**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

**FORM 10-Q**

**x****  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

**For the quarterly period ended March 31, 2007**

**o****  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE**

**EXCHANGEACT**

**Commission File No. 0-51715**

**SPORT-HALEY, INC.**

(Exact name ofsmall business issuer as specified in its charter)

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

 

**4600 E.48th Avenue, Denver, Colorado  80216**

(Address ofprincipal executive offices)

**(303) 320-8800**

(Issuer’stelephone 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, an accelerated filer, or anon-accelerated filer. See the definition of “accelerated filer andnon-accelerated filer” in Rule 12b-2 of the Exchange Act.

Largeaccelerated filer    o   Acceleratedfiler    o   Non-acceleratedfiler    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 April 30, 2007** | ** ** |
|---------------------------------|------------|-------------------------------------------------------|------------|
| **Common  Stock, no par value** | ** ** | **2,284,490**                                         | ** ** |

 

 

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**TABLEOF CONTENTS**
| **PART 1 – CONDENSED 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 4                                                        | SUBMISSION OF  MATTERS TO A VOTE OF SECURITY HOLDERS                                         | ** ** |
|                                                          |                                                                                         | ** ** |
| ITEM 5                                                        | OTHER  INFORMATION                                                                           | ** ** |
|                                                          |                                                                                         | ** ** |
| ITEM 6                                                        | EXHIBITS                                                                                     | ** ** |
|                                                          |                                                                                         | ** ** |
| **SIGNATURES**                                                |                                                                                         |
| ** **                                                    | ** **                                                                                   |   |
| **EXHIBITS**                                                  |                                                                                         |
| ** **                                                    |                                                                                         |   |
| 3.1                                                           | AMENDED AND RESTATED BYLAWS                                                                  |   |
| ** **                                                    |                                                                                         |   |
| 31.1                                                          | CERTIFICATION OF DONALD W. JEWELL                                                            | ** ** |
|                                                          |                                                                                         | ** ** |
| 31.2                                                          | CERTIFICATION OF PATRICK W. HURLEY                                                           | ** ** |
|                                                          |                                                                                         | ** ** |
| 32.1                                                          | CERTIFICATION OF DONALD W. JEWELL AND PATRICK W.  HURLEY                                     | ** ** |

####  

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**SPORT-HALEY,INC.**

**CONDENSED CONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                      | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                                                      | ** ** | **2007**           | ** ** | **2006**          | ** ** |
| ** **                                                                                                                      | ** ** | **(Unaudited)**    | ** ** | **(***)**         | ** ** |
| **ASSETS**                                                                                                                      |       |               |       |              |       |
| Current assets:                                                                                                                 |       |               |       |              |       |
| Cash and cash  equivalents                                                                                                      |       | $                  | 3,533,000  |              | $          | 8,492,000 |   |
| Accounts  receivable, net of allowances of $391,000 and $446,000, respectively                                                  |       | 3,838,000          |       | 3,950,000         |       |
| Inventories                                                                                                                     |       | 5,400,000          |       | 4,775,000         |       |
| Prepaid expenses  and other                                                                                                     |       | 167,000            |       | 194,000           |       |
| Total current  assets                                                                                                           |       | 12,938,000         |       | 17,411,000        |       |
|                                                                                                                            |       |               |       |              |       |
| Property and equipment,  net                                                                                                    |       | 450,000            |       | 613,000           |       |
| Goodwill                                                                                                                        |       | 270,000            |       | —            |       |
| Other assets                                                                                                                    |       | 3,000              |       | 3,000             |       |
|                                                                                                                            |       |               |       |              |       |
| Total Assets                                                                                                                    |       | $                  | 13,661,000 |              | $          | 18,027,000 |   |
|                                                                                                                            |       |               |       |              |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                  |       |               |       |              |       |
| Current liabilities:                                                                                                            |       |               |       |              |       |
| Accounts payable                                                                                                                |       | $                  | 1,018,000  |              | $          | 1,836,000 |   |
| Accrued  royalties payable                                                                                                      |       | 196,000            |       | 386,000           |       |
| Accrued  commissions payable                                                                                                    |       | 201,000            |       | 211,000           |       |
| Accrued payroll                                                                                                                 |       | 253,000            |       | 386,000           |       |
| Other                                                                                                                           |       | 146,000            |       | 137,000           |       |
| Total current  liabilities                                                                                                      |       | 1,814,000          |       | 2,956,000         |       |
| Long-Term Liabilities:                                                                                                          |       |               |       |              |       |
| Loan payable to  affiliate                                                                                                      |       | —             |       | 34,000            |       |
| Total long-term  liabilities                                                                                                    |       | —             |       | 34,000            |       |
|                                                                                                                            |       |               |       |              |       |
| Commitments and  Contingencies (Note 4)                                                                                         |       | —             |       | —            |       |
| Total Liabilities                                                                                                               |       | 1,814,000          |       | 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; 2,284,490 and 2,770,252 shares issued  and outstanding, respectively |       | 8,481,000          |       | 10,813,000        |       |
| Additional  paid-in capital                                                                                                     |       | 1,621,000          |       | 1,621,000         |       |
| Retained  earnings                                                                                                              |       | 1,745,000          |       | 2,581,000         |       |
| Total  shareholders’ equity                                                                                                |       | 11,847,000         |       | 15,015,000        |       |
|                                                                                                                            |       |               |       |              |       |
| Total Liabilities and Shareholders’ Equity                                                                                 |       | $                  | 13,661,000 |              | $          | 18,027,000 |   |

 

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

See accompanying notes to these condensed consolidated financialstatements.

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**SPORT-HALEY, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**
| ** **                                                                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                   | ** ** | **March 31,**               | ** ** | **March 31,**              | ** ** |
| ** **                                                                                   | ** ** | **2007**                         | ** ** | **2006**                        | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                   | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)**                 | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
|                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Net sales                                                                                    |       | $                                | 5,273,000  |                            | $          | 4,656,000 |   | $ | 14,136,000 |   | $ | 13,096,000 |   |
|                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Cost of goods  sold                                                                          |       | 3,404,000                        |       | 2,828,000                       |       | 9,088,000 |   | 8,132,000 |   |
| Impairments                                                                                  |       | 4,000                            |       | 91,000                          |       | 126,000 |   | 285,000 |   |
| Total cost of goods sold                                                                     |       | 3,408,000                        |       | 2,919,000                       |       | 9,214,000 |   | 8,417,000 |   |
|                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Gross profit                                                                                 |       | 1,865,000                        |       | 1,737,000                       |       | 4,922,000 |   | 4,679,000 |   |
|                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Other Operating  Costs:                                                                      |       |                             |       |                            |       |   |   |   |   |
| Selling, general and administrative expenses                                                 |       | 1,947,000                        |       | 1,959,000                       |       | 5,359,000 |   | 5,121,000 |   |
| Royalty expense                                                                              |       | 196,000                          |       | 203,000                         |       | 558,000 |   | 541,000 |   |
| Total other operating costs                                                                  |       | 2,143,000                        |       | 2,162,000                       |       | 5,917,000 |   | 5,662,000 |   |
|                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Loss from  operations                                                                        |       | (278,000                         | )          | (425,000                        | )          | (995,000 | ) | (983,000 | ) |
|                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Other income,  net                                                                           |       | 71,000                           |       | 237,000                         |       | 233,000 |   | 367,000 |   |
|                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Loss before  minority interest in subsidiary net income and  provision for income taxes |       | (207,000                         | )          | (188,000                        | )          | (762,000 | ) | (616,000 | ) |
|                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Minority  interest in subsidiary net income                                                  |       | —                           |       | —                          |       | (46,000 | ) | — |   |
|                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Provision for  income taxes                                                                  |       | (11,000                          | )          | (2,000                          | )          | (28,000 | ) | (3,000 | ) |
|                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Net loss                                                                                     |       | $                                | (218,000   | )                               | $          | (190,000 | ) | $ | (836,000 | ) | $ | (619,000 | ) |
|                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Basic and  diluted loss per common share                                                     |       | $                                | (0.09      | )                               | $          | (0.07 | ) | $ | (0.31 | ) | $ | (0.23 | ) |
|                                                                                         |       |                             |       |                            |       |   |   |   |   |
| Basic and diluted  weighted average shares outstanding                                       |       | 2,490,000                        |       | 2,770,000                       |       | 2,678,000 |   | 2,742,000 |   |

 

See accompanying notes to these condensed consolidated financialstatements.

