UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

(Mark One)[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period
ended: May
31, 2008

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                                                                              
|(State or other jurisdiction of
      incorporation or organization)                    
|                                                                                        
|10280 Camino Santa Fe, San
      Diego, California                                      
|(Address of principal executive
      offices)                                          
|                                                                                        
|(858)
  625-2633                                                                        
|(Registrants telephone number,
      including area code)                              
|                                                                                        
|                                                                                        
|(Former name, former address and
      former fiscal year, if changed since last
report)

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

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



|Large
      accelerated filer [  
      ]                                   Non-accelerated
      filer [ X ]                                         | Accelerated filer [   ]Smaller reporting company
      [   ]
|----------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------
|                                                                                                                                                      |                                                             
|Indicate by check mark whether
      the registrant is a shell company (as defined in Rule 12b-2 of the
      Exchange Act). Yes [   ] No [
      X ]

As of July 15, 2008 the registrant had
6,019,644 shares of common stock outstanding.



---

NITCHES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets

|ASSETS                                                                                
|--------------------------------------------------------------------------------------
|                                                                                      
|                                                                                      
|                                                                                      
|Current
      assets:                                                                 
|Cash                                                                                  
|Receivables:                                                                          
|Due from factor, net                                                                  
|Trade accounts, net                                                                   
|Due from affiliates and employees                                                     
|Total receivables                                                                     
|                                                                                      
|Refundable income taxes                                                               
|Inventories, less allowances                                                          
|Deferred income taxes, current                                                        
|Advances and prepaid expenses                                                         
|Other current assets                                                                  
|Total current assets                                                                  
|                                                                                      
|Furniture, fixtures and equipment, net                                                
|Goodwill                                                                              
|Intangibles, net                                                                      
|Other
      assets                                                                    
|Total assets                                                                          
|                                                                                      
|LIABILITIES AND SHAREHOLDERS EQUITY                                                  
|Current
      liabilities:                                                            
|Due to factor                                                                         
|Accounts payable                                                                      
|Accrued expenses                                                                      
|Accrued royalties                                                                     
|Customer credits and
    deposits                                                     
|Notes payable - bank                                                                  
|Total current liabilities                                                             
|                                                                                      
|Long
      term debt                                                                  
|Convertible debt,
      net                                                           
|Deferred income taxes, long term                                                      
|Total liabilities                                                                     
|                                                                                      
|Commitments and contingencies                                                         
|Shareholders
      equity:                                                           
|Series A preferred stock, $100 par value; 25,000,000
      shares authorized,         
|8,820 shares issued and outstanding                                                   
|Common stock, no par value;
      50,000,000 shares authorized; issued and outstanding
|6,019,644 shares at May 31, 2008 and 5,659,644 shares at
      August 31, 2007        
|Additional paid-in
capital                                                            
|Retained earnings                                                                     
|Total shareholders equity                                                            
|Total liabilities and shareholders
    equity                                        

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

2

---

NITCHES, INC. AND SUBSIDIARIESCondensed Consolidated Statements of
Operations (Unaudited)

|                                                   | Three Months Ended |            | Nine Months Ended
|-------------------------------------------------- | ------------------ | ---------- | -----------------
|                                                   | May 31,            |            | May 31,          
|                                                   | 2008               |            | 2007             
|Net sales                                          | $                  | 26,316,000 |                  
|Cost of goods
sold                                 |                    | 18,578,000 |                  
|Gross profit                                       |                    | 7,738,000  |                  
|Selling, general and
      administrative expenses |                    | 7,417,000  |                  
|Operating income
    (loss)                        |                    | 321,000    |                  
|Interest expense                                   |                    | 450,000    |                  
|Income (loss) before income
      taxes            |                    | (129,000   | )                
|Provision for (benefit from)
      income taxes    |                    | -          |                  
|Net income (loss)                                  | $                  | (129,000   | )                
|                                                  
|Basic earnings (loss) per
      share              | $                  | (0.02      | )                
|Diluted earnings (loss) per
      share            | $                  | (0.02      | )                
|                                                  
|Weighted average number of common
      shares:    |                    |            |                  
|Basic                                              |                    | 6,019,644  |                  
|Diluted                                            |                    | 6,019,644  |                  

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

3

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NITCHES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)

|                                                                                           | Nine months
  ended
|------------------------------------------------------------------------------------------ | -------------------
|                                                                                           | May
      31,      
|                                                                                           | 2008               
|Cash
      flows from operating activities:                                                |                    
|Net (loss) income                                                                          | $                  
|Adjustments to reconcile net (loss) income to net cash used in
      operating activities: |                    
|Depreciation and amortization                                                              |                    
|Amortization of debt discount                                                              |                    
|Stock based compensation                                                                   |                    
|Change in operating assets and liabilities, net of effects of
      acquisition:           |                    
|Trade receivables and due from
affiliates                                                  |                    
|Inventories, net                                                                           |                    
|Advances and prepaid expenses                                                              |                    
|Other assets                                                                               |                    
|Accounts payable and accrued expenses and
      royalties                                  |                    
|Income taxes payable                                                                       |                    
|Deferred income taxes, non current                                                         |                    
|Net cash used in operating activities                                                      |                    
|                                                                                          
|Cash
      flows used in investing activities:                                             |                    
|Capital expenditures                                                                       |                    
|Net
      cash used in investing activities                                                |                    
|                                                                                          
|Cash
      flows from financing activities:                                                |                    
|Advances from factor                                                                       |                    
|Common stock issuance                                                                      |                    
|Proceeds from (repayment of) notes payable                                                 |                    
|Net cash provided by financing
activities                                                  |                    
|                                                                                          
|Net
      (decrease) increase in cash                                                      |                    
|Cash at beginning of
      period                                                          |                    
|Cash at
      end of period                                                                | $                  

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

4

---

NITCHES, INC. AND
SUBSIDIARIES Condensed Consolidated Statements of Cash Flows, continued
(Unaudited)

|                                                       | Nine months
    ended
|------------------------------------------------------ | ---------------------
|                                                       | May 31,              
|                                                       | 2008                 
|Supplemental disclosures of cash flow
    information: |                      
|Cash paid during the period:                           |                      
|Interest                                               | $                    
|Income Taxes                                           |                      

Supplemental schedule of noncash
investing and financing activity:

Noncash
activity during the nine months ended May 31, 2008 includes the
following:

- Acquisition of assets with a fair value of
  $3,966,000 and the assumption of liabilities totaling $3,278,000 in connection
  with the acquisition of Back Woods Equipment Company on February 1, 2008,
  pursuant to which the Company issued 360,000 shares of its common stock valued
  at $688,000 (see Note 7).
- Acquisition of license agreement with Paula Deen
  Enterprises, LLC on December 31, 2007 through issuance of warrants to purchase
  150,000 shares of the Companys common stock with an estimated fair value of
  $161,000 (see Note 9).

