UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q/AAmendment No.
2

|(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: |  | to |  |  | 
|------------------------------------- |  | -- |  |  | 

|Commission File
      Number: | 000-13851 |  | 
|----------------------------- | --------- |  | 

|NITCHES,
      INC.                                         
|------------------------------------------------------------
|(Exact name of
      registrant as specified in its
charter)

|California                                                           |  | 95-2848021                                
|-------------------------------------------------------------------- |  | ------------------------------------------
|(State or other
      jurisdiction of incorporation or organization) |  | (I.R.S. Employer
      Identification No.)
|                                                                    
|10280 Camino Santa Fe, San Diego,
      California                   |  | 92121                                     
|(Address of principal
      executive offices)                       |  | (Zip
    Code)                            

|(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 July 20, 2007 the registrant had
      5,659,644 shares of common stock
outstanding.                                  



---

EXPLANATORY NOTE

We filed our Quarterly Report on Form 10-Q
for the period ended May 31, 2007 with the Securities and Exchange Commission on
July 23, 2007 (the "Original Filing").  We filed an Amendment No. 1 on Form
10-Q/A for the period ended May 31, 2007 with the Securities and Exchange
Commission on July 24, 2007 ("Amendment No. 1") to amend certain disclosures
with respect to changes in our internal controls over financial reporting under
Item 4(b).

In the Original Filing and in Amendment
No. 1, we indicated that we had determined that our 2006 income tax provision
included the correction of an error in the income tax provision for 2005, and
further determined that correction of the error from 2005 should have been
recorded as an adjustment to the 2005 financial statements, rather than as an
adjustment to the tax provision for 2006. We also stated that we intend to file
an amendment to our Annual Report on Form 10-K for the year ended August 31,
2006 to reflect this adjustment.

After further analysis, we determined that
although there was an error in the calculation of the income tax provision for
2005, correcting the issue would not be material to our operating results. 
The correction, if made, would reduce net income for 2006 by $103,000 and
correspondingly reduce the net loss recorded in 2005 by the same amount. 
While the changes to our fiscal 2006 financial statements would be
quantitatively significant when measured as a percentage of net income (the
effect on our statement of operations would be to reduce our net income from
$468,000 or $0.11 per share to $365,000 or $0.09 per share, a percentage change
of 22.0%), the significance is largely attributable to the nominal amount of net
income recorded in the period.  We believe that it is not quantitatively
significant when compared to the overall scale of our financial position or
results of operation.  Also, we do not believe that the change would be
material from a qualitative standpoint.  During 2006 we completed three
acquisitions that had a significant impact on our operations in 2006 and are
expected to have a larger impact on our operations for 2007.  We believe
that investors who are evaluating our stock will be concerned with a multitude
of factors such as financial position, gross profit margin, new product
initiatives, and integration of acquisitions.  Based on this analysis, we
do not believe that change is material from a quantitative or qualitative
standpoint, and accordingly do not intend to amend and restate our financial
statements for the year ended August 31, 2006.  Our audit committee has
discussed this matter with our independent accountants.

Accordingly, this Amendment No. 2 on Form
10-Q/A for the period ended May 31, 2007 ("Amendment No. 2") is being filed to
make the following changes to the following sections of Amendment No.
1:

(i)  Item 1. Financial
Statements.  We have amended our Condensed Consolidated Statement of
Changes in Shareholders' Equity to remove a $103,000 prior period adjustment to
our retained earnings as of the nine months ended May 31,
2006.

(ii)  Note 11 Item 1. Financial
Statements.  We are expanding our discussion concerning the terms for
vesting of our outstanding stock options.

(iii)  Note 15 to Item 1. Financial
Statements.  We have deleted Note 15 to Item 1. Financial Statements with
respect to pending restatements.  As discussed above, we have determined
not to restate our Annual Report on 10-K for the year ended August 31,
2006.  In addition, we have now filed amendments to our Quarterly Reports
on Form 10-Q for each of the quarters ended November 30, 2006 and February 28,
2007 to recognize an immediate expense related to stock based compensation
rather than expensing the amounts ratable over the first year of the term of the
options.

This Amendment No. 2 revises the items
discussed above, solely as a result of, and to reflect, the impact of the items
discussed in this Explanatory Note. While we have presented our complete
Quarterly Report on Form 10-Q in this Amendment No. 2, other than the items
discussed above, our Quarterly Report on Form 10-Q remains unchanged from
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 May 31, 2007 and does not reflect
events or changes that have occurred subsequent to that date.  Accordingly,
this Amendment No. 2 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. 2 shall not be deemed an
admission that the Original Filing or Amendment No. 1 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

