|Loss from equity
      investment                                 
|Income(loss) before income
    taxes                              
|Provision (benefit) for
      income taxes                        
|Net income (loss)                                                 
|Earnings (loss) per weighted
      average shares                 
|Basic                                                             
|Diluted                                                           
|Weighted average common shares
      outstanding                  
|Basic                                                             
|Diluted                                                           

---

Consolidated Statement
of Changes in Shareholders Equity (Unaudited) Six Months Ended February 28,
2007

|                                       | As Originally |            |                 |   | Effect of 
|-------------------------------------- | ------------- | ---------- | --------------- | - | ----------
|                                       | Reported      |            | As
    Adjusted |   | Change    
|Preferred
      stock                  |               |            |                 |   |           
|Balance, beginning of
    period       | $             | 882,000    |                 | $ | 882,000   
|Preferred stock
      issued           |               | -          |                 |   | -         
|Balance, end of period                 |               | 882,000    |                 |   | 882,000   
|                                      
|Common stock
      and paid-in capital |               |            |                 |   |           
|Balance, beginning of
    period       |               | 5,143,000  |                 |   | 5,143,000 
|Common stock
      issued              |               | 2,730,000  |                 |   | 2,730,000 
|Stock-based compensation
      expense |               | 119,000    |                 |   | 301,000   
|Balance, end of period                 |               | 7,992,000  |                 |   | 8,174,000 
|                                      
|Retained
      earning                 |               |            |                 |   |           
|Balance, beginning of
    period       |               | 3,233,000  |                 |   | 3,233,000 
|Net
      income                       |               | 798,000    |                 |   | 689,000   
|Balance, end of period                 |               | 4,031,000  |                 |   | 3,922,000 
|                                      
|Total stockholders
      equity       | $             | 12,905,000 |                 | $ | 12,978,000

---

Condensed Consolidated
Statements Of Cash Flows (Unaudited)Six Months Ended February 28,
2007

|                                                           | As Originally |            |                   |  | Effect of
|---------------------------------------------------------- | ------------- | ---------- | ----------------- |  | ---------
|                                                           | Reported      |            | As
      Adjusted |  | Change   
|Net
      income                                           | $             | 798,000    |                   |  | $        
|Cash flows from operating
      activities:                |               |            |                   |  |          
|Depreciation and
      amortization                        |               | 225,000    |                   |  |          
|Non-cash stock option compensation
      expense           |               | 119,000    |                   |  |          
|Loss from investment
      in unconsolidated subsidiary    |               | -          |                   |  |          
|(Increase) decrease in
      receivables                   |               | 315,000    |                   |  |          
|Decrease in
      refundable income taxes                  |               | -          |                   |  |          
|Decrease in
      inventories                              |               | 1,785,000  |                   |  |          
|Increase in other
      assets                             |               | (83,000    | )                 |  |          
|Decrease in accounts payable and
      accrued expenses    |               | (3,549,000 | )                 |  |          
|Increase in income
      taxes payables                    |               | 619,000    |                   |  |          
|Decrease in deferred income taxes,
      non-current       |               | (92,000    | )                 |  |          
|Net cash provided (used) by operating
      activities     | $             | 137,000    |                   |  | $        
|                                                          
|Cash flows from
      investing activities:                |               |            |                   |  |          
|Acquisition cost of
      transaction                      |               | -          |                   |  |          
|Capital
      expenditures                                 |               | (21,000    | )                 |  |          
|Cash (used) acquired in
      transaction                  |               | (300,000   | )                 |  |          
|Net cash provided (used) by
      investing activities     | $             | (321,000   | )                 |  | $        
|                                                          
|Cash flows provided
      by financing activities:         |               |            |                   |  |          
|Advances from factor                                       | $             | 669,000    |                   |  | $        
|Payment of loan
      payable                              | $             | (513,000   | )                 |  | $        
|Net cash provided by financing
      activities            | $             | 156,000    |                   |  | $        
|                                                          
|Net increase
      (decrease) in cash and cash equivalents |               | (28,000    | )                 |  |          
|                                                          
|Cash and cash
      equivalents at beginning of period     |               | 228,000    |                   |  |          
|Cash and cash equivalents at end of
      period           | $             | 200,000    |                   |  | $        
|                                                          
|Supplemental
      disclosures of cash flow information:   |               |            |                   |  |          
|Cash paid during the period:                               |               |            |                   |  |          
|Interest                                                   | $             | 546,000    |                   |  | $        
|Income taxes                                               |               | -          |                   |  |          
|                                                          
|Non-cash investing
      activity:                         |               |            |                   |  |          
|Acquisition of
      subsidiaries                          |               |            |                   |  |          
|Common stock issued                                        | $             | 2,730,000  |                   |  | $        
|Series A preferred stock issued                            |               | -          |                   |  |          
|                                                           | $             | 2,730,000  |                   |  | $        