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**SPORT-HALEY, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**
| ** **                                                                   | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | **March 31,**              | ** ** |
| ** **                                                                   | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| ** **                                                                   | ** ** | **(Unaudited)**                 | ** ** | **(Unaudited)** | ** ** |
| **Cash  flows from operating activities:**                                   |       |                            |       |   |   |
| Net loss                                                                     |       | $                               | (836,000   | ) | $ | (619,000 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities: |       | 202,000                         |       | 247,000 |   |
| Depreciation and amortization                                                |       |                            |       |   |   |
| Impairments and write-downs                                                  |       | 126,000                         |       | 285,000 |   |
| Allowance for doubtful accounts                                              |       | (27,000                         | )          | 29,000 |   |
| Common stock options                                                         |       | —                          |       | 31,000 |   |
| Gain/Loss on sale of fixed assets                                            |       | —                          |       | 12,000 |   |
| Minority interest                                                            |       | 49,000                          |       | — |   |
| Cash provided  (used) due to changes in assets and liabilities:              |       |                            |       |   |   |
| Accounts receivable                                                          |       | 139,000                         |       | 1,447,000 |   |
| Inventories                                                                  |       | (751,000                        | )          | (3,288,000 | ) |
| Other assets                                                                 |       | 27,000                          |       | 21,000 |   |
| Accounts payable                                                             |       | (818,000                        | )          | 900,000 |   |
| Accrued commissions and other expenses                                       |       | (324,000                        | )          | (277,000 | ) |
| Net cash used by operating activities                                        |       | (2,213,000                      | )          | (1,212,000 | ) |
|                                                                         |       |                            |       |   |   |
| **Cash  flows from investing activities:**                                   |       |                            |       |   |   |
| Proceeds from sale of fixed assets                                           |       | —                          |       | 16,000 |   |
| Purchase of fixed assets                                                     |       | (39,000                         | )          | (27,000 | ) |
| Purchase of minority interest                                                |       | (375,000                        | )          | — |   |
| Net cash used by investing activities                                        |       | (414,000                        | )          | (11,000 | ) |
|                                                                         |       |                            |       |   |   |
| **Cash  flows from financing activities:**                                   |       |                            |       |   |   |
| Net proceeds from minority interest loan                                     |       | —                          |       | 256,000 |   |
| Net proceeds from issuance of common stock                                   |       | —                          |       | 353,000 |   |
| Repurchase common stock                                                      |       | (2,332,000                      | )          | — |   |
| Net cash provided (used) by financing activities                             |       | (2,332,000                      | )          | 609,000 |   |
|                                                                         |       |                            |       |   |   |
| **Net  decrease in cash and cash equivalents**                               |       | (4,959,000                      | )          | (614,000 | ) |
| ** **                                                                   |       |                            |       |   |   |
| **Cash  and cash equivalents, beginning**                                    |       | 8,492,000                       |       | 7,721,000 |   |
| ** **                                                                   |       |                            |       |   |   |
| **Cash  and cash equivalents, ending**                                       |       | $                               | 3,533,000  |   | $ | 7,107,000 |   |
| ** **                                                                   |       |                            |       |   |   |
| **Supplemental  disclosure of cash flow information:**                       |       |                            |       |   |   |
| Cash paid during the period for:                                             |       |                            |       |   |   |
| Income taxes                                                                 |       | $                               | 11,000     |   | $ | 3,000 |   |

 

See accompanying notes to these condensed consolidated financialstatements.

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1****            SIGNIFICANTACCOUNTING POLICIES**

*Principlesof Consolidation*– Our condensed consolidated financialstatements include the accounts of Sport-Haley, Inc. (“Sport Haley”) and ReserveApparel Group LLC (“Reserve Apparel”). Sport Haley and Reserve Apparel maycollectively 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. Top-Flite® branded golf apparel is distributed per the terms ofa license agreement with Callaway. In accordance with its operating agreement,Sport Haley owned a 51% interest in Reserve Apparel and Explorer Gear USA, Inc.(“Explorer Gear”) owned a 49% interest. On September 21, 2006, Sport Haleyentered into an agreement with Explorer Gear to purchase its 49% membershipinterest in Reserve Apparel for a lump sum payment of $375,000, since whichtime Reserve Apparel has been a wholly-owned subsidiary of Sport Haley. BecauseExplorer Gear had contributed no equity capital to Reserve Apparel as of March31, 2006, our condensed consolidated financial statements for the three monthsand nine months ended March 31, 2006, included the entire loss of ReserveApparel in accordance with ARB No. 51. Had Explorer Gear contributed sufficientequity capital to offset its proportionate share of the Reserve Apparel loss,$73,000 would have been allocated to Explorer Gear as its proportionate shareof the loss for the three-month and nine-month periods ended March 31, 2006,and the consolidated loss reported by Sport Haley would have been $73,000 lessfor the three months and nine months ended March 31, 2006.

*CondensedConsolidated Financial Statements* - The accompanyingcondensed consolidated balance sheets and interim condensed consolidatedstatements of operations and cash flows include all adjustments (consistingonly of normal recurring items) necessary for their fair representation. Thepreparation of consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets, liabilities, revenues and expenses and the disclosure of contingentassets and liabilities.

Certain informationin footnote disclosures normally included in financial statements has beencondensed or omitted in accordance with the rules and regulations of theSecurities 

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and ExchangeCommission. The information included in this report on Form 10-Q should be readin conjunction with the financial statements and notes thereto and Management’sDiscussion and Analysis of Financial Condition and Results of Operations forthe year ended June 30, 2006, included in the Company’s filing on Form 10-K.

*Reclassification*– Certain priorperiod amounts have been reclassified to conform to the March 31, 2007,presentation. Such reclassifications had no affect on net income (loss) in anyof the periods presented.

*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.

AtMarch 31, 2007, there were outstanding options to purchase 593,500 shares ofour common stock at exercise prices ranging from $2.71 to $9.78 per share andexpiration dates between November 2007 and January 2013. No options wereexercised and 85,000 options expired during the nine months ended March 31,2007.

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.

Prior to July 1, 2005, weaccounted for stock-based compensation using the intrinsic value methodprescribed in Accounting Principles Board Opinion No. 25, “*Accounting for Stock Issued to Employees*,”and related interpretations and elected to apply the disclosure-only provisionsof Statement of Financial Accounting Standards (SFAS) No. 123, “*Accounting for Stock-Based Compensation*,”as amended by SFAS No. 148, “*Accounting forStock-Based Compensation – Transition and Disclosure*.” Under theintrinsic value method, compensation expense for stock options was recognizedover the vesting period of the 

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grant based on theexcess, if any, of the market price of our common stock at the date of grantover the stock option exercise price. As governed by the Plan, stock optionswere generally granted at or near fair market value on the date of grant. Theexpected life was determined based upon the Plan’s vesting period and exercisebehavior 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 all employee-related options are now fully vested.Therefore, we have omitted the comparison of pro forma amounts of net income(loss) and net income (loss) per share applicable to common stock for the threemonths and nine months ended March 31, 2007 and 2006, respectively.