ITEM 1. Financial
Statements

NITCHES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                                              | May 31,
    2007 |            | August 31,
    2006
|----------------------------------------------------------------------------- | ---------------- | ---------- | -------------------
|ASSETS                                                                        | (Unaudited)      |            |                    
|Current assets:                                                               |                  |            |                    
|Cash and
      cash equivalents                                               | $                | 282,000    |                    
|Receivables:                                                                  |                  |            |                    
|Due
      from factor, net                                                    |                  | 12,999,000 |                    
|Trade accounts, net                                                           |                  | 8,000      |                    
|Due
      from affiliates and employees                                       |                  | 35,000     |                    
|Total
      receivables                                                       |                  | 13,042,000 |                    
|                                                                             
|Inventories, less allowances                                                  |                  | 6,992,000  |                    
|Deferred
      income taxes, current                                          |                  | 587,000    |                    
|Other current assets                                                          |                  | 721,000    |                    
|Total current
      assets                                                    |                  | 21,624,000 |                    
|                                                                             
|Property and equipment, net                                                   |                  | 88,000     |                    
|Goodwill                                                                      |                  | 2,620,000  |                    
|Intangibles, net                                                              |                  | 6,398,000  |                    
|Other
      assets                                                            |                  | 55,000     |                    
|                                                                              | $                | 30,785,000 |                    
|                                                                             
|LIABILITIES
      AND SHAREHOLDERS' EQUITY                                    |                  |            |                    
|Current liabilities:                                                          |                  |            |                    
|Due to
      factor                                                           | $                | 10,039,000 |                    
|Accounts payable                                                              |                  | 4,556,000  |                    
|Accrued
      expenses                                                        |                  | 1,265,000  |                    
|Note payable                                                                  |                  | -          |                    
|Income
      taxes payable                                                    |                  | 179,000    |                    
|Total current liabilities                                                     |                  | 16,039,000 |                    
|                                                                             
|Long term liabilities:                                                        |                  |            |                    
|Deferred income taxes, non-current                                            |                  | 708,000    |                    
|                                                                             
|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;                     |                  |            |                    
|5,659,644 shares issued and outstanding
      (4,653,507 - August 31, 2006)   |                  | 9,373,000  |                    
|Additonal
      Paid-in-Capital                                               |                  | 301,000    |                    
|Retained earnings                                                             |                  | 3,482,000  |                    
|Total shareholders' equity                                                    |                  | 14,038,000 |                    
|                                                                              | $                | 30,785,000 |                    

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

---

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

|                                             | Three Months
    Ended |            | Nine Months Ended
|-------------------------------------------- | ---------------------- | ---------- | -----------------
|                                             | May
      31,          |            | May 31,          
|                                             | 2007                   |            | 2006             
|Net sales                                    | $                      | 19,475,000 |                  
|                                             |                        |            |                  
|Cost of goods sold                           |                        | 14,690,000 |                  
|                                             |                        |            |                  
|Gross profit                                 |                        | 4,785,000  |                  
|                                             |                        |            |                  
|Selling, general and administrative expenses |                        | 5,279,000  |                  
|                                             |                        |            |                  
|Income (loss) from operations                |                        | (494,000   | )                
|                                             |                        |            |                  
|Interest expense                             |                        | (206,000   | )                
|Other
      income                           |                        | -          |                  
|Loss from equity investment                  |                        | -          |                  
|                                             |                        |            |                  
|Income (loss) before income taxes            |                        | (700,000   | )                
|                                             |                        |            |                  
|Provision (benefit) for income taxes         |                        | (268,000   | )                
|                                             |                        |            |                  
|Net income (loss)                            | $                      | (432,000   | )                
|                                             |                        |            |                  
|Earnings (loss) per weighted average share   |                        |            |                  
|Basic                                        | $                      | (0.08      | )                
|Diluted                                      | $                      | (0.08      | )                
|                                             |                        |            |                  
|Weighted average common shares outstanding   |                        |            |                  
|Basic                                        |                        | 5,421,259  |                  
|Diluted                                      |                        | 5,421,259  |                  

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

---

NITCHES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)

|                                   | Nine Months Ended
|---------------------------------- | -----------------
|                                   | May 31,          
|                                   | 2007             
|Preferred stock                    |                  
|Balance,
      beginning of period | $                
|Preferred stock issued             |                  
|Balance, end of period             |                  
|                                  
|Common stock                       |                  
|Balance,
      beginning of period |                  
|Common stock issued                |                  
|Balance, end of period             |                  
|                                  
|Paid-in capital                    |                  
|Balance,
      beginning of period |                  
|Stock-based compensation expense   |                  
|Balance, end of period             |                  
|                                  
|Retained earnings                  |                  
|Balance,
      beginning of period |                  
|Net income                         |                  
|Balance, end of period             |                  
|                                  
|Total shareholders'
      equity   | $                