---

ITEM 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations.

Cautionary Statement under the
Private Securities Litigation Reform Act of 1995

Statements in this report under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations", as well as oral
statements that may be made us or by our officers, directors or employees acting
on our behalf, that are not historical fact constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Forward-looking statements involve known and unknown risks and
uncertainties that may cause our actual results in future periods to differ
materially from forecasted results. See "Forward Looking Information and Factors
that May Affect Future Results," below.

Overview

Nitches,
Inc. and subsidiaries ("we," "our," "us," or the "Company") is a wholesale
importer and distributor of clothing and home décor products manufactured to our
specifications and distributed in the United States under our brand labels and
retailer-owned private labels. We distribute clothing primarily in three
categories: womens sleepwear and loungewear, womens sportswear and outerwear,
and mens casual wear and performance apparel. We market sleepwear and
loungewear under the following brands: Princesse tam tam®, Derek Rose®, Crabtree
& Evelyn®, Disney Couture®, The Anne Lewin® Collection, The Bill Blass®
Lifestyle Collection, The Claire Murray® Collection and Gossard®. We market
womens sportswear and outerwear under the following brands: Adobe Rose®,
Country Tease®, Saguaro® and Southwest Canyon®. We market mens casual wear and
performance apparel under the following brands: Nat Nast®, Newport Blue®,
Dockers®, The Skins Game®, and ZOIC®. We distribute home décor products under
the Bill Blass® and Newport Blue® brands. We sell our branded products to better
department stores, specialty boutiques, moderate department stores, and national
and regional discount department stores and chains. We also develop and
manufacture private label products for many leading retailers and
catalogs.

Our results
of operations for the quarterly period ended February 28, 2007 include the
results of several recent acquisitions:

As of
October 24, 2005, we acquired Designer Intimates, Inc., a New York City based
importer and distributor of both branded and private label womens sleepwear,
robes, loungewear, swimwear and intimate apparel; mens sleepwear, robes, and
loungewear; and infants and childrens sleepwear and robes. The aggregate
purchase price for the acquisition was $1,800,000. We issued to the Sellers
180,000 restricted shares of our common stock at a value of $5.10 per share and
8,820 shares of series A preferred stock valued at $100.00 per share. With the
Designer Intimates acquisition, we became a diversified supplier of womens
intimate apparel at multiple levels of retail distribution. The purchase added
significant revenues, further strengthened our product mix, and added to our
portfolio of brands.

On July 1,
2006 we acquired the home décor product line of Taresha LLC. Home décor products
include candles, candle holders and other home decorating accessories. We paid
$2,730,000 to Taresha in the form of 600,000 shares of our common stock valued
at $4.55 per share (based on the average closing price for our common stock for
the ten trading days between June 7 and June 20, 2006, inclusive). Home décor
products are sold under the Bill Blass and Newport Blue brands primarily to the
same retailers as Nitches apparel products. The purchase added new sources of
revenue and diversified our product offerings to retailers beyond
apparel.

On October
24, 2006, we completed our acquisition of the Saguaro® mark and related
trademarks from Impex Inc., a leading manufacturer of branded and non-branded
specialty, western and private-label womens apparel. We paid consideration of
$3,030,000 to Impex in the form of 600,000 shares of our common stock valued at
$4.55 per share (based on the average closing price for our common stock for the
ten trading days between June 7 and June 20, 2006, inclusive) and a $300,000
promissory note. Since January 2005, we had been manufacturing and distributing
Saguaro® apparel products to specialty and catalog retailers under the terms of
a strategic alliance with Impex. Under this alliance, we recorded the revenue
from such sales and remitted royalties and design fees to Impex as part of our
operating expenses. As a result of this acquisition, we now incur normal
operating expenses for this product line and no longer pay royalties and design
fees to Impex.

