UNITED
STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM
10-Q/AAmendment No. 2

|(Mark One)
|----------
|[ X ]     

|For the quarterly period
      ended: | ********November 30,
      2006******** | 
|------------------------------------- | --------------------------------------- | 
|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: | ********0-13851******** | 
|----------------------- | ----------------------- | 

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

|California                                                           |  | 95-2848021                            
|-------------------------------------------------------------------- |  | --------------------------------------
|(State or other jurisdiction of incorporation or
      organization) |  | (I.R.S. Employer Identification
  No.)

|10280 Camino
      Santa Fe, San Diego, California |  | 92121     
|-------------------------------------------------- |  | ----------
|(Address of principal executive offices)           |  | (Zip Code)

|(858)
      625-2633                                                                    
|----------------------------------------------------------------------------------------
|(Registrant's telephone number, including area
      code)                              
|                                                                                        
|                                                                                        
|(Former name, former address and former fiscal year, if
      changed since last report)

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

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

|Large accelerated filer [   ] | Accelerated filer [   ] | Non- accelerated filer [ X
  ]
|----------------------------- | ----------------------- | ------------------------------

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

As of January 19,
2007 the registrant had 5,253,507 shares of common stock outstanding.

---

EXPLANATORY NOTE

We filed our Quarterly Report on Form 10-Q for the period ended November
30, 2006 with the Securities and Exchange Commission on January 22, 2007 (the
"Original Filing"). We filed an Amendment No. 1 on Form 10-Q/A for the period
ended November 30, 2006 with the SEC on January 31, 2007 ("Amendment No. 1"). We
are filing this Amendment No. 2 on Form 10-Q/A for the period ended November 30,
2006 to make certain revisions to "Item 1. Financial Statements" related to the
following:

(i) We are amending our disclosure with respect to our acquisition of
Saguaro LLC to allocate the purchase price to the value of the trademarks
acquired, rather than to goodwill. At the time of the acquisition, Saguaro's
only assets were the trademarks "Saguaro" and "Saguaro West." The effect of this
revision is a decrease in the dollar amount ascribed to "goodwill" for the
period ended November 30, 2006 from $5,344,000 to $2,620,000 and an increase in
the dollar amount ascribed to "other intangibles not subject to amortization"
from $1,208,000 to $3,932,000, and other related adjustments.

(ii) After filing Amendment No. 1 we reevaluated our methodology for
recognizing and reporting stock-based compensation expense in accordance with
Statement of Financial Accounting Standards No. 123R (revised 2004),
"Share-Based Payment." On August 21, 2007, we determined that due to the
immediate vesting of 25% of all of the options granted during the period, we
must recognize an expense equal to 25% of the fair value of the options granted
in such period, rather than expensing these amounts ratably over the first year
of the term of the options. As such, we are revising our disclosure with respect
to stock-based compensation to reflect a revised stock-based compensation cost
of approximately $199,000 for the three months ended November 30, 2007, which we
previously reported as $49,000, and other related adjustments. Our audit
committee has discussed this matter with our independent accountants.

Although this report only revises the disclosures in "Item 1. Financial
Statements" that are affected by the above discussed changes, we have presented
our complete Quarterly Report on Form 10-Q.

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

Except as otherwise specifically noted, all information contained herein
is as of November 30, 2006 and does not reflect events or changes that have
occurred subsequent to that date. Accordingly, this report should be read in
conjunction with our other filings made with the Securities and Exchange
Commission subsequent to the filing of the Original Filing. The filing of this
report shall not be deemed an admission that the Original Filing or Amendment
No. 1 when made included any untrue statement of a material fact or omitted to
state a material fact necessary to make a statement not misleading.





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ITEM 1. Financial Statements

NITCHES, INC. AND
SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS

ASSETSNovember 30,
    
    August 31,2006
    
    2006(Unaudited)Current assets:Cash
      and cash equivalents
    
    $
    724,000
    
    
    
    $
    228,000Receivables:Due from factor, net
    
    
    22,987,000
    
    
    
    
    10,057,000Trade
      receivables, net
    
    
    203,000
    
    
    
    
    484,000Due
      from affiliates and employees
    
    
    27,000
    
    
    
    
    18,000Total
      receivables
    
    
    23,217,000
    
    
    
    
    10,559,000Inventories, less allowances
    
    
    7,410,000
    
    
    
    
    12,424,000Deferred income taxes, current
    
    
    587,000
    
    
    
    
    587,000Other current assets
    
    
    562,000
    
    
    
    
    628,000Total
      current assets
    
    
    32,500,000
    
    
    
    
    24,426,000Property and equipment, net
    
    
    126,000
    
    
    
    
    164,000Goodwill
    
    
    2,620,000
    
    
    
    
    2,620,000Intangibles, net
    
    
    6,515,000
    
    
    
    
    3,543,000Other assets
    
    
    28,000
    
    
    
    
    31,000$
    41,789,000
    
    
    
    $
    30,784,000LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilities:Due to
      factor
    
    $
    20,237,000
    
    
    
    $
    9,676,000Accounts
      payable
    
    
    5,139,000
    
    
    
    
    9,349,000Accrued expenses
    
    
    993,000
    
    
    
    
    1,163,000Note
      payable
    
    
    250,000
    
    
    
    
    513,000Income taxes payable
    
    
    1,030,000
    
    
    
    
    89,000Total
      current liabilities
    
    
    27,649,000
    
    
    
    
    20,790,000Long term liabilities:Deferred income
      taxes, non-current
    
    
    736,000
    
    
    