*RecentPronouncements* – In February 2007, the FinancialAccounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards No. 159 (SFAS 159”), *“The Fair Value Option forFinancial Assets and Financial Liabilities – Including an Amendment of FASBStatement No. 115.”* SFAS 159 permits an entity to measure financialinstruments and certain other items at estimated fair value as of specificelection dates. The fair value option: (i) may generally be applied instrumentby instrument; (ii) is irrevocable unless a new election date occurs; and,(iii) must be applied to the entire instrument and not to only a portion of theinstrument. Most of the provisions of SFAS 159 are elective. However, theamendment to SFAS 115, *“Accounting for CertainInvestments in Debt and Equity Securities,”* applies to all entitiesthat own securities that are classified as trading or available for sale. SFAS159 is effective for fiscal years beginning after November 15, 2007. Earlyadoption of SFAS 159 is permitted if the entity: (i) chooses early adoptionwithin the first 120 days of its fiscal year; (ii) has not yet issued financialstatements for any interim period of such fiscal year; and (iii) elects toapply the provisions of FASB No. 157, *“Fair Value Measurements.”*We have not determined whether we will elect early adoption, and we have notevaluated the impact, if any, on our financial condition or the results of ouroperations that may be caused by our adoption of SFAS 159.

In June 2006, theFASB 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.

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**NOTE 2****             INVENTORIES**
|                                          | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                               | ** ** | **2007**           | ** ** | **2006**          | ** ** |
| Inventories  consisted of the following: |       |               |       |              |       |
| Component                                |       | $                  | 202,000    |              | $          | 366,000 |   |
| Finished goods                           |       | 5,198,000          |       | 4,409,000         |       |
|                                     |       |               |       |              |       |
|                                     |       | $                  | 5,400,000  |              | $          | 4,475,000 |   |

 

Included infinished goods inventories are allowances for write-downs of $50,000 and$276,000 as of March 31, 2007, and June 30, 2006, respectively.

**NOTE 3****             LINEOF 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 March 31, 2007, and June 30, 2006, respectively, we did not have anybalances due on the line of credit.

**NOTE 4****             COMMITMENTSAND CONTINGENCIES**

AtMarch 31, 2007, and June 30, 2006, we had $810,000 and $509,000, respectively,in outstanding letters of credit that were issued to foreign suppliers inaccordance with finished goods inventory purchase commitments. Outstandingletters of credit reduce the amount available for borrowing under the line ofcredit agreement.

**NOTE 5****             SHAREHOLDERS’EQUITY**

On January 3,2007, we commenced a modified “Dutch Auction” tender offer to purchase sharesof our common stock at a price neither greater than $5.30 nor less than $4.80per share, net in cash. Pursuant to the terms of the Offer to Purchase, whichwas filed with the Securities and Exchange Commission (the “SEC” or “Commission”)on January 3, 2007, and subsequently distributed to shareholders, we offered topurchase up to 472,000 shares that were properly tendered and not withdrawnprior to the expiration of the offer at 12:00 midnight Eastern Time on February1, 2007. The Offer to Purchase required us to analyze the total number ofshares tendered and the prices specified by the tendering shareholders and todetermine the lowest price per share within the stated range that enabled us topurchase up to 472,000 shares. The tender offer was not contingent upon anyminimum 

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number of sharesbeing tendered and was subject to a number of other terms and conditionsspecified in the Offer to Purchase.

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. Our Board of Directors andexecutive officers each advised that they did not intend to tender in the offershares they held individually or through an affiliated entity. Shareholderswere urged to read the Tender Offer Statement on Schedule TO, which included asexhibits the Offer to Purchase and the related Letter of Transmittal, as wellas any amendments or supplements to the Tender Offer Statement when they becameavailable. On January 12, 2007, we submitted an amended Schedule TO and anamended Offer to Purchase to the Commission. We filed further amendments to theSchedule TO on February 6 and February 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 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. The Depositarywas instructed to promptly pay for the shares accepted for purchase in thetender offer and to return all other shares tendered which were not acceptedfor purchase or withdrawn. Upon completion of the tender offer, we had2,284,490 shares of common stock outstanding.

**NOTE 6****             EARNINGSPER 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:

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|                                                | ** ** | **Three Months ended March 31, 2007** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Net**                                                        | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Income**                                                     | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **(Loss)**                                                     | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| Loss Per Common  Share                         |       |                                                           |       |   |   |   |   |
|                                           |       |                                                           |       |   |   |   |   |
| Basic loss per  share                          |       | $                                                              | (218,000   | ) | 2,490,000 |   | $ | (0.09 | ) |
|                                           |       |                                                           |       |   |   |   |   |
| Effect of  dilutive securities options **[A]** |       | —                                                         |       | — |   | — |   |
|                                           |       |                                                           |       |   |   |   |   |
| Diluted loss per share                         |       | $                                                              | (218,000   | ) | 2,490,000 |   | $ | (0.09 | ) |

 
|                                                | ** ** | **Nine Months ended March 31, 2007** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Net**                                                       | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Income**                                                    | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **(Loss)**                                                    | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| Loss Per Common  Share                         |       |                                                          |       |   |   |   |   |
|                                           |       |                                                          |       |   |   |   |   |
| Basic loss per  share                          |       | $                                                             | (836,000   | ) | 2,678,000 |   | $ | (0.31 | ) |
|                                           |       |                                                          |       |   |   |   |   |
| Effect of  dilutive securities options **[A]** |       | —                                                        |       | — |   | — |   |
| ** **                                     |       |                                                          |       |   |   |   |   |
| Diluted loss per share                         |       | $                                                             | (836,000   | ) | 2,678,000 |   | $ | (0.31 | ) |

 
|                                                | ** ** | **Three Months ended March 31, 2006** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Net**                                                        | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Income**                                                     | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **(Loss)**                                                     | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| Loss Per Common  Share                         |       |                                                           |       |   |   |   |   |
|                                           |       |                                                           |       |   |   |   |   |
| Basic loss per  share                          |       | $                                                              | (190,000   | ) | 2,770,000 |   | $ | (0.07 | ) |
|                                           |       |                                                           |       |   |   |   |   |
| Effect of  dilutive securities options **[A]** |       | —                                                         |       | — |   | — |   |
| ** **                                     |       |                                                           |       |   |   |   |   |
| Diluted loss per share                         |       | $                                                              | (190,000   | ) | 2,770,000 |   | $ | (0.07 | ) |

 
|                                                | ** ** | **Nine Months ended March 31, 2006** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Net**                                                       | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Income**                                                    | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **(Loss)**                                                    | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| Loss Per Common  Share                         |       |                                                          |       |   |   |   |   |
|                                           |       |                                                          |       |   |   |   |   |
| Basic loss per  share                          |       | $                                                             | (619,000   | ) | 2,742,000 |   | $ | (0.23 | ) |
|                                           |       |                                                          |       |   |   |   |   |
| Effect of  dilutive securities options **[A]** |       | —                                                        |       | — |   | — |   |
| ** **                                     |       |                                                          |       |   |   |   |   |
| Diluted loss per share                         |       | $                                                             | (619,000   | ) | 2,742,000 |   | $ | (0.23 | ) |

 

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**[A]**Due to the Company’s net losses, all options were anti-dilutive and thereforeexcluded from the loss per share calculations.

**NOTE 7****            ****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, after which we were notified that Wal-Mart had chosen to developits own private label for golf apparel and discontinue selling Top-Flite®apparel. We redesigned Top-Flite® branded apparel to include garments primarilycomprised of a variety of performance fabrics, and we have aggressivelymarketed our new Top-Flite® apparel line to a number of other mass retailersand certain big-box type high sales volume retail stores. We expect ourmarketing efforts will result in the establishment of business relationshipswith one or more mass retailers and other big-box type high sales volume retailstores, and to date we have received one order for Top-Flite® apparel from sucha retailer for a test in 50 of its stores. Based upon our recent discussions,Callaway has given us verbal approval to distribute Top-Flite® apparel to thisretailer, and we expect that Callaway will also provide us with writtenapproval in response to our request to expand our allowable channels ofdistribution to this and several other potential customers for Top-Flite®apparel. 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. However, weexpect that we will resume distributing Top-Flite® apparel in approximatelySeptember 2007.

