## ** **

## **FORM 10-K**

## ** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 
| **(Mark One)** |
|----------------|
| **x**          | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES   EXCHANGE ACT OF 1934** |
| ** **     | **For the fiscal year ended June 30, 2007** |
| **OR**         |
| **o**          | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **     | **for the transition period  from                    to                    ** |

 

**Commission file number:  0-51715**

 

**SPORT-HALEY, INC.**

(Exact Name of Registrantas Specified in Its Charter)

 

| **Colorado**                              | ** ** | **84-1111669**         |
|-------------------------------------------|------------|------------------------|
| (State or Other  Jurisdiction of          |       | (I.R.S. Employer       |
| Incorporation or  Organization)           |       | Identification Number) |
|                                      |       |                   |
| **4600  East 48th Avenue**                |       |                   |
| **Denver,  Colorado**                     | ** ** | **80216-3215**         |
| (Address of Principal  Executive Offices) |       | (Zip Code)             |

 

Registrant’s telephonenumber, including area code:  **(303) 320-8800**

 

Securities registeredpursuant to Section 12(b) of the Exchange Act:

 
| **Title of each class**    | ** ** | **Name of each exchange on which registered** |
|-------------------------------------------|------------|-----------------------------------------------------------------------------|
| **Common  Stock, no par value per share** | ** ** | **NASDAQ  Global Market****SM**                                             |

 

Securities registeredpursuant to section 12(g) of the Exchange Act:

 

**None**

 

Indicate by check mark whether the registrant is a well-known seasonedissuer, as defined in Rule 405 of the Securities Act.

Yes oNo  x

 

Indicate by check mark if the registrant is not required to filereports pursuant to Section 13 or Section 15(d) of the Act.

Yes oNo  x

 

Indicate by checkmark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.                                                                             Yes xNo  o

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer   o  AcceleratedFiler   o  Non-acceleratedFiler x

 

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

 

As of December 31, 2006, the last business day of the registrant’s mostrecently completed second fiscal quarter, the aggregate market value of the2,770,252 shares of Common Stock (the Registrant’s only common equity) held bynon-affiliates was $12,463,000 based on the closing sale price of theRegistrant’s Common Stock on the NASDAQ Global MarketSM on such date. For purposes of theforegoing calculation only, each of the Registrant’s officers and directors isdeemed to be an affiliate. This determination of affiliate status is not aconclusive determination for other purposes.

 

There were 2,284,490 shares of the Registrant’s Common Stockoutstanding at the close of business on September 14, 2007.

 

DOCUMENTS INCORPORATED BYREFERENCE:

 

**None**

** **

 

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**PART I**

 

**ITEM 1. BUSINESS**

 

**General**

 

Sport-Haley, Inc. (“Sport Haley”) consolidates theoperations of Sport-Haley with Reserve Apparel Group LLC (“Reserve Apparel”)for financial reporting purposes. Collectively throughout this report, SportHaley and Reserve Apparel may be referred to as the “Company,” “we,” “us” or “our”.

 

Sport Haley designs, purchases, contracts for themanufacture of, markets and distributes men’s and women’s fashion golf appareland outerwear under the SPORT HALEY® and Ben Hogan® labels. Our fashion golfapparel collections, known for their innovative designs, quality fabrics,generous fits and classic styles, are primarily marketed in the premium andmid-price markets, through a network of independent sales representatives anddistributors, to golf professional shops, country clubs, resorts and exclusive departmentstores throughout the United States and by certain distributors withininternational markets. Sport Haley distributes Ben Hogan® apparel pursuant to alicense agreement with Callaway Golf Company (“Callaway”). We have focused onexpanding brand recognition and appeal for our SPORT HALEY® and Ben Hogan®fashion apparel labels by continually improving the styling, sourcing andfabrications of the garments in order to continue to offer our customershigh-quality garments at competitive prices. Other services that we offer include optional custom embroideringof our fashion apparel with a personalized club, resort or corporate logo.Sport Haley was incorporated in Colorado in January 1991. The principalexecutive offices are located at 4600 East 48th Avenue, Denver, Colorado80216-3215, and the main telephone number is (303) 320-8800.

 

Reserve Apparel, formed in November 2005, designs,purchases, contracts for the manufacture of, markets and distributes brandedgolf apparel and outerwear under the Top-Flite® label. In accordance with theLLC operating agreement, as of June 30, 2006, Sport Haley owned a 51% interestin Reserve Apparel and Explorer Gear USA, Inc. (“Explorer Gear”) owned a 49%interest. Effective September 21, 2006, Sport Haley purchased Explorer Gear’smembership interest, and thereafter Reserve Apparel has been a wholly-ownedsubsidiary of Sport Haley. Reserve Apparel distributes Top-Flite® apparelpursuant to a license agreement with Callaway.

 

**Products and Product Design**

 

SPORT HALEY® fashion apparel is comprised almostexclusively of women’s garments and accessories, designed by utilizing classicstyles with contemporary influences intended to develop and maintain brandrecognition and loyalty, on or off the golf course. While each product in theSPORT HALEY® fashion apparel line is sold separately, the line is intentionallydesigned in groups with coordinated styles, color schemes and fabrics toencourage customers to purchase multiple garments. SPORT HALEY® women’s fashionapparel is manufactured using a variety of fabrics and weave patterns,including interlock, pique, French terry, jersey and twill, and may feature aunique trim, a special fabric finish or extra needlework. The SPORT HALEY®brand has been highly recognized within the premium and mid-priced fashion golfapparel markets for over 20 years, in part, because of the cohesiveness of ourdesign staff. Catherine B. Blair has provided direction for the SPORT HALEY®brand for over 15 years. Ms. Blair is keenly aware of fashion trends within thewomen’s golf apparel market and has modified the SPORT HALEY® fashion apparelcollections to include 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.

 

The following table presents the suggested retailprice ranges for various SPORT HALEY® fashion apparel items:

 

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| **SPORT HALEY®**    | ** ** | **Suggested Retail**                         | ** ** |
|-------------------------------|------------|---------------------------------------------------|------------|
| **Women’s Apparel** | ** ** | **Price Range**                              | ** ** |
| Tops                          |       | $  36 - $   78 |       |
| Shorts, skirts  and skorts    |       | $  58 - $   88 |       |
| Pants                         |       | $  52 - $   98 |       |
| Sweaters                      |       | $  68 - $ 170            |       |
| Outerwear                     |       | $  68 - $ 150            |       |
| Accessories                   |       | $  19 - $   52 |       |

 

Ben Hogan® men’s fashion apparel is designed utilizingelegant time-honored classic styles intended to garner nearly instantaneousbrand recognition. The Ben Hogan® label has been highly recognized within thegolf apparel industry for the past six years for continually providing elegantmen’s fashion golf apparel of impeccable quality in keeping with the image ofMr. Hogan. Since its introduction in 2002, Ben Hogan® fashion apparel has beendesigned and sourced by Donald W. Jewell, who also serves as our ChiefExecutive Officer and President. While each product in the Ben Hogan® apparelline is sold separately, the line is intentionally designed in groups withcoordinated styles, color schemes and fabrics to encourage customers topurchase multiple garments. Ben Hogan® apparel is manufactured using a varietyof fabrics, including wool, silk, cashmere and moisture wicking cotton, andweave patterns, including pique, jersey and twill, and most pieces feature aunique trim, a special fabric finish or extra needlework. Ben Hogan® men’sapparel is marketed in the premium-price markets to elite golf professionalshops, upscale resorts and exclusive department stores.

 

The following table presents the suggested retailprice ranges for various Ben Hogan® fashion apparel items:

 
| **Ben  Hogan®**   | ** ** | **Suggested  Retail**                   | ** ** |
|------------------------|------------|-----------------------------------------|------------|
| **Men’s Apparel** | ** ** | **Price  Range**                        | ** ** |
| Shirts                 |       | $  70 - $   98 |       |
| Shorts                 |       | $  72 - $ 110            |       |
| Pants                  |       | $  94 - $ 124            |       |
| Sweaters               |       | $  76 - $ 374            |       |
| Outerwear              |       | $  80 - $ 348            |       |
| Accessories            |       | $  28                         |       |

 

We closely coordinate the designing functions with oursales and production operations. The process for our design function for eachcollection of garments is a continual cycle of selecting fabric and weavepatterns, coloring, styling, and sewing techniques, which includes supervisingthe production of prototype garments. We primarily utilize in-house designersto develop our apparel collections. Our design staff is responsible fornegotiating prices and minimum quantities with suppliers, arranging for patternand sample manufacturing, and coordinating finished goods delivery scheduleswith production personnel. The design staff also supervises the qualitycontrols for inspection of fabric samples, as well as the testing of fabricsamples for die lots, shrinkage and colorfastness. Key persons within ourdesign and production staffs periodically visit the international factories ofcertain of our suppliers that produce SPORT HALEY® and Ben Hogan® fashionapparel in order to maintain the excellence of business relationships that havebeen established over several years and to assure that quality expectationstandards and production schedules are met or exceeded.