Noncash activity during the nine
months ended May 31, 2007 includes the following:

- Acquisition of the Saguaro® mark and related
  trademarks through the issuance of 600,000 shares of the Companys common
  stock valued at $2,730,000 and a note payable in the amount of
  $300,000.

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

5

---

1. Description of
Business

Nitches,
Inc. and subsidiaries (we, our, us, or the Company) is a wholesale
importer and distributor of clothing, home décor and tabletop 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 brands Anne Lewin®, Crabtree
& Evelyn®, Princesse tam tam®, Derek Rose®, Gossard®, Shock Absorber®, Cuddl
Duds® and Odille Oasis®. We market womens sportswear and outerwear under the
brands Adobe Rose®, Country Tease®, Saguaro® and Southwest Canyon®. We market
mens casual wear and performance apparel under the brands Nat Nast®, Newport
Blue®, Dockers®, The Skins Game® and ZOIC®. We distribute home décor and
tabletop products under the Paula Deen®, 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. The Company provides fashionable merchandise to
the popularly priced market segment that generally retails between $10 and $35
per item. For 35 years the Company has competed on the basis of price, quality,
the desirability of its fabrics and designs, and the reliability of its delivery
and service.

On February
1, 2008, we acquired specialty outdoor retailer Back Woods Equipment Company, a
Kansas corporation (Backwoods), as a wholly owned subsidiary. Backwoods
presently operates eight retail locations in Kansas, Nebraska, Oklahoma and
Texas. Backwoods offers customers a strong assortment of top quality technical
gear, clothing and footwear for active lifestyles and adventure travel. The
accompanying financial statements include the operations of Backwoods occurring
after February 1, 2008. For additional information concerning the acquisition,
see Note 7. Acquisition of Back Woods
Equipment Company.

2. Condensed Consolidated 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. The condensed
consolidated balance sheet as of August 31, 2007 was derived from our audited
financial statements. 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, 2007.
In the opinion of management, all adjustments of a normal recurring nature which
are considered necessary for a fair presentation have been included in the
interim period. Operating results for the quarter ended May 31, 2008 are not
necessarily indicative of the results that may be expected for the fiscal year
ending August 31, 2008, or any future period.

3. Earnings (Loss) Per
Share

We calculate earnings (loss) per
share in accordance with SFAS No. 128 Earnings per Share. Basic earnings
(loss) per common share is computed by dividing income (loss) available to
common shareholders by the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings (loss) per common share is
computed by dividing income (loss) 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 potential common shares related to outstanding stock options,
warrants or other convertible instruments is reflected in diluted earnings
(loss) 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 (loss) per share.

6

---

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

|                                               | Three Months Ended |           | Nine Months Ended
|---------------------------------------------- | ------------------ | --------- | -----------------
|                                               | May
      31,      |           | May
      31,    
|                                               | 2008               |           | 2007             
|Numerator:                                     |                    |           |                  
|Net (loss) income                              | $                  | (129,000  | )                
|                                              
|Denominator:                                   |                    |           |                  
|Weighted average shares
      outstanding      |                    | 6,019,644 |                  
|Effect of dilutive
      securities            |                    | -         | *                
|Denominator for diluted earnings per
    share |                    | 6,019,644 |                  
|                                              
|Basic
      earnings (loss) per share          | $                  | (0.02     | )                
|Diluted earnings (loss)
      per share        | $                  | (0.02     | )                

* The
effect was anti-dilutive for the respective periods because of the net
loss.

4. Inventories

Inventories consist of the
following:

May
      31,
    
    August
      31,2008
    
    2007Fabric
      and trim
    $
    56,000
    
    
    $
    60,000Goods in
    transit
    
    2,665,000
    
    
    
    5,992,000Finished goods
    
    10,888,000
    
    
    
    8,601,000Markdown
      allowances
    
    (1,100,000
    )
    
    
    (548,000
    )$
    12,509,000
    
    
    $
    14,105,000


5. 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 on a non-recourse basis, 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, 2008, $14.9 million of our trade
accounts receivable were non-recourse receivables due from CIT. As of August 31,
2007, non-recourse receivables due from CIT totaled $13.0 million.

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, 2008, totaled $1.8 million of which $1.0 million had
been collected by June 30, 2008.

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, has also provided a personal guaranty in
connection with our factoring arrangement.

7

---

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

May
      31,
    
    August
      31,2008
    
    2007Receivables assigned to factor:Non-recourse
    $
    14,913,000
    
    
    $
    12,957,000Recourse
    
    1,241,000
    
    
    
    222,000Allowance for customer credits and doubtful
accounts
    
    (1,241,000
    )
    
    
    (878,000
    )Due from factor, net
    
    14,913,000
    
    
    
    12,301,000Non-factored accounts receivable
    
    555,000
    
    
    
    304,000Allowance for customer
      credits and doubtful accounts
    
    (133,000
    )
    
    
    (87,000
    )Trade accounts, net
    $
    422,000
    
    
    $
    217,000Due to
      factor
    $
    14,279,000
    
    
    $
    7,879,000Contingent liabilities for irrevocable letters of
    credit
    $
    632,000
    
    
    $
    4,236,000


6. Significant
Customers

For the nine months ended May 31,
2008, sales to three separate customers accounted for 51.3% of our net sales.
Sales to five separate customers accounted for 86.7% of our net sales for the
nine months ended May 31, 2007. For the quarter ended May 31, 2008, sales to two
separate customers accounted for 68.2% of our net sales. Sales to three separate
customers accounted for 68.4% of our net sales for the quarter ended May 31,
2007.

One customer
accounted for 24.9% of our trade receivable balance sold to CIT as of May 31,
2008. Two customers accounted for 49.9% and 42.1% of our trade receivable
balance sold to CIT as of May 31, 2007 and August 31, 2007,
respectively.

7. Acquisition of Back Woods
Equipment Company

On February
1, 2008 we acquired specialty outdoor retailer Back Woods Equipment Company, a
Kansas corporation, in a share exchange agreement pursuant to which we acquired
all of the outstanding capital stock of Backwoods for a total purchase price of
$688,000. The aggregate purchase price consisted of 360,000 shares of common
stock valued at $1.91 per share based on the average closing price of our
shares over a three day period that included the two days before, and the day of
the transaction closing date. As a result of this transaction, Backwoods became our
wholly-owned subsidiary as of February 1, 2008, and accordingly, Backwoods
results of operations have been included in our condensed consolidated results
of operations since that date. The following is a condensed balance sheet
showing the fair values of the assets acquired and liabilities assumed as of the
date of acquisition:

Inventories, less allowances
    $
    1,193,000Furniture, fixtures and
      equipment, net
    
    336,000Other
      assets
    
    206,000Goodwill
    
    2,231,000Total
      assets acquired
    
    3,966,000Current
      liabilities other than bank debt
    
    1,628,000Notes payable to
      bank
    
    1,650,000Total
      liabilities assumed
    
    3,278,000Net assets
      acquired
    $
    688,000


8

---

Backwoods
has operated since 1973 as a regional distributor of outdoor lifestyle oriented
clothing, equipment, and accessories while also offering international adventure
trip promotions. Backwoods is headquartered in Austin, Texas with eight retail
outlets located in Kansas, Nebraska, Oklahoma and Texas. Backwoods presently
targets the active lifestyle and outdoor adventure consumer with a varied
selection of outdoor brands in footwear, clothing, equipment and accessories.
These products are distributed through non-exclusive arrangements with
international manufacturers on terms comparable to those generally available in
the industry. Backwoods is currently developing Backwoods branded apparel to
leverage its efforts to market innovative products that
address style, function and love of the outdoors.