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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 March 31,2007.

*CondensedConsolidated Balance Sheets Segment Information as of March 31, 2007, and June30, 2006:*
|                                         | ** ** | **March 31, 2007** | ** ** | **June 30, 2006** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **Fashion**                  | ** ** | **Branded**                 | ** ** | **Fashion** | ** ** | **Branded** | ** ** |
| ** **                              | ** ** | **Apparel**                  | ** ** | **Apparel**                 | ** ** | **Apparel** | ** ** | **Apparel** | ** ** |
| ** **                              | ** ** | **(Unaudited)**              | ** ** | **(Unaudited)**             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents               |       | $                            | 3,475,000  |                        | $          | 58,000 |   | $ | 6,590,000 |   | $ | 1,902,000 |   |
| Accounts  receivable, net of allowances |       | $                            | 3,485,000  |                        | $          | 353,000 |   | $ | 3,194,000 |   | $ | 756,000 |   |
| Inventories                             |       | $                            | 5,400,000  |                        | $          | — |   | $ | 4,440,000 |   | $ | 335,000 |   |
| Total assets                            |       | $                            | 13,250,000 |                        | $          | 411,000 |   | $ | 15,034,000 |   | $ | 2,993,000 |   |
| Total current  liabilities              |       | $                            | 1,574,000  |                        | $          | 240,000 |   | $ | 1,944,000 |   | $ | 1,012,000 |   |

 

*CondensedConsolidated Statements of Operation Segment Information for the Three Monthsand Nine Months Ended March 31, 2007:*
|                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **March 31, 2007**     | ** ** | **March 31, 2007**    | ** ** |
| ** **                                    | ** ** | **Fashion**                      | ** ** | **Branded**                     | ** ** | **Fashion** | ** ** | **Branded** | ** ** |
| ** **                                    | ** ** | **Apparel**                      | ** ** | **Apparel**                     | ** ** | **Apparel** | ** ** | **Apparel** | ** ** |
| ** **                                    | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)**                 | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
| Net sales                                     |       | $                                | 5,270,000  |                            | $          | 3,000 |   | $ | 12,948,000 |   | $ | 1,188,000 |   |
| Cost of goods  sold                           |       | $                                | 3,404,000  |                            | $          | — |   | $ | 8,203,000 |   | $ | 885,000 |   |
| Impairments                                   |       | $                                | 4,000      |                            | $          | — |   | $ | 126,000 |   | $ | — |   |
| Gross profit                                  |       | $                                | 1,862,000  |                            | $          | 3,000 |   | $ | 4,619,000 |   | $ | 303,000 |   |
| Selling, general  and administrative expenses |       | $                                | 1,852,000  |                            | $          | 95,000 |   | $ | 5,058,000 |   | $ | 301,000 |   |
| Royalty expense                               |       | $                                | 196,000    |                            | $          | — |   | $ | 494,000 |   | $ | 64,000 |   |
| Income (loss)  from operations                |       | $                                | (186,000   | )                               | $          | (92,000 | ) | $ | (933,000 | ) | $ | (62,000 | ) |
| Net income (loss)                             |       | $                                | (122,000   | )                               | $          | (96,000 | ) | $ | (812,000 | ) | $ | (24,000 | ) |

 

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*CondensedConsolidated Statements of Operation Segment Information for the Three Monthsand Nine Months Ended March 31, 2006:*
|                                               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **March 31, 2006**     | ** ** | **March 31, 2006**    | ** ** |
| ** **                                    | ** ** | **Fashion**                      | ** ** | **Branded**                     | ** ** | **Fashion** | ** ** | **Branded** | ** ** |
| ** **                                    | ** ** | **Apparel**                      | ** ** | **Apparel**                     | ** ** | **Apparel** | ** ** | **Apparel** | ** ** |
| ** **                                    | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)**                 | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
| Net sales                                     |       | $                                | 4,210,000  |                            | $          | 446,000 |   | $ | 12,650,000 |   | $ | 446,000 |   |
| Cost of goods  sold                           |       | $                                | 2,400,000  |                            | $          | 428,000 |   | $ | 7,704,000 |   | $ | 428,000 |   |
| Impairments                                   |       | $                                | 91,000     |                            | $          | — |   | $ | 285,000 |   | $ | — |   |
| Gross profit                                  |       | $                                | 1,719,000  |                            | $          | 18,000 |   | $ | 4,661,000 |   | $ | 18,000 |   |
| Selling, general  and administrative expenses |       | $                                | 1,821,000  |                            | $          | 138,000 |   | $ | 4,983,000 |   | $ | 138,000 |   |
| Royalty expense                               |       | $                                | 176,000    |                            | $          | 27,000 |   | $ | 514,000 |   | $ | 27,000 |   |
| Income (loss)  from operations                |       | $                                | (278,000   | )                               | $          | (147,000 | ) | $ | (836,000 | ) | $ | (147,000 | ) |
| Net income (loss)                             |       | $                                | (43,000    | )                               | $          | (147,000 | ) | $ | (472,000 | ) | $ | (147,000 | ) |

 

*Financial information about geographic areas* - Currently, the Company’s revenues, fromeither operating segment, derived from sales to customers outside the UnitedStates are immaterial.

**NOTE 8****            ****LEGAL PROCEEDINGS**

In March 2007,Sport Haley and Reserve Apparel (the “Plaintiffs”) filed a lawsuit in theDistrict Court for the City and County of Denver in the State of Colorado. Thesuit alleges, among other things, that a former inventory broker to ReserveApparel, 1130746 Ontario Ltd., a Canadian corporation incorporated in theProvince of Ontario, Canada, d/b/a Originals Apparel Group Co., or OriginalsApparel Group, and Francis Tat-Mo Chan (the “Defendants”), knowingly,wrongfully and without authorization converted Plaintiff’s funds. Among otherthings, the Plaintiffs alleged that the Defendants misapplied an inventory depositof $291,000 paid to the Defendants in March 2006 by Sport Haley, which theDefendants used to offset certain amounts purportedly owed to the Defendants byExplorer Headgear, Inc., and that the Defendants failed to return $177,000which was overpaid by Sport Haley as of July 2006. The Plaintiffs have allegedclaims against the Defendants for conversion and violation of the Coloradocivil theft statute as well as for unjust enrichment. Plaintiffs seek repaymentof the $291,000 and $177,000 amounts and other relief.

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**SPORT-HALEY,INC.**

**ITEM 2MANAGEMENT’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 ouroperations will depend on a number of factors, including, but not limited to,the following: 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 economic andpolitical 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. Theremay be other factors not mentioned above, in the discussion below or includedin our Securities and Exchange Commission filings that may cause actual resultsto differ 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**

SportHaley designs, purchases or contracts for the manufacture of, markets anddistributes women’s and men’s fashion golf apparel and outerwear under theSPORT HALEY® and Ben Hogan® labels. We are represented by a network ofindependent wholesale sales representatives and employ two regional salesmanagers, each with responsibilities for both of our fashion apparel labels.Most of the independent wholesale sales representatives solicit sales of bothSPORT HALEY® and Ben Hogan® fashion apparel collections on 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, youngerlooking, athletic style garments. The technical performance fabrics andathletic style garments have been well received by our customers.