| |  | 
| |  | 
|
| |  | 

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

---

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

|                                                                                                  | Nine Months Ended
|------------------------------------------------------------------------------------------------- | -----------------
|                                                                                                  | May 31,          
|                                                                                                  | 2007             
|Cash flows from operating activities:                                                             |                  
|Net income                                                                                        | $                
|Adjustments to reconcile net
      income to net cash provided by (used in) operating activities: |                  
|Depreciation and
      amortization                                                               |                  
|Noncash stock based
      compensation expense                                                    |                  
|Deferred income
      taxes                                                                       |                  
|Loss from investment in
      unconsolidated subsidiary                                           |                  
|(Increase) decrease in
      receivables                                                          |                  
|Increase in refundable
      income taxes                                                         |                  
|Decrease in
      inventories                                                                     |                  
|Increase in other
      assets                                                                    |                  
|Decrease in accounts payable
      and accrued expenses                                           |                  
|Increase in income taxes
      payables                                                           |                  
|Net cash provided by (used in)
      operating activities                                         |                  
|                                                                                                  |                  
|Cash flows from investing activities:                                                             |                  
|Acquisition related
      costs                                                                   |                  
|Capital
      expenditures                                                                        |                  
|Cash acquired in
      transaction                                                                |                  
|Net cash used by investing
      activities                                                       |                  
|                                                                                                  |                  
|Cash flows from
      financing activities:                                                       |                  
|Advances from
      factor                                                                        |                  
|Common stock issuance                                                                             |                  
|Repayment of notes
      payable                                                                  |                  
|Net cash provided by financing
      activities                                                   |                  
|                                                                                                  |                  
|Net increase 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
      for:                                                            |                  
|Interest                                                                                          | $                
|Income taxes                                                                                      |                  
|                                                                                                  |                  
|Noncash investing activity:                                                                       |                  
|Acquisition of subsidiaries
      and intangible assets                                           |                  
|Common stock
      issued                                                                         | $                
|Series A preferred stock
      issued                                                             |                  
|Promissory note
      issued                                                                      |                  
|                                                                                                  | $                

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

---

NITCHES, INC. AND
SUBSIDIARIESNotes to the Unaudited
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 womens sleepwear and
loungewear under the following brands: Princesse tam tam®, Derek Rose®, Crabtree
& Evelyn®, Disney Couture®, The Anne Lewin® 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 condensed 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 accounting principles generally accepted 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 nine months ended May 31, 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. Principles of
Consolidation:

The
condensed consolidated financial statements include the accounts of Nitches,
Inc., its wholly-owned subsidiaries Nitches Far East Limited and Designer
Intimates, Inc., and Designer Intimates wholly-owned subsidiary NAP, Inc. All
significant inter-company transactions and balances are eliminated in
consolidation.

4. Earnings Per
Share:

Basic
earnings per common share are 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.

---

NITCHES, INC. AND
SUBSIDIARIESNotes to the Unaudited
Condensed Consolidated Financial Statements

The following table sets forth the
computation of basic and diluted earnings per share:

Three Months Ended
    
    Nine Months EndedMay
      31,
    
    May
      31,2007
    
    2006
    
    2007
    
    2006Numerator:Net income (loss)
    
    $
    (432,000
    )
    
    $
    33,000
    
    $
    248,000
    
    $
    598,000Denominator:Weighted average shares outstanding
    
    
    5,421,259
    
    
    
    4,053,507
    
    
    5,193,555
    
    
    3,948,672Dilutive effect of options
    
    
    -
    
    *
    
    -
    
    
    103,568
    
    
    -Denominator for diluted earnings per share
    
    
    5,421,259
    
    
    
    4,053,507
    
    
    5,297,123
    
    
    3,948,672Basic earnings (loss) per share
    
    $
    (0.08
    )
    
    $
    0.01
    
    $
    0.05
    
    $
    0.15Diluted earnings
      (loss) per share
    
    $
    (0.08
    )
    
    $
    0.01
    
    $
    0.05
    
    $
    0.15


* Not reported due to the
anti-dilutive effect of options on the basic loss per share.

5.
Inventories:

May 31,
    
    August 31,2007
    
    2006Fabric and trim
    
    $
    170,000
    
    
    $
    222,000Work in
      progress
    
    
    1,306,000
    
    
    
    2,939,000Finished goods
    
    
    5,902,000
    
    
    
    9,651,000Markdown
      allowances
    
    
    (386,000
    )
    
    
    (388,000
    )$
    6,992,000
    
    
    $
    12,424,000


6. Trade accounts
receivable:

Pursuant to
the terms of a factoring agreement between us and CIT Commercial Services
(CIT), and a separate agreement between our subsidiary Designer Intimates,
Inc. and CIT, we sell a majority of our trade accounts receivable to CIT 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 CIT without recourse, CIT 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 CIT upon the earlier of the payment of the receivable to CIT by the
customer or the maturity of the receivable (generally 180 days from the date of
shipment to the customer). As of May 31, 2007, $13.6 million of our trade
accounts receivable were non-recourse receivables due from CIT.

Trade
accounts receivable not sold to CIT remain in our custody and control and we
maintain all credit risk on those accounts as well as accounts which are sold to
CIT with recourse. The combined credit risk for non-factored and recourse
receivables as of May 31, 2007, totaled $655,000, of which $264,000 had been
collected by June 30, 2007.

Under the
terms of our factoring agreement, we may request payment from CIT in advance of
the collection date or maturity. Any such advance payments are assessed an
interest charge through the collection date or maturity at CITs prime rate less
1.5% (one and one half percent) per annum. Our obligations with respect to
advances from CIT 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 $12.0 million aggregate 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.

