** **

**SECURITIESAND EXCHANGE COMMISSIONWASHINGTON, D.C.  20549**

**FORM 10-Q**

**x**** QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended December 31, 2006**

**o**** TRANSITION REPORT UNDERSECTION 13 OR 15(d) OF THEEXCHANGE ACT**

**Commission File No. 0-51715**

**SPORT-HALEY,INC.**(Exact name of small business issuer as specified in itscharter)

| **COLORADO**                     |   | **84-1111669**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

** **

**4600 E. 48th Avenue, Denver, Colorado 80216**(Address of principal executive offices)

**(303)320-8800**(Issuer’s telephone number including area code)

Indicate by check mark whether the registrant (1)filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x    No o

Indicate by check markwhether the registrant is a large accelerated filer, and accelerated filer, ora non-accelerated filer. See the definition of  “accelerated filer and non-accelerated filer”in Rule 12b-2 of the Exchange Act.

| Large accelerated  filer o |   | Accelerated  filer o |   | Non-accelerated  filer x |
|---------------------------------|--------|---------------------------|--------|-------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  Yes o    No x

Indicate the number of shares outstanding in each ofthe issuer’s classes of common stock, as of the latest practicable date.

| **Class**                       |   | **Outstanding  at February 9, 2007** |
|---------------------------------|--------|--------------------------------------|
| **Common  Stock, no par value** |   | **2,770,252**                        |

####  

 

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**TABLE OF CONTENTS**
|                                                     | ** ** | ** **                                                                                  | ** ** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|------------|
| **PART 1 — FINANCIAL INFORMATION (UNAUDITED)** |       |                                                                                        |
| ** **                                          |       |                                                                                        |       |       |
| ITEM 1 —                                       |       | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                                 |       |       |
|                                                |       |                                                                                        |       |       |
|                                                | ** ** | CONDENSED CONSOLIDATED BALANCE SHEETS                                                       |       |       |
|                                                | ** ** |                                                                                        |       |       |
|                                                | ** ** | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                             |       |       |
|                                                | ** ** |                                                                                        |       |       |
|                                                | ** ** | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                             |       |       |
|                                                | ** ** |                                                                                        |       |       |
|                                                | ** ** | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                        |       |       |
|                                                | ** ** |                                                                                        |       |       |
| ITEM 2 —                                       |       | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF OPERATIONS |       |       |
|                                                |       |                                                                                        |       |       |
| ITEM 3 —                                       |       | QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET  RISK                                 |       |       |
|                                                | ** ** |                                                                                        |       |       |
| ITEM  4 —                                      |       | CONTROLS  AND PROCEDURES                                                                    | ** ** | ** ** |
|                                                |       |                                                                                        | ** ** | ** ** |
| **PART  II - OTHER INFORMATION**                    |       |                                                                                        |
| ** **                                          |       |                                                                                        |       |       |
| ITEM  1 —                                      |       | LEGAL PROCEEDINGS                                                                           | ** ** | ** ** |
|                                                |       |                                                                                        | ** ** | ** ** |
| ITEM 1A  —                                     |       | RISK FACTORS                                                                                | ** ** | ** ** |
|                                                |       |                                                                                        | ** ** | ** ** |
| ITEM  5 —                                      |       | OTHER INFORMATION                                                                           | ** ** | ** ** |
|                                                |       |                                                                                        | ** ** | ** ** |
| ITEM 6 —                                       |       | EXHIBITS                                                                                    | ** ** | ** ** |
|                                                |       |                                                                                        | ** ** | ** ** |
| **SIGNATURES**                                      |       |                                                                                        |
| ** **                                          | ** ** | ** **                                                                                  |       |       |
| **EXHIBITS**                                        |       |                                                                                        |

####  

2

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**SPORT-HALEY,INC.CONDENSED CONSOLIDATED BALANCE SHEETS**
| ** **                                                                                  | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                  | ** ** | **2006**              | ** ** | **2006**          | ** ** |
| ** **                                                                                  | ** ** | **(Unaudited)**       | ** ** | **(***)**         | ** ** |
| **ASSETS**                                                                                  |       |                  |       |              |       |
| Current assets:                                                                             |       |                  |       |              |       |
| Cash and cash  equivalents                                                                  |       | $                     | 7,361,000  |              | $          | 8,492,000 |   |
| Accounts  receivable, net of allowances of $371,000 and $446,000, respectively              |       | 2,659,000             |       | 3,950,000         |       |
| Inventories                                                                                 |       | 5,037,000             |       | 4,775,000         |       |
| Prepaid expenses  and other                                                                 |       | 314,000               |       | 194,000           |       |
| Total current  assets                                                                       |       | 15,371,000            |       | 17,411,000        |       |
|                                                                                        |       |                  |       |              |       |
| Property and equipment,  net                                                                |       | 485,000               |       | 613,000           |       |
| Goodwill                                                                                    |       | 270,000               |       | —            |       |
| Other assets                                                                                |       | 3,000                 |       | 3,000             |       |
| Total Assets                                                                                |       | $                     | 16,129,000 |              | $          | 18,027,000 |   |
|                                                                                        |       |                  |       |              |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                              |       |                  |       |              |       |
| Current liabilities:                                                                        |       |                  |       |              |       |
| Accounts payable                                                                            |       | $                     | 907,000    |              | $          | 1,836,000 |   |
| Accrued  royalties payable                                                                  |       | 152,000               |       | 386,000           |       |
| Accrued  commissions payable                                                                |       | 193,000               |       | 211,000           |       |
| Accrued payroll                                                                             |       | 336,000               |       | 386,000           |       |
| Other                                                                                       |       | 144,000               |       | 137,000           |       |
| Total current  liabilities                                                                  |       | 1,732,000             |       | 2,956,000         |       |
|                                                                                        |       |                  |       |              |       |
| Long-Term Liabilities:                                                                      |       |                  |       |              |       |
| Loan payable to  affiliate                                                                  |       | —                |       | 34,000            |       |
| Total long-term  liabilities                                                                |       | —                |       | 34,000            |       |
|                                                                                        |       |                  |       |              |       |
| Commitments and  Contingencies (Notes 3 and 4)                                              |       | —                |       | —            |       |
|                                                                                        |       |                  |       |              |       |
| Total Liabilities                                                                           |       | 1,732,000             |       | 2,990,000         |       |
|                                                                                        |       |                  |       |              |       |
| Minority Interest                                                                           |       | —                |       | 22,000            |       |
|                                                                                        |       |                  |       |              |       |
| Shareholders’ equity:                                                                  |       |                  |       |              |       |
| Preferred stock,  no par value; 1,500,000 shares authorized; none issued and outstanding    |       | —                |       | —            |       |
| Common stock, no  par value; 15,000,000 shares authorized; 2,770,252 issued and outstanding |       | 10,813,000            |       | 10,813,000        |       |
| Additional  paid-in capital                                                                 |       | 1,621,000             |       | 1,621,000         |       |
| Retained  earnings                                                                          |       | 1,963,000             |       | 2,581,000         |       |
| Total  shareholders’ equity                                                            |       | 14,397,000            |       | 15,015,000        |       |
|                                                                                        |       |                  |       |              |       |
| Total Liabilities and Shareholders’ Equity                                             |       | $                     | 16,129,000 |              | $          | 18,027,000 |   |

----

***  Taken from the audited balance sheet at thatdate.

See accompanying notes to these condensed consolidated financialstatements.

