** **

**SECURITIESAND EXCHANGE COMMISSION**

** **

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended March 31, 2008**

 

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

 

**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 checkmark whether the registrant (1) filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.   Yes  x  No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer o          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company x |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).   Yes  o  No  x

 

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

 

| **Class**                      | ** ** | **Outstanding at May 7, 2008** |
|--------------------------------|------------|----------------------------------------------------|
| **Common Stock, no par value** | ** ** | **2,284,490**                                      |

 

 

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**TABLE OF CONTENTS**

 
| ** **                                                          | ** **    | ** **                                                                                  | **PAGE** |
|---------------------------------------------------------------------|---------------|---------------------------------------------------------------------------------------------|----------|
|                                                                |          |                                                                                        |     |
| **PART 1 – CONDENSED  FINANCIAL INFORMATION (UNAUDITED)** |          |
| ** **                                                          |          |
|                                                                | ITEM 1 – | CONDENSED CONSOLIDATED  FINANCIAL STATEMENTS                                                |     |
|                                                                |          |                                                                                        |     |
|                                                                |          | CONDENSED  CONSOLIDATED BALANCE SHEETS                                                      | **3**    |
|                                                                |          |                                                                                        |     |
|                                                                |          | CONDENSED  CONSOLIDATED STATEMENTS OF OPERATIONS                                            | **4**    |
|                                                                |          |                                                                                        |     |
|                                                                |          | CONDENSED  CONSOLIDATED STATEMENTS OF CASH FLOWS                                            | **5**    |
|                                                                |          |                                                                                        |     |
|                                                                |          | NOTES TO  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                       | **6**    |
|                                                                |          |                                                                                        |     |
|                                                                | ITEM 2 -      | MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | **15**   |
|                                                                |          |                                                                                        |     |
|                                                                | ITEM 3 -      | QUALITATIVE  AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK                                 | **27**   |
|                                                                |          |                                                                                        |     |
|                                                                | ITEM 4 -      | CONTROLS AND  PROCEDURES                                                                    | **28**   |
|                                                                |          |                                                                                        |     |
| **PART II - OTHER INFORMATION**                                |          |
| ** **                                                          |          |
|                                                                | ITEM 1        | LEGAL PROCEEDINGS                                                                           | **29**   |
|                                                                |          |                                                                                        |     |
|                                                                | ITEM 1A       | RISK FACTORS                                                                                | **29**   |
|                                                                |          |                                                                                        |     |
|                                                                | ITEM  4       | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS                                        | **29**   |
|                                                                |          |                                                                                        |     |
|                                                                | ITEM 5        | OTHER INFORMATION                                                                           | **30**   |
|                                                                |          |                                                                                        |     |
|                                                                | ITEM 6        | EXHIBITS                                                                                    | **30**   |
|                                                                |          |                                                                                        |     |
| **SIGNATURES**                                                      | **31**        |
|                                                                |          |                                                                                        |     |
| **EXHIBITS**                                                        |          |                                                                                        |
| ** **                                                          |          |                                                                                        |
|                                                                | 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                                     |     |

 

2

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** **

**SPORT-HALEY, INC.**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                                                        | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                                        | ** ** | **2008**           | ** ** | **2007**          | ** ** |
| ** **                                                                                                        | ** ** | **(Unaudited)**    | ** ** | **(***)**         | ** ** |
| **ASSETS**                                                                                                        |       |               |       |              |       |
| Current assets:                                                                                                   |       |               |       |              |       |
| Cash and cash  equivalents                                                                                        |       | $                  | 2,526,000  |              | $          | 4,464,000 |   |
| Accounts  receivable, net of allowances of $355,000 and $374,000, respectively                                    |       | 2,877,000          |       | 3,066,000         |       |
| Inventories                                                                                                       |       | 6,796,000          |       | 5,814,000         |       |
| Prepaid expenses  and other                                                                                       |       | 192,000            |       | 203,000           |       |
| Total current  assets                                                                                             |       | 12,391,000         |       | 13,547,000        |       |
|                                                                                                              |       |               |       |              |       |
| Property and  equipment, net                                                                                      |       | 249,000            |       | 399,000           |       |
| Other assets                                                                                                      |       | 3,000              |       | 3,000             |       |
|                                                                                                              |       |               |       |              |       |
| Total Assets                                                                                                      |       | $                  | 12,643,000 |              | $          | 13,949,000 |   |
|                                                                                                              |       |               |       |              |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                     |       |               |       |              |       |
| Current  liabilities:                                                                                             |       |               |       |              |       |
| Notes payable                                                                                                     |       | $                  | 500,000    |              | $          | — |   |
| Accounts payable                                                                                                  |       | 769,000            |       | 1,566,000         |       |
| Accrued  royalties payable                                                                                        |       | 141,000            |       | 181,000           |       |
| Accrued  commissions payable                                                                                      |       | 199,000            |       | 214,000           |       |
| Accrued payroll                                                                                                   |       | 113,000            |       | 249,000           |       |
| Other                                                                                                             |       | 184,000            |       | 179,000           |       |
| Total current  liabilities                                                                                        |       | 1,906,000          |       | 2,389,000         |       |
|                                                                                                              |       |               |       |              |       |
| Commitments and  Contingencies:                                                                                   |       |               |       |              |       |
| Minimum royalties  payable                                                                                        |       | 38,000             |       | 178,000           |       |
| Total contingent  liabilities                                                                                     |       | 38,000             |       | 178,000           |       |
|                                                                                                              |       |               |       |              |       |
| Total  Liabilities                                                                                                |       | 1,944,000          |       | 2,567,000         |       |
|                                                                                                              |       |               |       |              |       |
| 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 shares issued and outstanding,  respectively |       | 8,481,000          |       | 8,481,000         |       |
| Additional  paid-in capital                                                                                       |       | 1,621,000          |       | 1,621,000         |       |
| Retained  earnings                                                                                                |       | 597,000            |       | 1,280,000         |       |
| Total shareholders’  equity                                                                                  |       | 10,699,000         |       | 11,382,000        |       |
|                                                                                                              |       |               |       |              |       |
| Total  Liabilities and Shareholders’ Equity                                                                  |       | $                  | 12,643,000 |              | $          | 13,949,000 |   |

 

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

 

See accompanying notes to these condensed consolidated financial statements.

 

3

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**SPORT-HALEY, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

 
| ** **                                                                             | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                             | ** ** | **March 31,**               | ** ** | **March 31,**              | ** ** |
| ** **                                                                             | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                             | ** ** | **(Unaudited)**                  | ** ** | **(Unaudited)**                 | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
|                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Net sales                                                                              |       | $                                | 4,751,000  |                            | $          | 5,273,000 |   | $ | 12,690,000 |   | $ | 14,136,000 |   |
|                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Cost of goods  sold                                                                    |       | 2,940,000                        |       | 3,404,000                       |       | 7,742,000 |   | 9,088,000 |   |
| Impairments                                                                            |       | 5,000                            |       | 4,000                           |       | 179,000 |   | 126,000 |   |
| Total cost of  goods sold                                                              |       | 2,945,000                        |       | 3,408,000                       |       | 7,921,000 |   | 9,214,000 |   |
|                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Gross profit                                                                           |       | 1,806,000                        |       | 1,865,000                       |       | 4,769,000 |   | 4,922,000 |   |
|                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Other Operating  Costs:                                                                |       |                             |       |                            |       |   |   |   |   |
| Selling, general  and administrative expenses                                          |       | 1,901,000                        |       | 1,947,000                       |       | 5,272,000 |   | 5,359,000 |   |
| Royalty expense                                                                        |       | 179,000                          |       | 196,000                         |       | 447,000 |   | 558,000 |   |
| Total other  operating costs                                                           |       | 2,080,000                        |       | 2,143,000                       |       | 5,719,000 |   | 5,917,000 |   |
|                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Loss from  operations                                                                  |       | (274,000                         | )          | (278,000                        | )          | (950,000 | ) | (995,000 | ) |
|                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Other income,  net                                                                     |       | 196,000                          |       | 71,000                          |       | 276,000 |   | 233,000 |   |
|                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Loss before  minority interest in subsidiary net income and provision for income taxes |       | (78,000                          | )          | (207,000                        | )          | (674,000 | ) | (762,000 | ) |
|                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Minority  interest in subsidiary net income                                            |       | —                           |       | —                          |       | — |   | (46,000 | ) |
|                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Provision for  income taxes                                                            |       | (2,000                           | )          | (11,000                         | )          | (9,000 | ) | (28,000 | ) |
|                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Net loss                                                                               |       | $                                | (80,000    | )                               | $          | (218,000 | ) | $ | (683,000 | ) | $ | (836,000 | ) |
|                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Basic and  diluted loss per common share                                               |       | $                                | (0.04      | )                               | $          | (0.09 | ) | $ | (0.30 | ) | $ | (0.31 | ) |
|                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Basic and  diluted weighted average shares outstanding                                 |       | 2,284,000                        |       | 2,490,000                       |       | 2,284,000 |   | 2,678,000 |   |

 

See accompanying notes to these condensed consolidated financialstatements.