We acquired
Backwoods to enter a specialty retail niche with concept and product offerings
we view as favorable and to develop the Backwoods outdoor
lifestyle brand. The assets of Backwoods include inventories of non-returnable
finished goods and furniture, fixtures and equipment used in leased retail
space.

In
connection with the acquisition, management has determined that it will commence
closure of two existing store locations prior to January 31, 2009. The costs
associated with these store closures are estimated to be approximately $483,000,
and this amount was accrued as a portion of current liabilities assumed as of
the acquisition date.

Notes
payable assumed in the acquisition consist of $1,115,000 due under a revolving
line of credit maturing September 1, 2008, $520,000 principal remaining on a
term note maturing December 15, 2010, and a $15,000 vehicle loan due December
31, 2010. The revolving line of credit and the term loan are with a single bank
and both notes carry a variable interest rate equal to the banks prime lending
rate which was 7.25% as of the date of the acquisition, and was 5% at May 31,
2008. The revolving line of credit is subject to a maximum borrowing limit of
$3.5 million, and requires monthly interest payments. The outstanding balance on
the line of credit at May 31, 2008 was $3.0 million. The term loan and vehicle
loan require monthly payments of principal and interest, with remaining unpaid
principal of $444,000 at May 31, 2008. These notes are secured by a personal
guaranty from the CEO of Backwoods.

The pro
forma effects of the Backwoods acquisition on our condensed consolidated
financial statements have not been presented as such effects were not
material.

8. Stock-Based
Compensation

We account
for stock based compensation related to stock options in accordance with SFAS
No. 123R (revised 2004). 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 quarter ended May 31, 2008 include stock-based compensation
costs of approximately $88,000 related to employee stock option grants. We had
701,000 stock options outstanding at May 31, 2008. As of May 31, 2008, there
remains $923,000 of unrecognized compensation costs related to unvested stock
options which is expected to be recognized over the next 5.0 years. All
stock-based compensation costs have been recorded as selling, general and
administrative expenses 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. All options granted have a
maximum term of ten years. As permitted by SAB 107, for the quarter ended May
31, 2008, we utilized the shortcut approach to estimate the options expected
term, which represents the period of time that options granted are expected to
be outstanding. Expected volatilities are based on historical volatility of our
stock over terms commensurate with the expected terms of the option grants. The
risk-free interest 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 have
not declared or paid dividends for more than 2 years and have no plans to do so
in the foreseeable future.

9

---

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. We granted 105,000 options during the
quarter ended May 31, 2008. Through May 31, 2008, options to purchase 745,000
shares of our common stock have been granted under this plan to employees, of
which 701,000 remain outstanding. All options were issued with an exercise price
equal to or greater than the fair market value on the grant date. In March 2008,
the 2006 Equity Incentive Plan was amended to increase the number of shares
authorized for issuance from 600,000 to 1,050,000.

Summary of Stock Options

A summary of
the options granted under our 2006 Equity Incentive Plan as of May 31, 2008, and
the activity during the nine months ended May 31, 2008, are as
follows:

|                                                     |         |   |       |           |            | Weighted-   |       |          
|---------------------------------------------------- | ------- | - | ----- | --------- | ---------- | ----------- | ----- | ---------
|                                                     |         |   |       |           |            | Average     |       |          
|                                                     |         |   |       | Weighted- |            | Remaining   |       |          
|                                                     |         |   |       | Average   |            | Contractual |       | Aggregate
|                                                     |         |   |       | Exercise  |            | Term        |       | Intrinsic
|                                                     | Shares  |   | Price |           | (in Years) |             | Value
|Options
      outstanding at August 31, 2007         | 440,000 |   |       | $         | 4.35       |             |       |          
|Options
    granted                                  | 305,000 |   |       |           | 1.65       |             |       |          
|Options
      exercised                              | -       |   |       |           | -          |             |       |          
|Options
      forfeited                              | (44,000 | ) |       |           | 4.15       |             |       |          
|                                                    
|Options
      outstanding at May 31, 2008            | 701,000 |   |       | $         | 3.19       |             | 8.9   |          
|                                                    
|Options
      vested and exercisable at May 31, 2008 | 189,000 |   |       | $         | 4.00       |             | 8.5   |          

9. Warrants

On December
31, 2007, in connection with the signing of a license agreement with Paula Deen
Enterprises, LLC, we issued warrants to purchase up to 150,000 shares of our common
stock, no par value, at an exercise price of $1.67 per share, or an aggregate
purchase price of $251,000, subject to adjustment, including broad-based
anti-dilution protection. The warrants have a term of seven years. We capitalized
$161,000 as the cost of the intangible asset, based on estimated fair value of
the warrants on the date of issuance. The capitalized cost is being amortized
over the initial three year term of the license agreement.

We issued
warrants to purchase up to 577,500 shares of our common stock in conjunction
with the convertible debentures that we issued on June 21, 2007. These warrants
are further described in Note 10.

10

---

10. Convertible
Debentures

On June 21, 2007, we issued 12%
Unsecured Convertible Debentures in the aggregate principal amount of $3.15
million and warrants to purchase 577,500 shares of common stock to two
unaffiliated institutional investors (Investors), in exchange for net proceeds
of $2.95 million after deduction of fees and expenses. Interest on the
debentures is payable quarterly on February 28, May 31, August 31, and November
30, commencing on August 31, 2007, and the debentures are due December 31,
2009.

The warrants
have a five year term and an exercise price of $4.12 per share, subject to
adjustment, including full-ratchet anti-dilution protection.

We accounted
for the value of the warrants and the beneficial conversion feature of the
debentures as discounts to the principal of the debentures. These discounts are
being amortized over the 30 month term that the debentures are expected to be
outstanding. Transaction costs incurred in connection with this financing have
been deferred and are being amortized over the 30 month term of the debentures.
Any transaction costs in connection with the future exercise of the warrants
will be recognized at that date, when and if the warrants are
exercised.