Ben Hogan® men’s fashion apparel is designedutilizing elegant time-honored classic styles intended to garner nearlyinstantaneous brand recognition. The Ben Hogan® label has been widelyrecognized within the golf apparel industry for the past five years for continuallyproviding elegant men’s fashion golf apparel of impeccable quality in keepingwith the image of Mr. Hogan. While each product in the Ben Hogan® apparel lineis sold separately, the line is intentionally designed in groups withcoordinated styles, color schemes and fabrics to encourage customers topurchase multiple garments. Ben Hogan® apparel is manufactured using a varietyof fabrics, including wool, silk and cashmere, and weave patterns, includingpique, jersey and twill, and most pieces feature a unique trim, a specialfabric finish or extra needlework. Ben Hogan® men’s apparel is marketed in thepremium-price markets to elite golf professional shops, upscale resorts andexclusive department stores. We distribute Ben Hogan® apparel pursuant to ourlicensing agreement 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 redesigned Top-Flite®branded apparel to include garments primarily comprised of a variety ofperformance fabrics, 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. 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, and to date we have receivedone order for Top-Flite® apparel from such a retailer for a test in 50 of itsstores. 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 

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remainderof our 2007 fiscal year. However, we expect that we will resume distributingTop-Flite® apparel in approximately September 2007. We distribute Top-Flite® branded apparel pursuantto our licensing agreement with Callaway.

##### **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 ofthose significant accounting policies can be found in the Footnotes to theFinancial Statements included in our Report on Form 10-K for the fiscal yearended June 30, 2006. The estimates usedby management are based upon our historical experiences combined withmanagement’s understanding of current facts and circumstances. Certain of ouraccounting policies are considered critical as they are both important to theportrayal of our financial condition and the results of our operations andrequire significant or complex judgments on the part of management. We believethat the following critical accounting policies affect the more significantjudgments and 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 materialsand labor, import costs, such as customs duties, freight-in and othermiscellaneous costs, and allocated overhead. Excess fashion apparelinventories, consisting of discontinued or aging merchandise, are a naturalcomponent of a seasonal apparel business. While certain fashion apparel itemswill sell out in any particular selling season, quantities of other fashionapparel items will remain at the end of each selling season. We market excessfashion apparel finished goods inventories at reduced wholesale prices to ourcustomers in the normal course of business. Remaining excess inventories areliquidated through other markets. In the ordinary course of business, wemaintain reserves for inventory write downs due to the obsolescence of excessinventories. We perform analyses on a quarterly basis to identify unsold excessinventories and adjust our reserves for inventory obsolescence to reduce thecarrying value of excess inventories to their estimated net realizable value,which is estimated based on management’s disposition plans and historicalexperiences. Generally, branded apparel inventories are not prone toimpairment, because we usually order branded apparel in quantities per specificcustomer orders.

During the three months and nine months ended March31, 2007, we recorded fashion apparel inventory write-downs of $4,000 and$126,000, respectively. We did not record a write-down with regard to brandedapparel inventories during the three months or nine months ended March 31,2007.

*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 March 31, 2007, 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 a specificreserve is required. At March 31, 2007, our allowance for doubtful accountstotaled $236,000, including a specific reserve of $116,000 with respect to thepotential non-recovery of a net amount due to Reserve Apparel from a formerinventory broker. While we consider our processes to be adequate to effectivelyquantify our exposure to doubtful accounts, changes in economic, industry orspecific customer conditions may result in recoverability of our doubtfulaccounts 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 acomponent within our estimate of allowance for sales returns. We reviewhistorical data and consider factors such as general economic andindustry-specific conditions and anticipated customer performance whenevaluating the adequacy of our allowance for sales returns. At March 31, 2007,our allowance for sales returns was $155,000. Significant changes in generaleconomic or industry conditions may yield sales returns that differ materiallyfrom our estimates.

### **RECENT PRONOUNCEMENTS**

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 159 (SFAS 159”), *“The Fair Value Option forFinancial Assets and Financial Liabilities — Including an Amendment of FASBStatement No. 115.”* SFAS 159 permits an entity to measure financialinstruments and certain other items at estimated fair value as of specificelection dates. The fair value option: (i) may generally be applied instrumentby instrument; (ii) is irrevocable unless a new election date occurs; and,(iii) must be applied to the entire instrument and not to only a portion of theinstrument. Most of the provisions of SFAS 159 are elective. However, theamendment to SFAS 115, *“Accounting for CertainInvestments in Debt and Equity Securities,”* applies to all entitiesthat own securities that are classified as trading or available for sale. SFAS159 is effective for fiscal years 

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beginning after November15, 2007. Early adoption of SFAS 159 is permitted if the entity: (i) choosesearly adoption within the first 120 days of its fiscal year; (ii) has not yetissued financial statements for any interim period of such fiscal year; and(iii) elects to apply the provisions of FASB No. 157, *“Fair ValueMeasurements.”* We have not determined whether we will elect earlyadoption, and we have not evaluated the impact, if any, on our financialcondition or the results of our operations that may be caused by our adoptionof SFAS 159.

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 presented separately. We are currently evaluating theimpact that FIN 48 will have on our financial condition and the results of ouroperations.

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 ofMarch 31, 2007, may be more meaningful when compared with the balance sheetamounts as of March 31, 2006, rather than with the balance sheet amounts atJune 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 $112,000 to $3,838,000 at March 31, 2007, from$3,950,000 at June 30, 2006. When compared with the March 31, 2006, balance,the net accounts receivable balance at March 31, 2007, increased by $819,000,or 27%, while net sales for the comparable periods increased by 13%, from$4,656,000 for the three months ended March 31, 2006, to $5,273,000 for thethree months ended March 31, 2007. The $819,000 comparable difference primarilyrelates to a sale totaling $893,000 to a major retailer during the three monthsended March 31, 2007. We recorded a comparable sale of $913,000 to the sameretailer in December 2005. For the nine-month periods ended March 31, 2007 and2006, respectively, changes in our accounts receivable balances and relatedallowances provided operating cash of $112,000 and $1,476,000.

Our fashionapparel inventories increased by $625,000, or 13%, from $4,775,000 at June 30,2006, to $5,400,000 at March 31, 2007. Our finished goods inventories generallyincrease during our fiscal quarter ended March 31 when compared with the June30 balance in the previous fiscal year.We 

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generally receive a substantial amount of inventory at or near the end ofour March 31 fiscal quarter in order to fulfill orders for fall merchandisewhich we begin shipping in early May of each year. However, ourinventory requirements are highly cyclical in nature. When compared with thebalance of $6,517,000 at March 31, 2006, the balance of our fashion apparelinventories at March 31, 2007, declined by $1,117,000, or 17%, which isindicative that methods we implemented previously have helped us optimize thequantities of fashion apparel inventories on hand at any point in time. Our finished goods inventories may alsofluctuate from period to period due to the timing associated with the deliveryof ocean shipments, generally with terms of free on board at the port ofdeparture. Pending ocean deliveries of finished fashion apparelinventories at March 31, 2007, June 30, 2006, and March 31, 2006, totaled$1,168,000, $585,000 and $1,086,000 respectively. Changes in our inventorybalances used operating cash of $625,000 and $3,003,000 for the nine-monthperiods ended March 31, 2007 and 2006, 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 predominant reliance upon foreignsuppliers, and significant reliance on six separate foreign suppliers, alsosustains the risk that we would be left with inadequate or unsatisfactoryrecourse should the goods received from a foreign supplier be nonconforming.

Accounts payableand accrued expenses decreased by $1,142,000, or 39%, to $1,814,000 at March31, 2007, from $2,956,000 at June 30, 2006. Accounts payable and accruedexpenses decreased by $560,000, or 24%, from $2,374,000 at March 31, 2006. Thedecrease of $560,000 when comparing the balance at March 31, 2007, with thebalance at March 31, 2006, included a decrease of $136,000 in accrued payrollexpenses between the comparative periods. At March 31, 2007, our accruedpayroll expenses included the balance of $162,000 in severance and othercompensation payable to our former chief executive officer. Comparatively, atMarch 31, 2006, accrued payroll expenses included the balance of $326,000 inseverance and other compensation payable to the former chief executive officer.