 

4

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**SPORT-HALEY, INC.**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

 
| ** **                                                                   | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                   | ** ** | **March 31,**              | ** ** |
| ** **                                                                   | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| ** **                                                                   | ** ** | **(Unaudited)**                 | ** ** | **(Unaudited)** | ** ** |
| **Cash  flows from operating activities:**                                   |       |                            |       |   |   |
| Net loss                                                                     |       | $                               | (683,000   | ) | $ | (836,000 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities: |       |                            |       |   |   |
| Depreciation and  amortization                                               |       | 157,000                         |       | 202,000 |   |
| Impairments and  write-downs                                                 |       | 179,000                         |       | 126,000 |   |
| Allowance for  doubtful accounts                                             |       | 28,000                          |       | (27,000 | ) |
| Minority  interest                                                           |       | —                          |       | 49,000 |   |
| Cash provided  (used) due to changes in assets and liabilities:              |       |                            |       |   |   |
| Accounts  receivable                                                         |       | 161,000                         |       | 139,000 |   |
| Inventories                                                                  |       | (1,161,000                      | )          | (751,000 | ) |
| Other assets                                                                 |       | 11,000                          |       | 27,000 |   |
| Accounts payable                                                             |       | (797,000                        | )          | (818,000 | ) |
| Accrued  commissions and other expenses                                      |       | (326,000                        | )          | (324,000 | ) |
| Net cash used by  operating activities                                       |       | (2,431,000                      | )          | (2,213,000 | ) |
|                                                                         |       |                            |       |   |   |
| **Cash  flows from investing activities:**                                   |       |                            |       |   |   |
| Purchase of  fixed assets                                                    |       | (7,000                          | )          | (39,000 | ) |
| Purchase of  minority interest                                               |       | —                          |       | (375,000 | ) |
| Net cash used by  investing activities                                       |       | (7,000                          | )          | (414,000 | ) |
|                                                                         |       |                            |       |   |   |
| **Cash  flows from financing activities:**                                   |       |                            |       |   |   |
| Borrowings under  line of credit                                             |       | 1,850,000                       |       | — |   |
| Repayments under  line of credit                                             |       | (1,350,000                      | )          | — |   |
| Repurchase  common stock                                                     |       | —                          |       | (2,332,000 | ) |
| Net cash  provided (used) by financing activities                            |       | 500,000                         |       | (2,332,000 | ) |
|                                                                         |       |                            |       |   |   |
| **Net  decrease in cash and cash equivalents**                               |       | (1,938,000                      | )          | (4,959,000 | ) |
|                                                                         |       |                            |       |   |   |
| **Cash  and cash equivalents, beginning**                                    |       | 4,464,000                       |       | 8,492,000 |   |
|                                                                         |       |                            |       |   |   |
| **Cash  and cash equivalents, ending**                                       |       | $                               | 2,526,000  |   | $ | 3,533,000 |   |
|                                                                         |       |                            |       |   |   |
| **Supplemental  disclosure of cash flow information:**                       |       |                            |       |   |   |
| Cash paid during  the period for:                                            |       |                            |       |   |   |
| Income taxes                                                                 |       | $                               | 8,000      |   | $ | 28,000 |   |

 

See accompanying notes to these condensed consolidated financial statements.

 

5

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** **

**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**NOTE 1****            ****SIGNIFICANT ACCOUNTINGPOLICIES**

 

*Principlesof Consolidation*Our condensed consolidated financial statements include the accounts ofSport-Haley, Inc. (“Sport Haley”) and Reserve Apparel Group LLC (“ReserveApparel”). Sport Haley and Reserve Apparel may collectively be referred to as “theCompany,” “we,” “us” or “our.” All significant inter-company transactionsbetween Sport Haley and Reserve Apparel have been eliminated.

 

*Nature ofOperations*Sport Haley, organized as a Colorado corporation in January 1991, designs,purchases or contracts for the manufacture of, markets and distributes women’sand men’s fashion golf apparel and outerwear under the SPORT HALEY® and BenHogan® labels. Our fashion golf apparel collections, known for their innovativedesigns, quality fabrics, generous fits and classic styles, are primarilymarketed in the premium and mid-priced markets, through a network ofindependent sales representatives and distributors, to golf professional shops,country clubs, resorts and exclusive department stores within the UnitedStates. Ben Hogan® fashion golf apparel is distributed per the terms of alicense agreement with Callaway Golf Company (“Callaway”).

 

Reserve Apparel,formed in November 2005, designed, purchased or contracted for themanufacture of, marketed and distributed branded golf apparel and outerwearunder the Top-Flite® label to mass retailers and other big-box, high salesvolume retail stores. Since September 2006 Reserve Apparel has been awholly-owned subsidiary of Sport Haley. Top-Flite® branded golf apparel wasdistributed per the terms of a license agreement with Callaway. We discontinuedmarketing Top-Flite® Branded apparel in November 2007, and in March 2008the license agreement was amended to remove the Top-Flite® brand, effective January 1,2008.

 

*CondensedConsolidated Financial Statements* Our condensed consolidated balance sheets and interimcondensed consolidated statements of operations and cash flows include alladjustments (consisting only of normal recurring items) necessary for theirfair representation. The preparation of consolidated financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets, liabilities, revenues and expenses and thedisclosure of contingent assets and liabilities.

 

Certaininformation in footnote disclosures normally included in financial statementshas been condensed or omitted in accordance with the rules and regulationsof the Securities and Exchange Commission. The information included in this Form 10-Qshould be read in conjunction with financial statements and notes thereto andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations for the year ended June 30, 2007, included in the Company’sfiling on Form 10-K.

 

*Reclassification* Certain priorperiod amounts have been reclassified to conform to the March 31, 2008,presentation. Such reclassifications had no affect on net income (loss) in anyof the periods presented.

 

*Stock-Based Compensation*In January 2008, we adopted a newstock option plan, entitled the Sport-Haley 2008 Stock Option Plan (the “2008Plan”), which was approved by our shareholders at our annual meeting that washeld on February 21, 2008, and continued on

 

6

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

February 25, 2008.Under the 2008 Plan, the Compensation Committee of the Company’s Board ofDirectors is authorized to grant up to 50,000 non-qualified stock options andup to 150,000 incentive stock options. No options or other awards have been grantedunder the 2008 Plan.

 

Our former Stock Option Plan(the “Former Plan”) expired by its terms on February 28, 2003. Optionagreements that were issued in accordance with the Former Plan prior to February 28,2003, generally remain in force until the earlier of their exercise, theexpiration of certain time periods after the termination of a grantee’semployment (or other relationship with the Company) or expiration by theirterms.

 

At March 31, 2008,there were outstanding options to purchase 586,000 shares of our common stockat exercise prices ranging from $2.71 to $9.78 per share and expiration datesbetween August 2008 and January 2013. All outstanding options arefully vested. No options were exercised during the three months ended March 31,2008, and no options expired. During the nine months ended March 31, 2008,no options were exercised and 7,500 options expired.

 

*Recent Pronouncements*  InMarch 2008, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 161 (“SFAS 161”), *“Disclosures about Derivative Instruments and Hedging Activities – anamendment of FASB Statement No. 133.”* FASB Statement No. 133(“SFAS 131”), *“Accounting for Derivative Instruments andHedging Activities,”* establishes, among other things, the disclosurerequirements for derivative instruments and for hedging activities. SFAS 161amends and expands the disclosure requirements of SFAS 131 with the intent toprovide users of financial statements with an enhanced understanding of: (i) howand why an entity uses derivative instruments; (ii) how derivativeinstruments and related hedged items are accounted for under SFAS 133 and itsrelated interpretations; and, (iii) how derivative instruments and relatedhedged items affect an entity’s financial position, financial performance andcash flows. To meet those objectives, SFAS 161 requires qualitative disclosuresabout objectives and strategies for using derivatives, quantitative disclosuresabout fair value amounts of gains and losses on derivative instruments anddisclosures about credit-risk-related contingent features in derivativeagreements. SFAS 161 is effective for fiscal years, and interim periods withinthose fiscal years, beginning after November 15, 2008, with earlieradoption encouraged. SFAS 161 further encourages, but does not require,comparative disclosures for earlier periods at initial adoption. We do notanticipate early adoption, and our adoption of SFAS 161 upon its effective dateis not expected to have a material effect on our financial condition or theresults 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.

 

7

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**NOTE 2****            ****INVENTORIES**

 
| ** **                               | ** ** | **March 31,** | ** ** | **June 30,** | ** ** |
|------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                               | ** ** | **2008**           | ** ** | **2007**          | ** ** |
| Inventories  consisted of the following: |       |               |       |              |       |
| Component                                |       | $                  | 281,000    |              | $          | 283,000 |   |
| Finished goods                           |       | 6,515,000          |       | 5,531,000         |       |
|                                     |       |               |       |              |       |
|                                     |       | $                  | 6,796,000  |              | $          | 5,814,000 |   |

 

Included infinished goods inventories are allowances for write-downs of $178,000 and$236,000 as of March 31, 2008, and June 30, 2007, respectively.

 

**NOTE 3****            ****LINE OF CREDIT AGREEMENT**

 

We maintain arevolving line of credit agreement with a commercial bank. The revolving lineof credit agreement, renewed by amendment through December 5, 2008, providesfor a maximum loan amount of $2,000,000, collateralized by a certificate ofdeposit held at the commercial bank in the amount of $2,000,000, which earns amarket rate of interest. Borrowings under the line of credit agreement accrueinterest at 1.250% plus the one-month LIBOR rate. We generally maintain theline of credit to facilitate the issuance of letters of credit for inventorypurchases from offshore suppliers and, if necessary, to fund any temporaryworking capital needs. At March 31, 2008, and June 30, 2007,respectively, balances due on the line of credit were $500,000 and $0,respectively.

 

Outstandingletters of credit reduce the amount available for borrowing under the line ofcredit agreement. At March 31, 2008, and June 30, 2007, we had outstandingletters of credit totaling $312,000 and $2,173,000, respectively.

 

**NOTE 4****            ****COMMITMENTS ANDCONTINGENCIES**

 

Our license agreement withCallaway requires us to pay royalties based upon sales of Ben Hogan® fashionapparel and previously also required us to pay royalties based upon sales ofTop-Flite® branded apparel. We record royalties as other operating costs in theperiods when such sales are recognized. Terms of the license agreement providefor minimum royalties on a calendar year basis. Royalties are payable toCallaway on a quarterly basis.

 

Because sales of Top-Flite®branded apparel were insufficient to meet the contractual minimum royaltyrequirement for calendar 2007, we accrued a contingent liability of $178,000 atJune 30, 2007, and we accrued an additional contingent liability of $2,000at December 31, 2007. In March 2008, we reached an agreement withCallaway to remove the Top-Flite® brand from the license agreement, effective January 1,2008, whereby any unpaid minimum royalties due to Callaway as of December 31,2007, with respect to Top-Flite® apparel were extinguished and forgiven.Therefore, in March 2008, we reversed the contingent liability with regardto Top-Flite® minimum royalties and recorded miscellaneous income of $178,000.

 

8

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

Sales of Ben Hogan® fashionapparel for the three months ended March 31, 2008, were insufficient tosatisfy one-fourth of the 2008 calendar year minimum royalties due under thelicense agreement. Thus, at March 31, 2008, we recorded a contingentliability of $38,000 with regard to minimum royalties due for Ben Hogan®fashion apparel.