---

NITCHES, INC. AND
SUBSIDIARIESNotes to the Unaudited
Condensed Consolidated Financial Statements

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

May
      31,
    
    August
      31,2007
    
    2006Receivables assigned to factor:Non-recourse
    
    $
    13,626,000
    
    
    $
    10,472,000Recourse
    
    
    533,000
    
    
    
    168,000Allowance for customer credits and doubtful
      accounts
    
    
    (1,160,000
    )
    
    
    (583,000
    )Due from factor, net
    
    
    12,999,000
    
    
    
    10,057,000Non-factored accounts receivable
    
    
    122,000
    
    
    
    544,000Allowance for
      customer credits and doubtful accounts
    
    
    (114,000
    )
    
    
    (60,000
    )Trade accounts, net
    
    $
    8,000
    
    
    $
    484,000Due to factor
    
    $
    10,039,000
    
    
    $
    9,676,000Contingent liabilities for irrevocable letters of
    credit
    
    $
    3,091,000
    
    
    $
    6,086,000


7. 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.

8. Significant
Customers:

For the nine
months ended May 31, 2007, sales to five separate customers accounted for 86.7%
of our net sales. Sales to two separate customers accounted for 36.7% of our net
sales for the nine months ended May 31, 2006. Sales to three customers accounted
for 68.4% of our net sales in the three months ended May 31, 2007. Two separate
customers accounted for 43.8% of our net sales in the three months ended May 31,
2006.

Two
customers accounted for 49.9% of our trade receivable balance assigned to CIT as
of May 31, 2007. One customer accounted for 27.9% of our trade receivable
balance as of May 31, 2006.

9. Acquisitions:

Designer Intimates

On October 24, 2005, we acquired the
remaining seventy-two percent (72%) of the issued and outstanding stock of
Designer Intimates, Inc., a Delaware corporation (Designer Intimates) which we
did not own, resulting in the Company owning one hundred percent (100%) of
Designer Intimates. The aggregate purchase price for the acquisition was
$1,800,000. We issued to the Sellers 540,000 restricted shares of its common
stock at a value of $1.70 per share totaling $918,000 and 8,820 shares of Series
A preferred stock at a value of $882,000.

The primary
reason for the acquisition was to acquire the trademarks and brand licenses to
complement our broad production base. The transaction was accounted for using
the purchase method of accounting. The following is a condensed balance sheet
showing the fair values of the assets acquired and liabilities assumed as of the
date of acquisition:

---

NITCHES, INC. AND
SUBSIDIARIESNotes to the Unaudited
Condensed Consolidated Financial Statements

Accounts receivable
    
    $
    3,386,000Inventory
    
    
    3,569,000Intangibles
    
    
    2,618,000Other
      assets
    
    
    725,000Goodwill arising in the transaction
    
    
    2,620,000Total assets
      acquired
    
    
    12,918,000Current liabilities
    
    
    7,765,000Loan payable,
      factor
    
    
    3,353,000Total liabilities assumed
    
    
    11,118,000Net assets
      acquired
    
    $
    1,800,000


The pro
forma financial information presented below gives effect to the acquisition of
Designer Intimates as if it occurred as of the beginning of fiscal 2006. For
fiscal 2006, the post acquisition results are reflected in our results of
operations as of October 24, 2005 and pro forma results for the period September
1, 2005 to October 23, 2005 are included below.

Nine Months EndedMay
      31,2006Net sales
    
    $
    44,953,000Net income
      (loss)
    
    
    543,000Earnings (loss) per weighted average share:Basic
    
    $
    0.13Diluted
    
    $
    0.13Weighted average
      shares outstanding:Basic
    
    
    4,053,507Diluted
    
    
    4,053,507


The Company
acquired its initial 28% interest in Designer Intimates in October 2002.
Designer Intimates had acquired NAP from its founders and obtained a credit line
of approximately $12 million from HSBC, later assumed by CIT, secured by the
inventory and accounts receivable of NAP and the guarantees of shareholders of
Designer Intimates. Nitches guaranteed $3.0 million of this credit line and this
guarantee formed the consideration from Nitches for its 28% ownership interest
in Designer Intimates.

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 fair value of the securities and promissory note issued in
connection with the acquisition has been ascribed to the trademarks acquired and
is recorded as an intangible asset having an indefinite life not subject to
amortization.

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 our acquisition of the Saguaro® mark and related
trademarks, we now incur normal operating expenses for this product line and no
longer pay royalties and design fees to Impex.

---

NITCHES, INC. AND
SUBSIDIARIESNotes to the Unaudited
Condensed Consolidated Financial Statements

10. Equity Investment by
Sojitz:

On April 27,
2007, pursuant to the terms of a stock purchase agreement we issued to Sojitz
Corporation, a Japanese corporation, 406,137 shares of our common shares for
$1.5 million. The number of shares of our common stock issued under the
agreement was determined by (i) dividing $1.5 million by $3.88, which was the
average of the closing prices of a share of our common stock on the NASDAQ
Capital Market for the 10 trading days that immediately preceded the closing
date, plus (ii) an additional number of shares determined by multiplying that
number of shares calculated in (i) by 5%. Concurrently with the execution of the
stock purchase agreement, we entered into a manufacturing agreement with Sojitz
pursuant to which Sojitz will manufacture products on our behalf.

11. Stock-Based
Compensation

Adoption of SFAS 123R

Effective
September 1, 2006, we adopted Statement of Financial Accounting Standards No.
123R (revised 2004), Share-Based Payment, (SFAS 123R), which establishes
standards for the accounting for 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.