3

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**SPORT-HALEY, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**
| ** **                                                                                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                       | ** ** | **December 31,**            | ** ** | **December 31,**          | ** ** |
| ** **                                                                                       | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                       | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)**                | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
| Net sales                                                                                        |       | $                                | 4,190,000  |                           | $          | 4,429,000 |   | $ | 8,863,000 |   | $ | 8,440,000 |   |
|                                                                                             |       |                             |       |                           |       |   |   |   |   |
| Cost of goods  sold                                                                              |       | 2,562,000                        |       | 2,663,000                      |       | 5,684,000 |   | 5,304,000 |   |
| Impairments                                                                                      |       | 73,000                           |       | 129,000                        |       | 122,000 |   | 194,000 |   |
| Total cost of  goods sold                                                                        |       | 2,635,000                        |       | 2,792,000                      |       | 5,806,000 |   | 5,498,000 |   |
|                                                                                             |       |                             |       |                           |       |   |   |   |   |
| Gross profit                                                                                     |       | 1,555,000                        |       | 1,637,000                      |       | 3,057,000 |   | 2,942,000 |   |
|                                                                                             |       |                             |       |                           |       |   |   |   |   |
| Other Operating  Costs:                                                                          |       |                             |       |                           |       |   |   |   |   |
| Selling, general and administrative expenses                                                     |       | 1,691,000                        |       | 1,438,000                      |       | 3,412,000 |   | 3,162,000 |   |
| Royalty expense                                                                                  |       | 152,000                          |       | 175,000                        |       | 362,000 |   | 338,000 |   |
| Total other operating costs                                                                      |       | 1,843,000                        |       | 1,613,000                      |       | 3,774,000 |   | 3,500,000 |   |
|                                                                                             |       |                             |       |                           |       |   |   |   |   |
| Income (loss)  from operations                                                                   |       | (288,000                         | )          | 24,000                         |       | (717,000 | ) | (558,000 | ) |
|                                                                                             |       |                             |       |                           |       |   |   |   |   |
| Other income,  net                                                                               |       | 84,000                           |       | 77,000                         |       | 162,000 |   | 130,000 |   |
|                                                                                             |       |                             |       |                           |       |   |   |   |   |
| Income (loss)  before minority interest in subsidiary net income and provision for income  taxes |       | (204,000                         | )          | 101,000                        |       | (555,000 | ) | (428,000 | ) |
|                                                                                             |       |                             |       |                           |       |   |   |   |   |
| Minority  interest in subsidiary net income                                                      |       | —                           |       | —                         |       | (46,000 | ) | — |   |
|                                                                                             |       |                             |       |                           |       |   |   |   |   |
| Provision for  income taxes                                                                      |       | (17,000                          | )          | (2,000                         | )          | (17,000 | ) | (1,000 | ) |
|                                                                                             |       |                             |       |                           |       |   |   |   |   |
| Net income  (loss)                                                                               |       | $                                | (221,000   | )                              | $          | 99,000 |   | $ | (618,000 | ) | $ | (429,000 | ) |
|                                                                                             |       |                             |       |                           |       |   |   |   |   |
| Basic earnings  (loss) per common share                                                          |       | $                           | (0.08      | )                              | $     | 0.04 |   | $  | (0.22 | ) | $  | (0.16 | ) |
|                                                                                             |       |                             |       |                           |       |   |   |   |   |
| Diluted earnings  (loss) per common share                                                        |       | $                           | (0.08      | )                              | $     | 0.03 |   | $  | (0.22 | ) | $  | (0.16 | ) |
|                                                                                             |       |                             |       |                           |       |   |   |   |   |
| Basic weighted  average shares outstanding                                                       |       | 2,770,000                        |       | 2,770,000                      |       | 2,770,000 |   | 2,728,000 |   |
|                                                                                             |       |                             |       |                           |       |   |   |   |   |
| Diluted weighted  average shares outstanding                                                     |       | 2,770,000                        |       | 2,968,000                      |       | 2,770,000 |   | 2,728,000 |   |

 

See accompanying notes to these condensed consolidated financialstatements.

4

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**SPORT-HALEY, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**
| ** **                                                                              | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                              | ** ** | **December 31,**          | ** ** |
| ** **                                                                              | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| ** **                                                                              | ** ** | **(Unaudited)**                | ** ** | **(Unaudited)** | ** ** |
| **Cash  flows from operating activities:**                                              |       |                           |       |   |   |
| Net loss                                                                                |       | $                              | (618,000   | ) | $ | (429,000 | ) |
| Adjustments to  reconcile net loss to net cash provided (used) by operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                           |       | 147,000                        |       | 170,000 |   |
| Impairments and write-downs                                                             |       | 122,000                        |       | 194,000 |   |
| Allowance for doubtful accounts                                                         |       | 60,000                         |       | 75,000 |   |
| Common stock options                                                                    |       | —                         |       | 31,000 |   |
| Loss on sale of fixed assets                                                            |       | —                         |       | 12,000 |   |
| Minority interest                                                                       |       | 49,000                         |       | — |   |
| Cash provided  (used) due to changes in assets and liabilities:                         |       |                           |       |   |   |
| Accounts receivable                                                                     |       | 1,231,000                      |       | 1,697,000 |   |
| Inventories                                                                             |       | (384,000                       | )          | (1,151,000 | ) |
| Other assets                                                                            |       | (120,000                       | )          | (140,000 | ) |
| Accounts payable                                                                        |       | (929,000                       | )          | 123,000 |   |
| Accrued commissions and other expenses                                                  |       | (295,000                       | )          | (276,000 | ) |
| Net cash provided (used) by operating activities                                        |       | (737,000                       | )          | 306,000 |   |
|                                                                                    |       |                           |       |   |   |
| **Cash  flows from investing activities:**                                              |       |                           |       |   |   |
| Proceeds from sales of fixed assets                                                     |       | —                         |       | 16,000 |   |
| Purchase of fixed assets                                                                |       | (19,000                        | )          | (9,000 | ) |
| Purchase of minority interest                                                           |       | (375,000                       | )          | — |   |
| Net cash provided (used) by investing activities                                        |       | (394,000                       | )          | 7,000 |   |
|                                                                                    |       |                           |       |   |   |
| **Cash  flows from financing activities:**                                              |       |                           |       |   |   |
| Net proceeds from issuance of common stock                                              |       | —                         |       | 353,000 |   |
| Net cash provided by financing activities                                               |       | —                         |       | 353,000 |   |
|                                                                                    |       |                           |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**                               |       | (1,131,000                     | )          | 666,000 |   |
| ** **                                                                              |       |                           |       |   |   |
| **Cash  and cash equivalents, beginning**                                               |       | 8,492,000                      |       | 7,721,000 |   |
| ** **                                                                              |       |                           |       |   |   |
| **Cash  and cash equivalents, ending**                                                  |       | $                              | 7,361,000  |   | $ | 8,387,000 |   |
| ** **                                                                              |       |                           |       |   |   |
| **Supplemental  disclosure of cash flow information:**                                  |       |                           |       |   |   |
| Cash paid during the period for:                                                        |       |                           |       |   |   |
| Income taxes                                                                            |       | $                              | 17,000     |   | $ | 2,000 |   |

 

See accompanying notes to these condensed consolidated financialstatements.

####  

5

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**SPORT-HALEY, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1             SIGNIFICANT ACCOUNTING POLICIES**

*Principlesof Consolidation*— Included in the December 31, 2006,consolidated financial statements are the accounts of Sport-Haley, Inc. (“SportHaley”) and Reserve Apparel Group LLC (“Reserve Apparel”). Sport Haley andReserve Apparel may collectively be referred to as “the Company”, “we”, “us” or“our”.

*Nature ofOperations*— Sport Haley, organized as a Coloradocorporation in January 1991, designs, purchases or contracts for themanufacture of, markets and distributes women’s and men’s fashion golf appareland outerwear under the SPORT HALEY® and Ben Hogan® labels. Our fashion golfapparel collections, known for their innovative designs, quality fabrics,generous fits and classic styles, are primarily marketed in the premium andmid-priced markets, through a network of independent sales representatives anddistributors, to golf professional shops, country clubs, resorts and exclusivedepartment stores within the United States and by certain distributors withinvarious international markets. Ben Hogan® fashion golf apparel is distributedper the terms of a license agreement with Callaway Golf Company (“Callaway”).

Reserve Apparel,formed in November 2005, designs, purchases or contracts for the manufactureof, markets and distributes branded golf apparel and outerwear under theTop-Flite® label to mass retailers and other big-box type high sales volumeretail stores. In accordance with its operating agreement, Sport Haley owned a51% interest in Reserve Apparel and Explorer Gear USA, Inc. (“Explorer Gear”)owned a 49% interest. On September 21, 2006, Sport Haley entered into anagreement with Explorer Gear to purchase its 49% membership interest in ReserveApparel for a lump sum payment of $375,000, since which time Reserve Apparelhas been a wholly-owned subsidiary of Sport Haley. Top-Flite® branded golfapparel is distributed per the terms of a license agreement with Callaway.

*CondensedFinancial Statements*— The accompanying condensedconsolidated balance sheets and interim condensed consolidated statements ofoperations and cash flows include all adjustments (consisting only of normalrecurring items) necessary for their fair representation. The preparation ofconsolidated financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses and the disclosure of contingent assets andliabilities.

Certaininformation in footnote disclosures normally included in financial statementshas been condensed or omitted in accordance with the rules and regulations ofthe Securities and Exchange Commission. The information included in this Form10-Q should be read in conjunction with financial statements and notes theretoand Management’s Discussion and Analysis of Financial Condition and Results ofOperations for the year ended June 30, 2006, included in the Company’s filingon Form 10-K.

*Reclassification*— Certain priorperiod amounts have been reclassified to conform to the December 31, 2006,presentation. Such reclassifications had no affect on net income (loss) in anyof the periods presented.

6

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**SPORT-HALEY, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

*Stock-BasedCompensation* - Our Stock Option Plan (the “Plan”) expired by itsterms on February 28, 2003. Accordingly, no options have been granted since then. Option agreements that were issued inaccordance with the Plan prior to February 28, 2003, generally remain in forceuntil the earlier of their exercise, the expiration of certain time periodsafter the termination of a grantee’s employment (or other relationship with theCompany) or expiration by their terms.

AtDecember 31, 2006, there were outstanding options to purchase 673,500 shares ofour common stock at exercise prices ranging from $2.71 to $9.78 per share andexpiration dates between February 2007 and January 2013. No options wereexercised and 5,000 options expired during the six months ended December 31,2006.