 

**NOTE 5****            ****EARNINGS PER SHARE**

 

Effectivewith the year ended June 30, 1998, we adopted the provisions of Statementof Financial Accounting Standards No. 128 (“SFAS No. 128”), *Earnings per Share*. SFAS No. 128 requires thepresentation of basic and diluted earnings (loss) per common share. Thefollowing table provides a reconciliation of the numerator and denominator ofbasic and diluted earnings (loss) per common share:

 
| ** **                                    | ** ** | **Three Months ended March 31, 2008** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Net**                                                        | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Income**                                                     | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **(Loss)**                                                     | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| Loss Per Common  Share                        |       |                                                           |       |   |   |   |   |
|                                          |       |                                                           |       |   |   |   |   |
| Basic loss per  share                         |       | $                                                              | (80,000    | ) | 2,284,000 |   | $ | (0.04 | ) |
| Effect of  dilutive securities options**[A]** |       | —                                                         |       | — |   | — |   |
|                                          |       |                                                           |       |   |   |   |   |
| Diluted loss per  share                       |       | $                                                              | (80,000    | ) | 2,284,000 |   | $ | (0.04 | ) |

 
| ** **                                    | ** ** | **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, 2008** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Net**                                                       | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Income**                                                    | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **(Loss)**                                                    | ** ** | **Shares** | ** ** | **Per Share** | ** ** |
| Loss Per Common  Share                        |       |                                                          |       |   |   |   |   |
|                                          |       |                                                          |       |   |   |   |   |
| Basic loss per  share                         |       | $                                                             | (683,000   | ) | 2,284,000 |   | $ | (0.30 | ) |
| Effect of  dilutive securities options**[A]** |       | —                                                        |       | — |   | — |   |
|                                          |       |                                                          |       |   |   |   |   |
| Diluted loss per  share                       |       | $                                                             | (683,000   | ) | 2,284,000 |   | $ | (0.30 | ) |

 

9

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 
| ** **                                     | ** ** | **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 | ) |

 

----

**[A]** Due to the Company’s net losses, alloptions were anti-dilutive and therefore excluded from the loss per sharecalculations.

 

**NOTE 6****            ****SEGMENT INFORMATION**

 

The consolidatedCompany has two operating segments which consist of designing, purchasing orcontracting for the manufacture of and wholesale sales of women’s and men’s (1) fashiongolf apparel and outerwear and (2) branded golf apparel, which wediscontinued marketing as of November 2007. SPORT HALEY® and Ben Hogan®fashion golf apparel and outerwear collections are primarily 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 UnitedStates. Top-Flite® men’s branded apparel was marketed by Reserve Apparel tomass retailers and other big-box type high sales volume retail stores withinthe United States. Ben Hogan® fashion apparel and Top-Flite® branded apparelhave been distributed pursuant to a license agreement with Callaway.

 

Reserve Appareldistributed Top-Flite® apparel exclusively to Wal-Mart from March 2006through August 2006, after which we were notified that Wal-Mart had chosento develop its own private label for golf apparel and discontinue sellingTop-Flite® apparel. We redesigned Top-Flite® branded apparel to includegarments primarily comprised of a variety of performance fabrics, and weaggressively marketed Top-Flite® apparel to several mass retailers and big-boxtype high sales volume retail stores. We expected our marketing efforts wouldresult in the establishment of business relationships with one or more massretailers and other big-box type high sales volume retail stores. However, weonly received one order for Top-Flite® apparel from such a retailer for a testin 50 of its stores, which we shipped in September and October 2007.Since our concerted efforts failed to generate orders from a major customer, wediscontinued marketing apparel bearing the Top-Flite® label in November 2007.

 

At June 30,2007, we recorded a contingent liability of $178,000, and at December 31,2007, we recorded an additional contingent liability of $2,000, with regard tominimum royalties due for calendar year 2007 in accordance with our licenseagreement for Top-Flite® branded apparel. In March 2008, we reached anagreement with Callaway to remove the Top-Flite® brand from the licenseagreement, effective January 1, 2008, whereby any unpaid minimum royaltiesdue to Callaway as of December 31, 2007, with respect to Top-

 

10

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

Flite® apparelwere extinguished and forgiven. Therefore, in March 2008, we reversed thecontingent liability with regard to Top-Flite® minimum royalties and recordedmiscellaneous income of $178,000.

 

Condensedconsolidated balance sheets information and condensed consolidated statementsof operations information for each of our segments are presented in the tablesbelow.

 

*CondensedConsolidated Balance Sheets Segment Information as of March 31, 2008, and June 30,2007:*

** **
| ** **                              | ** ** | **March 31, 2008** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **Fashion**                  | ** ** | **Branded** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Apparel**                  | ** ** | **Apparel** | ** ** | **Total** | ** ** |
| ** **                              | ** ** | **(Unaudited)**              | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
| Assets:                                 |       |                         |       |   |   |   |   |
| Cash and cash  equivalents              |       | $                            | 2,488,000  |   | $ | 38,000 |   | $ | 2,526,000 |   |
| Accounts  receivable, net of allowances |       | 2,481,000                    |       | 396,000 |   | 2,877,000 |   |
| Inventories                             |       | 6,793,000                    |       | 3,000 |   | 6,796,000 |   |
| Prepaid expenses  and other             |       | 192,000                      |       | — |   | 192,000 |   |
| Property and  equipment, net            |       | 249,000                      |       | — |   | 249,000 |   |
| Other assets                            |       | 3,000                        |       | — |   | 3,000 |   |
| Total Assets                            |       | $                            | 12,206,000 |   | $ | 437,000 |   | $ | 12,643,000 |   |
| Liabilities:                            |       |                         |       |   |   |   |   |
| Notes payable                           |       | $                            | 500,000    |   | — |   | $ | 500,000 |   |
| Accounts payable                        |       | 532,000                      |       | 237,000 |   | 769,000 |   |
| Accrued  royalties payable              |       | 141,000                      |       | — |   | 141,000 |   |
| Accrued  commissions payable            |       | 199,000                      |       | — |   | 199,000 |   |
| Accrued payroll                         |       | 113,000                      |       | — |   | 113,000 |   |
| Other                                   |       | 184,000                      |       | — |   | 184,000 |   |
| Minimum royalties  payable              |       | 38,000                       |       | — |   | 38,000 |   |
| Total  Liabilities                      |       | 1,707,000                    |       | 237,000 |   | 1,944,000 |   |
| Total Equity                            |       | 10,499,000                   |       | 200,000 |   | 10,699,000 |   |
| Total  Liabilities and Equity           |       | $                            | 12,206,000 |   | $ | 437,000 |   | $ | 12,643,000 |   |

 

11

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 
| ** **                              | ** ** | **June 30, 2007** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **Fashion**                 | ** ** | **Branded** | ** ** | ** ** | ** ** |
| ** **                              | ** ** | **Apparel**                 | ** ** | **Apparel** | ** ** | **Total** | ** ** |
| Assets:                                 |       |                        |       |   |   |   |   |
| Cash and cash  equivalents              |       | $                           | 4,354,000  |   | $ | 110,000 |   | $ | 4,464,000 |   |
| Accounts  receivable, net of allowances |       | 2,716,000                   |       | 353,000 |   | 3,066,000 |   |
| Inventories                             |       | 5,814,000                   |       | — |   | 5,814,000 |   |
| Prepaid expenses  and other             |       | 198,000                     |       | 4,000 |   | 203,000 |   |
| Property and  equipment, net            |       | 399,000                     |       | — |   | 399,000 |   |
| Other assets                            |       | 3,000                       |       | — |   | 3,000 |   |
| Total Assets                            |       | $                           | 13,482,000 |   | $ | 467,000 |   | $ | 13,949,000 |   |
| Liabilities:                            |       |                        |       |   |   |   |   |
| Accounts payable                        |       | $                           | 1,329,000  |   | $ | 237,000 |   | $ | 1,566,000 |   |
| Accrued  royalties payable              |       | 181,000                     |       | — |   | 181,000 |   |
| Accrued  commissions payable            |       | 214,000                     |       | — |   | 214,000 |   |
| Accrued payroll                         |       | 249,000                     |       | — |   | 249,000 |   |
| Other                                   |       | 179,000                     |       | — |   | 179,000 |   |
| Minimum  royalties payable              |       | —                      |       | 178,000 |   | 178,000 |   |
| Total  Liabilities                      |       | 2,152,000                   |       | 415,000 |   | 2,567,000 |   |
| Total Equity                            |       | 11,330,000                  |       | 52,000 |   | 11,382,000 |   |
| Total  Liabilities and Equity           |       | $                           | 13,482,000 |   | $ | 467,000 |   | $ | 13,949,000 |   |

 

*CondensedConsolidated Statements of Operation Segment Information for the Three MonthsEnded March 31, 2008 and 2007:*

** **
| ** **                                    | ** ** | **Three Months Ended March 31, 2008** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Fashion**                                                    | ** ** | **Branded** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Apparel**                                                    | ** ** | **Apparel** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | **(Unaudited)**                                                | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
|                                          |       |                                                           |       |   |   |   |   |
| Net sales                                     |       | $                                                              | 4,740,000  |   | $ | 11,000 |   | $ | 4,751,000 |   |
| Cost of goods  sold                           |       | 2,923,000                                                      |       | 17,000 |   | 2,940,000 |   |
| Impairments                                   |       | 5,000                                                          |       | — |   | 5,000 |   |
| Total cost of  goods sold                     |       | 2,928,000                                                      |       | 17,000 |   | 2,945,000 |   |
| Gross profit                                  |       | 1,812,000                                                      |       | (6,000 | ) | 1,806,000 |   |
| Selling, general  and administrative expenses |       | 1,897,000                                                      |       | 4,000 |   | 1,901,000 |   |
| Royalty expense                               |       | 181,000                                                        |       | (2,000 | ) | 179,000 |   |
| Total other  operating costs                  |       | 2,078,000                                                      |       | 2,000 |   | 2,080,000 |   |
| Loss from  operations                         |       | (266,000                                                       | )          | (8,000 | ) | (274,000 | ) |
| Other income,  net                            |       | 18,000                                                         |       | 178,000 |   | 196,000 |   |
| Provision for  income taxes                   |       | (2,000                                                         | )          | — |   | (2,000 | ) |
| Net income  (loss)                            |       | $                                                              | (250,000   | ) | $ | 170,000 |   | $ | (80,000 | ) |