    
    736,000Shareholders' equity:Series A preferred stock, $100 par value; 25,000,000 shares
      authorized,8,820
      shares issued and outstanding
    
    
    882,000
    
    
    
    
    882,000Common stock, no par value; 50,000,000 shares authorized;5,253,507
      shares issued and outstanding (4,653,507 - August 31, 2006)
    
    
    7,873,000
    
    
    
    
    5,143,000Additional paid-in capital
    
    
    199,000
    
    
    
    
    -Retained earnings
    
    
    4,450,000
    
    
    
    
    3,233,000Total
      shareholders' equity
    
    
    13,404,000
    
    
    
    
    9,258,000$
    41,789,000
    
    
    
    $
    30,784,000


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

2

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

Three Months EndedNovember 30,2006
    
    2005Net sales
    
    $
    35,421,000
    
    
    
    $
    14,715,000Cost of goods sold
    
    
    26,845,000
    
    
    
    
    10,382,000Gross profit
    
    
    8,576,000
    
    
    
    
    4,333,000Selling, general and administrative expenses
    
    
    6,119,000
    
    
    
    
    3,037,000Income from operations
    
    
    2,457,000
    
    
    
    
    1,296,000Interest expense
    
    
    (300,000
    )
    
    
    
    (90,000
    )Other income
    
    
    -
    
    
    
    
    1,000Loss from equity investment
    
    
    -
    
    
    
    
    (11,000
    )Income before income
      taxes
    
    
    2,157,000
    
    
    
    
    1,196,000Provision for income taxes
    
    
    940,000
    
    
    
    
    676,000Net income
    
    $
    1,217,000
    
    
    
    $
    520,000Earnings per weighted average share:Basic
    
    $
    0.25
    
    
    
    $
    0.14Diluted
    
    $
    0.24
    
    
    
    $
    0.14Weighted average shares outstanding:Basic
    
    
    4,904,056
    
    
    
    
    3,739,002Diluted
    
    
    4,976,808
    
    
    
    
    3,739,002


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

3

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NITCHES, INC. AND
SUBSIDIARIESCONDENSED CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY(Unaudited)

Three Months EndedNovember 30,2006
    
    2005Preferred stockBalance, beginning of period
    
    $
    882,000
    
    
    
    $
    -Preferred stock issued
    
    
    -
    
    
    
    
    882,000Balance,
      end of period
    
    
    882,000
    
    
    
    
    882,000Common stock and paid-in capitalBalance, beginning of period
    
    
    5,143,000
    
    
    
    
    1,495,000Common stock issued
    
    
    2,730,000
    
    
    
    
    918,000Stock-based compensation expense
    
    
    199,000
    
    
    
    
    -Balance,
      end of period
    
    
    8,072,000
    
    
    
    
    2,413,000Retained earningsBalance, beginning of period
    
    
    3,233,000
    
    
    
    
    2,765,000Net
      income
    
    
    1,217,000
    
    
    
    
    520,000Balance,
      end of period
    
    
    4,450,000
    
    
    
    
    3,285,000Total
      stockholders' equity
    
    $
    13,404,000
    
    
    
    $
    6,580,000


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

4

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

Three Months EndedNovember
      30,2006
    
    2005Net income
    
    $
    1,217,000
    
    
    
    $
    520,000Cash flows from operating activities:Depreciation and amortization
    
    
    113,000
    
    
    
    
    35,000Non-cash stock option compensation expense
    
    
    199,000
    
    
    
    
    -Loss
      from investment in unconsolidated subsidiary
    
    
    -
    
    
    
    
    11,000(Increase) decrease in due from factor
    
    
    (12,930,000
    )
    
    
    
    (10,629,000
    )(Increase) decrease in trade receivables
    
    
    272,000
    
    
    
    
    275,000(Increase) decrease in inventories
    
    
    5,014,000
    
    
    
    
    3,613,000Decrease in refundable income taxes
    
    
    -
    
    
    
    
    (30,000
    )(Increase) decrease in other assets
    
    
    69,000
    
    
    
    
    (10,000
    )Decrease in accounts payable and accrued expenses
    
    
    (4,380,000
    )
    
    
    
    (3,511,000
    )Increase in income taxes payables
    
    
    941,000
    
    
    
    
    740,000Net cash used by operating activities
    
    
    (9,485,000
    )
    
    
    
    (8,986,000
    )Cash flows from investing activities:Capital expenditures
    
    
    (17,000
    )
    
    
    
    (17,000
    )Cash
      used in transaction
    
    
    (300,000
    )Cash
      acquired in transaction
    
    
    -
    
    
    
    
    124,000Net
      cash provided (used) by investing activities
    
    
    (317,000
    )
    
    
    
    107,000Cash flows from financing activities:Advances from factor
    
    
    10,561,000
    
    
    
    
    9,109,000Payment of loan payable
    
    
    (263,000
    )
    
    
    
    -Net cash provided by financing activities
    
    $
    10,298,000
    
    
    
    $
    9,109,000Net increase in cash and cash equivalents
    
    
    496,000
    
    
    
    
    230,000Cash and cash equivalents at beginning of period
    
    
    228,000
    
    
    
    
    192,000Cash and cash equivalents at end of period
    
    $
    724,000
    
    
    
    $
    422,000Supplemental disclosures of cash flow information:Interest paid during the period
    
    $
    298,000
    
    
    
    $
    90,000Non-cash investing activity:Acquisition of remaining outstanding shares of
      subsidiaryCommon stock issued
    
    $
    2,730,000
    
    
    