In December 2004, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards No. 123(R) (“SFAS 123R”), *“Share-Based Payment,”*which is a revision of Statement of Financial Accounting Standards No. 123, *“Accounting for Stock-Based Compensation.”* SFAS 123R iseffective for annual periods beginning after July 1, 2005, supersedesAccounting Principles Board Opinion No. 25, *“Accounting for StockIssued to Employees,”* and amends Statement of Financial AccountingStandards No. 95, *“Statement of Cash Flows.”* SFAS123R requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the statement of operations basedupon their fair values and rescinds the acceptance of pro forma disclosure.SFAS 123R permits two methods of adoption, a “modified prospective” method anda “modified retrospective” method. Under the modified prospective method,stock-based compensation cost is recognized, beginning with the effective date,based on the requirements of SFAS 123R for all share-based payments grantedafter the effective date and for all awards granted prior to the effective datethat remain unvested on the effective date. The modified retrospective methodincludes the requirements of the modified prospective method and also permitsrestatement of prior periods based on amounts previously reported in pro formadisclosures pursuant to SFAS 123 for either all periods presented or for onlyprior interim periods of the year of adoption. We adopted the modifiedprospective method prescribed in SFAS 123R, effective July 1, 2005.

Previously, we accountedfor stock-based compensation using the intrinsic value method prescribed inAccounting Principles Board Opinion No. 25, “*Accountingfor Stock Issued to Employees*,” and related interpretations andelected to apply the disclosure-only provisions of Statement of FinancialAccounting Standards (SFAS) No. 123, “*Accountingfor Stock-Based Compensation*,” as amended by SFAS No. 148, “*Accounting for Stock-Based Compensation — Transitionand Disclosure*.” Under the intrinsic value method, compensationexpense for stock options was recognized over the vesting period of the grantbased on the excess, if any, of the market price of our common stock at thedate of grant over the stock option exercise price. As governed by the Plan,stock options were generally granted at or near fair market value on the dateof grant. The expected life was determined based upon the Plan’s vesting periodand exercise behavior of the employees.

Uponour adoption of the modified prospective method prescribed in SFAS 123R,effective July 1, 2005, werecorded $31,000 in stock-based compensation expense during the three monthsended September 30, 2005, using the fair value method. We have not beenrequired to record any additional stock-based compensation expense sinceSeptember 30, 2005, as 

7

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**SPORT-HALEY, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

all employee-relatedoptions are now fully vested. Therefore, we have omitted the comparison of proforma amounts of net income (loss) and net income (loss) per share applicableto common stock for the three months and six months ended December 31, 2006 and2005, respectively.

*RecentPronouncements* — In June 2006, the Financial AccountingStandards Board issued Interpretation No. 48 (“FIN 48”), *“Accountingfor Uncertainty in Income Taxes.”* FIN 48 requires the use of atwo-step approach for recognizing and measuring tax benefits taken or expectedto be taken in an income tax return and disclosures regarding uncertainties inincome tax positions. Only tax positions that meet the “more likely than not”recognition threshold at the effective date may be recognized upon adoption ofFIN 48. We are required to adopt FIN 48 effective July 1, 2007. The cumulativeeffect of initial adoption of FIN 48, if any, will be recorded as an adjustmentto beginning retained earnings in the year of adoption and will be presentedseparately. We are currently evaluating the impact that FIN 48 will have on ourfinancial condition and the results of our operations.

We have reviewedall other recently issued, but not yet effective, accounting pronouncements anddo not believe the future adoption of any such pronouncements may be expectedto cause a material impact on our financial condition or the results of ouroperations.

**NOTE 2             INVENTORIES**

|                                          | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                               | ** ** | **2006**              | ** ** | **2006**          | ** ** |
| Inventories consisted  of the following: |       |                  |       |              |       |
| Component                                |       | $                     | 516,000    |              | $          | 366,000 |   |
| Finished goods                           |       | 4,521,000             |       | 4,409,000         |       |
|                                     |       |                  |       |              |       |
|                                     |       | $                     | 5,037,000  |              | $          | 4,775,000 |   |

 

Included in finished goods inventories are allowances for inventorywrite-downs of $147,000 and $276,000 as of December 31, 2006, and June 30,2006, respectively.

**NOTE 3             LINE OF CREDIT AGREEMENT**

We maintain arevolving line of credit agreement with a commercial bank. The revolving lineof credit agreement, renewed by amendment through December 5, 2007, providesfor a maximum loan amount of $3,000,000, collateralized by a certificate ofdeposit held at the commercial bank in the amount of $3,000,000, which earns amarket rate of interest. Borrowings under the line of credit agreement accrueinterest at the bank’s prime rate. We generally maintain the line of credit tofacilitate the issuance of letters of credit for inventory purchases fromoffshore suppliers and, if necessary, to fund any temporary working capitalneeds. At December 31, 2006, and June 30, 2006, respectively, we did not haveany balances due on the line of credit.

8

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**SPORT-HALEY, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 4             COMMITMENTS AND CONTINGENCIES**

AtDecember 31, 2006, and June 30, 2006, we had $2,356,000 and $509,000,respectively, in outstanding letters of credit that were issued to foreignsuppliers in accordance with finished goods inventory purchase commitments.Outstanding letters of credit reduce the amount available for borrowing underthe line of credit agreement.

**NOTE 5             EARNINGS PER SHARE**

Effective with the year ended June 30, 1998, we adopted theprovisions of Statement of Financial Accounting Standards No. 128 (“SFAS No.128”), *Earnings per Share*. SFAS No. 128requires the presentation of basic and diluted earnings (loss) per commonshare. The following table provides a reconciliation of the numerator anddenominator of basic and diluted earnings (loss) per common share:

|                                                | ** ** | **Three Months ended December 31, 2006** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Net**                                                           | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Income**                                                        | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **(Loss)**                                                        | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| Basic loss per  share                          |       | $                                                                 | (221,000   | ) | 2,770,000 |   | $ | (0.08 | ) |
|                                           |       |                                                              |       |   |   |   |   |
| Effect of  dilutive securities options **[A]** |       | —                                                            |       | — |   | — |   |
| ** **                                     |       |                                                              |       |   |   |   |   |
| Diluted loss per  share                        |       | $                                                                 | (221,000   | ) | 2,770,000 |   | $ | (0.08 | ) |

 

|                                                | ** ** | **Six Months ended December 31, 2006** | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                     | ** ** | **Net**                                | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Income**                             | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **(Loss)**                             | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| Basic loss per  share                          |       | $                                      | (618,000   | ) | 2,770,000 |   | $ | (0.22 | ) |
|                                           |       |                                   |       |   |   |   |   |
| Effect of  dilutive securities options **[A]** |       | —                                 |       | — |   | — |   |
| ** **                                     |       |                                   |       |   |   |   |   |
| Diluted loss per  share                        |       | $                                      | (618,000   | ) | 2,770,000 |   | $ | (0.22 | ) |

 

|                                        | ** ** | **Three Months ended December 31, 2005** | ** ** |
|----------------------------------------|------------|------------------------------------------|------------|
| ** **                             | ** ** | **Net**                                  | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Income**                               | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **(Loss)**                               | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| Basic income per  share                |       | $                                        | 99,000     |   | 2,770,000 |   | $ | 0.04 |   |
|                                   |       |                                     |       |   |   |   |   |
| Effect of dilutive  securities options |       | —                                   |       | 198,000 |   | (0.01 | ) |
|                                   |       |                                     |       |   |   |   |   |
| Diluted income  per share              |       | $                                        | 99,000     |   | 2,968,000 |   | $ | 0.03 |   |

 

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**SPORT-HALEY, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

|                                                | ** ** | **Six Months ended December 31, 2005** | ** ** |
|------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                     | ** ** | **Net**                                | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Income**                             | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **(Loss)**                             | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| Basic loss per  share                          |       | $                                      | (429,000   | ) | 2,728,000 |   | $ | (0.16 | ) |
|                                           |       |                                   |       |   |   |   |   |
| Effect of  dilutive securities options **[A]** |       | —                                 |       | — |   | — |   |
| ** **                                     |       |                                   |       |   |   |   |   |
| Diluted loss per share                         |       | $                                      | (429,000   | ) | 2,728,000 |   | $ | (0.16 | ) |

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**[A]**All securities options were anti-dilutive and therefore excluded from the lossper share calculations due to the loss for the period presented.

**NOTE 6             SEGMENT INFORMATION:**

The consolidatedCompany has two operating segments: designing, purchasing or contracting forthe manufacture of and wholesale sales of women’s and men’s (1) fashion golfapparel and outerwear and (2) branded golf apparel. Our SPORT HALEY® and BenHogan® fashion golf apparel and outerwear collections are marketed by SportHaley in the premium and mid-priced markets through a network of independentwholesale sales representatives and distributors to golf professional shops,country clubs, resorts and exclusive department stores within the United Statesand on a limited basis by certain distributors within international markets.Our Top-Flite® men’s branded apparel is marketed by Reserve Apparel to massretailers and other big-box type high sales volume retail stores. Ben Hogan®fashion apparel and Top-Flite® branded apparel are distributed pursuant to alicensing agreement with Callaway.

In November 2005,Callaway granted Sport Haley permission, with certain conditions, to allowReserve Apparel to distribute Top-Flite® branded apparel exclusively toWal-Mart Stores, Inc. (“Wal-Mart”), within the United States. Reserve Apparelwas formed to combine the perceived synergies between Sport Haley and ExplorerGear. Principal members of the management of Explorer Gear are also theprincipal members of management of Explorer Headgear, Inc., a Canadian companywhich has distributed Top-Flite® apparel to Wal-Mart in Canada for severalyears. On September 21, 2006, Sport Haley entered into an agreement withExplorer Gear to purchase its 49% membership interest in Reserve Apparel for alump sum cash payment of $375,000, since which time Reserve Apparel has been awholly-owned subsidiary of Sport Haley.