 

12

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 
| ** **                                    | ** ** | **Three Months Ended March 31, 2007** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Fashion**                                                    | ** ** | **Branded** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Apparel**                                                    | ** ** | **Apparel** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | **(Unaudited)**                                                | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
|                                          |       |                                                           |       |   |   |   |   |
| Net sales                                     |       | $                                                              | 5,273,000  |   | $ | — |   | $ | 5,273,000 |   |
| Cost of goods  sold                           |       | 3,404,000                                                      |       | — |   | 3,404,000 |   |
| Impairments                                   |       | 4,000                                                          |       | — |   | 4,000 |   |
| Total cost of  goods sold                     |       | 3,408,000                                                      |       | — |   | 3,408,000 |   |
| Gross profit                                  |       | 1,865,000                                                      |       | — |   | 1,865,000 |   |
| Selling, general  and administrative expenses |       | 1,852,000                                                      |       | 95,000 |   | 1,947,000 |   |
| Royalty expense                               |       | 196,000                                                        |       | — |   | 196,000 |   |
| Total other  operating costs                  |       | 2,048,000                                                      |       | 95,000 |   | 2,143,000 |   |
| Loss from  operations                         |       | (183,000                                                       | )          | (95,000 | ) | (278,000 | ) |
| Other income,  net                            |       | 65,000                                                         |       | 6,000 |   | 71,000 |   |
| Provision for  income taxes                   |       | (4,000                                                         | )          | (7,000 | ) | (11,000 | ) |
| Net loss                                      |       | $                                                              | (122,000   | ) | $ | (96,000 | ) | $ | (218,000 | ) |

 

*CondensedConsolidated Statements of Operation Segment Information for the Nine MonthsEnded March 31, 2008 and 2007:*

 
| ** **                                    | ** ** | **Nine Months Ended March 31, 2008** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Fashion**                                                   | ** ** | **Branded** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Apparel**                                                   | ** ** | **Apparel** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | **(Unaudited)**                                               | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
|                                          |       |                                                          |       |   |   |   |   |
| Net sales                                     |       | $                                                             | 12,532,000 |   | $ | 158,000 |   | $ | 12,690,000 |   |
| Cost of goods  sold                           |       | 7,604,000                                                     |       | 138,000 |   | 7,742,000 |   |
| Impairments                                   |       | 159,000                                                       |       | 20,000 |   | 179,000 |   |
| Total cost of  goods sold                     |       | 7,863,000                                                     |       | 158,000 |   | 7,921,000 |   |
| Gross profit                                  |       | 4,769,000                                                     |       | — |   | 4,769,000 |   |
| Selling, general  and administrative expenses |       | 5,140,000                                                     |       | 132,000 |   | 5,272,000 |   |
| Royalty expense                               |       | 438,000                                                       |       | 9,000 |   | 447,000 |   |
| Total other  operating costs                  |       | 5,578,000                                                     |       | 141,000 |   | 5,719,000 |   |
| Loss from  operations                         |       | (809,000                                                      | )          | (141,000 | ) | (950,000 | ) |
| Other income,  net                            |       | 96,000                                                        |       | 180,000 |   | 276,000 |   |
| Provision for  income taxes                   |       | (2,000                                                        | )          | (7,000 | ) | (9,000 | ) |
| Net income  (loss)                            |       | $                                                             | (705,000   | ) | $ | 32,000 |   | $ | (683,000 | ) |

 

13

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**SPORT-HALEY, INC.**

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 
| ** **                                    | ** ** | **Nine Months Ended March 31, 2007** | ** ** |
|-----------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Fashion**                                                   | ** ** | **Branded** | ** ** | ** ** | ** ** |
| ** **                                    | ** ** | **Apparel**                                                   | ** ** | **Apparel** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | **(Unaudited)**                                               | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
|                                          |       |                                                          |       |   |   |   |   |
| Net sales                                     |       | $                                                             | 12,951,000 |   | $ | 1,185,000 |   | $ | 14,136,000 |   |
| Cost of goods  sold                           |       | 8,203,000                                                     |       | 885,000 |   | 9,088,000 |   |
| Impairments                                   |       | 126,000                                                       |       | — |   | 126,000 |   |
| Total cost of  goods sold                     |       | 8,329,000                                                     |       | 885,000 |   | 9,214,000 |   |
| Gross profit                                  |       | 4,622,000                                                     |       | 300,000 |   | 4,922,000 |   |
| Selling, general  and administrative expenses |       | 5,058,000                                                     |       | 301,000 |   | 5,359,000 |   |
| Royalty expense                               |       | 494,000                                                       |       | 64,000 |   | 558,000 |   |
| Total other  operating costs                  |       | 5,552,000                                                     |       | 365,000 |   | 5,917,000 |   |
| Loss from  operations                         |       | (930,000                                                      | )          | (65,000 | ) | (995,000 | ) |
| Other income,  net                            |       | 185,000                                                       |       | 48,000 |   | 233,000 |   |
| Minority  interest in subsidiary net income   |       | —                                                        |       | (46,000 | ) | (46,000 | ) |
| Provision for  income taxes                   |       | (21,000                                                       | )          | (7,000 | ) | (28,000 | ) |
| Net loss                                      |       | $                                                             | (766,000   | ) | $ | (70,000 | ) | $ | (836,000 | ) |

 

*Financial information about geographic areas* Currently, ourrevenues, from either operating segment derived from sales to customers outsidethe United States are immaterial.

** **

**NOTE 7****            ****LEGAL PROCEEDINGS**

 

As previouslyreported, in March 2007, Sport Haley and Reserve Apparel (the “Plaintiffs”)filed a lawsuit in the District Court for the City and County of Denver in theState of Colorado. The suit alleges, among other things, that a formerinventory broker to Reserve Apparel, 1130746 Ontario Ltd., a Canadiancorporation incorporated in the Province of Ontario, Canada, d/b/a OriginalsApparel Group Co., or Originals Apparel Group, and Francis Tat-Mo Chan (the “Defendants”),knowingly, wrongfully and without authorization converted Plaintiff’s funds.Among other things, the Plaintiffs alleged that the Defendants misapplied aninventory deposit of $291,000 paid to the Defendants in March 2006 bySport Haley, which the Defendants used to offset certain amounts purportedlyowed to the Defendants by Explorer Headgear, Inc., and that the Defendantsfailed to return $177,000 which was overpaid by Sport Haley as of July 2006.The Plaintiffs have alleged claims against the Defendants for conversion andviolation of the Colorado civil theft statute as well as for unjust enrichment.Plaintiffs seek repayment of the $291,000 and $177,000 amounts and otherrelief. The Court approved the Defendants’ motion to continue the trial date,originally scheduled for May 2008, and rescheduled the trial to commenceon September 23, 2008. Based upon information that is currently available,we cannot determine whether the decision or settlement of this lawsuit willmaterially affect our financial position or the results of our operations.

 

14

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** **

**SPORT-HALEY, INC.**

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

 

This Report on Form 10-Q contains certain forward-lookingstatements, within the meaning of Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934. The words “may,”“will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” “believe,”and similar expressions, variations or the negative of these words, and anystatement regarding possible or assumed future results of operations of ourbusiness, the markets for our products, anticipated expenditures, regulatorydevelopments or competition, or other statements regarding matters that are nothistorical facts, are intended to identify forward-looking statements, althoughnot all forward-looking statements contain such identifying words. The readershould be aware that our actual results could differ materially from thosecontained in forward-looking statements. Our financial condition and the resultsof our operations will depend on a number of factors, including, but notlimited to, the following: our ability to successfully anticipate fashiontrends, design favorably accepted fashion golf apparel, effectively advertiseand communicate within the marketplace, and penetrate our chosen distributionchannels; competition within golf apparel markets; business conditions andgrowth in the fashion golf apparel market and the general economy; our abilityto successfully forecast sales and optimize inventory levels; our ability tosuccessfully manage risks associated with a high relative percentage of saleswith respect to licensed apparel, such as the Ben Hogan® apparel collections;loss of certain third party suppliers, and/or delays in receiving garments fromthird party suppliers caused by various factors, including lost or reducedmanufacturing capacity of significant suppliers, labor shortages, timelyperformance of third parties, transportation difficulties, and others;significant delays in deliveries from third party suppliers; unsatisfactoryrecourse with regard to nonconforming goods received from foreign suppliers;political and international trade relations; changes in international tradequota systems for apparel; significant reliance upon several individual foreignsuppliers; reliance upon a certain foreign person responsible for maintainingrelationships with and monitoring the performance of certain of our significantforeign suppliers; consumer spending on golf apparel; general global economicand political conditions resulting from threats or acts of war or terrorism andresponses thereto; access to capital; maintaining satisfactory relationshipswith commercial banking institutions; establishing controls with regard to andmaintaining the integrity of technology and information systems; and, relianceupon executive officers and key employees. Additional information on these andother factors that could affect our financial results is included in thediscussion below and in our Form 10-K for the year ended June 30,2007. There may be other factors not mentioned above, in the discussion belowor included in our Securities and Exchange Commission filings that may causeactual results to differ materially from any forward-looking statement. Thereader should not place undue reliance on any forward-looking statement.Neither the Company nor any of its corporate officers or key employees assumesany obligation to update any forward-looking statement as a result of newinformation, future event or development, except as required by securitieslaws.

 

All references to fiscal years are references to SportHaley’s fiscal year, which ends on June 30.

 

##### **OVERVIEW**

##### ** **

Sport-Haley, Inc.designs, purchases or contracts for the manufacture of, markets and distributeswomen’s and men’s fashion golf apparel and outerwear under the SPORT HALEY® andBen Hogan® labels. Weare represented by a network of independent wholesale sales representatives,most of whom solicit sales of both SPORT HALEY® and Ben Hogan® fashion apparelcollections on our behalf.