Our first
issuance of stock options under our 2006 Equity Incentive Plan as approved by
our shareholders on March 15, 2006, 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 nine months ended May 31, 2007 include stock-based
compensation costs of approximately $301,000 comprised of employee stock option
grants. We had no stock options outstanding in the prior year. The total fair
value of options granted is $1,205,000. After recording expense through May 31,
2007, there remains $904,000 of unrecognized compensation costs related to
unvested stock options to be recognized over the next 3.4 years.

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

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 nine months ended May 31,
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 we have no
historical share option exercise experience to 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 valuation of options
granted during the three months ended November 30, 2006 and 65.5% for the
valuation of options granted during 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. We
utilized 4.69% for options granted during the three months ended November 30,
2006 and 4.54% for options granted during the three months ended February 28,
2007. There were no options granted during the three months ended May 31, 2007.
We have not declared or paid dividends for more than 2 years and have no plans
to do so in the foreseeable future.

---

NITCHES, INC. AND
SUBSIDIARIESNotes to the Unaudited
Condensed Consolidated Financial Statements

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
    %
    
    
    4.54
    %Turnover
      rate
    
    
    3.00
    %
    
    
    3.00
    %Anticipated dividend yield
    
    
    0.00
    %
    
    
    0.00
    %Weighted average grant date fair value of options granted
    
    $
    2.61
    
    
    $
    3.03Forfeiture
      rate
    
    
    0.00
    %
    
    
    0.00
    %


Stock Option 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 May 31, 2007, options to
purchase 440,000 shares of our common stock have been granted under this plan to
employees and all remain outstanding. All such grants were made in the first
nine months of fiscal 2007, and have 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. These
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
the options granted under our 2006 Equity Incentive Plan as of May 31, 2007, and
the activity during the nine months then ended, are as follows:

Weighted-AverageWeighted-
    
    RemainingAverage
    
    Contractual
    
    AggregateExercise
    
    Term
    
    IntrinsicShares
    
    Price
    
    (in Years)
    
    ValueOptions outstanding at August 31, 2006
    
    -
    
    
    -Options
      granted
    
    440,000
    
    $
    4.35Options exercised
    
    -
    
    
    -Options
      forfeited
    
    -
    
    
    -Options outstanding at May 31, 2007
    
    440,000
    
    $
    4.35
    
    9.3
    
    -Options vested and exercisable at May 31, 2007
    
    110,000
    
    $
    4.35
    
    9.3
    
    -


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NITCHES, INC. AND
SUBSIDIARIESNotes to the
Unaudited Condensed Consolidated Financial Statements

12. Goodwill and Intangible
Assets:

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

May 31,
    
    August 31,2007
    
    2006Goodwill
    $
    2,620,000
    
    
    $
    2,620,000Intangibles not subject to amortization
    
    3,933,000
    
    
    
    902,000Intangibles
      subject to amortization
    
    2,791,000
    
    
    
    2,791,000Accumulated amortization
    
    (326,000
    )
    
    
    (150,000
    )$
    6,398,000
    
    
    $
    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. Goodwill
is not subject to amortization. Intangibles not subject to amortization are
comprised of assets purchased in the acquisitions of Designer Intimates, Inc.
and the assets acquired from Saguaro LLC, including trademarks that do not have
a finite life. In accordance with SFAS 142, Goodwill and Other Intangible
Assets, (SFAS 142), these assets will be tested for impairment on an annual
basis and between annual tests in certain instances (see "ITEM 2-Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Valuation of Goodwill, Long-lived Assets and Intangible Assets,"
below). 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 $58,658, $234,632, $234,632, $234,632,
and $217,402 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.

13. New Accounting
Pronouncements:

In June
2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109 (FIN 48). FIN 48 requires companies
to determine whether it is more likely than not that a tax position will be
sustained upon examination by the appropriate taxing authorities before any part
of the benefit can be recorded in the financial statements. This interpretation
also provides guidance on derecognition, classification, accounting in interim
periods, and expanded disclosure requirements. FIN 48 is effective for fiscal
years beginning after December 15, 2006. We are currently evaluating the impact
of adopting FIN 48 on our financial position, cash flows, and results of
operations.

In September
2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157),
which applies whenever other standards require (or permit) assets or liabilities
to be measured at fair value. SFAS 157 established a fair value hierarchy that
prioritizes the information used to develop the assumption that market
participants would use when pricing an asset or liability. SFAS 157 is effective
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years. We are currently evaluating the impact of adopting SFAS 157
on our financial position, cash flows, and results of operations.

In February
2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159), which permits entities to choose to
measure many financial instruments and certain other items at fair value that
are not currently required to be measured at fair value. SFAS 159 will be
effective for the fiscal years ending after November 15, 2007. The Company is
currently evaluating the impact of adopting SFAS 159 on its financial position,
cash flows, and results of operations.

14. Subsequent
Events:

On June 21,
2007, we entered into a Securities Purchase Agreement with Birchten Investments,
Ltd., an unaffiliated institutional investor, and Granite Financial Group, an
unaffiliated investment bank, for the sale of 12.0% Subordinated Convertible
Debentures and Common Stock Purchase Warrants. We issued an aggregate of $3.15
million principal amount of Debentures and 577,500 Warrants in the transaction,
in exchange for net proceeds of $2.95 million, after deduction of fees and
expenses.