Reserve Appareldistributed Top-Flite® apparel exclusively to Wal-Mart from March 2006 throughAugust 2006. However, in late September 2006, Reserve Apparel was notified thatWal-Mart had chosen to develop a line of golf apparel under a private labelrather than to continue purchasing our Top-Flite® branded apparel. We hadpresented a newly designed line of Top-Flite® apparel to Wal-Mart in earlySeptember 2006 which consisted of garments primarily comprised of a variety ofperformance fabrics. We believe there are several other markets for Top-Flite®branded golf apparel, and we have aggressively marketed our new Top-Flite®apparel line to a number of other mass retailers and certain big-box type highsales volume retail stores.

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**SPORT-HALEY, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

Condensedconsolidated balance sheets information and condensed consolidated statementsof operations for each of our segments are presented in the tables below. Thefirst sales of Top-Flite® branded apparel were made in March 2006. We did notrecord any sales of Top-Flite® apparel during the three months ended December31, 2006. While we expect our marketing efforts will result in theestablishment of business relationships with one or more mass retailers andother big-box type high sales volume retail stores, to date we have notreceived any orders for our new Top-Flite® apparel from such retailers. Due tothe length of time inherent within the business cycle for branded apparel, fromreceiving a sales order through delivery of packaged merchandise, we do notanticipate recording sales revenue with regard to Top-Flite® apparel for theremainder of our 2007 fiscal year.

*CondensedConsolidated Balance Sheets Segment Information as of December 31, 2006:*

|                                         | ** ** | **December 31, 2006** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|
| ** **                              | ** ** | **Fashion**                     | ** ** | **Branded** | ** ** |
| ** **                              | ** ** | **Apparel**                     | ** ** | **Apparel** | ** ** |
| Cash and cash  equivalents              |       | $                               | 6,869,000  |   | $ | 492,000 |   |
| Accounts receivable,  net of allowances |       | $                               | 2,304,000  |   | $ | 355,000 |   |
| Inventories                             |       | $                               | 5,037,000  |   | $ | — |   |
| Total assets                            |       | $                               | 15,282,000 |   | $ | 847,000 |   |
| Current liabilities                     |       | $                               | 1,475,000  |   | $ | 257,000 |   |

* *

*CondensedConsolidated Statements of Operation Segment Information for the Six MonthsEnded December 31, 2006:*

|                                               | ** ** | **Six Months Ended**  | ** ** |
|-----------------------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **December 31, 2006** | ** ** |
| ** **                                    | ** ** | **Fashion**                     | ** ** | **Branded** | ** ** |
| ** **                                    | ** ** | **Apparel**                     | ** ** | **Apparel** | ** ** |
| Net sales                                     |       | $                               | 7,678,000  |   | $ | 1,185,000 |   |
| Cost of goods sold                            |       | $                               | 4,799,000  |   | $ | 885,000 |   |
| Impairments                                   |       | $                               | 122,000    |   | $ | — |   |
| Gross profit                                  |       | $                               | 2,757,000  |   | $ | 300,000 |   |
| Selling, general and  administrative expenses |       | $                               | 3,206,000  |   | $ | 206,000 |   |
| Royalty expense                               |       | $                               | 298,000    |   | $ | 64,000 |   |
| Income (loss) from operations                 |       | $                               | (747,000   | ) | $ | 30,000 |   |

* *

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**SPORT-HALEY, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

*CondensedConsolidated Statements of Operation Segment Information for the Three MonthsEnded December 31, 2006:*

|                                               | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ** **                                    | ** ** | **December 31, 2006**  | ** ** |
| ** **                                    | ** ** | **Fashion**                      | ** ** | **Branded** | ** ** |
| ** **                                    | ** ** | **Apparel**                      | ** ** | **Apparel** | ** ** |
| Net sales                                     |       | $                                | 4,190,000  |   | $ | — |   |
| Cost of goods sold                            |       | $                                | 2,562,000  |   | $ | — |   |
| Impairments                                   |       | $                                | 73,000     |   | $ | — |   |
| Gross profit                                  |       | $                                | 1,555,000  |   | $ | — |   |
| Selling, general and  administrative expenses |       | $                                | 1,624,000  |   | $ | 67,000 |   |
| Royalty expense                               |       | $                                | 152,000    |   | $ | — |   |
| Income (loss) from operations                 |       | $                                | (221,000   | ) | $ | (67,000 | ) |

** **

**NOTE 7             SUBSEQUENTEVENTS:**

On January 3,2007, we commenced a modified “Dutch Auction” tender offer to purchase sharesof Sport-Haley, Inc. common stock at a price neither greater than $5.30 norless than $4.80 per share, net in cash. Pursuant to the terms of the Offer toPurchase, which was filed with the Securities and Exchange Commission (“SEC”and “Commission”) on January 3, 2007, and subsequently distributed toshareholders, we offered to purchase up to 472,000 shares that were properlytendered and not withdrawn prior to the expiration of the offer at 12:00midnight Eastern Time on February 1, 2007. The Offer to Purchase required us toanalyze the total number of shares tendered and the prices specified by thetendering shareholders and to determine the lowest price per share within thestated range that enabled us to purchase up to 472,000 shares. The tender offerwas not contingent upon any minimum number of shares being tendered and wassubject to a number of other terms and conditions specified in the Offer toPurchase.

We engagedComputershare Trust Company, the transfer agent for our common stock, to serveas the Depositary for the tender offer. None of the Company, our Board ofDirectors or the Depositary made any recommendation to any shareholder as towhether to tender or refrain from tendering any shares or as to the price orprices at which shareholders chose to tender shares. The members of the Boardof Directors and executive officers of the Company each advised that they didnot intend to tender in the offer shares they held individually or through anaffiliated entity. Shareholders were urged to read the Tender Offer Statementon Schedule TO, which included as exhibits the Offer to Purchase and therelated Letter of Transmittal, as well as any amendments or supplements to theTender Offer Statement when they became available. On January 12, 2007, wesubmitted an amended Schedule TO and an amended Offer to Purchase to theCommission. We filed further amendments to the Schedule TO on February 6 andFebruary 9, 2007.

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**SPORT-HALEY, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

On February 6,2007, the Depositary provided us with the final tabulation of the tender offerresults. In total, 1,357,698 shares were properly tendered and not withdrawn atprices from $4.80 to $5.30 per share. Of the total, 485,762 shares were tenderedat $4.80 per share, which exceeded by 13,762 shares the 472,000 shares wesought in the tender offer. In Section 1 of the Offer to Purchase, we reservedthe right, in our sole discretion, to purchase in the tender offer anadditional number of shares over the 472,000 shares we sought in the tenderoffer, not to exceed 2% of our outstanding common shares, without amending orextending the tender offer. On February 7, 2007, we exercised our right, underSection 1 of the Offer to Purchase and applicable SEC regulations, to acceptfor purchase all 485,762 shares tendered at $4.80 per share, without proration.The 485,762 shares accepted for purchase in the tender offer representapproximately 171⁄2 percent of the common shares outstanding as of January 3, 2007.

On February 8,2007, we transferred $2,332,000 to the Depositary to fund the purchase of485,762 shares of our common stock at a price of $4.80 per share. TheDepositary was instructed to promptly pay for the shares accepted for purchasein the tender offer and to return all other shares tendered which were notaccepted for purchase or withdrawn. Upon completion of the tender offer,Sport-Haley, Inc. will have 2,284,490 shares of common stock outstanding.

####  

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**ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

This Report on Form 10-Q contains certain forward-looking statements,within the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. The words “may”, “will”, “expect”, “anticipate”,“continue”, “estimate”, “project”, “intend”, “believe”, and similarexpressions, variations or the negative of these words, and any statementregarding possible or assumed future results of operations of our business, themarkets for our products, anticipated expenditures, regulatory developments orcompetition, or other statements regarding matters that are not historicalfacts, are intended to identify forward-looking statements, although not allforward-looking statements contain such identifying words. The reader should beaware that our actual results could differ materially from those contained inforward-looking statements. Our financial condition and the results of our operationswill depend on a number of factors, including, but not limited to, thefollowing: our ability to successfully anticipate fashion trends, designfavorably accepted fashion golf apparel, effectively advertise and communicatewithin the marketplace, and penetrate our chosen distribution channels;competition within golf apparel markets; business conditions and growth in thefashion golf apparel market and the general economy; our ability tosuccessfully forecast sales and optimize inventory levels; our ability tosuccessfully manage risks associated with the trend of an increasing relativepercentage of sales with respect to licensed apparel, such as the Ben Hogan®apparel collections; establishing markets for our Top-Flite® apparel whichprovide the annual sales amount required by Callaway to satisfy the minimumroyalty payments due in accordance with the license agreement for Top-Flite®apparel; loss of certain third party suppliers, and/or delays in receivinggarments from third party suppliers caused by various factors, including lostor reduced manufacturing capacity or significant suppliers, labor shortages,timely performance of third parties, transportation difficulties, and others;significant delays in deliveries from third party suppliers; unsatisfactoryrecourse with regard to nonconforming goods received from foreign suppliers;political and international trade relations; changes in international tradequota systems for apparel; significant reliance upon several individual foreignsuppliers; reliance upon a certain foreign person, responsible for maintainingrelationships with and monitoring the performance of certain of our significantforeign suppliers; consumer spending on golf apparel; general global economicand political conditions resulting from threats or acts of war or terrorism andresponses thereto; access to capital; maintaining satisfactory relationshipswith commercial banking institutions; establishing controls with regard to andmaintaining the integrity of technology and information systems; and, relianceupon executive officers and key employees. Additional information on these andother factors that could affect our financial results is included in thediscussion below and in our Form 10-K for the year ended June 30, 2006. There maybe other factors not mentioned above, in the discussion below or included inour Securities and Exchange Commission filings that may cause actual results todiffer materially from any forward-looking statement. The reader should notplace undue reliance on any forward-looking statement. Neither the Company norany of its corporate officers or key employees assumes any obligation to updateany forward-looking statement as a result of new information, future event ordevelopment, except as required by securities laws.