 

SPORT HALEY® and Ben Hogan® fashion apparel isgenerally received at our warehouse, embroidery and distribution facilities inDenver, Colorado. Many apparel items, primarily shirts and tops, areembroidered with the SPORT HALEY® or Ben Hogan® logo on a sleeve of the garment.Historically, a much greater percentage of our men’s fashion apparel is customembroidered with a golf course, country club, resort or company logo than thepercentage of our women’s fashion apparel which is similarly embroidered. Wemaintain an electronic library of over 10,000 custom logos and utilize tencomputer-controlled embroidering machines, which cumulatively have the capacityto embroider up to 4,000 custom logos each day. After being embroidered to thecustomer’s specifications, our fashion apparel receives a final inspection byquality assurance personnel. Generally, customer orders are packaged andshipped from our Denver, Colorado facility.

 

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Top-Flite® branded golf apparel is designed fordistribution to large retail stores in the low-price markets. Branded apparelis usually produced in mass quantities and utilizes much simpler designs and isof much lesser quality than our fashion apparel garments which are sold in thepremium and mid-priced markets. While fashion golf apparel is generallydesigned for two separate selling seasons each year, branded golf apparel isgenerally designed for four or more shorter selling periods each year. Most ofour Top-Flite® garments are designed utilizing basic performance fabrics madefrom polyester or other man-made materials or from blends of natural andman-made materials.

 

The following table presents the suggested retailprice ranges for Top-Flite® apparel:

 
| **Top-Flite®**    | ** ** | **Suggested Retail** | ** ** |
|------------------------|------------|---------------------------|------------|
| **Men’s Apparel** | ** ** | **Price  Range**          | ** ** |
| Shirts                 |       | $ 38 - $ 42     |       |

 

Historically, we have utilized third-party vendors inCalifornia to receive and distribute Top-Flite® apparel. Each receipt ofTop-Flite® apparel could consist of several shipping containers of merchandisethat need to be sorted and palletized in accordance with our customer’spurchase order and related instructions. The vendors that we utilize forshipments of Top-Flite® apparel are generally in the business of acting as athird-party shipper for a large variety of mass retailers.

 

#### **License Agreement**

#### ** **

In May 2001, we entered into a license agreement withSpalding Sports Worldwide, Inc. (“Spalding”) that granted us the right tomarket men’s premium golf apparel under the Ben Hogan® brand name. In July2002, the license agreement was amended to expand the applicable territorycovered by the agreement to include the United Kingdom, Sweden, Mexico andvarious Caribbean countries. The original license agreement had previouslygranted us the right to market Ben Hogan® apparel within the United States. InMay 2003, Spalding changed its corporate name to The Top-Flite Golf Company,Inc. (“Top-Flite Golf”). In June 2003, the license agreement was amended toreflect Spalding’s name change to Top-Flite Golf and to grant us an additionallicense to market a full line of golf apparel bearing the Top-Flite® brand namein the United States and its territories, Mexico, Aruba, the Cayman Islands,Jamaica, the Dominican Republic, the Bahamas and the British Virgin Islands. InSeptember 2003, Callaway purchased substantially all of the assets of Top-FliteGolf including the Ben Hogan® and Top-Flite® brand names licensed to us. Ourlicense agreement with Callaway requires us to pay royalties on sales of BenHogan® fashion apparel and Top-Flite® branded apparel and to meet certainminimum annual sales and royalties on a calendar year basis. Our sales ofTop-Flite® branded apparel will be insufficient to meet either the minimumsales or royalty requirements for calendar year 2007 under the licenseagreement. While we believe that we maintain a satisfactory relationship withCallaway, we have not reached an understanding with Callaway concerning theramifications of our inability to meet the minimum sales and royaltyrequirements under the licensing agreement for calendar year 2007 with regardto Top-Flite® branded apparel. We can currently give no assurance that Callawaywill not take the position that the license agreement, with respect toTop-Flite® branded apparel, is subject to termination.

 

#### **Sales and Marketing**

#### ** **

#### ***Company Sales Overview***

#### ** **

In fiscal 2007, 54% of our net sales were comprised ofBen Hogan® fashion apparel, SPORT HALEY® fashion apparel garments andaccessories accounted for 37% of our net sales and 6% of our net sales werecomprised of Top-Flite® branded apparel. Embroidery and shipping revenuescomprised 3% of our net sales in fiscal 2007. No single customer accounted for5% or more of our fiscal 2006 net sales, except that sales to a major retaildiscount store, comprised of discontinued Ben Hogan® and SPORT HALEY® apparelfrom prior seasons, accounted for 9% of our net sales.

 

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#### **For more information about ourreportable segments, see Note 13 to our Financial Statements filed under PartIV, Item 15(a)(1) of this report.**

#### ** **

#### ***SPORT HALEY® and Ben Hogan®***

#### ** **

We continually implement marketing strategies designedto enhance our position as a high-quality provider of fashion golf apparel bycapitalizing on the market awareness of the SPORT HALEY® and Ben Hogan® brandnames to establish, maintain and improve distribution channels. We implementthese strategies by: (i) enhancing distribution channels through our network ofindependent wholesale sales representatives in an effort to add new golf professionalshops to our customer base and maximize purchases from existing customers; (ii)diversifying product lines by developing new styles and designs that arenatural variations on our existing apparel designs in keeping with markettrends; and, (iii) intensifying marketing efforts in the premium, mid-pricedand retail markets.

 

Domestic sales of SPORT HALEY® and Ben Hogan® fashiongolf apparel are solicited primarily through a network of approximately 30independent wholesale sales representatives who sell the apparel in all of the50 United States, on a commission basis, mainly to golf professional shops atcountry clubs and resorts. Most of our independent sales representatives marketboth our SPORT HALEY® and Ben Hogan® fashion apparel lines. The independentrepresentatives, many of whom may also market other golf-related items forother companies, are responsible for generating new business and servingcustomers within specific geographic territories. We maintain buying programswith various entities whereby the participating golf professional shopoperators may purchase apparel directly from us in accordance with specificgroup programs. The group programs accounted for about 22% of our gross salesin fiscal 2007. Historically, the vast majority of our sales have been todomestic customers. International sales represented less than 1% of our netsales in fiscal 2007.

 

Our eastern and a western regional sales managers areresponsible for implementing marketing plans and sales programs, supervisingand coordinating our network of independent wholesale sales representatives,providing customer service support and participating in industry tradeshows.The sales and marketing executives support the sales activities of ourindependent sales representatives and distributors by personally assisting andtraining the representatives, supporting their participation in regionaltradeshows, assigning specific customer service personnel to assist them withinrespective geographic regions, advancing the distribution of sample garments,providing detailed catalogs that present pricing, sizing and style options foreach collection of garments, and providing access to a private electronicnetwork designed to expedite sales order processing. Via personal computers,each sales representative has access to current and future inventoryavailability and may create and transmit orders from remote locations. Remotecomputer access enhances the representatives’ order processing speed andaccuracy and reduces the risk of placing customer orders that cannot be timelydelivered. The electronic network also interfaces with our comprehensivemanagement information system that provides key sales order data to assistmanagement with planning, production scheduling, sales trends and cost controls.

 

Our current marketing efforts include searching foradditional distribution channels to enhance the sales of SPORT HALEY® and BenHogan® fashion apparel within corporate and retail markets. Our ManagingDirector of Sales – Retail Division is responsible for identifying, opening anddeveloping new accounts for our Ben Hogan® fashion apparel within departmentand specialty retail store markets. We are also searching for ways to increaseour Ben Hogan® fashion apparel among the certain international territoriesspecified within the license agreement by seeking to establish distributionagreements with individual distributors in the respective territories. However,the actual growth we have achieved within international markets has beenminimal.

 

Information regarding our SPORT HALEY® and Ben Hogan®brands, as well as general corporate information, may be found on ourrespective websites. The websites were designed to individually portray thedesign images inherent in our SPORT HALEY® and Ben Hogan® brands. The SPORTHALEY® site, located at www.sporthaley.com, utilizes a distinctive contemporaryand feminine approach. The Ben Hogan® site, located at www.benhoganapparel.com,generates a masculine sense through the use of dark rich colors. The corporatesite, located at www.sporthaleyinc.com, includes a basic corporate overview andlinks to pertinent investor relations information. Each of the websitescontains active links to one another. The SPORT HALEY® and Ben Hogan® 

 

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websites each include a glimpse of current and future collectionofferings, design philosophies and locator systems that can direct retailcustomers to establishments that sell our apparel and wholesale customers toour independent sales representative in their respective geographic area. Whilewe have not been able to quantify the effectiveness of the locator systems, webelieve that they enhance our marketing efforts by enabling the end consumer tofind our product lines in their area, thereby creating “pull through” sales forour current retailers and affording new customers easy access to contactinformation for our independent sales representative in their respectivegeographic region.