 

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

 

15

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HALEY®apparel line is sold separately, the line is intentionally designed in groupswith coordinated styles, color schemes and fabrics to encourage customers topurchase multiple garments. SPORT HALEY® women’s fashion apparel includes avariety of fabrics and weave patterns, including interlock, pique, Frenchterry, jersey and twill, and may feature a unique trim, a special fabric finishor extra needlework. The SPORT HALEY® name has been highly recognized as awomen’s fashion apparel brand within the premium and mid-priced golf apparelmarkets for over 20 years, in part, because of the cohesiveness of our designstaff. Catherine B. Blair, our Vice President – Merchandising and Design, hasprovided direction for the SPORT HALEY® brand for over 14 years. Ms. Blairis keenly aware of fashion trends within the women’s golf apparel market andhas kept our SPORT HALEY® fashion apparel collections on the leading edge ofthe market by including moisture wicking technical performance fabrics, such asAerocool® and Dry-Tech® 18, and several leading edge, younger looking, athleticstyle garments, while maintaining the time-honored elegance of the SPORT HALEY®brand. Certain of our premium priced SPORT HALEY® garments are trimmed withSwarovski® Austrian cut crystals, the unique and patented cutting process whichproduces ultimate brilliance, and come with a “Made with CrystallizedSwarovski® Elements” hangtag for authenticity. The technical performancefabrics, athletic style garments and Swarovski® trims have all been wellreceived by our customers.

 

BenHogan® men’s fashion apparel is designed utilizing elegant time-honored classicstyles intended to garner nearly instantaneous brand recognition. The BenHogan® label has been widely recognized within the golf apparel industry forseveral years for continually providing elegant men’s fashion golf apparel ofimpeccable quality in keeping with the image of Mr. Hogan. While eachproduct in the Ben Hogan® apparel line is sold separately, the line isintentionally designed in groups with coordinated styles, color schemes andfabrics to encourage customers to purchase multiple garments. Ben Hogan®apparel is manufactured using a variety of fabrics, including wool, silk andcashmere, and weave patterns, including pique, jersey and twill, and mostpieces feature a unique trim, a special fabric finish or extra needlework. BenHogan® men’s apparel is marketed in the premium-price markets to elite golfprofessional shops, upscale resorts and exclusive department stores. Wedistribute Ben Hogan® apparel pursuant to our license agreement with Callaway.

 

Top-Flite®branded golf apparel was designed for distribution to large retail stores inthe low-price markets pursuant to our license agreement with Callaway. Brandedapparel is generally produced in mass quantities and usually utilizes muchsimpler designs and is of much lesser quality than the fashion apparel garmentswhich we sell in the premium and mid-priced markets. While our fashion golfapparel is generally designed for two separate selling seasons each year,branded golf apparel may be designed for four or more shorter selling periodseach year. Reserve Apparel distributed Top-Flite® apparel exclusively toWal-Mart from March 2006 through August 2006. However, in late September 2006,Reserve Apparel was notified that Wal-Mart had chosen to develop a line of golfapparel under a private label rather than to continue purchasing Top-Flite®branded apparel. We redesigned Top-Flite® branded apparel to include garmentsprimarily comprised of a variety of performance fabrics, and we aggressivelymarketed the Top-Flite® apparel line to several mass retailers and big-box typehigh sales volume retail stores. While we expected our marketing efforts wouldresult in the establishment of business relationships with one or more massretailers and other big-box type high sales volume retail stores, we onlyreceived one order for Top-Flite® apparel from such a retailer for a test in 50of its stores, which we shipped in September and October 2007. Sinceour concerted efforts failed to generate orders from a major customer, wediscontinued marketing apparel bearing the Top-Flite® label in November 2007, and in March 2008 the licenseagreement with Callaway was amended to remove the Top-Flite® brand, effective January 1,2008.

 

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##### **CRITICAL ACCOUNTING POLICIESAND 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 fiscalyear ended June 30, 2007. Theestimates used by management are based upon our historical experiences combinedwith management’s understanding of current facts and circumstances. Certain ofour accounting policies are considered critical as they are both important tothe portrayal 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. Because branded apparel is generally produced in quantities tofulfill specific customer orders, branded apparel inventories are generally notprone to impairment unless a customer cancels an order after production hasbegun and an alternative customer cannot be located to purchase the merchandiseat a price in excess of its cost.

 

We recorded impairments of $5,000 and $159,000 withregard to fashion apparel inventories for the three-month and nine-monthperiods ended March 31, 2008, respectively.Comparatively,we recorded impairments of $4,000 and $126,000 with regard to fashion apparelinventories for the three-month and nine-month periods ended March 31,2007, respectively. We recorded impairments of $0 and $20,000 withregard to branded apparel for the three months and nine months ended March 31,2008, respectively, due to a customer’s cancellation of a replenishment order.Comparatively, we did not record an impairment with regard to branded apparelinventories during the three months or nine months ended March 31, 2007.

 

*Deferred Income Taxes*

 

Deferred income taxes are recognized for the expected tax consequencesin future years for differences between the tax bases of assets and liabilitiesand their financial reporting amounts, based upon enacted tax laws andstatutory tax rates applicable to the periods in which the differences areexpected to affect taxable income. Our significant deferred tax assets arerelated to net operating loss carry forwards for federal and state income tax purposes,stock-based compensation and an unrealized loss for tax purposes

 

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on a common stock investment. Governing regulations require that ouroperating losses be carried forward for income tax purposes. We maintain avaluation allowance to reduce deferred tax assets to the net amount expected tobe recovered in future periods. The estimates for deferred tax assets and thecorresponding valuation allowance require us to exercise complex judgments. Weperiodically review and adjust those estimates based upon the most currentinformation available. In accordance with Statement of Financial AccountingStandards No. 109 (“SFAS 109”), *“Accounting for IncomeTaxes,”* and based upon a review at March 31, 2008, 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 sustained profitability, wecannot be certain that our efforts will result in the generation of futureprofits. Because the recoverability of deferred tax assets is directlydependent upon future operating results, actual recoverability of deferred taxassets may differ materially from our estimates.

 

*Allowance for Doubtful Accounts*

 

Ourallowance for doubtful accounts reflects a reserve that reduces our customeraccounts receivable to the net amount estimated to be collectible. Estimatingthe credit worthiness of customers and the recoverability of customer accountsrequires us to exercise considerable judgment. In estimating the reserve foruncollectible accounts, we consider factors such as general economic andindustry-specific conditions, historical and anticipated customer performance.From time to time, we also identify delinquent customer accounts for which aspecific reserve is required. At March 31, 2008, our allowance fordoubtful accounts totaled $216,000, including a specific reserve of $116,000with respect to the potential non-recovery of a net amount due to ReserveApparel from a former inventory broker. While we consider our processes to beadequate to effectively quantify our exposure to doubtful accounts, changes ineconomic, industry or specific customer conditions may result in recoverabilityof our doubtful accounts that differs materially from our estimates.

 

*Allowance for 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 31,2008, our allowance for sales returns was $139,000. Significant changes ingeneral economic or industry conditions may yield sales returns that differmaterially from our estimates.

 

### **LIQUIDITY AND CAPITAL RESOURCES**

### ** **

The golf apparelbusiness is highly seasonal in nature, and the balance sheet amounts as of March 31,2008, may be more meaningful when compared with the amounts as of March 31,2007, rather than with the amounts at June 30, 2007.

 

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 capital

 

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expenditures overthe remainder of the current fiscal year. Our working capital requirements arehighly seasonal in nature, with greater requirements from approximately August throughOctober and February through April of each fiscal year, due tothe purchases of finished goods inventories for the spring/summer and fall/holidayselling seasons, respectively.

 

Our net accountsreceivable decreased by $189,000, or 6%, to $2,877,000 at March 31, 2008,from $3,066,000 at June 30, 2007. When compared with the March 31,2007, balance, our net accounts receivable balance at March 31, 2008,decreased by $961,000, or 25%, from $3,838,000, while net sales for thecomparable periods decreased by 10%, from $5,273,000 for the three months endedMarch 31, 2007, to $4,751,000 for the three months ended March 31,2008. We attribute the balance of the decrease between the March 31balances to our concerted efforts to further shorten our accounts receivablecollection cycles. For the nine-month periods ended March 31, 2008 and2007, changes in our accounts receivable balances and related allowancesprovided operating cash of $189,000 and $112,000, respectively.

 

Our fashionapparel inventories increased by $979,000, or 17%, from $5,814,000 at June 30,2007, to $6,793,000 at March 31, 2007. Our fashion apparel inventoriesgenerally increase during our fiscal quarter ended March 31 each year whencompared with the June 30 balance in the prior fiscal year. We generallyreceive a substantial amount of fashion apparel inventories at or near the endof our March 31 fiscal quarter each year in order to fulfill customerorders for the fall/holiday season that we begin shipping in early May eachyear. When compared with the balance of $5,400,000 at March 31, 2007, ourinventories at March 31, 2008, increased by $1,396,000, or 26%, primarilydue to increases in advance orders for our SPORT HALEY® women’s fashion apparelbetween the respective spring selling seasons and lower than expected ordersfor our Ben Hogan® men’s fashion apparel for the spring 2008 and fall 2007selling seasons. We expect to sell alarge portion of our excess fall 2007 Ben Hogan® fashion apparelinventories at a warehouse sale that we are conducting during the month of May 2008at our distribution facility. We anticipate that we will sell our excess BenHogan® inventories at prices at least equal to cost at either our warehousesale or to alternative markets and have valued those inventories accordingly atMarch 31, 2008. Our brandedapparel inventories increased by $3,000, or 100%, from $0 at June 30,2007, to $3,000 at March 31, 2008. Branded apparel inventories were $0 at March 31,2007. Our finished goods inventories also may fluctuate from period to perioddue to the timing associated with the delivery of ocean shipments, generallywith terms of free on board at the port of departure. Pending oceandeliveries of finished goods at March 31, 2008, June 30, 2007, and March 31,2007, totaled approximately $692,000, $1,255,000 and $1,168,000 respectively.Changes in our inventory balances used operating cash of $982,000 and $625,000for the nine-month periods ended March 31, 2008 and 2007, 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 acertain foreign person and certain significant foreign suppliers also sustainsthe risk that we would be left with inadequate or unsatisfactory recourseshould the goods received from a foreign supplier be nonconforming.