Interest on
the Debentures accrues at the rate of 12% per annum and is payable quarterly on
February 28, May 31, August 31, and November 30, commencing on August 31, 2007.
The Debentures are due December 31, 2009. We have the right to redeem the
Debentures, or any part thereof, before the maturity date for cash upon notice
to the holder upon payment of 110% of the amount outstanding on the Debentures
being redeemed.

---

NITCHES, INC. AND
SUBSIDIARIESNotes to the Unaudited
Condensed Consolidated Financial Statements

The holders
of the Debentures have the right to convert at any time, at their election, at a
conversion price of $4.12 per share, subject to adjustment as provided in the
Debentures including full-ratchet anti-dilution protection. We have the right to
force conversion of the Debentures at our election at the lower of (i) the
Conversion Price or (ii) a 15% discount to the variable weighted average price
for our Common Stock for the 10 Trading Days following the notice date. Our
ability to force conversion is subject to (i) the requirement the holders
resale of the underlying shares has been registered on an effective registration
statement and (ii) certain limitations on the amount that can be converted at
any one time based on our stock price at the time of the conversion, as set
forth in the Debentures. Under the terms of the Debentures no conversion can be
made, by the holder or by us, if the conversion would result in any one of the
holders (together with their affiliates) owning in excess of 9.9% of the number
of shares of our Common Stock following such conversion. This restriction on
conversion can be waived by the holder on not less than 61 days prior written
notice to us.

The
Debentures impose certain covenants on us, including restrictions against
incurring additional indebtedness (other than Permitted Indebtedness as defined
in the Debenture) that ranks in pari passu or senior to the Debentures and
creating any liens on the Companys property (other than Permitted Liens as
defined in the Debentures). The Debentures define certain Events of Default,
including breach of the covenants of the Debentures or related agreements
(subject to applicable cure periods), breach of representation or warranty,
bankruptcy, or delisting of our Common Stock. On the occurrences of an Event of
Default, the holders of the Debentures have the right to accelerate all amounts
outstanding under the Debentures to be paid within 30 days or demand that we
cure the default within 30 days. If we default, interest accrues at a rate of
1.5% interest per month from the day of the Event of Default through the day of
cure or payment.

We issued
Warrants for 577,500 shares of Common Stock in connection with the transaction.
The Warrants are five (5) year warrants to purchase our Common Stock at a price
of $4.12 per share, subject to adjustment, including full-ratchet anti-dilution
protection.

As part of
the transaction, Nitches entered into a Registration Rights Agreement with the
investors. Nitches agreed to file a registration statement covering the resale
of the shares of Common Stock that may be issued to investors upon the
conversion of the Debentures and the exercise of the Warrants, and to maintain
the effectiveness of that registration statement (subject to certain
limitations) for a period of time until the holders can sell the underlying
Common Stock without volume restrictions under Rule 144. If Nitches fails to
meet its registration obligations, it may be required to pay to the investors in
cash liquidated damages. The amount of liquidated damages is equal to 1.0% of
the principal amount outstanding for any 30 day period, or pro rata portion
thereof, that such a failure continues during the first year the Debenture is
outstanding and 0.5 % of the principal amount outstanding for any 30 day period,
or pro rata portion thereof, that such a failure continues during the second
year the Debenture is outstanding.

---

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

We are 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 women's sleepwear and loungewear under the following brands: Princesse
tam tam®, Derek Rose®, Crabtree & Evelyn®, Disney Couture®, The Anne Lewin®
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 nine months ended May 31, 2007 include the results of
several recent business or asset acquisitions:

(1) On
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, which we paid to the sellers
with 180,000 restricted shares of our common stock at a value of $5.10 per share
and 8,820 shares of our Series A preferred stock valued at $100 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.

(2) 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 to which we sell our apparel products. The
purchase added new sources of revenue and diversified our product offerings to
retailers beyond apparel.

(3) 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.

---

In addition
we recently completed two financing transactions; one during the quarterly
period ended May 31, 2007 and one shortly thereafter:

(1) On April
27, 2007, pursuant to the terms of a stock purchase agreement we issued to
Sojitz Corporation, a Japanese corporation, 406,137 shares or our common shares
for $1.5 million. The number of shares of our common stock issued under the
agreement was determined by (i) dividing $1.5 million by $3.88, which was the
average of the closing prices of a share of our common stock on the NASDAQ
Capital Market for the 10 trading days that immediately preceded the closing
date, plus (ii) an additional number of shares determined by multiplying that
number of shares calculated in (i) by 5%. Concurrently with the execution of the
stock purchase agreement, we entered into a manufacturing agreement with Sojitz
pursuant to which Sojitz will manufacture products on our behalf.