 

We introduce our distinctive SPORT HALEY® and BenHogan® golf apparel collections for the fall selling season at a major golfindustry tradeshow that is generally held near the end of January of each yearin Orlando, Florida. Because many buyers for golf resorts and professionalshops attend this particular tradeshow, we usually book a significant number ofcustomer orders at or immediately following the show. Retailers attending thetradeshow also provide us with direct feedback regarding apparel designs,fabrics, styles, fashion trends and other information necessary to assistmanagement with the preparation of sales forecasts and production schedules.

 

In order to enhance the visibility of our SPORT HALEY®and Ben Hogan® apparel, we may from time to time establish endorsementagreements with a limited number of PGA and LPGA professionals. In accordancewith an endorsement agreement, we may compensate the respective professionalwith apparel allowances, cash and/or other compensation.

 

We periodically advertise our SPORT HALEY® and BenHogan® apparel in several separate golf industry publications, including thosethat are distributed primarily to operators of golf professional shops. We alsoexpend a portion of our advertising budget to support the sales activities ofour independent sales representatives by reimbursing part or all of the cost oftheir participation in regional tradeshows. International distributors provideand pay for advertising, if any, in their respective geographic territories. Inaccordance with the license agreement, Callaway also advertises certainproducts associated with the Ben Hogan® brand in golf trade industrypublications and through other golf marketing channels.

 

We maintain programs that have provided selectcustomers with display fixtures dedicated to featuring SPORT HALEY® or Ben Hogan®fashion apparel collections. Uponthe customer’s agreement to maintain a pre-determined amount of inventory for aspecified period of time, the fixtures became the property of the customer fora nominal delivery fee. The display fixture programs encourage customers toreorder a sufficient amount of garments to maintain prominent displays of largeselections of SPORT HALEY® and Ben Hogan® apparel in their stores.

 

On a limited basis, we have utilized a combination ofour independent wholesale sales representatives, sales management andexecutives to market SPORT HALEY® and Ben Hogan® apparel collections directlywithin corporate markets. While we believe that there is a natural synergybetween the golf apparel market and the corporate apparel market, because bothmarkets can be served from some of the same inventory, we have not maintainedinventory levels sufficient to generate significant sales within corporatemarkets. We have developed a limited number of direct corporate accounts, andhave historically pursued this market primarily though promotional-productcompanies that source and distribute a variety of products for corporatefulfillment programs and special events. These promotional-product companiesgenerally produce corporate catalogs containing apparel and other products thatmay be used for employee recognition, customer appreciation and other corporatepurposes. A promotional-product company may also source and supply a specificproduct or products for special events sponsored by a corporation. SPORT HALEY®and Ben Hogan® apparel collections are currently included, or confirmed to beincluded, in a variety of catalogs. We do not enter into formal agreements orcontracts with these promotional-product companies, but we do agree that wewill make available the products advertised in any specific catalog during theperiod the catalog is being used, generally a one-year period. Becausecorporate apparel inventory must be maintained for a longer period of time andthe classic styles of corporate apparel are generally not designed for onespecific selling season, we typically feature only one collection of garmentsin our corporate collections each year. Corporate sales are made periodicallythroughout the year, and thus corporate sales are not historically quantifiablewithin the fixed or seasonal selling periods common to the other SPORT HALEY®and Ben Hogan® apparel collections.

 

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*Top-Flite®*

 

Our Top-Flite® branded apparel is marketed by ReserveApparel to mass retailers and other big-box type high sales volume retailstores. Product development and markets for branded apparel such as Top-Flite®garments follow production and sales cycles that differ from our SPORT HALEY®and Ben Hogan® fashion apparel brands. Branded apparel is generally developedfor delivery within at least four separate periods within any given year, whileSPORT HALEY® and Ben Hogan® fashion apparel collections are developed for twoseparate periods each year.

 

In November 2005, Callaway granted Sport Haleypermission, with certain conditions, to allow Reserve Apparel to distributeTop-Flite® branded apparel exclusively to Wal-Mart Stores, Inc. (“Wal-Mart”),within the United States. Reserve Apparel distributed Top-Flite® apparelexclusively to Wal-Mart from March 2006 through August 2006, after which wewere notified that Wal-Mart had chosen to develop its own private label forgolf apparel and discontinue selling Top-Flite® apparel. Since receiving thenotice from Wal-Mart, we have employed a sales executive familiar with the massand big-box retail markets to search for new customers for our Top-Flite®branded apparel. Our search for new customers has proven to be more difficultthan we had originally anticipated, and to date we have one order from aretailer for a test of Top-Flite® branded apparel in 50 of its stores. Thefirst delivery to the new retailer was shipped in September 2007.

 

We have continued to design and source new Top-Flite®branded apparel collections in order to support our search for new customers.Even before we shipped the initial order to our new retail customer inSeptember 2007, the retailer indicated to us that it would almost certainlyexpand our Top-Flite® branded apparel into approximately 200 of its stores.However, since our concerted efforts over the last year have failed to generateorders from other customers, we are currently evaluating how much longer wewill continue to market Top-Flite® branded apparel.

 

**Competition**

 

The fashion golf apparel market, both domestically andinternationally, is highly fragmented, and as new competitors enter the marketothers exit the market every year. We currently consider Ashworth, Cutter &Buck, Polo, Fairway & Greene and EP Pro as our most significant competitorsin the fashion golf apparel market. Many of these same fashion golf apparel andsportswear companies are also competitors in the corporate market. The intensecompetition throughout both the fashion golf and corporate apparel markets isdefined primarily by brand recognition and loyalty, quality, price, styling anddesign, service and availability of shelf space in the fashion golf apparel andleisure wear markets. In addition to competing with fashion golf apparelmanufacturers, our fashion apparel also competes with manufacturers of highquality men’s and women’s sportswear and general leisure wear such as Nike andAdidas, each of which has become more prominent within the fashion golf apparelmarket in the last year. The penetration of Nike and Adidas into the fashiongolf apparel market is concerning to us. Previously, the fashion apparelmarket, primarily comprised of golf professional shops, country clubs andresorts, preferred to sell quality apparel that was not broadly distributed inother retail markets. Fashion apparel brands appear to have been adverselyaffected by the penetration of Nike and Adidas, which are widely recognizedbrands in many other markets for sports and recreation equipment and apparel,into country club and resort markets. Many of our competitors have longeroperating histories, better name recognition and greater financial, marketingand other resources. Because of the intense competition in the golf apparel andleisure wear markets, we cannot be assured of obtaining additional market shareor maintaining the current market share of our fashion apparel collections;and, market and general economic conditions may dictate reductions in sellingprices that could result in reduced margins that may adversely impact our financialcondition and the results of our operations.

 

The branded apparel market is also highly fragmented,and many of our competitors within the fashion apparel market also operatewithin the branded apparel market. It is our understanding that branded apparelmay account for as much as 90% of the total golf apparel market, and we haveonly begun to penetrate that market with our Top-Flite® apparel.

 

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**Finished Goods Sourcing – Fashion Apparel**

 

Our production personnel assist our design departmentwith the sourcing of SPORT HALEY® and Ben Hogan® finished goods apparel,negotiating costs consistent with desired profit margins and the inspection ofsample fabrics and garments prior to the commencement of actual production.Production personnel are also responsible for ensuring timely-receipt offinished goods. We do not maintain any formal contractual arrangements with oursuppliers, but we issue purchase orders as apparel purchases are initiated.

 

We contract with several outside suppliers whichproduce garments in accordance with our specifications regarding quality,fabrication and custom styling. Almost all of our purchases are denominated inUnited States dollars. We do not own or operate any domestic or foreignmanufacturing facilities. While we do not maintain long-term contracts with anyof our suppliers, we highly value the long-term relationships that we haveestablished with several separate suppliers. We place orders with our suppliersas needed for delivery of specific quantities within particular date ranges byutilizing relationships we have established with certain foreign agents andforeign or domestic factories. In fiscal 2007, we purchased substantially allof our SPORT HALEY® and Ben Hogan® apparel from a variety of foreign suppliers,and we purchased 63%, 9%, and 6% of our finished apparel from three separatesuppliers, respectively. We maintain a close working relationship with acertain foreign person who is responsible for maintaining relationships withand monitoring the performance of certain of our foreign suppliers, includingthe two most significant of our foreign suppliers. If we were to lose orterminate the services of this individual or any of these significantsuppliers, our short-term ability to fulfill customers’ orders of fashionapparel on a timely basis could be substantially impaired, thereby negativelyaffecting our financial position and the results of our operations.