 

Accounts payableand accrued liabilities decreased by $983,000, or 41%, at March 31, 2008,to $1,406,000 from $2,389,000 at June 30, 2007. Accounts payable andaccrued liabilities decreased by $408,000, or 22%, from $1,814,000 at March 31,2007. The decrease of $408,000 when comparing the balance at March 31,2008, with the balance at March 31, 2007, was comprised of changes invarious liability categories. Our accounts payable with regard to fashionapparel were $532,000 at March 31,

 

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2008, a decreaseof $246,000, or 32%, when compared with accounts payable of $778,000 at March 31,2007. The $246,000 decrease was primarily attributable to the decrease inpending ocean deliveries of finished goods discussed above. Our accrued payrollexpenses were $113,000 at March 31, 2008, a decrease of $140,000, or 55%,from accrued payroll expenses of $253,000 at March 31, 2007. Included inaccrued payroll expenses at March 31, 2007, was the balance of $162,000 inseverance and other compensation payable to our former chief executive officer.Comparatively, at March 31, 2008, accrued payroll expenses included thebalance of $0 in severance and other compensation payable to our former chiefexecutive officer and the balance of $46,000 in severance and othercompensation payable to one of our former regional sales managers.

 

Commitments andcontingencies decreased by $140,000, or 79%, at March 31, 2008, to $38,000from $178,000 at June 31, 2007. We had no commitments and contingenciesrecorded at March 31, 2007. At June 30, 2007, we recorded acontingent liability of $178,000, and at December 31, 2007, we recorded anadditional contingent liability of $2,000, with regard to minimum royalties duefor calendar year 2007 in accordance with our license agreement for Top-Flite®branded apparel. In March 2008, we reached an agreement with Callaway toremove the Top-Flite® brand from the license agreement, effective January 1,2008, whereby any unpaid minimum royalties due to Callaway as of December 31,2007, with respect to Top-Flite® apparel were extinguished and forgiven. In March2008, we reversed the contingent liability with regard to Top-Flite® minimumroyalties and recorded miscellaneous income of $178,000 and we recorded acontingent liability of $38,000 with regard to calendar year 2008 minimumroyalties due as of March 31, 2008, in accordance with our licenseagreement for Ben Hogan® fashion apparel.

 

Due to thecombination of the factors discussed above, and others, during the nine-monthperiod ended March 31, 2008, our operating activities used cash of$2,431,000. Comparatively, during the nine months ended March 31, 2007,our operating activities used cash of $2,213,000.

 

For the ninemonths ended March 31, 2008, investing activities used cash of $7,000.Comparatively, for the nine months ended March 31, 2007, investingactivities used cash of $414,000. As previously reported, on September 21,2006, Sport Haley entered into an agreement with Explorer Gear to purchase its49% ownership interest in Reserve Apparel for a lump sum cash payment of$375,000, since which time Reserve Apparel has been a wholly-owned subsidiaryof Sport Haley. During the nine months ended March 31, 2008 and 2007, weexpended $7,000 and $39,000, respectively, for the purchase of property andequipment, and $157,000 and $202,000, respectively, in depreciation andamortization was charged to current operations.

 

We maintain arevolving line of credit agreement with a commercial bank. The revolving lineof credit agreement, renewed by amendment through December 5, 2008,provides for an amended maximum loan amount of $2,000,000, collateralized by acertificate of deposit held at the commercial bank in the amount of $2,000,000,which earns a market rate of interest. We generally maintain the line of creditto facilitate the issuance of letters of credit for inventory purchases fromoffshore suppliers and, if necessary, to fund any temporary working capitalneeds. Borrowings under the amended line of credit agreement accrue interest at1.250% plus the one-month LIBOR rate. Prior to its most recent amendment, therevolving line of credit agreement provided for a maximum loan amount of$3,000,000 and interest accrued on borrowings at the bank’s prime rate.Balances due on the line of credit were $500,000 and $0 at March 31, 2008or 2007, respectively. During the nine months ended March 31, 2008, weborrowed $1,850,000 under the letter of credit agreement to fund temporaryworking capital needs, and our repayments during the nine-month period totaled$1,350,000. We had no borrowings or repayments under the line of credit duringthe nine months ended March 31, 2007. At March 31, 2008 and 2007, wehad $312,000 and $810,000, respectively, in outstanding letters of credit thatwere issued to foreign

 

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suppliers inaccordance with finished goods inventory purchase commitments. Outstandingletters of credit reduce the amount available for borrowing under the line ofcredit agreement.

 

For the ninemonths ended March 31, 2008, financing activities provided cash of$500,000. Comparatively, for the nine months ended March 31, 2007,financing activities used cash of $2,332,000. As previously reported, wecommenced a modified “Dutch Auction” tender offer to purchase shares of ourcommon stock on January 3, 2007. On February 8, 2007, we transferred$2,332,000 to fund the purchase of 485,762 shares of our common stock at aprice of $4.80 per share. Since the completion of the tender offer, we have had2,284,490 shares of common stock outstanding.

 

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 2008. While we also havealternative sources of financing, including the factoring of customer accountsreceivable, we do not anticipate using alternative sources of financing duringthe remainder of fiscal 2008. However, our capital needs will depend on manyfactors, including the need to finance required inventory levels, the successof current sales and marketing programs, timely collections of trade accountsreceivable and various other factors.

 

**RESULTSOF OPERATIONS**

 

*Fashionapparel*

 

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

 

Net sales of fashion apparel for the three months ended March 31,2008, were $4,740,000, a decrease of $533,000, or 10%, from net fashion apparelsales of $5,273,000 for the comparable three-month period in the prior fiscalyear. Net sales of fashion apparel for the nine months ended March 31,2008, were $12,532,000, a decrease of $419,000, or 3%, from net fashion apparelsales of $12,951,000 for the comparable nine-month period in the prior fiscalyear. The decreases in sales of fashion apparel for the three and nine-monthperiods were primarily comprised of increases in sales of SPORT HALEY® fashionapparel that were more than offset with decreases in sales of Ben Hogan®fashion apparel between the respective periods. Net sales of our SPORT HALEY®fashion apparel collections were $2,196,000 and $5,945,000 for the three andnine months ended March 31, 2008, respectively, increases of $350,000, or19%, and $920,000, or 18%, from net sales of $1,846,000 and $5,025,000 for thethree and nine months ended March 31, 2007, respectively. Net sales of ourBen Hogan® fashion apparel collections were $2,397,000 and $6,185,000 for thethree and nine months ended March 31, 2008, respectively, decreases of$872,000, or 27%, and $1,307,000, or 17%, from net sales of $3,269,000 and$7,492,000 for the three and nine months ended March 31, 2007,respectively. The remainder of our fashion apparel net sales was comprised of embroideryand shipping revenues. Markets for women’s fashion golf apparel appear to havesomewhat flattened out, because we are now experiencing slight percentagedecreases in advance orders for the SPORT HALEY® women’s collections withrespect to our fall 2008 selling season. We consider Ben Hogan® fashionapparel, which is marketed in accordance with a licensing agreement we maintainwith Callaway for such apparel, to be a key component of our fashion apparelbusiness. We attribute the decrease in Ben Hogan® fashion apparel salesprimarily to dramatic changes in the country club and resort markets in whichwe operate. Historically, the country club and resort markets preferred to sellhigh-quality apparel that was not broadly distributed within other retailmarkets. However, with the introduction and favorable market acceptance ofmoisture-

 

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wicking and other performance garments within golf apparel markets,country clubs and resorts have begun to carry apparel brands such as Nike andAdidas, which are primarily comprised of performance fabrics and are globallydistributed into numerous markets other than country clubs and resorts. Webelieve that the broad penetration of Nike and Adidas into golf apparel marketshas diluted the value associated with the exclusivity of brands such as our BenHogan® fashion apparel, at least on a temporary basis. In order to bolsterfuture sales of Ben Hogan® fashion apparel, we have focused our marketingefforts on increasing our market presence in upscale retail stores and onpenetrating further into corporate markets. However, we expect that our effortswill not generate sales within the other markets for our Ben Hogan® fashionapparel which are sufficient to offset the sales we have lost within thecountry club and resort market, at least over the near term, and that decreasesin sales of Ben Hogan® fashion apparel will continue throughout our fall 2008selling season.

 

The valuation of inventories, when the market price for suchinventories is lower than cost, negatively impacts our gross profit percentage,because a reduction of inventory value causes an increase in our cost of goodssold, thereby reducing our gross profit. Our fashion apparel inventories onhand at March 31, 2008, were predominantly comprised of spring 2008 andfall 2008 SPORT HALEY® collections and fall 2007, spring 2008 and fall 2008 BenHogan® collections. We anticipate that we will begin shipping our fall 2008fashion apparel inventories in May 2008. Comparatively, our fashionapparel inventories on hand at March 31, 2007, were predominantlycomprised of spring 2007 and fall 2007 SPORT HALEY® and Ben Hogan® collections. We expect tosell a large portion of our excess fall 2007 Ben Hogan® fashion apparel inventories at awarehouse sale that we are conducting during the month of May 2008 at ourdistribution facility. We anticipate that we will sell our excess Ben Hogan®inventories at prices at least equal to cost at either our warehouse sale or toalternative markets and have valued those inventories accordingly at March 31,2008. Gross profit with regard to our fashion apparel was negativelyimpacted by $5,000 and $159,000 for the three and nine months ended March 31,2008, respectively, by the adjustment of our finished goods inventories to thelower of cost or market. Comparatively, gross profit with regard to our fashionapparel was negatively impacted by $4,000 and $126,000 for the three and ninemonths ended March 31, 2007, by similar lower of cost or marketadjustments.

 

Gross profit with regard to our fashion apparel is also affected bysales 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. Within the past six months, we have begunselling excess Ben Hogan® fashion apparel inventories to alternative markets athigher prices than are offered in the markets we have previously utilized inorder to minimize the negative impact on gross profit associated with thevaluation of excess inventories. For the nine months ended March 31, 2008,we recorded net sales of $530,000 and profit of $9,000, which included netsales $143,000 and profit of $7,000 during the three months ended March 31,2008, with regard to sales of excess inventories for SPORT HALEY® and BenHogan® fashion apparel collections for our fall 2007 selling season.Comparatively, for the nine months ended March 31, 2007, we recorded netsales of $543,000 and loss of $176,000, which included net sales $177,000 andloss of $33,000 during the three months ended March 31, 2007, with regardto sales of excess inventories for SPORT HALEY® and Ben Hogan® fashion apparelcollections for our fall 2006 selling season.