Due to thecombination of the factors discussed above and others, our operating activitiesused cash of $2,213,000 during the nine months ended March 31, 2007.Comparatively, during the nine months ended March 31, 2006, our operatingactivities used cash of $1,212,000.

For the nine months endedMarch 31, 2007, investing activities used cash of $414,000. Comparatively, forthe nine months ended March 31, 2006, investing activities used cash of$11,000. 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 nine months ended March 31, 2007, we expended$39,000 for the purchase of property and equipment, and $202,000 indepreciation and amortization was charged to current operations.

For the ninemonths ended March 31, 2007, financing activities used cash of $2,332,000.Comparatively, for the nine months ended March 31, 2006, financing activitiesprovided cash of $609,000. On January 3, 2007, we commenced a modified “DutchAuction” tender offer to purchase shares of our common stock 

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at a price neithergreater than $5.30 nor less than $4.80 per share, net in cash. Pursuant to theterms of the Offer to Purchase, we offered to purchase up to 472,000 sharesthat were properly tendered and not withdrawn prior to the expiration of theoffer at 12:00 midnight Eastern Time on February 1, 2007. The tender offer wasnot contingent upon any minimum number of shares being tendered and was subjectto a number of other terms and conditions specified in the Offer to Purchase.In total, 1,357,698 shares were properly tendered and not withdrawn at pricesfrom $4.80 to $5.30 per share. Of the total, 485,762 shares were tendered at$4.80 per share, which exceeded by 13,762 shares the 472,000 shares we soughtin the tender offer. Pursuant the Offer to Purchase and applicable SECregulations, we accepted for purchase all 485,762 shares tendered at $4.80 pershare, without proration. The 485,762 shares accepted for purchase in thetender offer represented approximately 171⁄2 percent of the common sharesoutstanding as of January 3, 2007. On February 8, 2007, we transferred$2,332,000 to the Depositary to fund the purchase of 485,762 shares of ourcommon stock at a price of $4.80 per share. Upon completion of the tenderoffer, we had 2,284,490 shares of common stock outstanding.

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 March 31, 2007, we did not have anybalances due on the line of credit, but we had $810,000 in outstanding lettersof credit that were issued to foreign suppliers in accordance with finishedgoods inventory purchase commitments. Outstanding letters of credit reduce theamount 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 access toalternative sources of financing, including the factoring of customer accountsreceivable. We do not anticipate drawing on the line of credit or usingalternative sources of financing during the remainder of fiscal 2007. However,our capital needs will depend on many factors, including the Company’s growthrate, the need to finance required inventory levels, the success of currentsales and marketing programs, the cash requirements of the operations ofReserve Apparel and various other factors.

**RESULTSOF OPERATIONS**

*Fashionapparel*

Our fashionapparel business is seasonal in nature, and sales occurring from Januarythrough June, which comprise our third and fourth quarters of each fiscal year,are generally disproportionately higher than sales occurring from July throughDecember.

Net sales offashion apparel for the three months ended March 31, 2007, were $5,270,000, anincrease of $1,060,000, or 25%, from net sales of $4,210,000 for the comparablethree-month period in the prior fiscal year. Net sales of fashion apparel forthe nine months ended March 31, 2007, were $12,948,000, an increase of$298,000, or 2%, from net sales of $12,650,000 for the comparable nine-monthperiod in the prior fiscal year. The comparative increase in fashion apparelsales for the three month period primarily 

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related to a saleof Ben Hogan® fashion apparel totaling $893,000 to a major retailer that wasdelivered during the three months ended March 31, 2007. We recorded a similarsale of $913,000 to the same retailer in December 2005, which was included inour comparative fashion apparel sales for the nine months ended March 31, 2006.The increase in sales of fashion apparel for the comparative nine-month periodswas due for the most part to increases in sales of SPORT HALEY® fashion apparelbetween the respective periods. Net sales of our SPORT HALEY® fashion apparelcollections were $1,846,000 and $1,607,000 for the three months ended March 31,2007 and 2006, an increase of $239,000, or 15%, and $5,025,000 and $4,526,000,an increase of $499,000, or 11%, for the nine months ended March 31, 2007 and2006, respectively. Market conditions for women’s fashion apparel appear to beimproving, because we continue to experience slight increases in advance ordersfor our women’s collections. Net sales of our Ben Hogan® fashion apparelcollections were $3,269,000 and $2,420,000 for the three months ended March 31,2007 and 2006, an increase of $849,000, or 35%, and $7,492,000 and $7,609,000,a decrease of $117,000, or 2%, for the nine months ended March 31, 2007 and2006, respectively. We consider Ben Hogan® fashion apparel, which is marketedin accordance with a licensing agreement we maintain with Callaway for suchapparel, to be a key component of our fashion apparel business.

As percentage of net sales, gross profit of our fashion apparel, was35% for the three months ended March 31, 2007, and 41% for the same three-monthperiod in the prior fiscal year. The relative percentage decrease between thecomparative three-month periods was largely caused by the $893,000 sale to amajor retailer, which we delivered during the three months ended March 31,2007, at a gross profit of approximately 30%, while no such comparative salewas recorded in the three-month period ended March 31, 2006. Gross profit ofour fashion apparel, as a percentage of net sales, was 36% for the nine-monthperiod ended March 31, 2007, and 37% for the comparable nine-month period inthe prior fiscal year, during which nine-month periods we recorded fashionapparel sales of $893,000 and $913,000, respectively, to the same majorretailer.

Gross profit with regard to our fashion apparel is generally affectedby sales discounts offered to customers on various marketing programs, paymentdiscounts offered to certain customers, dispositions of excess inventories atreduced sales prices and the valuation of excess inventories to the lower ofcost or market. The disposition of excess inventories negatively impacts ourgross profit percentage even when such inventories are properly valued to thelower of cost or market, because such valuation causes sales to be recordedwith gross profit at or near zero. For the nine months ended March 31, 2007, werecorded net sales of $543,000 and loss of $176,000, which included net sales$177,000 and loss of $33,000 during the three months ended March 31, 2007, withregard to the disposition of our fall 2006 selling season inventories for SPORTHALEY® and Ben Hogan® fashion apparel collections. Comparatively, for the threemonths ended March 31, 2006, we recorded net sales of $0, and for the ninemonths ended March 31, 2006, we recorded net sales of $539,000 and gross profitof $15,000 with respect to sales of excess fashion apparel inventories.

Our fashion apparel inventories on hand at March 31, 2007, werepredominantly comprised of spring 2007 and fall 2007 SPORT HALEY® and BenHogan® collections. We anticipate that we will begin shipping our fall 2007fashion apparel inventories in May 2007. Comparatively, our fashion apparelinventories on hand at March 31, 2006, were predominantly comprised of fall2005, spring 2006 and fall 2006 SPORT HALEY® and Ben Hogan® collections. Thevaluation of inventories, when the market price for such inventories is lowerthan cost, negatively impacts our gross profit percentage, because a reductionof inventory value causes an increase in our cost of goods sold, therebyreducing our gross profit. Gross profit with regard to our fashion apparel wasnegatively impacted by $4,000 and $126,000 for the three and nine months endedMarch 31, 2007, respectively, by the adjustment of our finished goodsinventories to the lower of cost or market. Comparatively, gross profit withregard to our fashion 

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apparel was negatively impacted by $91,000 and $285,000 for the threeand six months ended March 31, 2006, by similar lower of cost or market adjustments.

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. We include royalty payments,relating to sales of licensed apparel, in selling, general and administrativeexpenses.