Critical Accounting Policies

Revenue
Recognition.We recognize revenue at the time
products are shipped based on its terms of F.O.B. shipping point, where risk of
loss and title transfers to the buyer at time of shipment. We record sales in
accordance with SEC Staff Accounting Bulletin No. 104, Revenue Recognition.
Under these guidelines, revenue is recognized when all of the following exist:
persuasive evidence of a sale arrangement exists, delivery of the product has
occurred, the price is fixed or determinable and payment is reasonably assured.
Provisions are made currently for estimated product returns and sales
allowances.

Allowances for Sales Returns, Doubtful Accounts and Other.Sales are recorded net of estimated future
returns, uncollectible accounts receivable and other customer related
allowances. Our management analyzes historical returns and bad debt expense,
current economic trends, changes in customer demand and sell-through of our
products when evaluating the adequacy of these allowances. In addition, we may
provide warehousing credits and other allowances to certain customers in
accordance with industry practice. These reserves are determined based on
historical experience, budgeted customer allowances and existing commitments to
customers. Although our management believes it has established adequate reserves
with respect to these items, actual activity could vary from management's
estimates and such variances could have a material impact on reported results.
At February 28, 2007, trade accounts receivable balance was $10.2 million, net
of allowances of $713,000, as compared to the balance of $10.5 million, net of
allowances of $643,000, at August 31, 2006. At February 28, 2006, the trade
accounts receivable balance was $9.9 million, net of allowances of $541,000.

Inventory. We mark down our inventory for estimated obsolescence
or unmarketable inventory equal to the difference between the cost of inventory
and the estimated net realizable value based on assumptions about age of the
inventory, future demand and market conditions. This process provides for a new
basis for the inventory until it is sold. If actual market conditions are less
favorable than those projected by management, additional inventory markdowns may
be required. Our inventory balance was $10.6 million, net of inventory markdowns
of $387,000, at February 28, 2007, as compared to an inventory balance of $12.4
million, net of inventory markdowns of $388,000, at August 31, 2006. At February
28, 2006, the inventory balance was $7.8 million, net of inventory markdowns of
$375,000.

---

Deferred
Taxes.Deferred taxes are determined, based
on differences between the financial statement and tax bases of assets and
liabilities, as well as the future benefit of any net operating loss carry
forward, using enacted tax rates in effect for the year in which the differences
are expected to reverse. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized. In assessing
the need for a valuation allowance, our management considers estimates of future
taxable income and ongoing prudent and feasible tax planning strategies.

Valuation
of Goodwill, Long-Lived Assets and Intangible Assets. We evaluate goodwill, long-lived assets and intangible assets for
potential impairment on an annual basis during our fourth fiscal quarter,
subsequent to the completion of financial projections for the following fiscal
year. We may make an evaluation between annual tests in certain circumstances
such as a significant change in business climate, unanticipated competition,
loss of key personnel, or adverse action or assessment by a regulator such as
import quotas or duties. Any of these circumstances could cause us to conclude
that impairment exists and that the net book value of goodwill, long-lived
assets and/or intangible assets is impaired. Any resulting impairment loss could
have a material adverse impact on our financial condition and results of
operations.

Contingencies and Litigation. Our
management evaluates contingent liabilities including threatened or pending
litigation in accordance with SFAS No. 5, Accounting for Contingencies and
records accruals when the outcome of these matters is deemed probably and the
liability could be reasonably estimated.

Results of Operations

Six Months Ended February 28, 2007
Compared to the Six Months Ended February 28, 2006

Net sales
for the six months ended February 28, 2007 were $49.7 million, an increase of
$22.7 million or 84% as compared to the six months ended February 28, 2006. This
increase was attributable primarily to increased sales for our sleepwear and
womens private label apparel, as well as revenues associated with our home
décor product line.