 

Asa percentage of net sales, gross margin of our fashion apparel, was 38% for thethree months ended March 31, 2008, and 35% for the same three-month periodin the prior fiscal year. Gross margin of our

 

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fashionapparel, as a percentage of net sales, was 38% for the nine-month period ended March 31,2008, and 36% for the comparable nine-month period in the prior fiscal year. Our gross margins may not be comparableto other companies within the golf apparel industry. We have consistentlyincluded the cost of merchandise sold, including import charges, in-boundfreight, allocated overhead, freight out, embroidery costs and other charges inour cost of goods sold. Our overhead allocation includes our production costsplus a portion of our distribution costs, such as receiving and inspectioncosts, but we include some of the other costs of distribution, such as aportion of our warehousing and other handling costs, in selling, general andadministrative expenses. We include royalty payments, relating to sales oflicensed apparel, in selling, general and administrative expenses.

 

Selling, general and administrative expenses with regard to fashionapparel increased by $45,000, or 2%, to $1,897,000 for the three months ended March 31,2008, from $1,852,000 for the comparable three-month period in the prior fiscalyear. Selling, general and administrative expenses with regard to fashionapparel increased by $82,000, or 2%, to $5,140,000 for the nine months ended March 31,2008, from $5,058,000 for the comparable nine-month period in the prior fiscalyear. The comparative increase for the nine-month period was in general due toour accrual of $55,000 in severance compensation due to one of our formerregional sales managers. As a percentage of net sales, selling, general andadministrative expenses with regard to our fashion apparel were 40% and 41%,and 35% and 39%, for the three months and nine months ended March 31, 2008and 2007, respectively.

 

We recorded royalty expense of $181,000 and $196,000 for the three monthsended March 31, 2008 and 2007, and $438,000 and $494,000 for the ninemonths ended March 31, 2008 and 2007, with regard to net sales of fashionapparel, respectively. Royalty expense is due to Callaway in accordance withthe license they previously granted us to market men’s fashion apparel bearingthe Ben Hogan® label. In accordance with the license agreement for Ben Hogan®fashion apparel, our royalty expense for the three months ended March 31,2008, included an accrual of $38,000 with regard to minimum quarterly royaltiesdue to Callaway for calendar year 2008.

 

Income (loss) from operations with regard to fashion apparel for thethree months ended March 31, 2008, was ($266,000), a difference of($83,000), or (45%), from ($183,000) for the comparable three-month period inthe prior fiscal year. Primarily because of significant expenses associatedwith our annual participation in the PGA tradeshow, which is generally held ator near the end of January each year, historically, we have not generatedincome from fashion apparel operations during the three months ended March 31in any given fiscal year. Income (loss) from operations with regard to fashionapparel for the nine months ended March 31, 2008, was ($809,000), animprovement of $121,000 or 13%, from ($930,000) for the comparable nine-monthperiod in the prior fiscal year.

 

*Branded apparel*

 

We previously considered Top-Flite® branded apparel, which we marketedpursuant to our licensing agreement with Callaway for such apparel, to be a keycomponent in our overall business strategies, designed to return the Company tosustained profitability. Net sales of Top-Flite® branded apparel of $11,000 and$158,000 for the three months and nine months ended December 31, 2007,respectively, were comprised of shipments to a retailer for a test in 50 of itsstores and the disposition of inventories related to the cancellation by thatretailer of a portion of its original purchase order. Net sales of Top-Flite®branded apparel of $1,185,000 for the nine months ended March 31, 2007,were comprised of sales to Wal-Mart of $1,000,000 and sales of $185,000 toother markets with regard to the disposition of inventories related tocancellations of purchase orders by Wal-Mart. We shipped Top-Flite® brandedapparel to Wal-Mart from March 2006 through August 2006, after which we were notified thatWal-Mart

 

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had chosen todevelop its own private label for golf apparel and discontinue sellingTop-Flite® apparel. We redesigned Top-Flite® branded apparel to includegarments primarily comprised of a variety of performance fabrics, and weaggressively marketed Top-Flite® apparel to several mass retailers and big-boxtype high sales volume retail stores. We expected our marketing efforts wouldresult in the establishment of business relationships with one or more massretailers and other big-box type high sales volume retail stores. However, weonly received one order for Top-Flite® apparel from such a retailer for a testin 50 of its stores, which we shipped in September and October 2007.Since our concerted efforts failed to generate orders from a major customer, wediscontinued marketing apparel bearing the Top-Flite® label in November 2007,and in March 2008 the license agreement was amended to remove theTop-Flite® brand, effective January 1, 2008.

 

Ourdistribution of Top-Flite® branded apparel to the mass retail market generallygenerated gross margins lower than those expected to be achieved in the premiumand mid-price markets where we distribute our SPORT HALEY® and Ben Hogan®fashion apparel brands. Branded apparel is generally sold at much lower pricesthan for higher quality fashion apparel, and gross margins are also expected tobe lower for branded apparel than for fashion apparel. Other companies withinthe golf apparel industry may or may not operate within the lower-price brandedapparel markets. Gross profit with regard to our branded apparel has generallynot been affected by dispositions of excess inventories at reduced sales pricesand the valuation of excess inventories to the lower of cost or market, becausewe generally purchased quantities of branded apparel in amounts equal toquantities ordered by specific customers. However, since we generally purchasedquantities sufficient to fulfill initial and anticipated replenishment orders,in certain instances we were left with excess branded apparel inventories whena customer canceled a replenishment order. A disposition of excess brandedapparel inventories negatively impacted our gross profit percentage even whensuch inventories were properly valued to the lower of cost or market, becausesuch valuation caused sales to be recorded with gross profit at or near zero.For the three months and nine months ended March 31, 2008, we recordedimpairments of $0 and $20,000, respectively, with regard to the valuation ofexcess branded apparel inventories to the lower of cost or market.Comparatively, for the three months and nine months ended March 31, 2007,we did not record any impairments with regard to the valuation of excessbranded apparel inventories to the lower of cost or market. As percentage ofnet sales, gross profit of our branded apparel, was (55%) and 0%, and 0% and25%, for the three months and nine months ended March 31, 2008 and 2007,respectively.

 

Selling,general and administrative expenses were $4,000 and $132,000 with regard tobranded apparel for the three months and nine months ended March 31, 2008,decreases of $91,000, or 96%, and $169,000, or 56%, from $95,000 and $301,000for the three months and nine months ended March 31, 2007, respectively.The decreases primarily related to differences between the comparable periodsin allocated management and personnel costs, which totaled $0 in the threemonths ended March 31, 2008 versus $65,000 in the three months ended March 31,2007, and $77,000 in the nine-month period ended March 31, 2008, versus$257,000 in the nine-month period ended March 31, 2007. The decrease inallocated management costs related to changes in the ownership of ReserveApparel and the loss of the Wal-Mart account. Prior to our purchase of theminority interest in Reserve Apparel from Explorer Gear in September 2006,allocated management costs included a portion of Sport Haley’s costs withregard to managing Reserve Apparel and certain reimbursable expenses incurredby Explorer Gear on behalf of Reserve Apparel. Because Wal-Mart ceasedpurchasing Top-Flite® branded apparel from us shortly after we purchased theminority interest, the business operations of Reserve Apparel weresignificantly reduced and we discontinued our allocation of Sport Haleymanagement costs to Reserve Apparel, effective October 1, 2006. From October 1,2006, through October 31, 2007, personnel costs allocated to our brandedapparel operations consisted of salaries and benefits paid to an executiveSport Haley hired in November 2006 primarily to market Top-Flite® apparelon behalf of Reserve Apparel. We stopped

 

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allocatingpersonnel costs to Reserve Apparel in November 2007, when we discontinuedmarketing Top-Flite® branded apparel altogether. As a percentage of net brandedapparel sales, related selling, general and administrative expenses were 84%and 25% for the nine months ended March 31, 2008 and 2007, respectively.

 

Werecorded royalty expense of ($2,000) and $0 for the three months ended March 31,2008 and 2007, and $9,000 and $64,000 for the nine months ended March 31,2008 and 2007, with respect to net sales of branded apparel, respectively.Royalty expense is due to Callaway in accordance with the license theypreviously granted us to market branded apparel bearing the Top-Flite® label. At June 30, 2007, we recorded acontingent liability of $178,000, and at December 31, 2007, we recorded anadditional contingent liability of $2,000, with regard to minimum royalties duefor calendar year 2007 in accordance with our license agreement for Top-Flite®branded apparel. In March 2008, we reached an agreement with Callaway toremove the Top-Flite® brand from the license agreement, effective January 1,2008, whereby any unpaid minimum royalties due to Callaway as of December 31,2007, with respect to Top-Flite® apparel were extinguished and forgiven.Therefore, in March 2008, we reversed the contingent liability with regardto Top-Flite® minimum royalties and recorded miscellaneous income of $178,000.

 

Income(loss) from operations with regard to branded apparel for the three monthsended March 31, 2008, was ($8,000), an improvement of $87,000, or 92%,from ($95,000) for the comparable three-month period in the prior fiscal year.Income (loss) from operations with regard to branded apparel for the ninemonths ended March 31, 2008, was ($141,000), a difference of ($76,000) or(117%), from ($65,000) for the comparable nine-month period in the prior fiscalyear.

 

*Other income*

 

Other income, net, was $196,000 for the three months ended March 31,2008, an increase of $125,000, or 176%, from $71,000 for the comparablethree-month period in the prior fiscal year. Other income, net, was $276,000for the nine months ended March 31, 2008, an increase of $43,000, or 36%,from $233,000 for the comparable nine-month period in the prior fiscal year.Other income, net for the three months and nine months ended March 31,2008, primarily consisted of miscellaneous income of $178,000 with regard tothe extinguishment and forgiveness of minimum royalties related to the removalof the Top-Flite®brand from our license agreement with Callaway and from interest earned on cash and cash equivalent balances held atvarious financial institutions. The increases were partially offset by lowerrates of interest earned on lower balances of cash and cash equivalents duringthe respective periods. In February 2007, we expended $2,332,000 torepurchase shares of our common stock, thereby substantially reducing our cashand cash equivalents.