The Debentures are included in the
accompanying Condensed Consolidated Balance Sheets as follows:

May
      31,
    
    August
      31,2008
    
    2007Convertible debentures
    $
    3,150,000
    
    
    $
    3,150,000Discount from
      detachable warrants feature
    
    (1,046,000
    )
    
    
    (948,000
    )Discount from beneficial conversion feature
    
    (683,000
    )
    
    
    (683,000
    )Convertible debentures
      at issuance, net of discounts
    
    1,421,000
    
    
    
    1,519,000Add
      cumulative amortization of warrant and beneficialconversion feature discounts
    
    492,000
    
    
    
    108,000$
    1,913,000
    
    
    $
    1,627,000


As part of the transaction, Nitches
entered into a Registration Rights Agreement with the Investors. Nitches agreed
to file a registration statement by December 21, 2007 covering the resale of the
shares of Common Stock that may be issued to the 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. The registration statement was
declared effective on February 12, 2008.

11. Goodwill and Intangible
Assets

Goodwill and Intangible Assets
consisted of the following at May 31, 2008 and August 31, 2007:

May
      31
    
    August
      31,2008
    
    2007Goodwill
    $
    4,850,000
    
    
    $
    2,620,000Intangibles not subject to amortization
    $
    3,933,000
    
    
    $
    3,933,000Intangibles subject to
      amortization
    
    2,952,000
    
    
    
    2,791,000Accumulated amortization
    
    (583,000
    )
    
    
    (384,000
    )Intangibles, net
    $
    6,302,000
    
    
    $
    6,340,000


Goodwill
represents the excess purchase price over the fair value of the net assets
acquired in connection with our acquisitions of Designer Intimates, Inc. and
Back Woods Equipment Company. Goodwill is not subject to amortization. In
accordance with SFAS 142, Goodwill and Other Intangible Assets, (SFAS 142),
these assets are tested for impairment on an annual basis and between annual
tests in certain instances. Based on such testing we conducted during the fourth
quarter of our fiscal year ended August 31, 2007, we determined that there was
no impairment of this goodwill.

11

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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 are
tested for impairment on an annual basis and between annual tests in certain
instances. Based on such testing we conducted during the fourth quarter of our
fiscal year ended August 31, 2007, we determined that there was no impairment of
theses intangibles.

Intangibles
subject to amortization includes the sleepwear license for Crabtree &
Evelyn, the customer lists of and acquisition costs for Designer Intimates, and
the home décor licenses for Bill Blass and Paula Deen. Intangibles for licenses
total $1,957,000 and intangibles for customer lists and acquisition costs total
$995,000. The estimated amortization expense for each of the fiscal years
through August 31, 2012 is $270,000, $288,000, $288,000, $235,000, and $214,000
respectively. The weighted average amortization period is 13.8 years. 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. There were no such occurrences during
the current fiscal year.

12. Income Taxes

On September
1, 2007, the Company adopted the provisions of Financial Accounting Standards
Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, and Related Implementation Issues (FIN 48), an interpretation of FASB
Statement No. 109. FIN 48 provides certain criteria for the recognition,
measurement, presentation and disclosure of uncertain tax positions.

Upon
implementing FIN 48 we identified no unrecognized tax benefits or liabilities
and its adoption did not impact the Companys financial statements. There were
no material changes to unrecognized tax benefits, interest, or penalties for the
three month period ended May 31, 2008 and we do not anticipate any such material
changes during the next twelve months.

We file
income tax returns in the U.S. and various states. Our returns for tax years
2003 and forward remain open to audit under U.S. and state statutes. In the
event of a tax penalty accrual or assessment our policy is to record interest
and penalties directly to income tax expense in the condensed consolidated
statements of operations.

13. Recently Issued Accounting
Pronouncements

In March 2008, the FASB issued SFAS
No. 161, Disclosures About Derivative
Instruments and Hedging Activities  an amendment of FASB Statement No.
133 (SFAS 161), which requires enhanced
disclosures about an entitys derivative and hedging activities and thereby
improves the transparency of financial reporting. SFAS 161 will be effective for
financial statements issued after November 15, 2008. We do not currently
maintain any derivative holdings or engage in any hedging activities; therefore
we do not anticipate any effect of SFAS 161 on our financial reporting
requirements.

In December 2007, the FASB issued
SFAS No. 141 (revised 2007), Business
Combinations (SFAS 141(R)) and SFAS No.
160, Non-controlling Interests in Consolidated
Financial Statements (SFAS 160). SFAS
141(R) requires the acquiring entity in a business combination to recognize all
(and only) the assets acquired and liabilities assumed in the transaction;
establishes the acquisition- date fair value as the measurement objective for
all assets acquired and liabilities assumed; and requires the acquirer to
disclose to investors and other users all of the information they need to
evaluate and understand the nature and financial effect of the business
combination. SFAS 160 requires all entities to report non-controlling (minority)
interests in subsidiaries in the same manneras equity in the consolidated
financial statements and also requires transactions between an entity and
non-controlling interests to be treated as equity transactions. SFAS 160
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated (as of the date the parent ceases to have a controlling
financial interest in the subsidiary). Both statements are effective for fiscal
years beginning on or after December 15, 2008. We are currently assessing the
impact these standards may have on our consolidated financial
statements.

12

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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 year beginning September 1, 2008. Management is currently evaluating
the impact of adopting SFAS 159 on our financial position, cash flows, and
results of operations.

In September
2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No.
157). SFAS 157 establishes a common definition for fair value to be applied to
US GAAP guidance requiring the use of fair value, establishes a framework for
measuring fair value, and expands the disclosure about such fair value
measurements. The application of SFAS 157 as it relates to financial assets and
financial liabilities is effective for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. On February 12, 2008, the
FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157, which
delays the effective date of SFAS No. 157 for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on at least an annual basis, to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal
years. We are currently evaluating the impact that the adoption of SFAS No. 157 may have on our financial position and
results of operations.

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 brands Anne Lewin®, Crabtree
& Evelyn®, Princesse tam tam®, Derek Rose®, Gossard®, Shock Absorber®,
Claire Murray®, Cuddl Duds® and Odille Oasis®. We market womens sportswear and
outerwear under the brands Adobe Rose®, Country Tease®, Saguaro® and Southwest
Canyon®. We market mens casual wear and performance apparel under the brands
Nat Nast®, Newport Blue®, Dockers®, The Skins Game®, and ZOIC®. We distribute
home décor and tabletop products under the Paula Deen, 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. More information about
us may be found at www.nitches.com.

On February 1, 2008 we acquired
outdoor products specialty retailer Backwoods, marking our first venture into
specialty retailing. Backwoods has a long history of providing customers in the
Midwest with a strong assortment of branded products for the outdoor lifestyle,
including top quality, technical gear alongside a broad collection of outdoor
lifestyle clothing and footwear. Backwoods features brands such as Black
Diamond®, Cloudveil®, Eagle Creek®, Garmin®, GoLite®, Marmot®, Mountain
Hardware®, Osprey®, Patagonia®, and The North Face®. The first store opened in
Wichita, Kansas in 1973 and the chain presently comprises eight retail locations
in Kansas, Nebraska, Oklahoma and Texas. The accompanying financial statements include the operation of
Backwoods after February 1, 2008. More information about Backwoods can be found
at www.backwoods.com.