Cost of
goods sold for the six months ended February 28, 2007 were $37.4 million
compared to $19.1 for the period a year ago. Cost of goods sold as a percent of
net sales increased 4.4%, generating a lower gross profit margin of 24.8% for
the six months ended February 28, 2007, as compared to 29.2% for the year
earlier period. The decrease in gross margin came as the result of increased
private label sales and a high volume sale of branded product to a national
retailer, both at a lower average gross margin. Our product mix constantly
changes to reflect product mix, customer mix, fashion trends and changing
seasons. Consequently, gross margin is likely to vary on a quarter-to-quarter
basis and in comparison to gross margins generated in the same period of prior
fiscal years.

Selling,
general and administrative expenses for the first half of fiscal 2007 was $10.7 million an increase of $4.4
million as compared to the same period a year ago. The increase was due
primarily to the consolidation of selling, general and administrative costs for
Designer Intimates, Inc., which was acquired in October 2005. Selling, general
and administrative expenses for the period included $4.9 million of selling and
merchandising expenses and $1.3 million of shipping and warehousing expenses.
This compares with $2.8 million of selling and merchandising expenses and
$923,000 of shipping and warehousing expenses incurred during the six months
ended February 28, 2006. Selling, general and administrative expenses as a
percent of net sales decreased to 21.4% from 23.3% in
the prior period, due to the inclusion of higher sales from Designer Intimates
at a correspondingly lower selling, general and administrative expense
rate.

Interest
expense in the current period was $547,000, an increase of $324,000 as compared
to $223,000 for the six months ended February 28, 2006. This increase was due
primarily to increased advances under our factoring agreement and the inclusion
of the interest expense for Designer Intimates for the full six months of fiscal
2007. Interest expense was also impacted by higher interest rates charged on
advances due to an increase in the prime lending rate from 7.5% at February 28,
2006 to 8.25% at February 28, 2007.

---

Three Months Ended February 28, 2007
Compared to the Three Months Ended February 28, 2006

Net sales
for the three months ended February 28, 2007 were $14.3 million, an increase of
$2.0 million or 16% as compared to the three months ended February 28, 2006.
This increase was primarily attributable to additional unit sales of our
menswear product lines and the inclusion of sales of our home décor product
line.

Cost of
goods sold for the six months ended February 28, 2007 were $10.5 million
compared to $8.8 for the period a year ago. Cost of goods sold as a percent of
net sales increased 2.5%, generating a lower gross profit margin of 26.4% for
the three months ended February 28, 2007 as compared to 28.9% for the year
earlier period. The decrease in gross margin came primarily as the result of a
higher cost of sales in our sleepwear lines. Our product mix constantly changes
to reflect customer mix, fashion trends and changing seasons. Consequently,
gross margin is likely to vary on a quarter-to-quarter basis and in comparison
to gross margins generated in the same period of prior fiscal years.

Selling,
general and administrative expenses for the three months ended February 28, 2007
were $4.5 million, an increase of $1.3 million as
compared to a year ago. The increase was due to increased selling, general and
administrative costs as a result of our acquisition of the home décor product
line from Taresha LLC as of July 1, 2006, and the acquisition of the Saguaro®
mark and related trademarks from Impex Inc. on October 24, 2006. Selling,
general and administrative expenses for the period included $1.9 million of
selling and merchandising expenses and $634,000 of shipping and warehousing
expenses. This compares with $1.2 million of selling and merchandising expenses
and $509,000 of shipping and warehousing expenses incurred during the three
months ended February 28, 2006. Selling, general and administrative expenses as
a percent of net sales increased to 31.8% from 26.4%
in the prior period, due to the inclusion of selling, general and administrative
expenses associated with the home décor product line and Saguaro acquisitions
during a period of seasonally low sales volume for these product lines.

Interest
expense was $247,000 in the current period an increase of $114,000 as compared
to $133,000 for the three months ended February 28, 2006. This increase was due
to higher interest rates charged on increased advances under our factoring
agreement as a result of our increased working capital requirements. Interest
expense was also impacted by higher interest rates charged on advances due to an
increase in the prime lending rate from 7.5% at February 28, 2006 to 8.25% at
February 28, 2007.