    $
    918,000Series A preferred stock issued
    
    
    -
    
    
    
    
    882,000$
    2,730,000
    
    
    
    $
    1,800,000


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

5

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NITCHES, INC. AND
SUBSIDIARIESNotes to Condensed
Consolidated Financial Statements

1. Description of Business:

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

2. Condensed Financial Statements:

The
accompanying unaudited consolidated financial statements have been prepared in
accordance with the instructions to Form 10-Q. They do not include all
information and footnotes necessary for a fair presentation of financial
position and results of operations and cash flows in conformity with generally
accepted accounting principles in the United States of America. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes contained in our Annual
Report on Form 10-K for the year ended August 31, 2006. In the opinion of
Management, all adjustments considered necessary for a fair presentation have
been included in the interim period. Operating results for the three months
ended November 30, 2006 are not necessarily indicative of the results that may
be expected for the year ending August 31, 2007.

3. Earnings Per Share:

Basic
earnings per common share is computed by dividing income available to common
shareholders by the weighted-average number of shares of common stock
outstanding during the period. Diluted earnings per common share is computed by
dividing income available to common shareholders by the weighted-average number
of shares of common stock outstanding during the period increased to include the
number of additional shares of common stock that would have been outstanding if
the dilutive potential shares of common stock had been issued. The dilutive
effect of outstanding options is reflected in diluted earnings per share by
application of the treasury stock method. Under the treasury stock method, an
increase in the fair market value of our common stock can result in a greater
dilutive effect from outstanding options. Additionally, the exercise of employee
stock options can result in a greater dilutive effect on earnings per share.

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

Three Months EndedNovember
      30,2006
    
    2005Numerator:Net income
    
    $
    1,217,000
    
    
    
    $
    520,000Denominator:Weighted average shares outstanding
    
    
    4,904,056
    
    
    
    
    3,739,002Effect of dilutive options
    
    
    72,752
    
    
    
    
    -Denominator for diluted earnings per share
    
    
    4,976,808
    
    
    
    
    3,739,002Basic earnings per share
    
    $
    0.25
    
    
    
    $
    0.14Diluted earnings
      per share
    
    $
    0.24
    
    
    
    $
    0.14


6

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

4.Inventories:

November 30,
    
    August 31,2006
    
    2006Fabric and trim
    
    $
    566,000
    
    
    
    $
    222,000Work in
      progress
    
    
    615,000
    
    
    
    
    2,939,000Finished goods
    
    
    6,764,000
    
    
    
    
    9,651,000Markdown
      allowances
    
    
    (535,000
    )
    
    
    
    (388,000
    )$
    7,410,000
    
    
    
    $
    12,424,000


5.Trade
accounts receivable:

Pursuant to
the terms of an agreement between Nitches and a factor, Nitches sells a majority
of its trade accounts receivable to the factor on a pre-approved, non-recourse
basis. The price at which the accounts are sold is the invoice amount reduced by
the factor commission (.3% of the invoice amount) and all selling discounts. For
accounts sold to the factor without recourse, the factor is responsible for
collection, assumes all credit risk, and obtains all of the rights and remedies
against the companys customers. For such accounts, payment is due from the
factor upon the earlier of the payment of the receivable to the factor by the
customer, or the maturity of the receivable (generally 180 days from the date of
shipment to the customer). As of November 30, 2006, non-recourse receivables
totaled $23.2 million.

Trade accounts receivable not sold
to the factor remain in the custody and control of the Company and theCompany maintains all credit risk on those
accounts as well as accounts which are sold to the factor with recourse. The
combined credit risk for non-factored and recourse receivables as of November
30, 2006, totaled $939,000 of which $247,000 had been collected by December 31,
2006.

The Company
may request payment from the factor in advance of the collection date or
maturity. Any such advance payments are assessed an interest charge through the
collection date or maturity at the factors prime rate less 1.5% (one and one
half percent) per annum. The companys obligations with respect to advances from
the factor are limited to the interest charges thereon. Advance payments are
limited to a maximum of 85% (eighty-five percent) of eligible accounts
receivable. The factoring agreement also provides for the issuance of
irrevocable letters of credit for the Companys purchase of inventory in the
normal course of its business. Letters of credit are subject to a $6 million
limit. All assets of the company collateralize the advances and letters of
credit. The Companys Chairman has also provided a personal guaranty in
connection with the factoring arrangement.

The status of the Companys trade
accounts receivable and letters of credit are as follows:

|                                                               | November 30, |            | August 31,
|-------------------------------------------------------------- | ------------ | ---------- | ----------
|                                                               | 2006         |            | 2006      
|Receivables assigned to factor:                                |              |            |           
|Non-recourse                                                   | $            | 23,171,000 |           
|Recourse                                                       |              | 677,000    |           
|Allowance for customer credits and doubtful
      accounts     |              | (861,000   | )         
|Due from factor, net                                           | $            | 22,987,000 |           
|                                                               |              |            |           
|Non-factored accounts receivable                               | $            | 262,000    |           
|Allowance for customer credits and doubtful accounts           |              | (59,000    | )         
|Trade
      receivables, less allowances                       | $            | 203,000    |           
|                                                               |              |            |           
|Due to factor                                                  | $            | 20,237,000 |           
|                                                               |              |            |           
|Contingent liabilities for irrevocable letters of
      credit | $            | 2,610,000  |           

7

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

6. Dividends:

The Company did not pay any
dividends during the current period or the prior fiscal year.