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Critical Accounting Policies

Revenue
Recognition. We recognize revenue at the time
products are shipped based on 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
conditions are met: persuasive evidence of a sale arrangement exists, shipment
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, 2008, trade
accounts receivable balance was $15.3 million, net of allowances of $1.4
million, as compared to the balance at August 31, 2007 of $12.5 million, net of
allowances of $965,000. At May 31, 2007, trade accounts receivable balance was
$13.0 million, net of allowances of $1.3 million.

Inventory. We periodically estimate
mark down allowances for our inventory on hand to provide for estimated
obsolescence or lack of marketability. The valuation allowance is 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 $12.5 million, net of inventory markdowns of $1.1 million, at May
31, 2008, as compared to an inventory balance of $14.1 million, net of inventory
markdowns of $548,000, at August 31, 2007. At May 31, 2007, the inventory
balance was $7.0 million, net of inventory markdowns of $386,000.

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 probable and the
liability could be reasonably estimated.

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Results of Operations

Nine months Ended May 31, 2008 Compared
to the Nine months Ended May 31, 2007

Net sales
for the nine months ended May 31, 2008 were $75.6 million, an increase of $6.4
million compared to sales of $69.2 million for the nine months ended May 31,
2007. The increase includes revenue from Backwoods after February 2, 2008, and
incremental sales of home décor, sleepwear, and menswear product. The apparel
business is seasonal and as a result our revenues are likely to vary from
quarter to quarter, and revenues for the nine months ended May 31, 2008 are not
necessarily indicative of the revenues we expect to achieve on an annualized
basis.

Cost of
goods sold for the nine months ended May 31, 2008 were $58.0 million compared to
$52.0 for the same period a year ago. Cost of goods sold as a percent of net
sales increased 1.5%, generating a lower gross profit margin of 23.3% for the
nine months ended May 31, 2008, as compared to 24.8% for the year earlier
period. The decrease in gross margin reflects reductions in net sales due to
sales returns and chargebacks and high volume sales of branded product to
national retailers at lower average gross margins. 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, 2008 were
$17.8 million, compared to $16.0 million for the same period a year ago.
Selling, general and administrative expenses for the period included $8.1
million of selling and merchandising expenses and $3.4 million of shipping and
warehousing expenses. This compares with $7.9 million of selling and
merchandising expenses and $2.5 million of shipping and warehousing expenses
incurred during the nine months ended May 31, 2007. The $1.8 million increase is
primarily attributable to the addition of Backwoods operating costs for the
current period.

Interest
expense in the nine month period ended May 31, 2008 was $1.3 million, an
increase of $561,000 as compared to $752,000 for the nine months ended May 31,
2007. This increase was due primarily to cash interest payments on the
convertible debentures that were not outstanding during the prior period and
related amortization of warrant and beneficial conversion features that are also
charged to interest expense.

Three Months Ended May 31, 2008
Compared to the Three Months Ended May 31, 2007

Net sales
for the three months ended May 31, 2008 were $26.3 million, an increase of $6.8
million or 34.9% as compared to net sales of $19.5 million for the three months
ended May 31, 2007. This increase was primarily attributable to the addition of
sales from Backwoods in the current quarter, as well as incremental sales of
home décor, sleepwear, and menswear product.

Cost of
goods sold for the three months ended May 31, 2008 were $18.5 million compared
to $14.7 million for the period a year ago. Cost of goods sold as a percent of
net sales decreased 4.8%, generating a higher gross profit margin of 29.4% for
the three months ended May 31, 2008 as compared to 24.6% for the year earlier
period. The increase in gross margin derived from a shift in our product mix to
higher margin branded sales as well as the inclusion of the higher margin retail
sales from our Backwoods stores. 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, 2008 were $7.4
million, an increase of $2.1 million as compared to expenses of $5.3 million in
the year ago period. The increase was due to the inclusion of operating costs of
Backwoods and volume related increases in sales commissions, design costs and
warehouse expenses as compared to the prior period. Selling, general and
administrative expenses for the period included $3.9 million of selling and
merchandising expenses and $1.1 million of shipping and warehousing expenses.
This compares with $2.5 million of selling and merchandising expenses and $1.0
million of shipping and warehousing expenses incurred during the three months
ended May 31, 2007. Selling, general and administrative expenses as a percent of
net sales increased slightly to 28.2% from 27.1% in the same period of the prior
year, due to a lower proportional increase in selling and merchandising expenses
as compared to the rate of increase in net sales.

15

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Interest
expense was $450,000 in the current period, an increase of $244,000 as compared
to $206,000 for the three months ended May 31, 2007. This increase was due
primarily to interest on the convertible debentures that were not outstanding in
the prior period and related amortization charges that are also charged to
interest expense.

Liquidity and Capital
Resources

Net cash
used in operating activities for the nine month period ended May 31, 2008 was
approximately $8.1 million. Cash was consumed in reducing our payables to
suppliers, funding our loss from operations, an increase in trade receivables,
and an increase in prepaid expenses, offset partially by a decrease in
inventories.

For the nine
months ended May 31, 2008 net cash used by investing activities consisted of
$198,000 in capital expenditures, principally invested in new equipment and
fixtures related to Backwoods store openings.

Cash provided by financing
activities consisted of $8.2 million for the nine months ended May 31, 2008,
comprised of advances from our factor and borrowings from a bank under a line of
credit that we assumed through the acquisition of Backwoods.

Working
capital at May 31, 2008 was $4.8 million, a decrease of $2.4 million from $7.2
million at August 31, 2007. This decrease resulted from decreased inventory
levels, and increased borrowings from our factor offset partially by increases
in receivables and prepaid expenses. In addition, the assumption of a short term
debt in the Backwoods acquisition, partially offset by an increase in
inventories associated with the purchase transaction also reduced working
capital. Our current ratio decreased slightly to 1.2 to 1.0 at May 31, 2008,
down from 1.3 to 1.0 at August 31, 2007.

Our
principal external source of liquidity comes from our financing arrangement with
CIT. That financing arrangement is established on a borrowing base that is
determined by our levels of trade receivables and inventory.

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 outstanding receivables that were non-recourse at May 31, 2008 was $14.9
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,
2008 was approximately $1.8 million of which approximately $1.0 million had been
collected through March 31, 2008.

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 (5% at May 31, 2008) 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, 2008, we had outstanding letters of credit of
approximately $632,000 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. 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.

Our Backwoods subsidiary has a
separate revolving line of credit assumed in the acquisition which enables it to
borrow up to a maximum of $3.5 million. Advances under the line of credit bear
interest at a rate equal to the banks prime lending rate, which was 5.0% as of
May 31, 2008. The Backwoods line of credit expires by its terms in September
2008.