 

 We receivesales orders for our SPORT HALEY® and Ben Hogan® spring and fall collectionsover a period commencing when samples are first shown to customers andcontinuing through the respective selling seasons. Because the apparel industryhas long lead times, we must begin to schedule purchases and production ofapparel collections in advance of sales order placements. Due to thetime-sensitive nature of the receiving and delivery of apparel collections,management devotes considerable time and effort to the revision of salesprojections, item by item within our apparel collections. Our computerizedmanagement information systems provide management with key data thatfacilitates sales forecasting, product tracking and standard cost controls aswell as providing perpetual inventory records and inventory availability.

 

**Finished Goods Sourcing – Branded Apparel**

 

We contract with foreign suppliers to produce ourTop-Flite® branded apparel. Branded apparel is generally sold in largequantities, and factories generally require larger minimum orders for brandedapparel than the minimum orders we have negotiated with suppliers for ourfashion apparel. While we were able to contract with a certain foreign vendorto produce the Top-Flite® branded apparel that we shipped to a retail customerin September 2007, we cannot be certain that the vendor will continue toproduce our Top-Flite® apparel unless we obtain additional customer orderssufficient to support larger production runs.

 

**Seasonal Nature of Business – Fashion Apparel**

 

Fashion apparel sales within the golf industry tend tobe seasonal in nature, with disproportionately higher sales occurring fromearly spring through early summer. Accordingly, our fashion apparel sales aredisproportionately higher from January through June, which are our third andfourth quarters of each fiscal year, than sales from July to December, whichare our first and second fiscal quarters. Advance sales orders for our springcollections are generally solicited from July through December, and customerdeliveries for the spring season are generally shipped from November throughApril each year. Advance sales orders for our fall fashion collections aregenerally solicited from January through June, and customer deliveries for thefall season are generally shipped from May through October each year. Springcollections typically account for about 60% of our annual fashion apparelsales, with the fall collections accounting for the remainder.

 

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**Management Information Systems and InventoryManagement**

 

We utilize integrated computer systems to manage allbusiness transactions, historical data and record keeping, including sourcing,warehousing, embroidering and shipping. The computer systems provideinformation to our executives, management, all of our internal departments andour independent wholesale sales representatives. The electronic computer systemused by our independent sales representatives interfaces with the main systemto provide representatives with inventory information and order entry capabilityand allows the representatives to order against actual inventory availability.The computer systems provide valuable information for forecasting such asanalyses of sales histories, purchasing histories, and future customercommitments, all of which facilitate the management of our fashion apparelfinished goods 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. We maintain a significant amountof fashion apparel finished goods inventories to meet customers’ delivery expectations.Because of such factors as the long lead time between ordering and receivingpackaged apparel from foreign vendors, receiving advance orders from anddelivery of finished apparel to customers, and the considerable number ofindividual items that comprise fashion apparel collections within a singleselling season, an excess of finished goods inventories remaining at the end ofa selling season is common within the golf apparel industry. Excess andprevious seasons’ fashion apparel finished goods inventory items usually mustbe marketed at reduced selling prices, which negatively affects gross margins.We utilize our computer systems to assist management with controlling fashionapparel inventories by providing information with regard to sales forecasting,initial and reorders of finished apparel and warehouse management. The computersystem was designed to increase operating efficiencies by providing betterinformation with regard to sales forecasting, purchasing and inventorymanagement. In fiscal 2005, we developed a system to better estimate ouranticipated future sales in order to better forecast fashion apparelinventories expected to remain at the end of a current or future distributionperiod. Having better information available to forecast quantities and mix ofunsold inventories allows us to better estimate valuations of excessinventories expected to be on hand in a future period. Having such informationalso allows us to better plan marketing strategies for the sales of suchinventories through existing marketing channels and to better estimate theoverall recoverability of our finished goods inventories. We believe that themethods we use to evaluate our fashion apparel inventories produce fairvaluations of our excess inventories, but, if actual market conditions are lessfavorable than those we have projected, additional allowances may be requiredor losses on dispositions may be recorded, thereby adversely affecting ourfinancial position and the results of our operations.

 

Generally, branded apparel inventories are not proneto impairment, because we usually order branded apparel in quantities equal tospecific customer orders, and under normal circumstances no branded apparelinventories remain upon shipment to the customer.

 

**Order Placement and Backlog**

 

Advance sales orders for the fall fashion apparelselling season are typically received by the beginning of May each year.Similarly, advance sales orders for the spring fashion apparel selling seasonare typically received by the beginning of November each year. Generally, weship partial orders if they are at least 90% complete. We usually allow advanceorders to be changed or canceled up to 30 days prior to the scheduled shippingdate of the merchandise. Generally, we do not sell our apparel on consignmentand generally do not accept returns of purchased apparel, other than apparelthat is defective or damaged or which was shipped to the customer after theirspecified delivery date. Our operations software affords us the ability to shipmerchandise within customer-specified delivery dates, thereby reducing salesreturns due to refused shipments for late delivery. As a percentage of netsales, sales returns were approximately 3% in fiscal 2007, 3% in fiscal 2006and 6% in fiscal 2005.

 

Historically, the backlog of orders has not materiallyimpacted our sales with respect to cancellations and rejections of back orders.Back orders are common occurrences within the apparel industry in general. Theamount of back orders outstanding at any particular time may be affected by anumber of factors, including the timely receipt of first-quality products fromsuppliers, which can impact an apparel distributor’s ability to ship garmentson time, and 

 

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the timing of orders placed by customers. Accordingly,a comparison of our backlog of orders from period to period is not necessarilymeaningful and may not be indicative of actual shipments during any specificperiod. Our backlog of unfilled customer orders was less than $100,000 at June30, 2007, the majority of which we filled within the first few months of fiscal2008.

 

#### **Payment Terms**

#### ** **

Generally, fashion apparel sales to customers arecollectible within 30 days of the sale. However, on a limited basis, we mayoffer discounted or extended payment terms of up to 90 days. On rare occasions,payment terms may be extended on specific sales to as much as 180 days.

 

Payment terms are negotiated with branded apparelcustomers when the order is obtained. Historically, branded apparel sales tocustomers have been collectible within 30 to 60 days of the sale.

 

**Trademarks**

 

We market women’s and a limited amount of men’sfashion golf apparel under the SPORT HALEY® label. We have registered ourcurrent SPORT HALEY® trademarks with the United States Patent and TrademarkOffice. Certain of our former United States trademarks expired during 2007,which we had previously registered in a select number of internationaljurisdictions.

 

We also market men’s fashion golf apparel under theBen Hogan® label. Callaway has registered the Ben Hogan® trademark and thedistinctive signature of Mr. Hogan with the United States Patent and TrademarkOffice. Callaway also has the right to use the Ben Hogan® trademark outside ofthe United States. We are licensed by Callaway to use the Ben Hogan® trademarkin the United States and certain other countries, subject to the terms of ourlicense agreement with Callaway, as amended.

 

Callaway has registered the Top-Flite® trademark withthe United States Patent and Trademark Office. We are licensed by Callaway touse the Top-Flite® trademark in the United States and certain other countries,subject to the terms of our license agreement with Callaway, as amended.

 

**Employees**

 

At June 30, 2007, we had 65 full-time employees andtwo part-time employees, including 25 full-time executive and administrativeemployees, four full-time marketing and sales management employees, and 34full-time and two part-time personnel in inspection, packaging, embroidering anddistribution operations. The majority of our sales representatives areindependent agents. None of our employees is a member of a trade union, and weconsider our relations with our employees and agents to be satisfactory.

 

**ITEM 1A.****           RISKFACTORS**

 

Our business in general is subject to certain risksand uncertainties including the following:

 

**Markets for Our Products andCompetition**

 

•      Our fashion apparel sales are seasonal, andhistorically sales from July through December, which comprise our first and secondfiscal quarters, are weaker than sales from January through June, whichcomprise our third and fourth fiscal quarters.

 

•      We must continue to successfully anticipatefashion trends, design apparel that is accepted by consumers as fashionable andstylish and maintain an adequate product mix thereof in order to continue tohave market acceptance. If we fail in these endeavors, our sales will likelydecline, thereby adversely affecting our operating results.