All references to fiscal years are references to Sport-Haley’s fiscalyear, which ends on June 30.

##### **OVERVIEW**

Sport-Haley, Inc. designs, purchases or contractsfor the manufacture of, markets and distributes women’s and men’s fashion golfapparel and outerwear under the SPORT HALEY® and Ben Hogan® labels. Weare represented by a network of independent wholesale sales representatives andemploy two regional sales managers, each with responsibilities for both of ourfashion apparel labels. Most of the independent wholesale sales representativessolicit sales of both SPORT HALEY® and Ben Hogan® fashion apparel collectionson our behalf.

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SPORTHALEY® fashion apparel is comprised almost exclusively of women’s garments andaccessories, designed by utilizing classic styles with contemporary influencesintended to develop and maintain brand recognition and loyalty, on or off thegolf course. While each product in the SPORT HALEY® apparel line is soldseparately, the line is intentionally designed in groups with coordinatedstyles, color schemes and fabrics to encourage customers to purchase multiplegarments. SPORT HALEY® women’s fashion apparel includes a variety of fabricsand weave patterns, including interlock, pique, French terry, jersey and twill,and may feature a unique trim, a special fabric finish or extra needlework. TheSPORT HALEY® name has been highly recognized as a women’s fashion apparel brandwithin the premium and mid-priced golf apparel markets for over 20 years, inpart, because of the cohesiveness of our design staff. Catherine B. Blair, ourVice President — Merchandising and Design, has provided direction for the SPORTHALEY® brand for over 14 years. Ms. Blair recognized that fashion designswithin the women’s golf apparel market were trending toward technicalperformance fabrics and more athletic styling and began designing our women’sfashion apparel to include moisture wicking fabrics such as AEROCool andDry-Tech 18 and to include a larger selection of more leading edge, younger looking,athletic style garments. The technical performance fabrics and athletic stylegarments have been well received by our customers.

Ben Hogan® men’s fashion apparel is designedutilizing elegant time-honored classic styles intended to garner nearly instantaneousbrand recognition. The Ben Hogan® label has been widely recognized within thegolf apparel industry for the past five years for continually providing elegantmen’s fashion golf apparel of impeccable quality in keeping with the image ofMr. Hogan. While each product in the Ben Hogan® apparel line is soldseparately, the line is intentionally designed in groups with coordinatedstyles, color schemes and fabrics to encourage customers to purchase multiplegarments. Ben Hogan® apparel is manufactured using a variety of fabrics,including wool, silk and cashmere, and weave patterns, including pique, jerseyand twill, and most pieces feature a unique trim, a special fabric finish orextra needlework. Ben Hogan® men’s apparel is marketed in the premium-pricemarkets to elite golf professional shops, upscale resorts and exclusivedepartment stores. We distribute Ben Hogan® apparel pursuant to our licensingagreement with Callaway.

Top-Flite® branded golf apparel is designed fordistribution to large retail stores in the low-price markets. Branded apparelis generally produced in mass quantities and usually utilizes much simplerdesigns and is of much lesser quality than the fashion apparel garments whichwe sell in the premium and mid-priced markets. While our fashion golf apparelis generally designed for two separate selling seasons each year, branded golfapparel is generally designed for four or more shorter selling periods eachyear. Many of our Top-Flite® garments are designed utilizing basic performancefabrics made from polyester or other man-made materials or from blends ofnatural and man-made materials. Reserve Apparel distributed Top-Flite® apparelexclusively to Wal-Mart from March 2006 through August 2006. However, in lateSeptember 2006, Reserve Apparel was notified that Wal-Mart had chosen todevelop a line of golf apparel under a private label rather than to continuepurchasing our Top-Flite® branded apparel. We had presented a newly designedline of Top-Flite® apparel to Wal-Mart in early September 2006 which consistedof garments primarily comprised of a variety of performance fabrics. We believethere are several other markets suitable for Top-Flite® branded golf apparel,and we have begun to aggressively market our newly designed Top-Flite® apparelline to a number of mass retailers and other big-box type high sales volumeretail stores. While we expect our marketing efforts will result in theestablishment of business relationships with one or more mass retailers andother big-box type high sales volume retail stores, to date we have notreceived any orders for our new Top-Flite® apparel from such retailers. Due tothe length of time inherent within the business cycle for branded apparel, fromreceiving 

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asales order through delivery of packaged merchandise, we do not anticipaterecording sales revenue with regard to Top-Flite® apparel for the remainder ofour 2007 fiscal year. Wedistribute Top-Flite® branded apparel pursuant to our licensing agreement withCallaway.

##### **CRITICALACCOUNTING POLICIES AND ESTIMATES**

Ourfinancial statements have been prepared in accordance with standards of thePublic Company Accounting Oversight Board (United States), which require us tomake estimates and judgments that affect the reported amounts of assets, liabilities,revenues and expenses, and the related disclosures. A summary of thosesignificant accounting policies can be found in the Footnotes to the FinancialStatements included in our Report on Form 10-K for the fiscal year ended June30, 2006. The estimates used bymanagement are based upon our historical experiences combined with management’sunderstanding of current facts and circumstances. Certain of our accountingpolicies are considered critical as they are both important to the portrayal ofour financial condition and the results of our operations and requiresignificant or complex judgments on the part of management. We believe that thefollowing critical accounting policies affect the more significant judgmentsand estimates used in the preparation of our financial statements.

*Inventories*

Our inventories, predominately comprised of finishedgoods, are generally valued at the lower of cost (weighted average) or market.Costs include amounts paid to suppliers for packaged apparel and/or materials andlabor, import costs, such as customs duties, freight-in and other miscellaneouscosts, and allocated overhead. Excess fashion apparel inventories, consistingof discontinued or aging merchandise, are a natural component of a seasonalapparel business. While certain fashion apparel items will sell out in anyparticular selling season, quantities of other fashion apparel items willremain at the end of each selling season. We market excess fashion apparelfinished goods inventories at reduced wholesale prices to our customers in thenormal course of business. Remaining excess inventories are liquidated throughother markets. In the ordinary course of business, we maintain reserves forinventory write downs due to the obsolescence of excess inventories. We performanalyses on a quarterly basis to identify unsold excess inventories and adjustour reserves for inventory obsolescence to reduce the carrying value of excessinventories to their estimated net realizable value, which is estimated basedon management’s disposition plans and historical experiences. Generally,branded apparel inventories are not prone to impairment, because we usuallyorder branded apparel in quantities per specific customer orders.

During the quarter and six months ended December 31,2006, we recorded fashion apparel inventory write-downs of $73,000 and$122,000, respectively. We did not record a write-down with regard to brandedapparel inventories during the three months or six months ended December 31,2006.

*Deferred Income Taxes*

Deferred incometaxes are recognized for the expected tax consequences in future years fordifferences between the tax bases of assets and liabilities and their financialreporting amounts, based upon enacted tax laws and statutory tax ratesapplicable to the periods in which the differences are expected to affecttaxable income. Our significant deferred tax assets are related to netoperating loss carry forwards for federal and state income tax purposes,stock-based compensation and an unrealized loss for tax purposes on a commonstock investment. Governing regulations require that our operating losses becarried forward for income tax purposes. We maintain a valuation allowance toreduce deferred tax assets to the 

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net amountexpected to be recovered in future periods. The estimates for deferred taxassets and the corresponding valuation allowance require us to exercise complexjudgments. We periodically review and adjust those estimates based upon themost current information available. In accordance with SFAS 109 and based upona review at December 31, 2006, of our utilization of deferred tax assets, wemaintained a valuation allowance that effectively reduces our net deferred taxassets to zero. While we continue to explore various strategies to return theCompany to profitability, including finding alternative markets for ourTop-Flite® branded apparel, we cannot be certain that our efforts will resultin the generation of future profits. Because the recoverability of deferred taxassets is directly dependent upon future operating results, actualrecoverability of deferred tax assets may differ materially from our estimates.