7. Significant Customers:

Sales to
four separate customers accounted for 18.7%, 15.6%, 13.0% and 12.1%,
respectively, of the Companys net sales in the three months ended November 30,
2006. Sales to three separate customers accounted for 19.1%, 18.3% and 17.9% of
the Companys net sales in the three months ended November 30, 2005.

Four
customers accounted for 27.8%, 18.1%, 12.7% and 10.5% respectively of the
Companys trade receivable balance as of November 30, 2006. Three customers
accounted for 20.9%, 16.6% and 15.9% of the Companys trade receivable balance
as of November 30, 2005.

8. Acquisition of Saguaro LLC:

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

9. Stock-Based
Compensation

Adoption of SFAS 123R

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

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

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

Compensation Costs

Results of
operations for the three months ended November 30, 2006 include stock-based
compensation costs of approximately $199,000 comprised of employee stock option grants. The Company
had no stock options outstanding in the prior period.

The total fair value of options vested is $199,000. After recording
expense through November 30, 2006, there remains $598,000 of unrecognized
compensation costs related to unvested stock options to be recognized over the
next 3.75 years.

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

8

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

Valuation of Stock Option Awards

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

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

Three months endedNovember 30, 2006Expected
      life (in years)
    6.0Expected
      volatility
    64.6
    %Risk-free
      interest rate
    4.7
    %Anticipated Dividend Yield
    0.00
    %Weighted-Average Grant-Date Fair Value of Options
      Granted
    $2.61Forfeiture Rate
    0.00
    %


Stock Option and Warrant Activity

Awards under the 2006
Equity Incentive Plan may be granted to any of our employees, directors or
consultants or those of our affiliates. Awards may consist of stock options
(both incentive stock options and non-statutory stock options), stock awards,
stock appreciation rights and cash awards. As of November 30, 2006, options to
purchase 305,000 shares of common stock have been granted under this plan to
employees and all remain outstanding. We granted options to purchase 305,000
shares of common stock under this plan for the first three months of 2006 at an
exercise price of $4.15 per share, which was the fair market value on the grant
date.These options vest at a rate
of 25% immediately upon grant date and 75% ratably per month over the 36 month
service period commencing on the first anniversary of the grant date.

Summary of Stock Options

A summary of options
under our share-based compensation plan as of November 30, 2006, and the
activity during the three months then ended, are as follows:

|                                                          |         |  |                |      | Weighted-      |      |                
|--------------------------------------------------------- | ------- |  | -------------- | ---- | -------------- | ---- | ---------------
|                                                          |         |  |                |      | Average        |      |                
|                                                          |         |  |                |      | Remaining      |      |                
|                                                          |         |  | Weighted-      |      | Contractual    |      |                
|                                                          |         |  | Average        |      | Term
      (in |      | Aggregate      
|                                                          | Shares  |  | Exercise Price |      | Years)         |      | Intrinsic Value
|Options outstanding at August 31, 2006                    | 0       |  | $              | 0.00 |                |      |                
|Options
      granted                                     | 305,000 |  | $              | 4.15 |                |      |                
|Options exercised                                         | 0       |  | $              | 0.00 |                |      |                
|Options
      forfeited                                   | 0       |  | $              | 0.00 |                |      |                
|Options outstanding at November 30, 2006                  | 305,000 |  | $              | 4.15 |                | 9.75 |                
|Options vested
      and exercisable at November 30, 2006 | 76,250  |  | $              | 4.15 |                | 9.75 |                

9

---

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

10. Goodwill and Intangible Assets:

Goodwill and Other Intangible Assets
consisted of the following at November 30, 2006 and August 31, 2006:

November 30,
    
    
    August 31,2006
    
    
    2006Good will
    
    
    $
    2,620,000
    
    
    
    $
    2,620,000Intangibles not subject to amortization
    
    
    3,932,000
    
    
    
    902,000Intangibles
      subject to amortization
    
    
    2,791,000
    
    
    
    2,791,000Accumulated amortization
    
    
    
    (208,000
    )
    
    
    
    (150,000
    )Intangibles, net
    
    
    $
    6,515,000
    
    
    
    $
    3,543,000


Goodwill
represents the excess purchase price over the fair value of the net assets
acquired with Designer Intimates, Inc. and is not subject to amortization.
Intangibles not subject to amortization comprise assets purchased in the
acquisitions of Designer Intimates, Inc. and Saguaro LLC, including trademarks,
that do not have a finite life. In accordance with SFAS 142, these assets will
be tested for impairment on an annual basis and between annual tests in certain
instances (see Valuation of Goodwill, Long-lived Assets and Intangible Assets).
Intangibles subject to amortization includes the sleepwear license for Crabtree
& Evelyn, the customer lists of Designer Intimates and the home décor
license for Bill Blass. The estimated amortization expense for each of the
ensuing years through August 31, 2011 is $176,000, $234,000, $234,000, $234,000
and $134,000 respectively. In accordance with SFAS 142 intangible assets that
are subject to amortization are reviewed for potential impairment whenever
events or circumstances indicate that carrying amounts may not be recoverable.

11. New Accounting Pronouncements:

In September
2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurement (SFAS 157). This
standard clarifies the principle that fair value should be based on the
assumptions that market participants would use when pricing an asset or
liability. Additionally, it establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. SFAS 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007.
We have not yet determined the impact that the implementation of SFAS 157 will
have on our results of operations or financial condition.