We are currently reviewing options
for replacing and increasing our Backwoods line of credit, commensurate with the
anticipated working capital needs of expanding our retail operations. We have no
arrangements or agreements in place for such financing at this time. We cannot
provide any assurances about our ability to obtain additional credit for our
Backwoods operations or the terms of any credit facility that we may obtain.
Recent developments in the commercial credit market may impact the terms on
which we can obtain credit.

16

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Contractual Obligations and
Commercial Commitments

As of May
31, 2008, we had no off-balance sheet arrangements. The following summarizes our
contractual obligations at May 31, 2008 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                        |  |                                                       
| | Letters of
      credit                 |  |                                                       
| | Employment agreements                   |  |                                                       
| | Bank debt and vehicle
      loan        |  |                                                       
| | Convertible Debentures                  |  |                                                       
| | Total obligations
      and commitments |  | $                                                     

Inventory

Our
inventory decreased 11.3% to $12.5 million at May 31, 2008, from $14.1 million
at August 31, 2007. Compared to inventories of $6.9 million at May 31, 2007
current period ending inventory increased 81.2%. This increase is reflective of
the inclusion of inventories for our recently acquired Backwoods business, as
well as inventories on hand for shipment against a higher volume of orders for
June 2008 as compared to June 2007. 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, 2008. The
amount of such off-price 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, 2008, 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, 2008 for which customer sales
orders have not yet been received, or are delayed or cancelled. 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, 2008, we had on-hand unfilled customer orders of $31.1 million as compared
to $45.2 million at May 31, 2007, with such orders generally scheduled for
delivery by November 2008 and November 2007, respectively. The decrease in
backlog is due to a reduction in orders from retailers for our womens sleepwear
and mens and womens sportswear product lines. We believe that the decrease in
backlog is attributable primarily to the weakening U.S. economy as retailers
limit their commitments for future purchases.

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, 2008. 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 our operating results.

17

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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 2008 and planning for fiscal 2009.

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:
  achieve solid, sustainable revenue
    growth;maintain and enhance our product
    line;successfully introduce new products and product
    categories;successfully integrate acquisitions, including
    the acquisition of Backwoods;cost effectively acquire and retain
    customers;compete against existing and new
    competitors;manage expenses associated with necessary
    general and administrative investments;cost efficiently manage inventories;
    andgrow our revenues and leverage our operating
    infrastructure to enhance profitability;
- achieve solid, sustainable revenue
    growth;
- maintain and enhance our product
    line;
- successfully introduce new products and product
    categories;
- successfully integrate acquisitions, including
    the acquisition of Backwoods;
- cost effectively acquire and retain
    customers;
- compete against existing and new
    competitors;
- manage expenses associated with necessary
    general and administrative investments;
- cost efficiently manage inventories;
    and
- grow our revenues and leverage our operating
    infrastructure to enhance profitability;

18

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- 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, 2007 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 interest rate
debt, including advances under our factoring agreement and borrowings under
Backwoods revolving line of credit. Interest rates may fluctuate over time
based on economic conditions and we could be subject to increased interest
payments if interest rates rise. As of May 31, 2008, a one percent change in
interest rates would increase or decrease our annual interest expense by
approximately $107,000. We do not use derivative instruments to manage our
interest rate risk.

There have
been no material changes in market risk exposures from those disclosed in our
Annual Report on Form 10-K for the year ended August 31, 2007.

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 Exchange Act Rule 13a-15(b), we carried out an evaluation, under the
supervision and with the participation of our management, including our chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of May 31,
2008, the end of the period covered by this report. Based on that evaluation,
our chief executive officer and chief financial officer concluded that certain
control deficiencies as described below existed in our internal control over
financial reporting. As a result of these deficiencies our chief executive
officer and chief financial officer concluded that our disclosure controls and
procedures were not effective at the reasonable assurance level as of May 31,
2008.

19

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In
connection with its audit of the Companys consolidated financial statements
included in the Companys Annual Report on Form 10-K for the fiscal year ended
August 31, 2007, J.H. Cohn advised the Companys management and the audit
committee of the board of directors of the Company that the Company did not have
the internal controls necessary to timely prepare and file reliable financial
statements. We have continued to implement, but did not complete steps to remedy
this deficiency by the period ended May 31, 2008.

In our
Annual Report on Form 10-K we reported that we lacked sufficient experienced
senior accounting staff to enable us to timely process, summarize and report
financial information. Our lack of sufficient staff has resulted in our late
filing of our Annual Report on Form 10-K for the fiscal year ended August 31,
2007 and an extension of time for us to file our Quarterly Reports on Form 10-Q
for the quarters ended November 30, 2007 and February 29, 2008.

We are
implementing additional internal controls and procedures designed to assure the
timely and accurate preparation of our financial statements, including the
centralization and standardization of accounting systems among our operating
subsidiaries, integration of the accounting and reporting functions for our
recently acquired Backwoods business, and the recruitment and training
accounting staff on the accounting issues relevant to our business operations.
These controls and procedures were not fully implemented by May 31, 2008.

While we
continue to implement controls and procedures to improve the quality and
timeliness of our processing information, we have completed our internal control
procedures for the period ended May 31, 2008. Accordingly, our management has
concluded that the financial statements included in this report fairly present
in all material respects our financial position, results of operations and cash
flows for the periods presented in conformity with generally accepted accounting
principles.

(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, and subsequent to that
period, that have materially affected, or are likely to materially affect, our
internal control over financial reporting. During the quarter ended May 31, 2008
we have taken the following actions each of which are expected to have a
material impact on our internal controls over financial reporting:

- Implementation of Controls and
  Procedures. In connection with our
  obligations under Section 404(b) of the Sarbanes Oxley Act of 2002, we are
  required to design and implement a system of internal controls over financial
  reporting and test our controls against a standardized framework in connection
  with our upcoming annual report for the fiscal year ending August 31, 2008.
  During the quarter ended May 31, 2008 we continued the design and
  implementation of additional internal controls, including the implementation
  of additional procedures for segregating accounting functions, standardizing
  and automating reporting formats and documenting the audit and control
  procedures.
- Accounting and Information
  Systems. In 2006 we acquired the business
  of Designer Intimates. Since that time, we have operated separate accounting
  systems for our west coast based business operations and the Designer
  Intimates business that operates primarily in New York and New Jersey. In
  connection with the appointment of new Chief Financial Officer and Chief
  Accounting Officer in the second quarter of the year, we began centralizing
  accounting and information functions and systems under the direction of our
  Chief Accounting Officer.
- Integration of Backwoods and Related
  Reporting. On February 2, 2008 we acquired
  all of the outstanding common stock of Back Woods Equipment Company. The
  quarter ended May 31, 2008 was our first full quarter of operations of the
  Backwoods retail stores. Consequently, we have implemented new accounting
  policies and have been required to review accounting issues related to those
  retail operations.

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PART II - OTHER
INFORMATION

ITEM 1. Legal
Proceedings

From time to
time, we may be involved in litigation relating to claims arising out of our
operations in the normal course of business. As of the date of this report, we
are not a party to any such litigation which we believe would have a material
adverse effect on us.