(2) On June
21, 2007, subsequent to the end of the most recent quarter, we entered into a
Securities Purchase Agreement with Birchten Investments, Ltd., an unaffiliated
institutional investor, and Granite Financial Group, an unaffiliated investment
bank, for the sale of 12.0% Subordinated Convertible Debentures and Common Stock
Purchase Warrants. In this transaction, we issued an aggregate of $3.15 million
principal amount of debentures and warrants to purchase up to 577,500 shares of
our common stock in exchange for net proceeds of $2.95 million, after deduction
of fees and expenses. Interest on the debentures accrues at the rate of 12% per
annum and is payable quarterly on February 28, May 31, August 31, and November
30, commencing on August 31, 2007. The debentures are due December 31, 2009. The
warrants are exercisable at any time within five years from the date of issuance
at an exercise price of $4.12 per share, subject to adjustment, including
full-ratchet anti-dilution protection.

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 amounts 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 May 31, 2007, trade
accounts receivable balance was $12.9 million, net of allowances of $1.3
million, as compared to the balance of $10.5 million, net of allowances of
$643,000, at August 31, 2006. At May 31, 2006, the trade accounts receivable
balance was $7.3 million, net of allowances of $601,000.

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 $7.0
million, net of inventory markdowns of $386,000, at May 31, 2007, as compared to
an inventory balance of $12.4 million, net of inventory markdowns of $388,000,
at August 31, 2006. At May 31, 2006, the inventory balance was $6.4 million, net
of inventory markdowns of $632,000.

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

Nine Months Ended May 31, 2007 Compared
to the Nine Months Ended May 31, 2006

Net sales
for the nine months ended May 31, 2007 were $69.2 million, an increase of $29.6
million or 74.6% as compared to the nine months ended May 31, 2006. This
increase was attributable primarily to increased sales for our sleepwear, men's
sportswear and women's private label apparel, as well as the inclusion of
revenues associated with our home décor product line acquired in July
2006.

Cost of
goods sold for the nine months ended May 31, 2007 were $52.0 million compared to
$28.0 for the same period a year ago. Cost of goods sold as a percent of net
sales increased 4.5%, generating a lower gross profit margin of 24.8% for the
nine months ended May 31, 2007, as compared to 29.3% 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 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 nine months ended May 31, 2007 were
$16.0 million, an increase of $6.1 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, the home décor line which was acquired on July 1, 2006, and the Saguaro®
assets which were acquired on October 24, 2006. Selling, general and
administrative expenses for the period included $7.9 million of selling and
merchandising expenses and $2.5 million of shipping and warehousing expenses.
This compares with $4.2 million of selling and merchandising expenses and $1.4
of shipping and warehousing expenses incurred during the nine months ended May
31, 2006. Selling, general and administrative expenses as a percent of net sales
decreased to 23.0% from 24.7% in the prior period, due to the inclusion of
higher sales from Designer Intimates and the home décor line at a
correspondingly lower selling, general and administrative expense
rate.

Interest
expense in the current period was $752,000, an increase of $393,000 as compared
to $359,000 for the nine months ended May 31, 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 nine 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 7.75% at May 31,
2006 to 8.25% at May 31, 2007.

Three Months Ended May 31, 2007
Compared to the Three Months Ended May 31, 2006

Net sales
for the three months ended May 31, 2007 were $19.5 million, an increase of $6.9
million or 54.8% as compared to the three months ended May 31, 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 three months ended May 31, 2007 were $14.7 million compared
to $8.9 for the same period a year ago. Cost of goods sold as a percent of net
sales increased 4.8%, generating a lower gross profit margin of 24.6% for the
three months ended May 31, 2007 as compared to 29.4% for the year earlier
period. The decrease in gross margin came primarily as the result of a higher
cost of sales in our women's sleepwear and men's sportswear 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 May 31, 2007 were
$5.3 million, an increase of $1.8 million as compared to a year ago. The
increase was due in part to supporting additional sales made in the period, as
well as additional operating costs incurred as a result of our acquisitions of
the home décor line on July 1, 2006, and the Saguaro® assets which were acquired
on October 24, 2006. Selling, general and administrative expenses for the period
included $2.5 million of selling and merchandising expenses and $1.0 million of
shipping and warehousing expenses. This compares with $1.4 million of selling
and merchandising expenses and $500,000 of shipping and warehousing expenses
incurred during the three months ended May 31, 2006. Selling, general and
administrative expenses as a percent of net sales decreased to 27.1% from 27.9%
in the prior period, due to higher sales in the current period at a lower
expense rate, offset in part by the additional home décor and Saguaro expenses
previously noted.

Interest
expense was $206,000 in the current period, an increase of $70,000 as compared
to $136,000 for the three months ended May 31, 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 7.75% at May 31, 2006 to 8.25% at May
31, 2007.

Liquidity and Capital
Resources

Working
capital at May 31, 2007 was $5.6 million, an increase of $1.9 million from $3.6
million at August 31, 2006. Our current ratio increased to 1.35:1 at May 31,
2007 from 1.17:1 at August 31, 2006. This slight increase resulted primarily
from a reduction in current liabilities partially offset by a reduction in
inventories.

Net cash
used by operating activities for the nine month period ended May 31, 2007 was
approximately $946,000. The increase in cash used by operating activities during
the period was primarily the result of a decrease in net income and accounts
payable and an increase in accounts receivable, offset by a decrease in
inventory.

Net cash
used by investing activities for the nine month period ended May 31, 2007 was
$50,000 in capital expenditures.