In September 2006, the FASB issued
SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans (SFAS 158). SFAS 158 requires employers to fully
recognize the obligations associated with single-employer defined benefit
pension, retiree healthcare and other postretirement plans in their financial
statements. The provisions of SFAS 158 are effective as of the end of the fiscal
year ending August 31, 2007. The Company does not currently believe that
adoption will have a material impact on the Companys results of operations,
cash flows, or financial position.

12. Adjustments to
Previously Issued Financial Statements

After filing Amendment No. 1 to our Quarterly Report for the period ended
November 30, 2006, we reevaluated our methodology for recognizing and reporting
stock-based compensation expense in accordance with Statement of Financial
Accounting Standards No. 123R (revised 2004), "Share-Based Payment." On Awe
determined that due to the immediate vesting of 25% of all of the options
granted during the period, we must recognize an expense equal to 25% of the fair
value of the options granted in such period, rather than expensing these amounts
ratably over the first year of the term of the options. As such, the financial
statements included in this report have been revised from the financial
statements included in our previous filings relating to our quarter ended
November 30, 2006. Such revisions reflect a stock-based compensation cost of
approximately $199,000 for the three months ended November 30, 2007, which we
previously reported as $49,000.

We are also amending our disclosure with respect to our acquisition of
Saguaro LLC to allocate the purchase price to the value of the trademarks
acquired, rather than to goodwill. At the time of the acquisition, Saguaro's
only assets were the trademarks "Saguaro" and "Saguaro West." The effect of this
revision is to decrease the dollar amount ascribed to "goodwill" for the period
ended November 30, 2006 from $5,344,000 to $2,620,000 and to increase the dollar
amount ascribed to "Intangibles, net" from $1,208,000 to $3,932,000, and other
related adjustments.

10

---

The following financial statement line items for the period ended
November 30, 2006 were affected by the adjustments discussed above:

Condensed Consolidated
      Balance Sheets (Unaudited)Three Months Ended November 30,
      2006As
      Originally
    
    
    
    
    Effect
      ofReported
    
    As Adjusted
    
    **Change**ASSETSTotal Current assets
    
    $
    32,500,000
    
    $
    32,500,000
    
    $
    -Property and equipment,
    net
    
    
    126,000
    
    
    126,000
    
    
    -Goodwill
    
    
    5,344,000
    
    
    2,620,000
    
    
    (2,724,000
    )Intangibles, net
    
    
    3,791,000
    
    
    6,515,000
    
    
    2,724,000Other assets
    
    
    28,000
    
    
    28,000
    
    
    -$
    41,789,000
    
    $
    41,789,000
    
    $
    -LIABILITIES AND SHAREHOLDERS'
      EQUITYCurrent liabilitiesDue to factor
    
    $
    20,237,000
    
    $
    20,237,000
    
    $
    -Accounts payable
    
    
    5,139,000
    
    
    5,139,000
    
    
    -Accrued expenses
    
    
    993,000
    
    
    993,000
    
    
    -Note payable
    
    
    250,000
    
    
    250,000
    
    
    -Income taxes
    payable
    
    
    1,088,000
    
    
    1,030,000
    
    
    (58,000
    )Total current
      liabilities
    
    
    27,707,000
    
    
    27,649,000
    
    
    (58,000
    )Long term liabilities:Deferred income taxes,
      non-current
    
    
    736,000
    
    
    736,000
    
    
    -Shareholders' equity:Series A preferred stock,
      $100 par value; 25,000,000shares authorized,
      8,820 shares issued and outstanding
    
    
    882,000
    
    
    882,000
    
    
    -Common stock, no par value;
      50,000,000 sharesauthorized;
      5,253,507 shares issued and outstanding(4,653,507 - August
      31, 2006)
    
    
    7,873,000
    
    
    7,873,000
    
    
    -Additional
      Paid-in-Capital
    
    
    49,000
    
    
    199,000
    
    
    150,000Retained earnings
    
    
    4,542,000
    
    
    4,450,000
    
    
    (92,000
    )Total shareholders'
      equity
    
    
    13,346,000
    
    
    13,404,000
    
    
    58,000$
    41,789,000
    
    $
    41,789,000
    
    $
    -


11

---

Consolidated Statements
Operations (Unaudited) Three Months Ended November 30, 2006

|                                                   | As Originally |            |                   |  | Effect of
|-------------------------------------------------- | ------------- | ---------- | ----------------- |  | ---------
|                                                   | Reported      |            | As
      Adjusted |  | Change   
|Net Sales                                          | $             | 35,421,000 |                   |  | $        
|Cost of goods sold                                 |               | 26,845,000 |                   |  |          
|Gross profit                                       |               | 8,576,000  |                   |  |          
|Selling, general and administrative
      expenses |               | 5,969,000  |                   |  |          
|Income from operations                             |               | 2,607,000  |                   |  |          
|Interest expense                                   |               | (300,000   | )                 |  |          
|Other income                                       |               | -          |                   |  |          
|Loss from equity investment                        |               | -          |                   |  |          
|Income before income taxes                         |               | 2,307,000  |                   |  |          
|Provision for income taxes                         |               | 998,000    |                   |  |          
|Net income                                         | $             | 1,309,000  |                   |  | $        
|Earnings per weighted average share:               |               |            |                   |  |          
|Basic                                              | $             | 0.27       |                   |  | $        
|Diluted                                            | $             | 0.26       |                   |  | $        
|Weighted average common shares
      outstanding   |               |            |                   |  |          
|Basic                                              |               | 4,904,056  |                   |  |          
|Diluted                                            |               | 4,976,808  |                   |  |          