Selling, generaland administrative expenses with regard to fashion apparel increased by$31,000, or 2%, to $1,852,000 for the three months ended March 31, 2007, from$1,821,000 for the comparable three-month period in the prior fiscal year.Selling, general and administrative expenses with regard to fashion apparelincreased by $75,000, or 2%, to $5,058,000 for the nine months ended March 31,2007, from $4,983,000 for the comparable nine-month period in the prior fiscalyear. Our selling, general and administrative expenses for the three months endedMarch 31 are generally higher than for the other three-month periods in ourfiscal year, because of the costs associated with our participation in the PGAtradeshow which is held in Orlando, Florida at or near the end of January eachyear. The overall increases were primarily attributable to comparativedifferences in sales commissions, compensation expenses, advertising expensesand various other factors between the respective periods. Sales commissionsdecreased for the three months ended March 31, 2007, because primarily all ofour net sales of fashion apparel for the three-month period ended March 31,2006, were commissionable, but our net sales of fashion apparel for the threemonths ended March 31, 2007, included a sale totaling $893,000 to a major retailerupon which no sales commission was due. Increases in compensation expensesincluded comparatively higher salaries paid to our chief executive and otherofficers and key employees in the nine months ended March 31, 2007, plus salarypaid to a person we hired in August 2006 to implement corporate salesinitiatives with regard to our fashion apparel. Increases in advertisingexpenses primarily related to our efforts to increase our participation inregional golf-related tradeshows during the three months ended March 31, 2007,as compared with the corresponding three-month period in the prior fiscal year,as well as increased expenditures with regard to redesigning our salescatalogs. As a percentage of net sales, selling, general and administrative expenseswith regard to our fashion apparel were 35% and 43% for the three-month periodsand 39% and 39% for the nine-month periods ended March 31, 2007 and 2006,respectively.

We recorded royalty expense of $196,000 and $176,000 for the three monthsended March 31, 2007 and 2006, and $494,000 and $514,000 for the nine monthsended March 31, 2007 and 2006, with regard to net sales of fashion apparel,respectively. Royalty expense is due to Callaway in accordance with the licensethey previously granted us to market men’s fashion apparel bearing the BenHogan® label.

Income (loss) from operations with regard to fashion apparel for thethree months ended March 31, 2007, was ($186,000), an improvement of $92,000,or 33%, from ($278,000) for the comparable three-month period in the priorfiscal year. Because of significant expenses associated with our annualparticipation in the PGA tradeshow, which is generally held at or near the endof January each year, historically, we have not generated income from fashionapparel operations during the thee months ended March 31 in any given fiscalyear. Income (loss) from operations with regard to fashion apparel for the ninemonths ended March 31, 2007, was ($933,000), a difference of ($97,000) or(12%), from ($836,000) for the comparable nine-month period in the prior fiscalyear.

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*Branded apparel*

We consider Top-Flite® branded apparel, which we market pursuant to ourlicensing agreement with Callaway for such apparel, to be a key component inour overall business strategies, designed to return the Company to sustainedprofitability. Net sales of Top-Flite® branded apparel of $1,188,000 for thenine months ended March 31, 2007, were comprised of sales to Wal-Mart of$1,000,000, sales of $185,000 to other markets for the disposition of ourremaining branded apparel inventories and collection from Wal-Mart of $3,000relating to disputed amounts which were previously omitted from reported netsales of branded apparel due to the uncertain nature of their collection. Webegan shipping Top-Flite® branded apparel to Wal-Mart in March 2006, and werecorded $446,000 in sales of Top-Flite® apparel during the nine months endedMarch 31, 2006. As previously reported, in late September 2006, Wal-Martdiscontinued purchasing Top-Flite® apparel from us, opting instead to develop aline of golf apparel under a private label. We redesigned Top-Flite®apparel to include garments primarily comprised of a variety of performancefabrics, and we have aggressively marketed the new branded apparel line to anumber of other mass retailers and certain big-box type high sales volumeretail stores. We expect our marketing efforts will result in the establishmentof business relationships with one or more mass retailers and other big-boxtype high sales volume retail stores, and to date we have received one orderfor Top-Flite® apparel from such a retailer for a test in 50 of its stores.Based upon our recent discussions, Callaway has given us verbal approval todistribute Top-Flite® apparel to this retailer, and we expect that Callawaywill also provide us with written approval in response to our request to expandour allowable channels of distribution to this and several other potentialcustomers for Top-Flite® apparel. Due to the length of time inherent within thebusiness cycle for branded apparel, from receiving a sales order throughdelivery of packaged merchandise, we do not anticipate recording sales revenuewith regard to Top-Flite® apparel for the remainder of our 2007 fiscal year.However, we expect that we will resume distributing Top-Flite® apparel inapproximately September 2007.

Our distributionof Top-Flite® branded apparel to the mass retail market generally generatesgross 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. Branded apparel is generally sold at much lower prices than forhigher quality fashion apparel, and gross margins are also expected to be lowerfor branded apparel than for fashion apparel. Other companies within the golfapparel industry may or may not operate within the lower-price branded apparelmarkets. As a percentageof net sales, gross margins with respect to net sales of branded apparelwere 100% and 4% for the three months ended March 31, 2007 and 2006,respectively. The relative percentage increase between the comparativethree-month periods was largely caused by the recovery of $3,000 from Wal-Martduring the three months ended March 31, 2007. We previously omitted thepotential recovery amount from our net sales due to the uncertain nature of itscollection. As a percentage of net sales, gross margins with respect to netsales of branded apparel were 26% and 4% for the nine months ended March 31,2007 and 2006, respectively.

Selling, generaland administrative expenses were $95,000 and $138,000 with regard to ourbranded apparel for the three months ended March 31, 2007 and 2006, and were$301,000 and $138,000 for the nine months ended March 31, 2006 and 2007, respectively.Selling, general and administrative expenses with regard to our branded apparelfor the three and nine months ended March 31, 2007, included wages paid to aperson we hired in November 2006 to actively market Top-Flite® branded apparelto the mass retail and big-box market suitable for such apparel. This personprovided consulting services to us with regard to marketing our branded apparelto Wal-Mart and other mass retailers from approximately May 2006 to October2006. Selling, general and administrative expenses with regard to our brandedapparel for the three and nine months ended March 31, 2007, also includedtravel costs related to our marketing 

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efforts andexpenses related to our participation in various industry-related tradeshows.As a percentage of net sales, selling, general and administrative expenses withregard to our branded apparel were 25% and 31% for the nine months ended March31, 2007 and 2006, respectively.

We recorded royalty expense of $0 and $27,000 for the three months endedMarch 31, 2007 and 2006, and $64,000 and $27,000 for the nine months endedMarch 31, 2007 and 2006, with respect to net sales of branded apparel,respectively. Royalty expense is due to Callaway in accordance with the licensethey previously granted us to market branded apparel bearing the Top-Flite®label.

Income (loss) from operations with regard to branded apparel for thethree months ended March 31, 2007, was ($92,000), an improvement of $55,000, or37%, from ($147,000) for the comparable three-month period in the prior fiscalyear. Income (loss) from operations with regard to branded apparel for the ninemonths ended March 31, 2007, was ($62,000), an improvement of $85,000 or 58%,from ($147,000) for the comparable nine-month period in the prior fiscal year.

*Other income*

Other income, net, was $71,000 for the three months ended March 31, 2007,a decrease of $166,000, or 70%, from $237,000 for the comparable three-monthperiod in the prior fiscal year. Other income, net, was $233,000 for the ninemonths ended March 31, 2007, a decrease of $134,000, or 37%, from $367,000 forthe comparable nine-month period in the prior fiscal year. Other income, net,was primarily derived from interest earned on cash and cash equivalent balancesheld at various financial institutions. The decreases were generallyattributable to our lower balance of cash and cash equivalents during therespective periods. In February 2007, we expended $2,332,000 to purchase485,762 shares of our common stock at a price of $4.80 per share, therebysubstantially reducing our cash and cash equivalents.