Liquidity and Capital Resources

Working
capital at February 28, 2007 was $4.4 million and increase of $0.8 million from
$3.6 million at August 31, 2006. Our current ratio increased to 1.24:1 at
February 28, 2007 from 1.25:1 at August 31, 2006.
This slight increase resulted primarily from a reduction in current liabilities
partially offset by a reduction in inventory.

Net cash
provided by operating activities for the six month period ended February 28,
2007 was approximately $137,000. The increase in cash provided by operating
activities during the period was primarily the result of next income and a
decrease in accounts receivables and inventory, offset by a decrease in accounts
payable and accrued expenses.

---

Net cash
used by investing activities for the six month period ended February 28, 2007
was $321,000 including $21,000 in capital expenditures and $300,000 used in the
Saguaro acquisition.

Net cash
provided by financing activities for the six month period ended February 28,
2007 was approximately $156,000, which was attributable to advances from our
factor in accordance with the terms of the factoring agreement.

We sell
substantially all of our trade receivables to a factor (CIT) on a pre-approved,
non-recourse basis. We attempt to make any recourse shipments on a COD basis or
ensure that the customers' payments are backed by a commercial or standby letter
of credit issued by the customers bank. The amount of our receivables that were
non-recourse at February 28, 2007 was $10.3 million. The amount of our
receivables that were recourse and were not made on a COD basis or supported by
commercial or standby letters of credit at February 28, 2007 was approximately
$629,000, of which approximately $162,000 had been collected through March 31,
2007.

Payment for
non-recourse factored receivables is made at the time customers make payment to
CIT or, if a customer is financially unable to make payment, within
approximately 180 days of the invoice due date. Under the factoring agreement,
we can request advances in anticipation of customer collections at the prime
rate (currently 8.25%) less one and one-half percent (1.5%). The amount of
advances available to us is limited to eighty-five percent (85%) of non-recourse
factored receivables and fifty percent (50%) of eligible finished goods
inventory.

We may issue
import letters of credit through CIT for the purchase of inventory in the normal
course of our operations. Letters of credit are subject to a $12 million limit.
At February 28, 2007, we had outstanding letters of credit of approximately $3.1
million for the purchase of finished goods, which had been opened through CIT.

The
factoring agreement does not contain any financial covenants to which we must
adhere. Advances are collateralized by all of our assets as well as a personal
guaranty of our chairman, who also serves as our chief executive officer and
chief financial officer. CIT can terminate the factoring agreement on 30-days
written notice. We believe the factoring agreement with CIT, along with our
expected cash flow from operating activities and our current levels of working
capital are adequate to fulfill our liquidity needs for the foreseeable future.

Contractual Obligations and
Commercial Commitments

As of February 28, 2007, we had no
off-balance sheet arrangements. The following summarizes our contractual
obligations at February 28, 2007 and the effect those obligations are expected
to have on our liquidity and cash flow in future periods:

|                                | Payments due/Commitments expiringper period
|------------------------------- | -------------------------------------------
|                                | Total Amounts                              
|                                | Committed                                  
|Operating leases                | $                                          
|Employment
      agreement      |                                            
|Letters of credit               |                                            
|Guarantees                      |                                            
|Total obligations & commitments | $                                          

* In connection with the acquisition of Designer Intimates, Inc., we
guaranteed a $3 million credit line, which is due on demand, that Designer
Intimates has with its factor.

Inventory

Our
inventory decreased 14.4% to $10.6 million at February 28, 2007, from $12.4
million at August 31, 2006. Compared to inventories of $7.8 million at February
28, 2006, inventories ending the current period increased 36.7%, in line with
the increase in customer orders and the inclusion of home décor inventory at the
end of the current period. We believe that our current inventory mix and unit
levels are appropriate to respond to anticipated market demand.

In our
ordinary course of operations, we generally make some sales below normal selling
prices or below cost. Based on prior experience, our management believes this
will be true for some inventory held on or acquired after February 28, 2007. The
amount of such sales depends on several factors, including general economic
conditions, market conditions within the apparel industry, the desirability of
the styles held in inventory and competitive pressures from other garment
suppliers.