Consolidated Statement
of Changes in Shareholders Equity (Unaudited) Three Months Ended November
30, 2006

|                                 | As Originally |            |                   |   | Effect of 
|-------------------------------- | ------------- | ---------- | ----------------- | - | ----------
|                                 | Reported      |            | As
      Adjusted |   | Change    
|Preferred stock                  |               |            |                   |   |           
|Balance, beginning of period     | $             | 882,000    |                   | $ | 882,000   
|Preferred stock issued           |               | -          |                   |   | -         
|Balance, end of period           |               | 882,000    |                   |   | 882,000   
|                                
|Common stock and paid-in capital |               |            |                   |   |           
|Balance, beginning of period     |               | 5,143,000  |                   |   | 5,143,000 
|Common stock
    issued          |               | 2,730,000  |                   |   | 2,730,000 
|Stock-based compensation expense |               | 49,000     |                   |   | 199,000   
|Balance, end of
      period     |               | 7,922,000  |                   |   | 8,072,000 
|                                
|Retained earning                 |               |            |                   |   |           
|Balance, beginning of period     |               | 3,233,000  |                   |   | 3,233,000 
|Net income                       |               | 1,309,000  |                   |   | 1,217,000 
|Balance, end of period           |               | 4,542,000  |                   |   | 4,450,000 
|                                
|Total stockholders
      equity | $             | 13,346,000 |                   | $ | 13,404,000

12

---

|Condensed Consolidated Statements of Cash Flows
      (Unaudited)
|-----------------------------------------------------------------
|Three Months Ended November 30, 2006                             
|                                                                 
|                                                                 
|Net income                                                       
|Cash flows from operating activities:                            
|Depreciation and amortization                                    
|Non-cash stock option compensation
      expense                 
|Loss from investment in
      unconsolidated subsidiary          
|(Increase) decrease in due from
      factor                     
|(Increase) decrease in
      trade receivables                   
|(Increase) decrease in
      inventories                         
|Decrease in refundable
      income taxes                        
|(Increase) decrease in other
      assets                        
|Decrease in accounts
      payable and accrued expenses          
|Increase in income taxes
      payables                          
|Net cash provided (used) by operating
      activities           
|                                                                 
|Cash flows from investing activities:                            
|Capital expenditures                                             
|Cash used in
      transaction                                   
|Cash acquired in transaction                                     
|Net cash provided (used) by investing
      activities           
|                                                                 
|Cash flows provided by financing
      activities:               
|Advances from factor                                             
|Payment of loan
      payable                                    
|Net cash provided by financing activities                        
|                                                                 
|Net increase in cash and cash
      equivalents                  
|Cash and cash equivalents at beginning of period                 
|Cash and cash equivalents at end of
      period                 
|                                                                 
|Supplemental disclosures of cash flow
      information:         
|Interest paid during the period:                                 
|                                                                 
|Non-cash investing activity:                                     
|Acquisition of remaining outstanding
      shares of subsidiary  
|Common stock issued                                              
|Series A preferred stock issued                                  
|                                                                 

ITEM 2. Managements Discussion And
Analysis Of Financial Condition And Results Of Operations.

CRITICAL ACCOUNTING POLICIES

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

13

---

Allowances for Sales Returns, Doubtful Accounts and Other.Sales are recorded net of estimated future
returns, uncollectible accounts receivable and other customer related
allowances. 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, the Company may
provide warehousing credits and other allowances to certain customers in
accordance with industry practice. These reserves are determined based on
historical experience, budgeted customer allowances and existing commitments to
customers. Although 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 November 30, 2006, trade accounts receivable balance was $23.2 million, net
of allowances of $921,000, as compared to the balance of $10.5 million, net of
allowances of $643,000, at August 31, 2006. At November 30, 2005, the trade
accounts receivable balance was $14.5 million, net of allowances of $624,000.

Inventory.The Company marks down its
inventory for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and the estimated net realizable value
based on assumptions about age of the inventory, future demand and market
conditions. This process provides for a new basis for the inventory until it is
sold. If actual market conditions are less favorable than those projected by
management, additional inventory markdowns may be required. The Companys
inventory balance was $7.4 million, net of inventory markdowns of $535,000, at
November 30, 2006, as compared to an inventory balance of $12.4 million, net of
inventory markdowns of $388,000, at August 31, 2006. At November 30, 2005, the
inventory balance was $4.8 million, net of inventory markdowns of
$276,000.

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 carryforward, 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 management considers estimates of future taxable income and
ongoing prudent and feasible tax planning strategies.

Valuation of Goodwill, Long-Lived
Assets and Intangible Assets. The Company
evaluates goodwill, long-lived assets and intangible assets for potential
impairment on an annual basis during the fourth fiscal quarter, subsequent to
the completion of financial projections for the following fiscal year. The
Company 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 the Company 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 the Companys financial condition
and results of operations.

Contingencies and
Litigation. 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.

Results of Operations

Three Months Ended November 30, 2006
Compared to the Three Months Ended November 30, 2005

Net sales
for the three months ended November 30, 2006, increased $20.7 million as
compared to the three months ended November 30, 2005. This increase was
attributable primarily to increased sales for the Companys sleepwear and
womens private label apparel, as well as the addition of home décor revenues.

Cost of
sales as a percent of net sales increased 5.2%, generating a lower gross profit
margin of 24.2% for the three months ended November 30, 2006 as compared to
29.4% for the year earlier period. The decrease in gross margin came as the
result of increased private label sales and a high volume sale of branded
product to a national retailer, both at a lower average gross margin. The
Companys 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.