*Allowancefor Doubtful Accounts*

Ourallowance for doubtful accounts reflects a reserve that reduces our customeraccounts receivable to the net amount estimated to be collectible. Estimatingthe credit worthiness of customers and the recoverability of customer accountsrequires us to exercise considerable judgment. In estimating the reserve foruncollectible accounts, we consider factors such as general economic andindustry-specific conditions, historical and anticipated customer performance.From time to time, we also identify delinquent customer accounts for which aspecific reserve is required. At December 31, 2006, our allowance for doubtfulaccounts totaled $371,000, including a specific reserve of $116,000 withrespect to the potential non-recovery of a net amount due to Reserve Apparelfrom a former inventory broker. While we consider our processes to be adequateto effectively quantify our exposure to doubtful accounts, changes in economic,industry or specific customer conditions may result in recoverability of ourdoubtful accounts that differs materially from our estimates.

*Allowancefor Sales Returns*

Werecord allowances for sales returns as net adjustments to customer accountsreceivable. When recording an allowance, the net method reduces customeraccounts receivable and net sales by the estimated gross margin effect of theanticipated sales return. Generally, our selling terms preclude return of ourproducts subsequent to the sale. However, we have traditionally maintainedlimited programs that offer various customers the right to return certainfashion apparel items under predefined conditions, which we include as a componentwithin our estimate of allowance for sales returns. We review historical dataand consider factors such as general economic and industry-specific conditionsand anticipated customer performance when evaluating the adequacy of ourallowance for sales returns. At December 31, 2006, our allowance for salesreturns was $155,000. Significant changes in general economic or industryconditions may yield sales returns that differ materially from our estimates.

### **RECENT PRONOUNCEMENTS**

In June 2006, theFinancial Accounting Standards Board issued Interpretation No. 48 (“FIN 48”), *“Accounting for Uncertainty in Income Taxes.”* FIN 48requires the use of a two-step approach for recognizing and measuring taxbenefits taken or expected to be taken in an income tax return and disclosuresregarding uncertainties in income tax positions. Only tax positions that meetthe “more likely than not” recognition threshold at the effective date may berecognized upon adoption of FIN 48. We are required to adopt FIN 48 effectiveJuly 1, 2007. The cumulative effect of initial adoption of FIN 48, if any, willbe recorded as an adjustment to beginning retained earnings in the year ofadoption and will be 

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presented separately. Weare currently evaluating the impact that FIN 48 will have on our financialcondition and the results of our operations.

We have reviewed all other recently issued, but not yet effective,accounting pronouncements and do not believe the future adoption of any suchpronouncements may be expected to cause a material impact on our financialcondition or the results of our operations.

### **LIQUIDITY AND CAPITAL RESOURCES**

The golf apparelbusiness is highly seasonal in nature, and the balance sheet amounts as ofDecember 31, 2006, may be more meaningful when compared with the amounts as ofDecember 31, 2005, rather than with the amounts at June 30, 2006.

Our primarysources of liquidity are comprised of available cash and cash equivalents, cashflows from operations and a working capital line of credit with a commercialbank. We require cash for general working capital purposes. We do notanticipate the requirements of material amounts of cash for capitalexpenditures over the remainder of the current fiscal year. Our working capitalrequirements are highly seasonal in nature, with greater requirements fromapproximately August through October and February through April of each fiscalyear, due to the purchases of finished goods inventories for the spring/summerand fall/holiday selling seasons, respectively.

Our net accountsreceivable decreased by $1,291,000, or 33%, to $2,659,000 at December 31, 2006,from $3,950,000 at June 30, 2006. When compared with the December 31, 2005,balance, our net accounts receivable balance at December 31, 2006, decreased by$64,000, or 2%, from $2,723,000. Historically, a significant number of ourcustomers close their businesses for the winter months, beginning in October orNovember of each year. Because many of those business owners prefer to settletheir outstanding account balances prior to closing for the winter, our netaccounts receivable balance generally declines during our second fiscalquarter. Changes in our accounts receivable balances and related allowancesprovided operating cash of $1,291,000 and $1,772,000 for the six-month periodsended December 31, 2006 and 2005, respectively.

Our fashionapparel inventories increased by $262,000, or 5%, from $4,775,000 at June 30,2006, to $5,037,000 at December 31, 2006. However, our inventory requirementsare highly cyclical in nature. When compared with the balance of $5,110,000 atDecember 31, 2005, our inventories at December 31, 2006, declined by $73,000,or 1%, which is indicative that methods we implemented previously have helpedus optimize the quantities of fashion apparel inventories on hand at any pointin time. Our finished goods inventoriesmay fluctuate from period to period due to the timing associated with thedelivery of ocean shipments, generally with terms of free on board at the portof departure. Pending ocean deliveries of finished goods at December 31,2006, June 30, 2006, and December 31, 2005, totaled approximately $658,000,$585,000 and $750,000 respectively. Changes in our inventory balances usedoperating cash of $262,000 and $957,000 for the six-month periods ended December31, 2006 and 2005, respectively.

Our continuedreliance on foreign suppliers sustains the risk that our revenues could beadversely affected if a foreign shipment or shipments were received late orlost. We maintain insurance for risk of loss relating to goods shipped from ourforeign and domestic suppliers. However, our significant reliance on certainforeign suppliers sustains the risk that we would be left with inadequate orunsatisfactory recourse should the goods received from a foreign supplier benonconforming.

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Accounts payableand accrued expenses decreased by $1,224,000, or 41%, at December 31, 2006, to$1,732,000 from $2,956,000 at June 30, 2006. Accounts payable and accruedexpenses increased by $134,000, or 8%, from $1,598,000 at December 31, 2005.The increase of $134,000 when comparing the balance at December 31, 2006, withthe balance at December 31, 2005, primarily related to our accounts payable andaccrued expenses balance with regard to branded apparel of $257,000 at December31, 2006, as compared with $0 at December 31, 2005. Our accounts payable andaccrued expenses balance with regard to fashion apparel was $1,475,000 atDecember 31, 2006, a decrease of $123,000, or 8%, when compared with thebalance of $1,598,000 at December 31, 2005, primarily attributable to a$128,000 decrease in accrued payroll expenses. Included in accrued payrollexpenses at December 31, 2005, was the balance of $367,000 in severance andother compensation payable to our former chief executive officer. Comparatively,at December 31, 2006, accrued payroll expenses included the balance of $203,000in severance and other compensation payable to our former chief executiveofficer.

Due to thecombination of the factors discussed above, and others, during the six monthsended December 31, 2006, our operating activities used cash of $737,000.Comparatively, during the six months ended December 31, 2005, our operatingactivities provided cash of $306,000.

For the six months endedDecember 31, 2006, investing activities used cash of $394,000. Comparatively,for the six months ended December 31, 2005, investing activities provided cashof $7,000. As previously reported, on September 21, 2006, Sport Haley enteredinto an agreement with Explorer Gear to purchase its 49% ownership interest inReserve Apparel for a lump sum cash payment of $375,000, since which timeReserve Apparel has been a wholly-owned subsidiary of Sport Haley. Thetransaction with Explorer Gear caused us to record $270,000 in goodwill withrespect to the purchase, which was calculated as the purchase price less loansand accrued interest payable to Explorer Gear as of the purchase date and lessthe capital balance of Explorer Gear as of the purchase date after allocationof their proportionate share of Reserve Apparel’s loss for the period ended onthe purchase date. During the six months ended December 31, 2006, we expended$19,000 for the purchase of property and equipment, and $147,000 indepreciation and amortization was charged to current operations.

We maintain arevolving line of credit agreement with a commercial bank. The revolving lineof credit agreement, renewed by amendment through December 5, 2007, providesfor a maximum loan amount of $3,000,000, collateralized by a certificate ofdeposit held at the commercial bank in the amount of $3,000,000, which earns amarket rate of interest. Borrowings under the line of credit agreement accrueinterest at the bank’s prime rate. We generally maintain the line of credit tofacilitate the issuance of letters of credit for inventory purchases fromoffshore suppliers and, if necessary, to fund any temporary working capitalneeds. Outstanding letters of credit reduce the amount available for borrowingunder the line of credit agreement. At December 31, 2006, we did not have anybalances due on the line of credit, but we had $2,356,000 in outstandingletters of credit that were issued to foreign suppliers in accordance withfinished goods inventory purchase commitments. Outstanding letters of creditreduce the amount available for borrowing under the line of credit agreement.

We believe thatcash on hand and cash generated from operations, as well as the ability toborrow under the bank line of credit, will be sufficient to meet our cashrequirements during the remainder of fiscal 2007. We also have alternativesources of financing, including the factoring of customer accounts receivable.We do not anticipate drawing on the line of credit or using alternative sourcesof financing during the remainder of fiscal 2007. However, our capital needswill depend on many factors, including

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the need tofinance required inventory levels, the success of current sales and marketingprograms, potential cash requirements related to the operations of ReserveApparel and various other factors.

**RESULTSOF OPERATIONS**

Our business isseasonal in nature, and sales occurring from January through June, whichcomprise our third and fourth quarters of each fiscal year, are generallydisproportionately higher than sales occurring from July through December.