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We have
established an inventory markdown reserve as of February 28, 2007, which our
management believes will be sufficient for current inventory that is expected to
sell below cost in the future. There can be no assurance that we will realize
our expected selling prices, or that the inventory markdown reserve will be
adequate, for items in inventory as of February 28, 2007 for which customer
sales orders have not yet been received. The inventory markdown reserve is
calculated based on specific identification of aged goods and styles that are
slow-moving or selling off-price.

Backlog

As of
February 28, 2007, we had on-hand unfilled customer orders of $28.1 million as
compared to $23.4 million at February 28, 2006, with such orders generally
scheduled for delivery by August2007 and 2006, respectively. The increase in
backlog is due primarily to the inclusion of the home décor product line order
backlog, an increase in orders for our branded womens sleepwear and branded
mens sportswear lines, and earlier receipt of private label womens sportswear
orders.

Backlog
amounts include both confirmed and unconfirmed orders that we believe, based on
industry practice and past experience, will be confirmed. While cancellations,
rejections and returns have generally not been material in the past, there can
be no assurance that cancellations, rejections and returns will not reduce the
amount of sales realized from the backlog of orders at February 28, 2007.
Because of our reliance upon a few major accounts, any deteriorating financial
performance by one or more of these customers could lead to the cancellation of
existing orders and/or an inability to secure future orders, which would have a
material adverse financial effect on us.

Impact of Exchange Rates

While we
purchase over 98% of our products from foreign manufacturers, all of our
purchases are denominated in United States dollars. Because our products are
sold primarily in the United States, in United States dollar denominated
transactions, we do not engage in hedging or other arbitrage to reduce currency
risk. An increase in the value of the United States dollar versus foreign
currencies could enhance our purchasing power for new purchase orders and reduce
our cost of goods sold. Conversely, a decrease in the value of the United States
dollar relative to foreign currencies could result in an increase in both our
cost of manufacturing for new purchase orders and costs of goods sold.

Impact of Inflation and Deflation

Our
management does not believe that inflation has had any material impact upon our
revenues or income from operations in the current period. Our management
believes that the apparel sector in which we operate has been in a period of
deflation, contrary to the modest inflation experienced in the economy in
general. The persistence of the consumer to buy on sale merchandise has put
pressure on retail gross margins, which in turn has led to downward pressure
from retailers on wholesale gross margins, in the form of selling cost
adjustments taken as deductions against invoices issued by us. In the apparel
industry, these are commonly referred to as markdown allowances or chargebacks.
Without a corresponding decrease in fabric and labor prices, these markdown
allowances have led to a decline in wholesale gross margins. Our management
believes these modest deflationary pressures will persist into the foreseeable
future.

Future Operating Results

Business
conditions in the apparel sector continue to be characterized by limited
consumer demand and persistent discounting of merchandise by retailers. The
propensity of consumers to seek on sale merchandise has sustained the use of
significant discounting by most retailers to stimulate sales. In general,
retailers have to sell more units in order to achieve sales equal to last year.
We do not expect significant improvement in business conditions in the apparel
sector for the upcoming fiscal year. Furthermore, we expect to incur significant
expense related to internal controls documentation, testing and remediation
requirements as mandated by Sarbanes-Oxley legislation with which we must be in
compliance by August 31, 2008. In view of the market uncertainties and economic
pressures facing us, our management remains conservative in its approach to the
reminder of the fiscal year.

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Forward Looking Information and
Factors that May Affect Future Results

Our
disclosure and analysis in this report contain forward-looking information about
our financial results and estimates, business prospects that involve substantial
risks and uncertainties. From time to time, we also may provide oral or written
forward-looking statements in other materials we release to the public.
Forward-looking statements give our current expectations or forecasts of future
events. You can identify these statements by the fact that they do not relate
strictly to historic or current facts. They use words such as "anticipate,"
"estimate," "expect," "project," "intend," "plan," "believe," "target,"
"forecast" and other words and terms of similar meaning in connection with any
discussion of future operating or financial performance. In particular, these
include statements relating to future actions, future performance, new products
and product categories, the outcome of contingencies, such as legal proceedings,
and financial results. Among the factors that could cause actual results to
differ materially are the following:

- our ability to: 
  achieve solid, sustainable revenue
    growth;maintain and enhance our product
    line;successfully introduce new products and product
    categories;successfully integrate acquisitions, including
    the acquisition of Designer Intimates, Inc., the home décor product line of
    Taresha LLC and the Saguaro® mark and related trademarks from Impex
    Inc.;cost effectively acquire and retain
    customers;compete against existing and new
    competitors;manage expenses associated with necessary
    general and administrative investments;cost efficiently manage inventories;
    andgrow our revenues and leverage our operating
    infrastructure to enhance profitability;
- achieve solid, sustainable revenue
    growth;
- maintain and enhance our product
    line;
- successfully introduce new products and product
    categories;
- successfully integrate acquisitions, including
    the acquisition of Designer Intimates, Inc., the home décor product line of
    Taresha LLC and the Saguaro® mark and related trademarks from Impex
    Inc.;
- cost effectively acquire and retain
    customers;
- compete against existing and new
    competitors;
- manage expenses associated with necessary
    general and administrative investments;
- cost efficiently manage inventories;
    and
- grow our revenues and leverage our operating
    infrastructure to enhance profitability;

- general consumer sentiment and economic conditions
  that may affect levels of discretionary customer purchases of our products;
  and
- competition from
  existing and potential new competitors, including pricing pressures and other
  competitive forces.

We cannot
guarantee that any forward-looking statement will be realized, although we
believe we have been prudent in our plans and assumptions. Achievement of future
results is subject to risks, uncertainties and inaccurate assumptions. Should
known or unknown risks or uncertainties materialize, or should underlying
assumptions prove inaccurate, actual results could vary materially from past
results and those anticipated, estimated or projected. Investors should bear
this in mind as they consider forward-looking statements.

We undertake
no obligation to publicly update forward-looking statements, whether as a result
of new information, future events or otherwise. You are advised, however, to
consult any further disclosures we make on related subjects in our Forms 10-Q,
8-K and 10-K reports filed with the SEC. Our Annual Report on Form 10-K filing
for the fiscal year ended August 31, 2006 listed various important factors that
could cause actual results to differ materially from expected and historic
results. We note these factors for investors as permitted by the Private
Securities Litigation Reform Act of 1995. Readers can find them in Part I, Item
1A, of that filing under the heading "Risk Factors." We incorporate that section
of that Form 10-K in this filing and investors should refer to it. You should
understand that it is not possible to predict or identify all such factors.
Consequently, you should not consider any such list to be a complete set of all
potential risks or uncertainties.

ITEM 3. Quantitative and Qualitative
Disclosures about Market Risk

Market risk
represents the potential impact to our financial position, results of operations
or cash flows due to adverse changes in the financial markets. We are exposed to
market risk from changes in the base interest rate of our variable rate debt. As
of August 31, 2006, a one percent change in interest rates would increase or
decrease our annual interest expense by approximately $82,000. There has been no
material changes in market risk exposures from those disclosed in our Annual
Report on Form 10-K for the fiscal year ended August 31, 2006.

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ITEM 4. Controls and Procedures

(a)Disclosure Controls and Procedures.Disclosure controls and procedures are
controls and other procedures that are designed to ensure that information
required to be disclosed in our reports filed pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act") is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms and that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate, to allow for timely decisions regarding required disclosure.

Because of
the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within our company have been detected. The design of any system of controls
is based in part upon a cost-benefit analysis and certain assumptions about the
likelihood of future events, and any design may not succeed in achieving its
stated goals under all potential future conditions. While our management does
not believe that our controls will prevent all errors or all instances of fraud,
our disclosure controls and procedures are designed to provide a reasonable
assurance of achieving their objectives.

As required
by Securities and Exchange Commission Rule 13a-15(b), we carried out an
evaluation, under the supervision and with the participation of our management,
including our chief executive and financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of February
28, 2007, the end of the period covered by this report. Based on that
evaluation, our chief executive officer and chief financial officer concluded
that our disclosure controls and procedures were effective at the reasonable
assurance level as of February 28, 2007.

(b)Changes In Internal Controls Over Financial Reporting. We made changes in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act)
during our most recent fiscal quarter that has materially affected, or is likely
to materially affect, our internal control over financial reporting.