 

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•      The market for golf apparel is extremelycompetitive, and price competition or industry consolidation could weaken ourcompetitive position. Some of our competitors are significantly larger and morediversified than we are and have substantially greater financial resourcesavailable for developing, sourcing and marketing their products in the marketswithin which we operate. In order to maintain our competitive position, we musteffectively advertise and communicate within the marketplace and successfullypenetrate our chosen distribution channels. We may not be able to maintain orincrease our market share in the distribution channels in which we operate, andwe may also face increased competition from new or existing competitors. As aresult, we may experience lower sales or greater operating costs, which wouldhave an adverse effect on our margins and the results of our operations.

 

•      We maintain a significant level of finished goodsinventories to support our fashion apparel sales volume and our limitedcorporate apparel program. Disposal of excess prior seasons’ fashion apparelinventories at reduced margins is an inherent characteristic within the golfapparel industry, but a significant amount of sales at the lower marginsdictated by the disposition of excess inventories may impair our financialcondition and the results of our operations. Write-downs with regard toobsolete fashion apparel inventories may also adversely affect our financialcondition.

 

**License Agreement**

 

•      A substantial portion of our net sales are governed by the licenseagreement we maintain with Callaway, and we have consistently exceeded theminimum sales requirements of the license agreement with regard to Ben Hogan®fashion apparel. However, our sales ofTop-Flite® branded apparel will be insufficient to meet the minimumrequirements for calendar year 2007 under the license agreement. Untilwe are able to establish other markets for Top-Flite® apparel which provide theannual sales amount required by Callaway to satisfy the minimum royaltypayments due in accordance with the license agreement, we will not be able tomeet the minimum sales or minimum royalty requirements per the licenseagreement and our financial position and the results of our operations may benegatively impacted thereby. Webelieve that we maintain a satisfactory relationship with Callaway, and we areworking with them to negotiate a mutually acceptable resolution for ourinability to meet the minimum requirements with regard to Top-Flite® apparelunder the agreement. However, we can currently give no assurance thatCallaway will not take the position that the license agreement, with respect toTop-Flite® branded apparel, is subject to termination. An early termination of the license agreement, with regard toTop-Flite® branded apparel, could negatively impact our financial position andresults of our operations significantly.

 

•      A significant component of our business strategies and a largepercentage of our revenues are reliant upon licensed sales of apparel pursuantto our agreement with Callaway. Of our apparel lines, only our SPORT HALEY®women’s fashion apparel line is not a licensed brand. Our significant relianceupon sales of licensed apparel indicates a lack of diversification which couldnegatively impact our business should either our Ben Hogan® men’s fashionapparel line or our Top-Flite® branded apparel line be unsuccessful. Should ourlicense agreement with Callaway be terminated, or not extended upon itsscheduled expiration date in December 2011, our business would suffermaterially.

 

**Reliance Upon Third Parties**

 

•      We depend on timely delivery of finished garmentsfrom our suppliers. The loss of certain suppliers, and/or delays in receivinggarments from suppliers caused by various factors, including lost or reducedmanufacturing capacity of significant suppliers, labor shortages, timelyperformance of third parties, transportation difficulties, and others, couldadversely affect our ability to make timely delivery of finished garments toour customers.

 

•      Our significant reliance onforeign suppliers enhances the risk that revenues might be adversely affectedif a foreign shipment were lost or significantly delayed. We maintain insurancefor risk of loss including those relating to raw materials inventories shippedbetween foreign vendors and finished goods inventories shipped 

 

11

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from foreign suppliers to our distribution facilitiesin Denver, Colorado. However, our significant reliance on foreign suppliersheightens the risk that we could be left with inadequate or unsatisfactoryrecourse should the goods received from the foreign suppliers be nonconforming.

 

•      Our significant reliance onforeign suppliers sustains the risk that revenues might be adversely affectedby changes in international trade quota systems for apparel or by deteriorationin political and international trade relations between the United States ofAmerica and the foreign countries where the suppliers are located.

 

•      We purchase significant amounts of finished apparel from severalseparate foreign suppliers. While we believe that we could obtain finishedapparel from numerous other suppliers, if we were to lose or terminate theservices of any of these significant suppliers, our short-term ability tofulfill customers’ orders on a timely basis could be substantially impaired,thereby negatively affecting our financial position and the results of ouroperations.

 

•      We maintain a close workingrelationship with a certain foreign person who is responsible for maintainingrelationships with and monitoring the performance of certain of our foreignsuppliers. While we believe that we could utilize other such persons to performsimilar services, if we were to loseor terminate the services of this individual, our short-term ability to fulfillcustomers’ orders on a timely basis could be substantially impaired, therebynegatively affecting our financial position and the results of our operations.

 

**Economy**

 

•      The demand for our products may decrease if thepopularity of golf decreases or if other factors, such as adverse businessconditions, a sluggish economy or inclement weather, cause golfers not topatronize golf professional shops.

 

•      The increased threats ofterrorist activities in the United States, the conflict in Iraq and otherinternational conflicts may adversely affect our sales. Business trends of the golf apparel industry closely follow trends in thetravel and leisure sectors of the United States economy. International conflictsand other geopolitical conditions resulting from threats or acts of war orterrorism and responses thereto may continue to affect the travel and leisuresectors that had already been negatively impacted by the general economicdownturn experienced during previous years. Our sales could decrease ifthe USA economy weakens due to these or other factors.

 

•      We may experience anincrease in the number and magnitude of delinquent or uncollectible customeraccounts during periods of economic downturn.

 

•      On a limited basis, weadvance monies to certain of our independent wholesale sales representativesunder agreements whereby the sales representatives reimburse us as they earnmonthly sales commissions. Our financial results may be adversely affectedshould the sales representatives not generate wholesale sales sufficient tojustify the amounts advanced to them under the agreements and should they haveinsufficient financial resources to repay the outstanding balance of moniesadvanced by us to them.

 

**Access to Capital**

 

•      Our significant reliance on foreign suppliers requires that we maintainsatisfactory relationships with a commercial banking institution in order tohave adequate access to capital to finance inventory purchases from foreignsuppliers via import letters of credit. While we believe that we could obtainaccess to capital from other sources, if the commercial banking institutionwere to terminate or not renew the line of credit agreement that we maintainwith the institution, our short-term ability to purchase finished goodsinventories from foreign suppliers could be substantially impaired, therebynegatively affecting our financial position and the results of our operations.

 

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•      We regularly maintain cash balances at a commercial bank in excess ofthe Federal Deposit Insurance Corporation insurance limit of $100,000. Whilethe financial position and liquidity of the commercial bank has beenexceedingly greater than our uninsured cash balances at any point in time, ifthe financial position and/or liquidity of the bank were to become impaired,our financial position and the results of our operations could be negativelyaffected to the extent of account balances held at the financial institution inexcess of the federally insured limit.

 

**Computer Information Systems**

 

•      Businesses in general areever increasingly dependent upon computer information systems. We mustcontinually establish and sustain controls with regard to maintaining theintegrity of our technology, information systems and electronic data in orderto adequately manage business activities and control costs and expenses. Weheavily rely upon our computer information systems to record sales and othertransactions and to maintain historic data, all of which is stored on networkfile servers. While we regularly maintain backup systems for our file servers,if any of our file servers failed during a traumatic event or due to a powersurge or other electronic failure, we could lose electronic data that isessential to our business operations.

 

**Executive Officers and KeyEmployees**

 

•      Because we operate withinstrict seasonal periods, our business operations are heavily dependent upon ourcurrent executive officers and our key employees within various areas of ouroperations including production and sales management. The loss of any of ourexecutive officers or key employees, or the inability to attract and retainqualified personnel, could prevent us from successfully exercising our businessstrategies, delay the development and introduction of new seasonal apparelcollections, damage the image of our brands and/or harm our ability to sell ourproducts.

 

There may be other factors not mentioned above, in thediscussion below or included in our other Securities and Exchange Commissionfilings that may cause actual results to differ materially from anyforward-looking statements. Neither the Company nor any of its corporateofficers or key employees assumes any obligation to update any forward-lookingstatements as a result of new information, future events or developments,except as required by applicable securities laws.

 

**ITEM 2.  PROPERTIES**

 

Our executive offices and warehouse facilities arelocated in Denver, Colorado. We utilize the entire 82,500 square feet of officeand warehouse space at the Denver location in accordance with an operatinglease that extends through October 2011. The Denver facilities were leased atan annual base rent of $272,000 in fiscal 2007. We are obligated to pay therelated taxes, insurance and maintenance expenses for the leased space.

 

**ITEM 3.  LEGAL PROCEEDINGS**

 

As previously reported, in March 2007, Sport Haley andReserve Apparel (the “Plaintiffs”) filed a lawsuit in the District Court forthe City and County of Denver in the State of Colorado. The suit alleges, amongother things, that a former inventory broker to Reserve Apparel, 1130746Ontario Ltd., a Canadian corporation incorporated in the Province of Ontario,Canada, d/b/a Originals Apparel Group Co., or Originals Apparel Group, andFrancis 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 bySport Haley 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 

 

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$177,000 amounts and other relief. Based upon information that iscurrently available, we cannot determine whether the decision or settlement ofthis lawsuit will materially affect our financial position or the results ofour operations.