Net sales for thethree months ended December 31, 2006, were $4,190,000, a decrease of $239,000,or 5%, from net sales of $4,429,000 for the comparable three-month period inthe prior fiscal year. Net sales for the six months ended December 31, 2006,were $8,863,000, an increase of $423,000, or 5%, from net sales of $8,440,000for the comparable six-month period in the prior fiscal year. The comparativedifferences were attributable to increases in sales of SPORT HALEY® fashionapparel combined with greater comparative decreases in sales of Ben Hogan® fashionapparel between the respective periods. Net sales of our SPORT HALEY® fashionapparel collections were $1,872,000 and $1,437,000 for the three months endedDecember 31, 2006 and 2005, an increase of $435,000, or 30%, and $3,178,000 and$2,919,000, an increase of $259,000, or 9%, for the six months ended December31, 2006 and 2005, respectively. Market conditions for women’s fashion apparelappear to be improving, because we continue to experience slight increases inadvance orders for our women’s collections. Net sales of our Ben Hogan® fashionapparel collections were $2,175,000 and $2,841,000 for the three months endedDecember 31, 2006 and 2005, a decrease of $666,000, or 23%, and $4,223,000 and$5,189,000, a decrease of $966,000, or 19%, for the six months ended December31, 2006 and 2005, respectively. While intense competition for floor spaceremains within the markets for our fashion apparel collections, especially withregard to men’s fashion apparel, the majority of the decreases in sales of BenHogan® fashion apparel collections between the respective periods relate to a$913,000 sale to a major retailer in December 2005. We did not record such asale in either the three-month or six-month periods ended December 31, 2006.Ben Hogan® apparel is marketed in accordance with a licensing agreement wemaintain with Callaway for such apparel, which we consider to be a keycomponent of our business strategies.

Net sales of Top-Flite® branded apparel were $1,185,000 for the sixmonths ended December 31, 2006. We began shipping Top-Flite® branded men’s golfapparel to Wal-Mart in March 2006, therefore we did not record any sales ofTop-Flite® branded apparel during the comparative six-month period endedDecember 31, 2005. Net sales of branded apparel for the six months endedDecember 31, 2006, were comprised of sales to Wal-Mart of $1,000,000 and salesof $185,000 to other markets for the disposition of our remaining brandedapparel inventories. As previously reported, in late September 2006, Wal-Martdiscontinued purchasing Top-Flite® branded golf apparel from us, opting insteadto develop a line of golf apparel under a private label. We believethere are several other markets for Top-Flite® branded golf apparel, and wehave continued to aggressively market the new Top-Flite® apparel line to anumber of other mass retailers and other big-box type high sales volume retailstores. While we expect todevelop a business relationship with one or more mass retailer or big-box typestore, to date we have not received any orders for Top-Flite® apparel from suchretailers. Due to the length of time inherent within the business cycle forbranded apparel, from receiving a sales order through delivery of packagedmerchandise, we do not anticipate recording sales revenue with regard toTop-Flite® apparel for the remainder of our 2007 fiscal year. We distributeTop-Flite® branded apparel pursuant to our licensing agreement with Callawayfor such apparel.

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Gross profit, as a percentage of net sales, was 37% for the three monthsended December 31, 2006, and 37% for the same three-month period in the priorfiscal year. Gross profit, as a percentage of net sales, was 34% for thesix-month period ended December 31, 2006, and 35% for the same six-month periodin the prior fiscal year. Our gross profit is generally affected by salesdiscounts offered to customers on various marketing programs, payment discountsoffered to certain customers, dispositions of excess inventories at reducedsales prices and the valuation of excess inventories to the lower of cost ormarket. The disposition of excess inventories negatively impacts our grossprofit percentage even when such inventories are properly valued to the lowerof cost or market, because such valuation causes sales to be recorded with grossprofit at or near zero. For the six months ended December 31, 2006, we recordednet sales of $366,000 and loss of $143,000, which included net sales $184,000and loss of $118,000 during the three months ended December 31, 2006, withregard to the disposition of incomplete size runs from our fall 2006 sellingseason inventories for Ben Hogan® apparel collections. Comparatively, for thesix months ended December 31, 2005, we recorded net sales of $539,000 and grossprofit of $15,000 with respect to sales of excess fashion apparel inventories.The valuation of inventories to the lower of cost or market negatively impactsour gross profit percentage, because a reduction of inventory value causes anincrease in our cost of goods sold, thereby reducing our gross profit. Ourgross profit was negatively impacted by $73,000 and $122,000 for the quarterand six months ended December 31, 2006, respectively, by the adjustment of ourfinished goods inventories to the lower of cost or market. Comparatively, ourgross profit was negatively impacted by $129,000 and $194,000 for the quarterand six months ended December 31, 2005, by similar lower of cost or marketadjustments.

Our gross marginsmay not be comparable to other companies within the golf apparel industry. Wehave consistently included the cost of merchandise sold, including importcharges, in-bound freight, allocated overhead, freight out, embroidery costsand other charges in our cost of goods sold. Our overhead allocation includesour production costs plus a portion of our distribution costs, such asreceiving and inspection costs, but we include some of the other costs ofdistribution, such as a portion of our warehousing and other handling costs, inselling, general and administrative expenses. Our gross margins also include,on a consolidated basis, the operations of Reserve Apparel, which distributesTop-Flite® branded apparel to the mass retail market at much lower price pointsand gross margins lower than those expected to be achieved in the premium andmid-price markets where we distribute our SPORT HALEY® and Ben Hogan® fashionapparel brands. Other companies within the golf apparel industry may or may notoperate within the lower price markets. We include royalty payments, relatingto sales of licensed apparel, in selling, general and administrative expenses.

Our gross marginswith respect to net sales of our SPORT HALEY® and Ben Hogan® fashion golfapparel were 37% and 36% for the three months and six months ended December 31,2006, respectively, and were 37% and 35% for the three months and six monthsended December 31, 2005, respectively. Our gross margins with respect to netsales of Top-Flite® branded apparel for the three months and six months endedDecember 31, 2006, were 0% and 25%, respectively.

Selling, generaland administrative expenses increased by $253,000, or 18%, to $1,691,000 forthe three months ended December 31, 2006, from $1,438,000 for the samethree-month period in the prior fiscal year. Selling, general andadministrative expenses increased by $250,000, or 8%, to $3,412,000 for the sixmonths ended December 31, 2006, from $3,162,000 for the comparable six-monthperiod in the prior fiscal year. The differences were attributable to increasesin the selling, general and administrative expenses with regard to our fashionapparel segment plus the consolidation of the selling, general andadministrative expenses of our branded apparel segment. Selling, general andadministrative expenses for the three months ended December 31, 2006, with regardto our fashion apparel segment, increased to 

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$1,623,000 from$1,438,000 for the three months ended December 31, 2005. Selling, general andadministrative expenses for the six months ended December 31, 2006, with regardto our fashion apparel segment increased to $3,206,000 from $3,162,000 for thesix months ended December 31, 2005. The overall differences were primarilyattributable to comparative increases in sales commissions, executivecompensation, advertising expenses and various other factors between therespective periods. Sales commissions increased for the three months endedDecember 31, 2006, because primarily all of our net sales of fashion apparelfor the three-month period were commissionable, but comparatively our net salesof fashion apparel for the three months ended December 31, 2005, included a$913,000 sale to a major retailer upon which no sales commission was due.Increases in executive compensation related to comparatively higher salariespaid to our chief executive and other officers and key employees in the sixmonths ended December 31, 2006, plus salary paid to an executive we hired inAugust 2006 to implement corporate sales initiatives. Increases in advertisingexpenses primarily related to greater expenditures for print advertising inprofessional golf publications in the six months ended December 31, 2006, ascompared with the corresponding six-month period in the prior fiscal year.Selling, general and administrative expenses were $67,000 and $206,000 withregard to our branded apparel segment for the three months and six months endedDecember 31, 2006, respectively. We did not incur any selling, general andadministrative expenses with regard to our branded apparel during the sixmonths ended December 31, 2005. As a percentage of net sales, selling, generaland administrative expenses with regard to our fashion apparel segment wereapproximately 42% and 37% for the six months ended December 31, 2006 and 2005,respectively. As a percentage of net sales, selling, general and administrativeexpenses with regard to our branded apparel segment were 17% and 0% for the sixmonths ended December 31, 2006 and 2005, respectively.

We recorded royalty expense of $152,000 and $175,000 for the three monthsended December 31, 2006 and 2005, with regard to net sales of fashion golfapparel, respectively. We recorded royalty expense of $298,000 and $338,000 forthe six months ended December 31, 2006 and 2005, with regard to net sales offashion golf apparel, respectively. We recorded royalty expense of $0 and$64,000 with respect to net sales of branded golf apparel for the three monthsand six months ended December 31, 2006, respectively. We did not record anyroyalty expense with regard to sales of branded golf apparel during the sixmonths ended December 31, 2005. Royalty expense is due to Callaway inaccordance with the license they previously granted us to market men’s fashionapparel bearing the Ben Hogan® label and branded apparel bearing the Top-Flite®label.

Other income, net, was $84,000 for the three months ended December 31,2006, an increase of $7,000, or 9%, from $77,000 for the comparable three-monthperiod in the prior fiscal year. Other income, net, was $162,000 for the sixmonths ended December 31, 2006, an increase of $32,000, or 28%, from $130,000for the comparable six-month period in the prior fiscal year. Other income,net, was primarily derived from interest earned on cash and cash equivalentbalances held at various financial institutions. The increases were generally attributableto higher rates of interest earned during the respective periods ended December31, 2006, than had been earned during the comparable periods in the priorfiscal year.