ITEM 1A. Risk Factors

See our
discussion of risk factors disclosed in Part 1, Item 1A, of our Annual Report on
Form 10-K for the fiscal year ended August 31, 2007. In addition to those risk
factors, below are additional risks and uncertainties that we have identified at
this time, though there may be additional risks not currently known to us or
that we currently believe are immaterial.

General
economic conditions, including continued weakening of the economy, may affect
consumer purchases of discretionary items, which could adversely affect our
sales.

The
industries in which we operate have historically been subject to cyclical
variations, recessions in the general economy and future economic outlook. Our
results are dependent on a number of factors impacting consumer spending
including general economic and business conditions; consumer confidence; wages
and employment levels; the housing market; consumer debt levels; availability of
consumer credit; credit and interest rates; fuel and energy costs; energy
shortages; taxes; general political conditions, both domestic and abroad; and
the level of customer traffic within department stores, malls and other shopping
and selling environments.

Consumer
purchases of discretionary items, including our products, may decline during
recessionary periods and at other times when disposable income is lower. A
downturn or an uncertain outlook in the economy may materially adversely affect
our business and our revenues and profits.

**Weakness in the financial
condition of retailers could harm our wholesale business.**

Our
wholesale apparel and home décor business depends on retailers to sell our
products. In recent years, the retail industry has experienced economic
weakness. The current economic downturn has negatively influenced customer
spending, increasing the financial pressure on retailers. As a result, some
retailers are delaying or curtailing their purchase orders for goods. Some
retailers have filed for voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code. A decline in the financial condition of retail
customers of our wholesale business may cause our factor to refuse to finance
receivables to those customers, result in a delay of payment on our accounts,
cause a retailer to reduce their advance orders or the level of business they
conduct with us, or change the purchase terms on which they are willing to do
business with us.

Apparel
industry practices regarding chargebacks and allowances may increase volatility
in our results of operations.

The retail
apparel industry has traditionally employed a system of chargebacks and
allowances on its suppliers, seeking credits or discounts on product which they
cannot sell or sell at prices that are discounted below their expected selling
price. In certain of our agreements with our retail customers we provide
assurances of cooperation with the retailer to help them try to achieve gross
margin targets, but we do not provide gross margin guarantees or purchase price
protection. We have historically worked with our retail customers, including the
acceptance of chargebacks and allowances where we believe that the product sale
or customer relationship merit such cooperation.

In
connection with the preparation of our financial statements, we establish a
reserve against sales, accruing for anticipated retailer chargebacks and
allowances. Management establishes this reserve based on the terms of purchase
agreements and our historical experience. In difficult economic times, retailers
have additional incentive to improve their operating margins by increasing the
amount of chargebacks or allowances. The consolidation in the retail industry
has also increased retailers leverage in negotiations with their suppliers. As
a result, we are aware of increasingly aggressive chargeback practices among
certain retailers. This trend has resulted in lawsuits that have been filed
against certain department store retailers claiming that those retailers
fraudulently deducted chargebacks against invoices owing to
suppliers.

21

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Uncertainty
related to possible chargebacks and allowances makes it more difficult for our
management to accurately estimate reserves and therefore increases the potential
for significant changes in revenues and gross margin from one reporting period
to the next. Disagreements with any retailer over their chargeback and allowance
practices may impact our ongoing business relationship with that
retailer.

Our
international operations, including manufacturing, are subject to a variety of
legal, regulatory, political and economic risks, including risks relating to the
importation and exportation of product.

We source
most of our products outside the U.S. through arrangements with independent
manufacturers in China. There are a number of risks associated with importing
our products, including but not limited to the following:

- Quotas imposed by bilateral textile agreements
  with China and non-WTO countries. These agreements limit the amount and type
  of goods that may be imported annually from these countries;
- Changes in social, political, legal and economic
  conditions or terrorist acts that could result in the disruption of trade from
  the countries in which our manufacturers or suppliers are
  located;
- The imposition of additional regulations relating
  to imports or exports;
- The imposition of additional duties, taxes and
  other charges on imports or exports;
- Risks of increased sourcing costs, including costs
  for materials and labor, including as a result of the elimination of quota on
  apparel products;
- Our ability to adapt to and compete effectively in
  the current quota environment, including changes in sourcing patterns
  resulting from the elimination of quota on apparel products, as well as
  lowered barriers to entry;
- Significant delays in the delivery of cargo due to
  security considerations;
- The imposition of antidumping or countervailing
  duty proceedings resulting in the potential assessment of special antidumping
  or countervailing duties; and
- The enactment
  of new legislation or the administration of current international trade
  regulations, or executive action affecting international textile agreements,
  including the United States reevaluation of the trading status of certain
  countries and/or retaliatory duties, quotas or other trade sanctions, which,
  if enacted, would increase the cost of products purchased from suppliers in
  such countries.

Any one of
these factors could have a material adverse effect on our financial condition,
results of operations and current business practices.

Recent
changes in Chinas wage and tax laws may increase the costs of goods sourced in
China and decrease our profitability.

China has
developed as a world leader in the manufacturing and production of apparel and
other products. China has recently eliminated tax rebates for certain goods
exported from that country, including apparel. In addition, changes in Chinas
labor minimum wage and hour laws have increased the cost of labor for goods
produced in that country. Following the implementation of these regulatory
changes, we have seen increases in quoted prices for goods manufactured in
China.

We
continually work with our Chinese manufacturers as well as manufacturers in
other countries to minimize our costs of goods sold. Our Chinese manufacturers
are also evaluating options to reduce their costs under the new regulatory
scheme. If Chinese manufacturers increase their prices as a result of changes in
tax and wage laws, our cost of goods may increase, putting pressure on our gross
margin and net income.

If we
fail to anticipate changes in consumer preferences, we may experience lower net
sales, higher inventory markdowns and lower margins.

Our products
must appeal to a broad range of consumers whose preferences cannot be predicted
with certainty. These preferences are also subject to change. Our success
depends upon our ability to anticipate and respond in a timely manner to trends
in outdoor lifestyle goods merchandise and consumers participation in outdoor
activities. If we fail to identify and respond to these changes, our net sales
may decline. In addition, because we often make commitments to purchase products
from our vendors up to 6 months in advance of the proposed delivery, if we
misjudge the market for our merchandise, we may over-stock unpopular products
and be forced to take inventory markdowns that could have a negative impact on
profitability.

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Changes
in the credit market or the financial position of the providers of our credit
facilities may impact our ability to borrow money or our interest
expense.