14

---

Selling,
general and administrative expenses for the first quarter of fiscal 2006
increased $3.1 million as compared
to a year ago, due primarily to the consolidation of selling, general and
administrative costs for Designer Intimates and additional expenses related to
the increased sales reported for the period. Expenses included $2.6 million of
selling and merchandising expenses and $631,000 of shipping and warehousing
expenses. This compares with $1.8 million of selling and merchandising expenses
and $414,000 of shipping and warehousing expenses incurred during the quarter
ended November 30, 2005. Expenses as a percent of net sales decreased to 17.3% from 20.6% in the prior period, due
to the inclusion of higher sales from Designer Intimates and Home Décor at a
correspondingly lower selling, general and administrative expense rate, as well
as increased sales across the Companys product lines.

Interest
expense increased to $300,000 in the current quarter as compared to $90,000 for
the three months ended November 30, 2005. This increase was due to higher
interest rates charged on increased advances under the Companys factoring
agreement.

Acquisition of Saguaro LLC

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

Liquidity and Capital Resources

For the
quarter ended November 30, 2006 cash used by operating activities was
approximately $9,485,000 whereas for the prior quarter ended November 30, 2005
cash used by operating activities was approximately $8,986,000. For the period
ended November 30, 2006, the increase in cash used by operating activities was
due primarily to an increase in accounts receivable as a result of higher sales
in the current period and a decrease in accounts payable, offset partially by a
decrease in inventories. Similarly for the quarter ended November 30, 2005, cash
used by operating activities was due primarily to an increase in accounts
receivable as a result of higher sales in the current period and a decrease in
accounts payable, offset partially by a decrease in inventories.

For the
quarter ended November 30, 2006, net cash used by investing activities of
$317,000 included cash used in the Saguaro acquisition. For the quarter ended
November 30, 2005, net cash provided by investing activities of $107,000 derived
from the acquisition of cash balances of Designer Intimates, offset partially by
capital expenditures on equipment and leasehold improvements.

Cash
provided by financing activities of $10,298,000 for the quarter ended November
30, 2006 included advances from the factor offset slightly by partial repayment
of a note payable. Cash provided by financing activities in the prior period of
$9,109,000 also consisted of advances from the factor.

Working
capital increased to $4.9 million
at November 30, 2006 from $3.6 million at August 31, 2006 primarily due to the
net income in the quarter. The increase in working capital coincides with
increased accounts receivable and payable in conjunction with the increased
revenue reported for the period. The current ratio remained constant at 1.18:1 at November 30, 2006 as compared
to August 31, 2006.

15

---

The Company
sells substantially all of its trade receivables to a factor (CIT) on a
pre-approved, non-recourse basis. The Company attempts to make any recourse
shipments on a COD basis or ensure that the customers' payments are backed by a
commercial or standby letter of credit issued by the customers bank. The amount
of the Company's receivables that were recourse and were not made on a COD basis
or supported by commercial or standby letters of credit at November 30, 2006 was
approximately $939,000 of which approximately $247,000 had been collected
through December 31, 2006.

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,
the Company can request advances in anticipation of customer collections at the
prime rate (currently 8.25%) less one and one-half percent (1.5%). The amount of
advances available to the Company is limited to eighty-five percent (85%) of
non-recourse factored receivables.

The Company
may issue import letters of credit through CIT for the purchase of inventory in
the normal course of its operations. Letters of credit are subjected to a limit
of $6 million. At November 30, 2006, the Company had outstanding letters of
credit of approximately $2.6 million for the purchase of finished goods, which
had been opened through CIT.

The
factoring agreement does not contain any financial covenants to which the
Company must adhere. Advances are collateralized by all of the assets of the
Company as well as a personal guaranty of the Companys Chairman. The factoring
agreement can be terminated by CIT on 30-days written notice. The company
believes the factoring agreement with CIT, along with expected cash flow from
operating activities and current levels of working capital are adequate to
fulfill the Companys liquidity needs for the foreseeable future.

Contractual Obligations and
Commercial Commitments

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

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

Inventory

The
Company's inventory decreased 40% to $7.4 million at November 30, 2006, from
$12.4 million at August 31, 2006. Compared to inventories of $4.9 million at
November 30, 2005, inventories ending the current period increased 51%,
primarily because the Company is holding additional inventory to meet the
increased backlog for the coming period, including home décor inventory. The
Company believes that its current inventory mix and unit levels are appropriate
to respond to anticipated market demand.

In its
ordinary course of operations, the Company generally makes some sales below its
normal selling prices or below cost. Based on prior experience, management
believes this will be true for some inventory held on or acquired after November
30, 2006. The amount of such sales depends on several factors, including general
economic conditions, market conditions within the apparel industry, the
desirability of the styles held in inventory and competitive pressures from
other garment suppliers.

The Company
has established an inventory markdown reserve as of November 30, 2006, which
management believes will be sufficient for current inventory that is expected to
sell below cost in the future. There can be no assurance that the Company will
realize its expected selling prices, or that the inventory markdown reserve will
be adequate, for items in inventory as of November 30, 2006 for which customer
sales orders have not yet been received. The inventory markdown reserve is
calculated based on specific identification of aged goods and styles that are
slow-moving or selling off-price.

16

---

Backlog

As of
November 30, 2006, the Company had on-hand unfilled customer orders of $35.1
million as compared to $23.4 million at November 30, 2005, with such orders
generally scheduled for delivery by May2007 and 2006, respectively. The increase in
backlog is due primarily to an increase in sleepwear orders and the inclusion of
home décor orders.