 

We are subject to various other legal proceedings andclaims which arise in the ordinary course of our business. Based uponinformation that is currently available, management does not believe that thetotal impact of the various other legal proceedings will materially affect ourfinancial position or the results of our operations.

 

**PART II**

** **

**ITEM 5.****        MARKET FOR REGISTRANT’SCOMMON EQUITY AND RELATED SHAREHOLDER MATTERS**

 

Our common stock is quoted on the NASDAQ Global MarketSM under the trading symbol “SPOR.” Thefollowing table sets forth the range of high and low sale prices of our commonstock, as reported by The NASDAQ Global MarketSM, from July 1, 2004 through June 30, 2007. The pricesset forth below reflect interdealer quotations, without retail markups,markdowns or commissions, and may not be representative of actual transactions.

 
| ** **                     | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------|------------|----------|------------|---------|------------|
| **Fiscal Year 2007** |       |     |       |    |       |
| Fourth Quarter                 |       | $        | 4.450      |    | $          | 4.030 |   |
| Third Quarter                  |       | 5.260    |       | 3.950   |       |
| Second Quarter                 |       | 5.060    |       | 3.840   |       |
| First Quarter                  |       | 5.190    |       | 4.300   |       |
|                           |       |     |       |    |       |
| **Fiscal  Year 2006**          |       |     |       |    |       |
| Fourth Quarter                 |       | $        | 6.000      |    | $          | 4.520 |   |
| Third Quarter                  |       | 5.380    |       | 4.510   |       |
| Second Quarter                 |       | 5.007    |       | 4.030   |       |
| First Quarter                  |       | 5.450    |       | 3.140   |       |
|                           |       |     |       |    |       |
| **Fiscal  Year 2005**          |       |     |       |    |       |
| Fourth Quarter                 |       | $        | 4.990      |    | $          | 2.970 |   |
| Third Quarter                  |       | 4.370    |       | 4.000   |       |
| Second Quarter                 |       | 4.889    |       | 3.830   |       |
| First Quarter                  |       | 4.990    |       | 3.812   |       |

#  

As of June 20, 2007, therewere approximately 102 holders of record of our common stock. We computed thenumber of record holders by adding to the number of actual record holders asshown on the securities holder list obtained from our transfer agent the numberof individual participants or accounts held by the Depository Trust Company (“DTC”),according to securities position listings as defined in Rule 17Ad-8. The vastmajority of our common shares are held in trust by Cede & Co., as nomineefor the DTC. We estimate that as of June 20, 2007, our common stock was ownedbeneficially by approximately 450 shareholders.

 

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

 

We engaged ComputershareTrust Company, the transfer agent for our common stock, to serve as theDepositary for the tender offer. None of the Company, our Board of Directors orthe Depositary made any

 

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recommendation to anyshareholder as to whether to tender or refrain from tendering any shares or asto the price or prices at which shareholders chose to tender shares. Our Boardof Directors and executive officers each advised that they did not intend totender in the offer shares they held individually or through an affiliatedentity. Shareholders were urged to read the Tender Offer Statement on ScheduleTO, which included as exhibits the Offer to Purchase and the related Letter ofTransmittal, as well as any amendments or supplements to the Tender OfferStatement when they became available. On January 12, 2007, we submitted anamended Schedule TO and an amended Offer to Purchase to the Commission. Wefiled further amendments to the Schedule TO on February 6 and February 9, 2007.

 

On February 6, 2007, theDepositary provided us with the final tabulation of the tender offer results.In total, 1,357,698 shares were properly tendered and not withdrawn at pricesfrom $4.80 to $5.30 per share. Of the total, 485,762 shares were tendered at$4.80 per share, which exceeded by 13,762 shares the 472,000 shares we soughtin the tender offer. In Section 1 of the Offer to Purchase, we reserved theright, in our sole discretion, to purchase in the tender offer an additionalnumber of shares over the 472,000 shares we sought in the tender offer, not toexceed 2% of our outstanding common shares, without amending or extending thetender offer. On February 7, 2007, we exercised our right, under Section 1 ofthe Offer to Purchase and applicable SEC regulations, to accept for purchaseall 485,762 shares tendered at $4.80 per share, without proration. The 485,762shares accepted for purchase in the tender offer represented approximately 171⁄2percent of the common shares outstanding as of January 3, 2007.

 

On February 8, 2007, wetransferred $2,332,000 to the Depositary to fund the purchase of 485,762 sharesof our common stock at a price of $4.80 per share. The Depositary wasinstructed to promptly pay for the shares accepted for purchase in the tenderoffer and to return all other shares tendered which were not accepted forpurchase or withdrawn. Upon completion of the tender offer, we had 2,284,490shares of common stock outstanding.

 

Holders of common stock areentitled to receive such dividends as may be declared by our Board of Directorsfrom time to time. In April 2006, our Board of Directors declared a dividend of$0.25 per share that was paid to our beneficial shareholders who held suchshares as of May 5, 2006. No dividend was declared in fiscal 2007, and theBoard of Directors does not anticipate that any dividends will be declared inthe foreseeable future.

 

**Performance Graph**

 

Notwithstanding anything tothe contrary set forth in any of the previous filings made by Sport-Haley, Inc.under the Securities Act of 1933, as amended, or the Securities Exchange Act of1934, as amended, that might incorporate future filings, including, but notlimited to, this Report on Form 10-K, in whole or in part, the followingperformance graph shall not be deemed to be incorporated by reference into anysuch future filings.

 

Set forth below is a linegraph prepared by Zacks Investment Research comparing the yearly percentagechange in our cumulative total shareholder return (share price appreciationplus dividends) on Sport-Haley, Inc. common stock with the cumulative totalreturn of (i) the NASDAQ US Market Index and (ii) the stocks of apparelmanufacturers having Standard Industrial Classification codes from 2300 through2341, which is deemed as a market weighted index of publicly traded peers, forthe period from July 1, 2002 through June 30, 2007 (the “Measurement Period”).The graph assumes that $100 is invested on July 1, 2002, in each: our commonstock; our publicly traded peers; and, the NASDAQ US Market Index. The graphalso assumes that all dividends were reinvested. In May 2006, we paid a $0.25per share dividend to our beneficial shareholders. No other dividends were paidby Sport-Haley, Inc. during the Measurement Period. Our shareholder return iscalculated by dividing the difference between our share price at July 1, 2002,and each June 30 of the Measurement Period by the share price at the beginningof the Measurement Period.

 

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| ** **                               | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                               | ** ** | **2002**                                           | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                               | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Sport-Haley, Inc.                   |       | 100.00                                             |       | 109.95 |   | 134.43 |   | 79.83 |   | 129.03 |   | 108.34 |   |
| Industry Peer Group Index |       | 100.00                                             |       | 90.59 |   | 117.00 |   | 122.62 |   | 137.25 |   | 178.03 |   |
| NASDAQ Market Index            |       | 100.00                                             |       | 111.45 |   | 141.31 |   | 142.87 |   | 152.12 |   | 183.63 |   |

 

**ITEM 6. SELECTED FINANCIAL DATA**

 

The following selected financial data should be readin conjunction with the Financial Statements and related Notes thereto,appearing elsewhere in this report on Form 10-K, and “Management’s Discussionand Analysis of Financial Condition and Results of Operations.” The statementsof operations data for the fiscal year ended June 30, 2007, and the balancesheets data at June 30, 2007, are derived from the financial statements ofSport-Haley, Inc. which have been audited by Gordon, Hughes & Banks, LLP,an independent registered public accounting firm, as indicated in their reportincluded herein. The statements of operations data for each of the fiscal yearsin the four-year period ended June 30, 2006, and the balance sheets data atJune 30 of each of the fiscal years then ended, are derived from the financialstatements of Sport-Haley, Inc. which were audited by Hein & AssociatesLLP, our former independent registered public accounting firm. The consolidatedstatements of operations data for the two-year period ended June 30, 2007, andthe balance sheets data at June 30, 2007 and 2006, include the amounts ofSport-Haley, Inc. and our subsidiary, Reserve Apparel Group LLC. The selectedfinancial data provided below is not necessarily indicative of the futureresults of operations or future financial performance of Sport-Haley, Inc.