Net cash
provided by financing activities for the nine month period ended May 31, 2007
was approximately $1.1 million, which was attributable to Sojitz's investment of
$1.5 million and advances from CIT in accordance with the terms of the factoring
agreement, offset by the repayment of notes payable.

Subsequent to the end of the
quarter, on June 21, 2007 we sold $3.15 million of 12.0% Subordinated
Convertible Debentures and Common Stock Purchase
Warrants to purchase up to 577,500 shares of our common stock, resulting in net
proceeds to us of $2.95 million, after deduction of fees and
expenses.

We sell
substantially all of our trade receivables to CIT on a pre-approved,
non-recourse basis. We attempt to make any recourse shipments on a
cash-on-delivery 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 May 31, 2007 was $13.6 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 May 31, 2007 was
approximately $655,000, of which approximately $264,000 had been collected
through June 30, 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 $12.0 million
aggregate limit. At May 31, 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 May
31, 2007, we had no off-balance sheet arrangements. The following summarizes our
contractual obligations at May 31, 2007 and the effect those obligations are
expected to have on our liquidity and cash flow in future
periods:

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

|* |  | Guarantee of Nitches
      under separate Designer Intimates, Inc. factoring agreement with CIT, due
      on demand
|- |  | --------------------------------------------------------------------------------------------------------------------

Inventory

Our
inventory decreased 43.7% to $7.0 million at May 31, 2007, from $12.4 million at
August 31, 2006, in line with lower order backlog for the fourth quarter of
fiscal 2007 as compared to the first quarter of fiscal 2007. Compared to
inventories of $6.4 million at May 31, 2006, inventories ending the current
period increased 9.4%, in line with the comparative 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 May 31, 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.

We have
established an inventory markdown reserve as of May 31, 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 May 31, 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 May
31, 2007, we had on-hand unfilled customer orders of $45.2 million as compared
to $38.8 million at May 31, 2006, with such orders generally scheduled for
delivery by November 2007 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 May 31, 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 in which we operate. 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 remainder
of fiscal 2007 and planning for fiscal 2008.

Forward Looking Information and
Factors that May Affect Future Results

Our
disclosure and analysis in this report contains 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:

| |  | o |  | achieve solid, sustainable revenue
      growth;                                                                                                                                                                      
| |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | o |  | maintain and enhance our product
      line;                                                                                                                                                                          
| |  | o |  | successfully introduce new
      products and product categories;                                                                                                                                                     
| |  | o |  | 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.;
| |  | o |  | cost effectively acquire and
      retain customers;                                                                                                                                                                  
| |  | o |  | compete against existing and new
      competitors;                                                                                                                                                                   
| |  | o |  | manage expenses associated with
      necessary general and administrative investments;                                                                                                                               
| |  | o |  | cost efficiently manage
      inventories; and                                                                                                                                                                        
| |  | o |  | 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.

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 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 SEC 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 May 31, 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 May 31,
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 nine months ended May 31, 2007 we implemented the following changes to our
internal controls over financial reporting:

- Staff Experience. Effective April 1,
  2007, we experienced a change in accounting personnel. Our controller resigned
  for personal reasons and was replaced. We have retained a consultant to
  perform those functions. We also 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 close 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.

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.

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 6. Exhibits

|Exhibit
      No. |  | Description                                                                                                                                                              
|----------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                  |  |                                                                                                                                                                          
|4.1               |  | Securities
      Purchase Agreement between Nitches, Inc. and the signatories thereto dated
      June 21, 2007 (1)                                                      
|4.2               |  | Form of 12%
      Convertible Subordinated Debenture (1)                                                                                                                 
|4.3               |  | Form of
      Common Stock Purchase Warrant (1)                                                                                                                          
|4.4               |  | Registration
      Rights Agreement between Nitches, Inc. and the signatories thereto dated
      June 21, 2007 (1)                                                      
|10.1              |  | Stock
      Purchase Agreement between Nitches, Inc. and Sojitz Corporation dated
      April 23, 2007 (2)                                                               
|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                                                                   

(1) Incorporated by reference to the
registrant's Current Report on Form 8-K filed on April 25, 2007(2)
Incorporated by reference to the registrants Current Report on Form 8-K filed on
June 21, 2007

---

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                                                                                                                                                              
|----------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                 
|4.1               |  | Securities
      Purchase Agreement between Nitches, Inc. and the signatories thereto dated
      June 21, 2007 (1)                                                      
|4.2               |  | Form of 12%
      Convertible Subordinated Debenture (1)                                                                                                                 
|4.3               |  | Form of
      Common Stock Purchase Warrant (1)                                                                                                                          
|4.4               |  | Registration
      Rights Agreement between Nitches, Inc. and the signatories thereto dated
      June 21, 2007 (1)                                                      
|10.1              |  | Stock
      Purchase Agreement between Nitches, Inc. and Sojitz Corporation dated
      April 23, 2007 (2)                                                               
|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                                                                   

(1) Incorporated by reference to the
registrant's Current Report on Form 8-K filed on April 25, 2007(2)
Incorporated by reference to the registrants Current Report on Form 8-K filed on
June 21, 2007

---