 

*Net income (loss)*

 

Net loss for the three months ended March 31,2008, was ($80,000), an improvement of $138,000, or 63%, as compared with thenet loss of ($218,000) for the comparable three-month period in the priorfiscal year. Net loss for the nine months ended March 31, 2008, was($683,000), an improvement of $153,000, or 18%, as compared with the net lossof ($836,000) for the comparable nine-month period in the prior fiscal year. Wehad federal and state net operating loss carry forwards of approximately $7.5million and $9.7 million at March 31, 2008, that we estimated may berecoverable at income tax rates of 34% and 5%, respectively. In accordancewith SFAS 109 and based upon a review at March 31, 2008, 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 additional markets for our SPORT HALEY® and Ben Hogan® fashion

 

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apparel brands, we cannot be certain that our efforts will result inthe generation of future profitssufficient to offset our significant net operating loss carry forwards prior totheir expirations. Accordingly, we did not record benefits from income taxesassociated with the corresponding losses for the respective nine-month periodended March 31, 2008.

 

*Earnings(loss) per share*

 

Basicand diluted earnings (loss) per common share were ($0.09) and ($0.07) for thethree-month periods ended March 31, 2008 and 2007, respectively. Basic anddiluted earnings (loss) per common share were ($0.31) and ($0.23) for thenine-month periods ended March 31, 2008 and 2007, respectively. Allsecurities options were anti-dilutive and therefore excluded from the per sharecalculations with respect to periods in which net losses were incurred.

 

*Bookvalue*

 

Ourbook value per common share was $4.68 at March 31, 2008, $4.98 at June 30,2007 and $5.19 at March 31, 2007.

 

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** **

**SPORT-HALEY, INC.**

**ITEM 3 QUALITATIVE ANDQUANTITATIVE DISCLOSURES**

**ABOUT MARKET RISK**

 

Market risk representsthe risk of loss that may impact the financial position, results of operationsor cash flows due to adverse changes in financial and commodity market pricesand rates. We are exposed to market risk with regard to changes in UnitedStates interest rates. This exposure is directly related to our normaloperating and funding activities. Historically, and as of March 31, 2008,we have not used derivative instruments or engaged in hedging activities. Ourmarket risk has not changed significantly from December 31, 2007.

 

**InterestRate Risk**

 

We maintain a revolvingline of credit agreement with a commercial bank that provides for interest atthe bank’s prime rate. The agreement provides for a maximum loan amount of$2,000,000 collateralized by a certificate of deposit held at the commercialbank in the amount of $2,000,000, which earns a market rate of interest.Borrowings under the line of credit agreement accrue interest at 1.250% plusthe one-month LIBOR 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. We had $500,000 outstanding in net borrowings under the line of creditat March 31, 2008. Increases in the one-month LIBOR rate could increasethe interest expense with respect to borrowings under the line of credit.Outstanding letters of credit reduce the amount available for borrowing underthe line of credit. We had outstanding letters of credit totaling $312,000 at March 31,2008. We do not use derivative financial instruments to manage interest raterisk.

 

From time to time, wemaintain short-term investments in low risk and no risk financial instruments,readily convertible into cash, which earn interest at variable rates. Our cashbalances held at financial institutions regularly exceed federally insuredlimits.

 

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**SPORT-HALEY, INC.**

**ITEM 4 CONTROLS AND PROCEDURES**

 

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

 

Ourmanagement, with the participation of our Chief Executive Officer and our ChiefFinancial Officer, conducted an evaluation of the effectiveness of ourdisclosure controls and procedures pursuant to Rule 13a-15 under theSecurities Exchange Act of 1934 as of the end of the period covered by thisreport. Based on that evaluation, management, including the Chief ExecutiveOfficer and Chief Financial Officer, concluded that, as of the end of theperiod covered by this report, our disclosure controls and procedures wereeffective in reaching a reasonable level of assurance that: (a) allmaterial information relating to the Company, required to be disclosed in thisreport, was made known to management in a timely manner; and (b) informationwas recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and regulations.

 

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

 

During our third quarterof fiscal 2008, we did not institute any significant changes in internalcontrols over financial reporting as defined in Rules 13a-15(f) or15d-15(f) that materially affected, or are reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

Our management, including the Chief ExecutiveOfficer and the Chief Financial Officer, does not expect that our disclosurecontrols and procedures or our internal controls over financial reporting will,in all instances, prevent all errors and all fraud. A control system, no matterhow well conceived or operated, can only provide reasonable, not absolute,assurance that the objectives of the control system are met. While our controlsystems provide 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 be faulty,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**

**OTHER INFORMATION**

 

### **ITEM 1**       LEGAL PROCEEDINGS

### ** **

In March 2007, SportHaley and Reserve Apparel (the “Plaintiffs”) filed a lawsuit in the DistrictCourt for the City and County of Denver in the State of Colorado. The suitalleges, among other things, that a former inventory broker to Reserve Apparel,1130746 Ontario Ltd., a Canadian corporation incorporated in the Province ofOntario, Canada, d/b/a Originals Apparel Group Co., or Originals Apparel Group,and Francis Tat-Mo Chan (the “Defendants”), knowingly, wrongfully and withoutauthorization converted Plaintiff’s funds. Among other things, the Plaintiffsalleged that the Defendants misapplied an inventory deposit of $291,000 paid tothe Defendants in March 2006 by Sport Haley, which the Defendants used tooffset certain amounts purportedly owed to the Defendants by Explorer Headgear, Inc.,and that the Defendants failed to return $177,000 which was overpaid by SportHaley as of July 2006. The Plaintiffs have alleged claims against theDefendants for conversion and violation of the Colorado civil theft statute aswell as for unjust enrichment. Plaintiffs seek repayment of the $291,000 and$177,000 amounts and other relief. The Court approved the Defendants’ motion tocontinue the trial date, originally scheduled for May 2008, andrescheduled the trial to commence on September 23, 2008.

 

### **ITEM 1A**    RISK FACTORS

### ** **

Therehave been no material changes from the risk factors previously disclosed inItem 1A of our annual report on Form 10-K for the year ended June 30,2007.

 

**ITEM 4****      ****SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Sport Haley held its annual meeting of shareholders onFebruary 21, 2008. The meeting was continued on February 25, 2008.The following matters were considered and approved by the shareholders:

 

(a)   To elect five directors to hold officefor one-year terms or until their successors are elected and qualified:

 
| ** **            | ** ** | ** ** | ** ** | **Votes**            | ** ** | ** ** | ** ** |
|-----------------------|------------|------------|------------|----------------------|------------|------------|------------|
| ** **            | ** ** | **Votes**  | ** ** | **Against**          | ** ** | **Total**  | ** ** |
| ** **            | ** ** | **For**    | ** ** | **or Withheld** | ** ** | **Voted**  | ** ** |
|                  |       |       |       |                 |       |       |       |
| Ronald J. Norick      |       | 1,429,278  |       | 766,035              |       | 2,195,313  |       |
| James R.  TenBrook    |       | 1,429,278  |       | 766,035              |       | 2,195,313  |       |
| Mark J. Stevenson     |       | 1,429,278  |       | 766,035              |       | 2,195,313  |       |
| William O.  Johnstone |       | 1,435,178  |       | 760,135              |       | 2,195,313  |       |
| Donald W. Jewell      |       | 1,435,178  |       | 760,135              |       | 2,195,313  |       |

 

(b)   To ratify appointment of Gordon Hughes &Banks LLP as the independent registered public accountants for Sport Haley:

 
| Votes For        |   | 2,165,392 |   |
|------------------|--------|-----------|--------|
| Votes Against    |   | 24,049    |   |
| Votes Abstaining |   | 5,872     |   |
| Total Voted      |   | 2,195,313 |   |

 

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(d)   To approve the Sport-Haley, Inc.2008 Stock Option Plan:

 
| Votes For        |   | 966,035 |   |
|------------------|--------|---------|--------|
| Votes Against    |   | 499,896 |   |
| Votes Abstaining |   | 500     |   |
| Non-Voted        |   | 728,882 |   |

 

(d)   To authorize to vote upon such otherbusiness as may properly come before the meeting or any adjournment orpostponement thereof:

 
| Votes For        |   | 442,622 |   |
|------------------|--------|---------|--------|
| Votes Against    |   | 474,964 |   |
| Votes Abstaining |   | 548,845 |   |
| Non-Voted        |   | 728,882 |   |

 

### **ITEM 5**       OTHER INFORMATION

### ** **

(a)   On February 21, 2008, our Board ofDirectors approved an amendment to our 2008 Stock Option Plan (the “2008 Plan”),amending the number of options to purchase common stock authorized under the2008 Plan as follows: 50,000 non-qualified options and 150,000 incentiveoptions. A copy of the 2008 Plan, as amended, is attached as Exhibit 10.1.

 

(b)   We have made no materialchanges to the procedures by which our common shareholders may recommendnominees to the Nominating Committee of our Board of Directors.

 

### **ITEM 6**       EXHIBITS

### ** **

| Exhibit 10.1 |   | Sport-Haley, Inc.  2008 Stock Option Plan                                                                                                                         |
|-------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |   |                                                                                                                                                                   |
| Exhibit 31.1 |   | Certification of Donald  W. Jewell pursuant to Exchange Act Rule 13a-14(a)                                                                                        |
|              |   |                                                                                                                                                                   |
| Exhibit 31.2 |   | Certification of  Patrick W. Hurley pursuant to Exchange Act Rule 13a-14(a)                                                                                       |
|              |   |                                                                                                                                                                   |
| Exhibit 32.1 |   | Certifications of  Donald W. Jewell and Patrick W. Hurley pursuant to 18 U.S.C. §1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |

 

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**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 15, 2008 |                                            | /s/ PATRICK W. HURLEY |   |
|       |              | Patrick W. Hurley                               |
|       |              | Chief Financial Officer                         |
| * *   | * *          | *(Principal Financial and  Accounting Officer)* |
|            |                   |                                                 |  |  |

 

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