 

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| ** **                                                                     | ** ** | **Fiscal Year Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2007**                                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                           |       | **(in  thousands, except per share data)**         |       |
| **Statements  of Operations Data  (2007 and 2006 Consolidated):**              |       |                                               |       |   |   |   |   |   |   |   |   |
| Net sales                                                                      |       | $                                                  | 18,893     |   | $ | 20,962 |   | $ | 22,041 |   | $ | 20,800 |   | $ | 19,196 |   |
| Total cost of  goods sold                                                      |       | 12,205                                             |       | 14,050 |   | 15,689 |   | 13,619 |   | 11,873 |   |
| Gross profit                                                                   |       | 6,688                                              |       | 6,912 |   | 6,352 |   | 7,181 |   | 7,323 |   |
| Total other  operating costs                                                   |       | 8,274                                              |       | 8,017 |   | 9,833 |   | 8,737 |   | 8,026 |   |
| Loss from  operations                                                          |       | (1,586                                             | )          | (1,105 | ) | (3,481 | ) | (1,556 | ) | (703 | ) |
| Other income and  expenses, net                                                |       | 360                                                |       | 438 |   | 208 |   | 116 |   | 135 |   |
| Loss from  operations before (provision for) benefit from income taxes         |       | (1,226                                             | )          | (667 | ) | (3,273 | ) | (1,440 | ) | (568 | ) |
| Minority  interest in subsidiary income/loss                                   |       | (46                                                | )          | 259 |   | 0 |   | 0 |   | 0 |   |
| (Provision for)  benefit from income taxes                                     |       | (29                                                | )          | (7 | ) | (8 | ) | (746 | ) | 180 |   |
| Net loss                                                                       |       | $                                                  | (1,301     | ) | (415 | ) | $ | (3,281 | ) | $ | (2,186 | ) | $ | (388 | ) |
|                                                                           |       |                                               |       |   |   |   |   |   |   |   |   |
| Loss per common  and equivalent shares outstanding (basic and diluted)         |       | $                                                  | (0.50      | ) | $ | (0.15 | ) | $ | (1.29 | ) | $ | (0.89 | ) | $ | (0.15 | ) |
|                                                                           |       |                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average  common and equivalent shares outstanding (basic and diluted) |       | 2,580                                              |       | 2,749 |   | 2,548 |   | 2,448 |   | 2,621 |   |

 
| ** **                                               | ** ** | **June 30,**                          | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                               | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                               | ** ** | **(in  thousands, except per share data)** | ** ** |
| **Balance  Sheets Data:  (2007 and 2006 Consolidated):** |       |                                       |       |   |   |   |   |   |   |   |   |
| Working capital                                          |       | $                                          | 10,980     |   | $ | 14,455 |   | $ | 14,814 |   | $ | 17,503 |   | $ | 19,180 |   |
| Total assets                                             |       | 13,949                                     |       | 18,027 |   | 17,490 |   | 20,771 |   | 21,545 |   |
| Long-term debt                                           |       | 0                                          |       | 34 |   | 0 |   | 0 |   | 0 |   |
| Total  liabilities                                       |       | 2,567                                      |       | 3,012 |   | 1,751 |   | 2,148 |   | 1,118 |   |
| Shareholders’  equity                               |       | 11,382                                     |       | 15,015 |   | 15,739 |   | 18,623 |   | 20,427 |   |
| Net book value  per share of common stock                |       | $                                          | 4.98       |   | $ | 5.42 |   | $ | 5.95 |   | $ | 7.37 |   | $ | 8.36 |   |

 

The following tablesummarizes selected quarterly financial information for each of the quarterlyperiods in the fiscal years ended June 30, 2007 and 2006:

 
| ** **                                                                                                         | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | **Year**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                                                         | ** ** | **Fiscal Quarter Ended** | ** ** | **Ended**  | ** ** |
| ** **                                                                                                         | ** ** | **Sep 30**                         | ** ** | **Dec 31** | ** ** | **Mar 31** | ** ** | **Jun 30** | ** ** | **Jun 30** | ** ** |
| **Quarterly  Financial Data – Unaudited  (in thousands, except per share data)  Fiscal 2007 (Consolidated):** |       |                               |       |       |       |       |       |       |       |       |       |
| Net sales                                                                                                          |       | $                                  | 4,673      |       | $          | 4,190      |       | $          | 5,273      |       | $          | 4,757 |   | $ | 18,893 |   |
| Total cost of  goods sold                                                                                          |       | 3,171                              |       | 2,635      |       | 3,408      |       | 2,991      |       | 12,205     |       |
| Gross profit                                                                                                       |       | 1,502                              |       | 1,555      |       | 1,865      |       | 1,766      |       | 6,688      |       |
| Total other  operating costs                                                                                       |       | 1,931                              |       | 1,843      |       | 2,143      |       | 2,357      |       | 8,274      |       |
| Other income and  expense, net                                                                                     |       | 78                                 |       | 84         |       | 71         |       | 127        |       | 360        |       |
| Minority  interest in subsidiary income/loss                                                                       |       | (46                                | )          | 0          |       | 0          |       | 0          |       | (46        | )          |
| (Provision for)  benefit from income taxes                                                                         |       | 0                                  |       | (17        | )          | (11        | )          | (1         | )          | (29        | )          |
| Net income  (loss)                                                                                                 |       | $                                  | (397       | )          | $          | (221       | )          | $          | (218       | )          | $          | (465 | ) | $ | (1,301 | ) |
|                                                                                                               |       |                               |       |       |       |       |       |       |       |       |       |
| Earnings (loss)  per common share                                                                                  |       |                               |       |       |       |       |       |       |       |       |       |
| Basic                                                                                                              |       | $                                  | (0.14      | )          | $          | (0.08      | )          | $          | (0.09      | )          | $          | (0.19 | ) | $ | (0.50 | ) |
| Diluted                                                                                                            |       | $                                  | (0.14      | )          | $          | (0.08      | )          | $          | (0.09      | )          | $          | (0.19 | ) | $ | (0.50 | ) |
|                                                                                                               |       |                               |       |       |       |       |       |       |       |       |       |
| Weighted average  shares outstanding                                                                               |       |                               |       |       |       |       |       |       |       |       |       |
| Basic                                                                                                              |       | 2,770                              |       | 2,770      |       | 2,490      |       | 2,284      |       | 2,580      |       |
| Diluted                                                                                                            |       | 2,770                              |       | 2,770      |       | 2,490      |       | 2,284      |       | 2,580      |       |
|                                                                                                               |       |                               |       |       |       |       |       |       |       |       |       |
| **Fiscal  2006:**                                                                                                  |       |                               |       |       |       |       |       |       |       |       |       |
| Net sales                                                                                                          |       | $                                  | 4,011      |       | $          | 4,429      |       | $          | 4,656      |       | $          | 7,866 |   | $ | 20,962 |   |
| Total cost of  goods sold                                                                                          |       | 2,706                              |       | 2,792      |       | 2,919      |       | 5,633      |       | 14,050     |       |
| Gross profit                                                                                                       |       | 1,305                              |       | 1,637      |       | 1,737      |       | 2,233      |       | 6,912      |       |
| Total other  operating costs                                                                                       |       | 1,887                              |       | 1,613      |       | 2,162      |       | 2,355      |       | 8,017      |       |
| Other income and  expense, net                                                                                     |       | 53                                 |       | 77         |       | 237        |       | 71         |       | 438        |       |
| Minority  interest in subsidiary income/loss                                                                       |       | 0                                  |       | 0          |       | 0          |       | 259        |       | 259        |       |
| (Provision for)  benefit from income taxes                                                                         |       | 1                                  |       | (2         | )          | (2         | )          | (4         | )          | (7         | )          |
| Net income  (loss)                                                                                                 |       | $                                  | (528       | )          | $          | 99         |       | $          | (190       | )          | $          | 204 |   | $ | (415 | ) |
|                                                                                                               |       |                               |       |       |       |       |       |       |       |       |       |
| Earnings (loss)  per common share                                                                                  |       |                               |       |       |       |       |       |       |       |       |       |
| Basic                                                                                                              |       | $                                  | (0.20      | )          | $          | 0.04       |       | $          | (0.07      | )          | $          | 0.08 |   | $ | (0.15 | ) |
| Diluted                                                                                                            |       | $                                  | (0.20      | )          | $          | 0.03       |       | $          | (0.07      | )          | $          | 0.07 |   | $ | (0.15 | ) |
|                                                                                                               |       |                               |       |       |       |       |       |       |       |       |       |
| Weighted average  shares outstanding                                                                               |       |                               |       |       |       |       |       |       |       |       |       |
| Basic                                                                                                              |       | 2,685                              |       | 2,770      |       | 2,770      |       | 2,770      |       | 2,749      |       |
| Diluted                                                                                                            |       | 2,685                              |       | 2,968      |       | 2,770      |       | 2,968      |       | 2,749      |       |

 

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| **ITEM 7.** | **MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|-------------|-------------------------------------------------------------------------------------------------|

 

Statements made in this filing that are not historicalfacts are forward-looking statements. The reader should be aware that ouractual results could differ materially from those contained in forward-lookingstatements. When used in this report, the words “may,” “will,” “will likelyresult,” “will continue,” “expect,” “anticipate,” “continue,” “estimate,” “plan,”“project,” “intend,” “believe” and similar expressions, variations or negativeof these words, and any statement regarding possible or assumed future resultsof operations of our business, the markets for our products, anticipatedexpenditures, regulatory developments or competition, or other statementsregarding matters that are not historical facts, are intended to identifyforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934, althoughnot all forward-looking statements contain such identifying words. Suchstatements are based on management’s current expectations and are subject torisks, uncertainties and assumptions, including those risks set forth in PartI, Item 1A of this report, along with the factors and risks set forth below.The reader should be aware that, should one or more of these risks oruncertainties materialize, or should underlying assumptions prove incorrect,the actual plan of operations, business strategies, operating results andfinancial position of Sport-Haley, Inc. could differ materially from thoseexpressed in, or implied by, such forward-looking statements.