*Net income (loss)*

Net loss for the three months ended March 31, 2007, was ($218,000), adifference of ($28,000), or 15%, as compared with the net loss of ($190,000)for the comparable three-month period in the prior fiscal year. Net loss forthe nine months ended March 31, 2007, was ($836,000), a difference of($217,000), or 35%, as compared with the net loss of ($619,000) for thecomparable nine-month period in the prior fiscal year. We had federal and statenet operating loss carry forwards of $6,674,000 and $8,865,000 at March 31,2007, that we estimated may be recoverable at income tax rates of 34% and 5%,respectively. Inaccordance with SFAS 109 and based upon a review at March 31, 2007, of ourutilization of deferred tax assets, we maintained a valuation allowance thateffectively reduces our net deferred tax assets to zero. While we continue toexplore various strategies to return the Company to profitability, includingfinding alternative markets for our Top-Flite® branded apparel, we cannot becertain that our efforts will result in the generation of future profits sufficient to offset our significant netoperating loss carry forwards prior to their expirations. Accordingly, we didnot record benefits from income taxes associated with the corresponding lossesfor the respective three-month and nine-month periods ended March 31, 2007.

*Earnings(loss) per share*

Basic and dilutedearnings (loss) per common share were ($0.09) and ($0.07) for the three-monthperiods and were ($0.31) and ($0.23) for the nine-month periods ended March 31,2007 and 2006, respectively. All securities options were anti-dilutive andtherefore excluded from the per share calculations with respect to periods inwhich net losses were incurred.

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*Bookvalue*

Our book value peroutstanding common share was $5.19 at March 31, 2007, $5.42 at June 30, 2006,and $5.60 at March 31, 2006.

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**SPORT-HALEY,INC.**

**ITEM 3 QUALITATIVE AND QUANTITATIVE DISCLOSURESABOUT MARKET 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 March 31,2007, we have not used derivative instruments or engaged in hedging activities.Our market risk has not changed significantly from December 31, 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 March 31, 2007.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$810,000 at March 31, 2007. We do not use derivative financial instruments tomanage interest rate risk.

Fromtime to time, we maintain short-term investments in low risk and no riskfinancial instruments, readily convertible into cash, which earn interest atvariable rates. Our cash balances held at financial institutions regularlyexceed federally insured limits.

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**SPORT-HALEY, INC.**

**ITEM 4 CONTROLS AND PROCEDURES**

**(a)****                                  Evaluationof Disclosure Controls and Procedures**

Our management, with theparticipation of our Chief Executive Officer and our Chief Financial Officer,conducted an evaluation of the effectiveness of our disclosure controls andprocedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 asof the end of the period covered by this report. Based on that evaluation,management, including the Chief Executive Officer and Chief Financial Officer,concluded that, as of the end of the period covered by this report, ourdisclosure controls and procedures were effective in reaching a reasonablelevel of assurance that: (a) all material information relating to the Company,required to be disclosed in this report, was made known to management in atimely manner; and (b) information was recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and regulations.

**(b)****                                  Changesin Internal Controls**

During the third 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 have been detected. These inherentlimitations include the realities that judgments in decision-making can befaulty, and that breakdowns can occur because of simple errors or mistakes.Additionally, a control may be circumvented by the individual act of someperson, by collusion of two or more persons, or by management’s override of aspecific control. The design of any system of controls is also based in part oncertain assumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential 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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**SPORT-HALEY, INC.**

**PART II**

**OTHERINFORMATION**

### **ITEM 1****                          LEGALPROCEEDINGS**

In March 2007,Sport Haley and Reserve Apparel (the “Plaintiffs”) filed a lawsuit in theDistrict Court for the City and County of Denver in the State of Colorado. Thesuit alleges, among other things, that a former inventory broker to ReserveApparel, 1130746 Ontario Ltd., a Canadian corporation incorporated in theProvince of Ontario, Canada, d/b/a Originals Apparel Group Co., or OriginalsApparel Group, and Francis Tat-Mo Chan (the “Defendants”), knowingly, wrongfullyand without authorization converted Plaintiff’s funds. Among other things, thePlaintiffs alleged that the Defendants misapplied an inventory deposit of$291,000 paid to the Defendants in March 2006 by Sport Haley, which theDefendants used to offset certain amounts purportedly owed to the Defendants byExplorer Headgear, Inc., and that the Defendants failed to return $177,000which was overpaid by Sport Haley as of July 2006. The Plaintiffs have allegedclaims against the Defendants for conversion and violation of the Coloradocivil theft statute as well as for unjust enrichment. Plaintiffs seek repaymentof the $291,000 and $177,000 amounts and other relief.

### **ITEM 1A****                 RISKFACTORS**

There have been no material changes from the risk factors previously disclosedin Item 1A of our annual report on Form 10-K for the year ended June 30, 2006.

**ITEM 4****                         ****SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

Sport Haley. heldits annual meeting of shareholders on February 21, 2007. The following matterswere considered and approved by the shareholders:

(a)   Toelect six directors to hold office for one-year terms or until their successorsare elected and qualified:
|                      | ** ** | ** ** | ** ** | **Votes**            | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|----------------------|------------|------------|------------|
| ** **           | ** ** | **Votes**  | ** ** | **Against**          | ** ** | **Total**  | ** ** |
| ** **           | ** ** | **For**    | ** ** | **or Withheld** | ** ** | **Voted**  | ** ** |
|                 |       |       |       |                 |       |       |       |
| Ronald J. Norick     |       | 2,304,140  |       | 354,195              |       | 2,658,335  |       |
| James R.  TenBrook   |       | 2,304,140  |       | 354,195              |       | 2,658,335  |       |
| Mark J.  Stevenson   |       | 2,304,140  |       | 354,195              |       | 2,658,335  |       |
| James H. Everest     |       | 2,304,140  |       | 354,195              |       | 2,658,335  |       |
| Donald W. Jewell     |       | 2,304,140  |       | 354,195              |       | 2,658,335  |       |
| William O. Johnstone |       | 2,304,140  |       | 354,195              |       | 2,658,335  |       |

 

(b)   Toratify appointment of Gordon Hughes & Banks LLP as the independentregistered public accountants for Sport Haley:
| Votes For        |   | 2,652,726 |   |
|------------------|--------|-----------|--------|
| Votes Against    |   | 5,500     |   |
| Votes Abstaining |   | 109       |   |
| Total Voted      |   | 2,658,335 |   |

 

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(c)   Toauthorize to vote upon such other business as may properly come before themeeting or any and all adjournments thereof:
| Votes For        |   | 2,455,512 |   |
|------------------|--------|-----------|--------|
| Votes Against    |   | 50,447    |   |
| Votes Abstaining |   | 152,376   |   |
| Total Voted      |   | 2,658,335 |   |

 

### **ITEM 5****         OTHERINFORMATION**

(a)   OnFebruary 22, 2007, we announced that, effective immediately, our Board ofDirectors and the shareholders, pursuant to the proxies received grantinggeneral discretion to consider and transact other business coming before theannual meeting of shareholders which was held on February 21, 2007, approved anamendment to our Amended and Restated Bylaws, Article III, Section 2, secondparagraph to state: “Directors shall be elected at each annual meeting ofshareholders, or at a special meeting called for that purpose...” Previously,this Section of the Bylaws stated that “Directors shall be elected at eachannual meeting of shareholders...” The amendment was unanimously approved by thedirectors and by an overwhelming majority of shareholders, by proxy and inperson.

(b)   We have made no material changes to the procedures by which our commonshareholders may recommend nominees to Nominating Committee of the Board ofDirectors.

### **ITEM 6****                          EXHIBITS**

Exhibit 3.1          Amendedand Restated By Laws as of February 21, 2007

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

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

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

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**SPORT-HALEY, INC.**

**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:      | May 14, 2007                                   |   | /s/ PATRICK W. HURLEY |   |
|       | Patrick W. Hurley                              |
|       | Chief Financial Officer                        |
| * *   | *(Principal Financial and Accounting Officer)* |
|            |                                                |  |  |  |

 

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