Backlog
amounts include both confirmed and unconfirmed orders that the Company believes,
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 November
30, 2006. Because of the Companys 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 the
Company.

Impact of Exchange Rates

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

Impact of Inflation and Deflation

Management
does not believe that inflation has had any material impact upon the Company's
revenues or income from operations to date. Management believes that the apparel
sector in which the Company operates 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 the Company. 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. 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
continuing conflict in Iraq, coupled with 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. The Company does not expect
significant improvement in business conditions in the apparel sector for the
upcoming fiscal year. Furthermore, the Company expects to incur significant
expense related to internal controls documentation, testing and remediation
requirements as mandated by Sarbanes-Oxley legislation with which the Company
must be in compliance by August 31, 2008. In view of the market uncertainties
and economic pressures facing the Company, management remains conservative in
its approach to the upcoming fiscal year.

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 Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms and that such
information is accumulated and communicated to our management, including our
chief executive and financial officer, as appropriate, to allow for timely
decisions regarding required disclosure.

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

As required by Securities and
Exchange Commission Rule 13a-15(b), we carried out an evaluation, under the
supervision and with the participation of our management, including our chief
executive and financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of November 30, 2006, the
end of the period covered by this report. Based on that evaluation, our chief
executive and financial officer concluded that certain control deficiencies, as
described below, existed in our internal control over financial reporting
as of November 30, 2006. As a result of these deficiencies, our chief
executive and financial officer concluded that our disclosure controls and
procedures were not effective at the reasonable assurance level as of November
30, 2006.

Notwithstanding the deficiency
described below, management believes the consolidated financial statements
included in this Quarterly Report on Form 10-Q fairly present in all material
respects our financial condition, results of operations and cash flows for the
periods presented.

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Deficiencyin Internal Control
over Financial Reporting

Following our acquisition of Designer Intimates in October 2005, we
integrated the accounting and financial operations and personnel from that
company into our operations. We filed for an extension of time to complete the
preparation of our Annual Report on Form 10-K for the year ended August 31,
2005, in part to reflect the results of that transaction. Thereafter we filed
for an extension of time to complete the preparation of our Quarterly Reports on
Form 10-Q for the periods ended November 30, 2005 and February 28, 2006.
Subsequently, in June 2006 we entered into transactions for the purchase of the
Home Décor business and the Saguaro brand. We then filed for an extension of
time to file our Quarterly Report on Form 10-Q for the period ended May 31, 2006
and our Annual Report on Form 10-K for the year ended August 31, 2006, and our
Quarterly Report for the period ended November 30, 2006.

Insufficient Staffing in Our
Accounting and Financial Reporting Functions.
As of November 30, 2006, we lacked a sufficient number of personnel possessing
adequate knowledge, experience and training in the application of United States
generally accepted accounting principles to support our financial accounting and
reporting functions. At November 30, 2006 we had not yet completed our Annual
Report on Form 10-K for the year ended August 31, 2006, we had closed the
acquisition of Saguaro from Impex, Inc. and we had starting issuing equity
compensation, in the fom of stock option grants. These factors strained our
accounting resources. Management had focused for the prior two quarters on
reallocation of responsibilities and streamlining reporting roles. During
the quarter ended November 30, 2006, our chief executive officer and our
president determined that our existing staffing levels were insufficient to
support the increased volume of financial transactions as a result of our recent
acquisitions. As a result of this deficiency, we have not been able to process
and report information in a timely fashion.

We have taken the following actions
to remediate the deficiency related to the insufficient staffing in our
accounting and financial reporting functions:

- We use experienced qualified consultants as
  needed to assist management in the accounting and financial reporting
  functions. As deemed necessary, we will continue to leverage the resources and
  expertise of financial consultants to help us timely meet our reporting
  obligations.
- We have retained an
  outside consultant to assist us in managing the accounting, valuation and
  reporting issues relating to our stock option plan.
- We are evaluating the
  retention of additional qualified accounting personnel to assist our
  controller and to provide additional experience with the increasingly complex
  financial issues we are now addressing on a regular basis.

The deficiency
identified as of November 30, 2006 was not remediated as of that date. We are
looking to retain additional qualified accounting personnel. We expect that this
deficiency will be fully remediated once those additional personnel are retained
and have sufficient time in their positions.

(b)Changes In Internal Controls Over Financial
Reporting.Except as described above, no
changes were made in our internal control over financial reporting (as defined
in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recent
fiscal quarter that has materially affected, or is likely to materially affect,
our internal control over financial reporting.

Cautionary Statement under the
Private Securities Litigation Reform Act of 1995

Statements
in the quarterly report on Form 10-Q under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations", as well as oral
statements that may be made by the Company or by officers, directors or
employees of the Company acting on the Company's 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. Forward-looking statements involve known and
unknown risks and uncertainties that may cause the Company's actual results in
future periods to differ materially from forecasted results. Those risks include
a softening of retailer or consumer acceptance of the Company's products,
pricing pressures and other competitive forces, or unanticipated loss of a major
customer. In addition, the Company's business, operations and financial
condition are subject to reports and statements filed from time to time with the
Securities and Exchange Commission.

18

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PART II - OTHER INFORMATION

ITEM 6. Exhibits

31.1    
 Certification required under Section 302

32.1      Certification required under
Section 906

19

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SIGNATURES

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

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

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EXHIBIT INDEX

|Exhibit |  |                                         
|------- |  | ----------------------------------------
|Number  |  | Exhibit                                 
|        |  |                                         
|31.1    |  | Certification required under Section 302
|        |  |                                         
|32.1    |  | Certification required under Section
906

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