We have
historically relied on credit facilities and factoring agreements to provide
working capital to support the operations of business. With respect to our
wholesale business, we have a credit arrangement with our principal lender under
which we factor our receivables and borrow against our inventory. Our retail
business also has a line of credit under which allows us to borrow against
inventory. Commercial banks and lenders have faced challenges recently related
to nonperforming loans, including principally subprime based real estate loans.
The impact of losses in the subprime mortgage industry has broadly affected the
availability of commercial loans. We have received nonbinding assurances from
the lender of our wholesale business that they do not intend to change or
terminate our credit facility. We regularly evaluate alternative financing
sources; however we have no other agreements or arrangement in place at this
time. Further changes in the commercial credit market or in the financial
stability of our creditors may impact the ability of our creditors to provide
additional financing. In addition, the financial condition of our credit
facility providers, which is beyond our control, may adversely change. Any
decrease in our access to borrowings under our credit facilities, tightening of
lending standards and other changes to our sources of liquidity could adversely
impact our ability to obtain the financing we need to continue operating the
business in our current manner or impact our cost of capital.

**Our hardware and software
systems are vulnerable to damage that could harm our
business.**

Our success,
in particular our ability to successfully manage inventory levels, largely
depends upon the efficient operation of our computer hardware and software
systems. We use management information systems to track inventory information at
the store level, communicate customer information and aggregate daily sales
information. These systems and our operations are vulnerable to damage or
interruption from:

- earthquake, fire, flood and other natural
  disasters;
- power loss, computer systems failures, Internet
  and telecommunications or data network failure, operator negligence, improper
  operation by or supervision of employees, physical and electronic loss of
  data, security breaches, misappropriation, data theft and similar
  events;and
- computer viruses, worms, Trojan horses,
  intrusions, or other external threats.

Any failure
that causes an interruption in our operations or a decrease in inventory
tracking could result in reduced net sales and profitability.

Intense
competition in the outdoor lifestyle goods industry could limit the growth of
our retail business and reduce our profitability.

The retail
market for outdoor lifestyle goods is highly fragmented and intensely
competitive. Our Backwoods retail stores compete directly or indirectly with the
following categories of companies:

- large format full-line sporting goods and outdoor
  lifestyle goods retailers;
- traditional sporting goods stores and
  chains;
- specialty outdoor lifestyle goods retailers and
  pro shops;
- mass merchandisers, warehouse clubs, discount
  stores and department stores; and
- catalog and internet-based sporting goods and
  outdoor lifestyle goods retailers.

Some of our
competitors have a larger number of stores and greater financial, distribution,
marketing and other resources than we have. If our competitors reduce their
prices, it may be difficult for us to reach our net sales goals without reducing
our prices. As a result of this competition, we may also need to spend more on
advertising and promotion than we anticipate. If we are unable to compete
successfully, our operating results will suffer.

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**Because our Backwoods stores
are concentrated in four states, we are subject to regional
risks.**

Our
Backwoods stores are located in four states - Kansas, Nebraska, Oklahoma and
Texas. Because of this, we are subject to regional risks, such as the economy,
weather conditions, power outages, electricity costs and natural disasters
specific to the states in which we operate. State and local regulatory
compliance also can impact our financial results. If the region were to suffer
an economic downturn or other adverse regional event, our net sales and
profitability and our ability to implement our planned operations could suffer.
Several of our competitors operate stores across the United States and thus are
not as vulnerable to these regional risks.

If we
lose key management or are unable to attract and retain the talent required for
our retail business, our operating results could suffer.

The future
success of Backwoods depends to a significant degree on the skills, experience
and efforts of Jennifer Mull, the president and chief executive officer of
Backwoods, and other key personnel who are not obligated to stay with us. The
loss of the services of any of these individuals could harm our business and
operations. In addition, as our Backwoods business and lifestyle clothing
collection grows, we will need to attract and retain additional qualified
personnel in a timely manner and develop, train and manage an increasing number
of management-level sales associates and other employees. Competition for
qualified employees could require us to pay higher wages and benefits to attract
a sufficient number of employees, and increases in the minimum wage or other
employee benefits costs could increase our operating expenses. If we are unable
to attract and retain personnel as needed in the future, our net sales growth
and operating results may suffer.

ITEM 2. Unregistered Sales of Equity
Securities and Use of Proceeds

None.

ITEM 3. Defaults Upon Senior Securities

None.

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

We held our
annual meeting of shareholders on March 26, 2008. The matters submitted for
shareholder vote at the meeting were to: (1) elect a board of five directors;
(2) vote on the proposed reincorporation from California to Nevada; and (3) vote
upon a proposal to increase the number of shares of common stock subject to the
Nitches, Inc. 2006 Equity Incentive Plan. See our Definitive Proxy Statement on
Schedule 14A filed with the SEC on February 19, 2008, for further description of
each matter submitted for shareholder vote at our annual meeting.

Each of the
five nominees for director nominated by our board of directors was elected to
office. The following table sets forth the number of votes cast for, against or
withheld for each nominee:

Nominee
    
    
    For
    
    Against
    
    WithheldSteven P. Wyandt
    
    4,917,801
    
    0
    
    361,571Paul
      M. Wyandt
    
    4,905,629
    
    0
    
    373,743Eugene B. Price II
    
    4,813,418
    
    0
    
    465,954Michael D. Sholtis
    
    4,906,229
    
    0
    
    373,143T. Jefferson Straub
    
    4,825,941
    
    0
    
    453,431


24

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Our
shareholders approved both of the other two proposals submitted to a vote at the
annual meeting: (i) the proposed reincorporation from California to Nevada and
(ii) the proposal to increase the number of shares of common stock subject to
the Nitches, Inc. 2006 Equity Incentive Plan. The following table sets forth the
number votes cast for, against or abstained with respect to each of those
proposals:

Proposal
    
    
    For
    
    Against
    
    AbstainedReincorporation
    
    3,163,884
    
    244,046
    
    1,871,442Equity
      Incentive Plan Amendment
    
    3,091,373
    
    308,988
    
    1,879,011


**ITEM 5. Other
Information**

None.

ITEM 6. Exhibits

See the exhibit index immediately
following the signature page to this report.

25

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SIGNATURES

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

|                    |  |     |                                                       | NITCHES, INC. | 
|------------------- |  | --- | ----------------------------------------------------- | ------------- | 
|                    |  |     | (Registrant)                                         
|                   
|July 15,
      2008 |  | By: | /s/ Paul M. Wyandt                                   
|                    |  |     | Paul M.
      Wyandt                                 
|                    |  |     | As
      Principal Financial Officer and on behalf of
|                    |  |     | the
      Registrant                                 

26

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EXHIBIT INDEX

|Exhibit
      No. |  | Description                                                                                                                                  
|----------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|31.1              |  | Certification pursuant to Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934, as amended, by Chief Executive
      Officer
|31.2              |  | Certification pursuant to Rule 13a-14(a)/15d-14(a) of the
      Securities Exchange Act of 1934, as amended, by Chief Financial
      Officer
|32.1              |  | Certification pursuant to 18 U.S.C. §1350 by Chief Executive
      Officer                                                                   
|32.2              |  | Certification pursuant to 18 U.S.C. §1350 by Chief Financial
      Officer                                                                   

27

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