In our reports for our fiscal year
ended August 31, 2006 and our quarterly period ended November 30, 2006 we
identified certain deficiencies in our internal controls over financial
reporting, including insufficient experience of our internal staff,
concentration of closing responsibility in a few executives and the failure to
effectively integrate the accounting systems of our home décor product
line.

During the quarter ended February
28, 2007 we implemented the following changes to our internal controls over
financial reporting:

- Staff Experience. During the recent fiscal quarter we did not experience any
  significant change in accounting personnel. We continued internal education
  programs for our accounting staff.
- Reallocating accounting duties. We reallocated several duties associated with closing
  quarterly financial results away from our chief executive officer and chief
  financial officer to reduce our dependence on the availability of that officer
  in order to compile our financial information.
- Completion of home décor integration.We completed the acquisition of the home
  décor product line in July 2006 and maintained a separate accounting system
  through the fiscal year ended August 31, 2006. During the first quarter we
  began the integration of the home décor product line into our principal
  accounting system. We completed that integration in the quarter ended February
  28, 2007.

Subsequent
to the end of the current quarter, effective April 1, 2007, we experienced a
change in accounting personnel. Our controller resigned for personal reasons and
was replaced. We believe that with the reallocation of accounting duties and the
completion of the home décor integration, we have sufficient experienced staff
to maintain appropriate internal controls over financial
reporting.

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PART II - OTHER INFORMATION

ITEM 1A. Risk Factors

There have
been no material changes from the risk factors disclosed in Part 1, Item 1A, of
our Annual Report on Form 10-K for the fiscal year ended August 31, 2006.

ITEM 4. Submission of Matters to a Vote
of Security Holders

On or about
February 2, 2007, our board of directors solicited the consent and ratification
from our shareholders of the issuance of 600,000 shares of our common stock to
Taresha, LLC. The 600,000 shares were issued to Taresha under the terms of the
asset purchase and sale agreement entered into between us and Taresha as of July
1, 2006, pursuant to which we acquired substantially all of the assets related
to Tareshas home décor line of business in exchange for the 600,000 shares. We
solicited the consent and ratification of the issuance of the 600,000 shares by
written consent in lieu of a meeting of shareholders.

To approve
and ratify the issuance of the 600,000 shares, we had to obtain approval from
shares representing a majority of the outstanding shares of our common stock
entitled to vote, or 2,326,754 shares. As of February 27, 2007, we received
consents representing (i) 2,327,776 shares approving and ratifying the issuance
of the 600,000 shares, and (ii) 12,644 shares voting against the issuance of the
600,000 shares. Shareholders representing 336 shares abstained from voting. As
such, the issuance of the 600,000 shares was approved and ratified by our
shareholders effective as of February 27, 2007.

As a result
of obtaining such shareholder approval and ratification, the lock up agreement
entered into between us and Taresha expired effective February 27, 2007. The
lock up agreement restricted the transfer, voting and dividend rights of the
Shares until such time, if ever, that we received shareholder approval for the
issuance of the 600,000 shares.

ITEM 6. Exhibits

|Exhibit
      No. |  | Description                                                                                                                                                        
|----------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1              |  | Certification pursuant to Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934, as amended, by Chief Executive Officer and Chief Financial Officer
|32.1              |  | Certification pursuant to 18 U.S.C. §1350 by Chief Executive
      Officer and Chief Financial Officer                                                             

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SIGNATURES

Pursuant to
the requirement of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned there unto duly
authorized.

|                 |     | NITCHES, INC.                                      
|---------------- | --- | ---------------------------------------------------
|                 |     | (Registrant)                                       
|                
|October 26, 2007 | By: | /s/ Steven
      P. Wyandt                         
|                 |     | Steven P. Wyandt                                   
|                 |     | As Principal Financial Officer and on behalf
    of
|                 |     | the Registrant                                     

EXHIBIT INDEX

|Exhibit
      No. |  | Description                                                                                                                                                        
|----------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1              |  | Certification pursuant to Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934, as amended, by Chief Executive Officer and Chief Financial Officer
|32.1              |  | Certification pursuant to 18 U.S.C. §1350 by Chief Executive
      Officer and Chief Financial Officer                                                             

---