Net loss for the three months ended December 31, 2006, was ($221,000), adifference of ($320,000), or 323%, as compared with the net income of $99,000for the comparable period in the prior fiscal year. Net loss for the six monthsended December 31, 2006, was ($618,000), a difference of ($189,000), or 44%, ascompared with the net loss of ($429,000) for the comparable period in the priorfiscal year. We had federal and state net operating loss carry forwards of$6,371,000 and $8,562,000 at December 31, 2006, that we estimated may berecoverable at income tax rates of 34% and 5%, respectively. In accordance with SFAS 109 and based upon areview at December 31, 2006, of our utilization of deferred tax assets, 

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we maintained a valuation allowance that effectively reduces our netdeferred tax assets to zero. While we continue to explore various strategies toreturn the Company to profitability, including finding alternative markets forour Top-Flite® branded apparel, we cannot be certain that our efforts willresult in the generation of future profits sufficient to offset our significant net operating loss carry forwardsprior to their expirations. Accordingly, we did not record benefits from incometaxes associated with the corresponding losses for the respective three-monthand six-month periods ended December 31, 2006.

Basic earnings (loss)per common share were ($0.08) and $0.04 for the three-month periods and were($0.22) and ($0.16) for the six-month periods ended December 31, 2006 and 2005,respectively. Diluted earnings (loss) per common share were ($0.08) and $0.03for the three-month periods and were ($0.22) and ($0.16) for the six-monthperiods ended December 31, 2006 and 2005, respectively. All securities optionswere anti-dilutive and therefore excluded from the per share calculations withrespect to periods in which net losses were incurred.

Our book value peroutstanding common share was $5.20 at December 31, 2006, $5.42 at June 30,2006, and $5.67 at December 31, 2005.

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**ITEM 3 QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUTMARKET RISK**

Marketrisk represents the risk of loss that may impact the financial position,results of operations or cash flows due to adverse changes in financial andcommodity market prices and rates. We are exposed to market risk with regard tochanges in United States interest rates. This exposure is directly related toour normal operating and funding activities. Historically, and as of December31, 2006, we have not used derivative instruments or engaged in hedgingactivities. Our market risk has not changed significantly from September 30,2006.

**InterestRate Risk**

We maintain arevolving line of credit agreement with a commercial bank that provides forinterest at the bank’s prime rate. The agreement provides for a maximum loanamount of $3,000,000 collateralized by a certificate of deposit held at thecommercial bank in the amount of $3,000,000, which earns a market rate ofinterest. Borrowings under the line of credit agreement accrue interest at thebank’s prime rate. We generally maintain the line of credit to facilitate theissuance of letters of credit for inventory purchases from offshore suppliers,and, if necessary, to fund any temporary working capital needs. We did not haveany outstanding borrowings under the line of credit at December 31, 2006.Increases in the bank’s prime rate could, however, increase the interestexpense with respect to future borrowings, including borrowings under the lineof credit. Outstanding letters of credit reduce the amount available forborrowing under the line of credit. We had outstanding letters of credit of $2,356,000at December 31, 2006. We do not use derivative financial instruments to manageinterest rate risk.

From time to time,we maintain short-term investments in low risk and no risk financialinstruments, readily convertible into cash, which earn interest at variablerates. Our cash balances held at financial institutions regularly exceedfederally insured limits.

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**ITEM 4 CONTROLS AND PROCEDURES**

**(a)       Evaluation of Disclosure Controls andProcedures**

Our management,with the participation of our Chief Executive Officer and our Chief FinancialOfficer, conducted an evaluation of the effectiveness of our disclosurecontrols and procedures pursuant to Rule 13a-15 under the Securities ExchangeAct of 1934 as of the end of the period covered by this report. Based on thatevaluation, management, including the Chief Executive Officer and ChiefFinancial Officer, concluded that, as of the end of the period covered by thisreport, our disclosure controls and procedures were effective in reaching areasonable level of assurance that:  (a)all material information relating to the Company, required to be disclosed inthis report, was made known to management in a timely manner; and (b)information was recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and regulations.

**(b)  Changes in Internal Controls Over FinancialReporting**

During the second quarterof fiscal 2007, we did not institute any significant changes in internalcontrols over financial reporting as defined in Rules 13a-15(f) or 15d-15(f)that materially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

Our management, including the Chief Executive Officer and the ChiefFinancial Officer, does not expect that our disclosure controls and proceduresor our internal controls over financial reporting will, in all instances,prevent all errors and all fraud. A control system, no matter how wellconceived or operated, can only provide reasonable, not absolute, assurancethat the objectives of the control system are met. While our control systemsprovide a reasonable assurance level, the design of our control systemsreflects the fact that there are resource constraints, and the benefits of suchcontrols were considered relative to their costs. Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within the financial reports of Sport-Haley, Inc. have been detected. Theseinherent limitations include the realities that judgments in decision-makingcan be faulty, and that breakdowns can occur because of simple errors ormistakes. Additionally, a control may be circumvented by the individual act ofsome person, by collusion of two or more persons, or by management’s overrideof a specific control. The design of any system of controls is also based inpart on certain assumptions about the likelihood of future events, and therecan be no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions. Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

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**PART IIOTHER INFORMATION**

### **ITEM 1         LEGALPROCEEDINGS**

None.

### **ITEM 1A      RISKFACTORS**

There have been no material changes from the risk factors previouslydisclosed in Item 1A of our annual report on Form 10-K for the year ended June30, 2006.

### **ITEM 5         OTHERINFORMATION**

On January 3,2007, we commenced a modified “Dutch Auction” tender offer to purchase sharesof Sport-Haley, Inc. common stock at a price neither greater than $5.30 norless than $4.80 per share, net in cash. Pursuant to the terms of the Offer toPurchase, which was filed with the Securities and Exchange Commission (“SEC”and “Commission”) on January 3, 2007, and subsequently distributed toshareholders, we offered to purchase up to 472,000 shares that were properlytendered and not withdrawn prior to the expiration of the offer at 12:00midnight Eastern Time on February 1, 2007. The Offer to Purchase required us toanalyze the total number of shares tendered and the prices specified by thetendering shareholders and to determine the lowest price per share within thestated range that enabled us to purchase up to 472,000 shares. The tender offerwas not contingent upon any minimum number of shares being tendered and wassubject to a number of other terms and conditions specified in the Offer toPurchase.

We engagedComputershare Trust Company, the transfer agent for our common stock, to serveas the Depositary for the tender offer. None of the Company, our Board ofDirectors or the Depositary made any recommendation to any shareholder as towhether to tender or refrain from tendering any shares or as to the price orprices at which shareholders chose to tender shares. The members of the Boardof Directors and executive officers of the Company each advised that they didnot intend to tender in the offer shares they held individually or through anaffiliated entity. Shareholders were urged to read the Tender Offer Statementon Schedule TO, which included as exhibits the Offer to Purchase and therelated Letter of Transmittal, as well as any amendments or supplements to theTender Offer Statement when they became available. On January 12, 2007, wesubmitted an amended Schedule TO and an amended Offer to Purchase to theCommission. We filed further amendments to the Schedule TO on February 6 andFebruary 9, 2007.

On February 6,2007, the Depositary provided us with the final tabulation of the tender offerresults. In total, 1,357,698 shares were properly tendered and not withdrawn atprices from $4.80 to $5.30 per share. Of the total, 485,762 shares weretendered at $4.80 per share, which exceeded by 13,762 shares the 472,000 shareswe sought in the tender offer. In Section 1 of the Offer to Purchase, wereserved the right, in our sole discretion, to purchase in the tender offer anadditional number of shares over the 472,000 shares we sought in the tenderoffer, not to exceed 2% of our outstanding common shares, without amending orextending the tender offer. On February 7, 2007, we exercised our right, underSection 1 of the Offer to Purchase and applicable SEC regulations, to acceptfor purchase all 485,762 shares tendered at $4.80 per share, without proration.The 485,762 shares accepted for purchase in the tender 

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offer representapproximately 171⁄2 percent of the common shares outstanding as of January 3,2007.

On February 8, 2007, we transferred $2,332,000 to theDepositary to fund the purchase of 485,762 shares of our common stock at aprice of $4.80 per share. The Depositary was instructed to promptly pay for theshares accepted for purchase in the tender offer and to return all other sharestendered which were not accepted for purchase or withdrawn. Upon completion ofthe tender offer, Sport-Haley, Inc. will have 2,284,490 shares of common stockoutstanding.

### **ITEM 6         EXHIBITS**

Exhibit 31.1 —Certification of Donald W. Jewell pursuant to Exchange Act Rule 13a-14(a)

Exhibit 31.2 —Certification of Patrick W. Hurley pursuant to Exchange Act Rule 13a-14(a)

Exhibit 32.1 —Certifications of Donald W. Jewell and Patrick W. Hurley pursuant to 18 U.S.C.§1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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**SIGNATURES**

In accordance withthe requirements of the Securities Exchange Act of 1934, the Registrant causedthis report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                          | **SPORT-HALEY, INC.**                          |
|--------------------------|------------------------------------------------|
|                     | (Registrant)                                   |
|                     |                                           |
| Date: February  12, 2007 | /s/ PATRICK W. HURLEY                          |
|                     | Patrick W. Hurley                              |
|                     | Chief Financial Officer                        |
| * *                 | *(Principal Financial and Accounting Officer)* |

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