 

Factors or risks that could cause actual results orcircumstances to differ materially from those set forth or contemplated inforward-looking statements include, but are not limited to, the following:

 

•                  Our ability torespond to continual competition in our markets as well as the extent, timingand success of such competition;

 

•                  Our ability toexpand into new markets and to effectively manage our growth;

 

•                  Access tosufficient working capital to meet our operating and financial needs;

 

•                  General economicconditions or material adverse changes in markets we serve;

 

•                  Changes in, orfailure to comply with, applicable legislation or governmental regulation;

 

•                  Changes in taxlaws or rates;

 

•                  Risk that ouranalyses of these risks could be incorrect and that the strategies developed toaddress them could be unsuccessful;

 

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•                  Changes in ouraccounting assumptions that regulatory agencies, including the SEC, may requireor that result from changes in the accounting rules or their application, whichcould result in an impact on our earnings; and,

 

•                  Various otherfactors discussed in this filing.

 

There may be other factors not mentioned above, or inPart I, Item 1A of this report, in the discussion below or included in ourother SEC filings that may cause actual results to differ materially from anyforward-looking statements. Neither the Company nor any of its corporateofficers or key employees assumes any obligation to update any forward-lookingstatements as a result of new information, future events or developments,except as required by applicable securities laws.

 

*The following discussion should be read inconjunction with the Financial Statements and Notes thereto.*

 

**Critical Accounting Policies and Estimates**

 

Our financial statements have been prepared inaccordance with standards of the Public Company Accounting Oversight Board(United States), which require us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, and therelated disclosures. A summary of those significant accounting policies can befound in the Footnotes to the Financial Statements included in this Report onForm 10-K for the fiscal year ended June 30, 2007. The estimates used by management are based upon our historicalexperiences combined with management’s understanding of current facts andcircumstances. Certain of our accounting policies are considered critical asthey are both important to the portrayal of our financial condition and theresults of our operations and require significant or complex judgments on thepart of management. We believe that the following critical accounting policiesaffect the more significant judgments and estimates used in the preparation ofour financial statements.

* *

*Inventories*

 

Our inventories,predominately comprised of finished goods, are generally valued at the lower ofcost (weighted average) or market. Costs include amounts paid to suppliers forpackaged apparel and/or materials and labor, import costs, such as customsduties, freight-in and other miscellaneous costs, and allocated overhead.Excess fashion apparel inventories, consisting of discontinued or agingmerchandise, are a natural component of a seasonal apparel business. Whilecertain fashion apparel items will sell out in any particular selling season,quantities of other fashion apparel items will remain at the end of eachselling season. We market excess fashion apparel finished goods inventories atreduced wholesale prices to our customers in the normal course of business.Remaining excess inventories are liquidated through other markets. In theordinary course of business, we maintain reserves for inventory write-downs dueto the obsolescence of excess inventories. We perform analyses on a quarterlybasis to identify unsold excess inventories and adjust our reserves forinventory obsolescence to reduce the carrying value of excess inventories totheir estimated net realizable value, which is estimated based on management’sdisposition plans and historical experiences. Generally, branded apparelinventories are not prone to impairment, because we usually order brandedapparel in quantities per specific customer orders.

 

During fiscal 2007, werecorded fashion apparel inventories write-downs of $312,000, including awrite-down of $186,000 during the fourth fiscal quarter. We did not record anywrite-downs with regard to branded apparel during fiscal 2007. While managementbelieves that our processes produce fair valuations of obsolete inventories, ifactual market conditions are less favorable than those projected by management,additional allowances may be required.

 

*Deferred Income Taxes*

 

Deferred income taxes arerecognized for the expected tax consequences in future years for differencesbetween the tax bases of assets and liabilities and their financial reportingamounts, based upon enacted tax laws and statutory tax rates applicable to theperiods in which the differences are expected to affect taxable income. Our 

 

19

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significant deferred tax assets are related to netoperating loss carry forwards for federal and state income tax purposes,stock-based compensation and an unrealized loss for tax purposes on a commonstock investment. Governing regulations require that our operating losses becarried forward for income tax purposes. We maintain a valuation allowance toreduce deferred tax assets to the net amount expected to be recovered in futureperiods. The estimates for deferred tax assets and the corresponding valuationallowance require us to exercise complex judgments. We periodically review andadjust those estimates based upon the most current information available. Inaccordance with Statement of Financial Accounting Standards No. 109 (“SFAS 109”),*“Accounting for Income Taxes,”* and basedupon a review at June 30, 2007, of our utilization of deferred tax assets, wemaintained a valuation allowance that effectively reduces our net deferred taxassets to zero. While we continue to explore various strategies to return theCompany to profitability, including finding additional markets for ourTop-Flite® branded apparel, we cannot be certain that our efforts will resultin the generation of future profits. Because the recoverability of deferred taxassets is directly dependent upon future operating results, actual recoverabilityof deferred tax assets may differ materially from our estimates.

 

*Allowance for Doubtful Accounts*

 

Our allowance for doubtful accounts reflects a reservethat reduces our customer accounts receivable to the net amount estimated to becollectible. Estimating the credit worthiness of customers and therecoverability of customer accounts requires us to exercise considerablejudgment. In estimating the reserve for uncollectible accounts, we considerfactors such as general economic and industry-specific conditions, historicaland anticipated customer performance. From time to time, we also identifydelinquent customer accounts for which a specific reserve is required. At June30, 2007, our allowance for doubtful accounts totaled $235,000, including aspecific reserve of $116,000 with respect to the potential non-recovery of anet amount due to Reserve Apparel from a former inventory broker. While weconsider our processes to be adequate to effectively quantify our exposure todoubtful accounts, changes in economic, industry or specific customerconditions may result in recoverability of our doubtful accounts that differsmaterially from our estimates.

 

*Allowance for Sales Returns*

 

We record allowances for sales returns as netadjustments to customer accounts receivable. When recording an allowance, thenet method reduces customer accounts receivable and net sales by the estimatedgross margin effect of the anticipated sales return. Generally, our sellingterms preclude return of our products subsequent to the sale. However, we havetraditionally maintained limited programs that offer various customers theright to return certain fashion apparel items under predefined conditions,which we include as a component within our estimate of allowance for salesreturns. We review historical data and consider factors such as generaleconomic and industry-specific conditions and anticipated customer performancewhen evaluating the adequacy of our allowance for sales returns. At June 30,2007, our allowance for sales returns was $139,000. Significant changes ingeneral economic or industry conditions may yield sales returns that differmaterially from our estimates.

 

**Recent Developments**

 

In February 2007, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards No. 159 (“SFAS159”), *“The Fair Value Option for Financial Assets andFinancial Liabilities – Including an Amendment of FASB Statement No. 115.”*SFAS 159 permits an entity to measure financial instruments and certain otheritems at estimated fair value as of specific election dates. The fair valueoption: (i) may generally be applied instrument by instrument; (ii) isirrevocable unless a new election date occurs; and, (iii) must be applied tothe entire instrument and not to only a portion of the instrument. Most of theprovisions of SFAS 159 are elective. However, the amendment to SFAS 115, *“Accounting for Certain Investments in Debt and Equity Securities,”*applies to all entities that own securities that are classified as trading oravailable for sale. SFAS 159 is effective for fiscal years beginning afterNovember 15, 2007. Early adoption of SFAS 159 is permitted if the entity: (i)chooses early adoption within the first 120 days of its fiscal year; (ii) hasnot yet issued financial statements for any interim period of such fiscal year;and (iii) elects to apply the provisions of FASB No. 157, *“Fair ValueMeasurements.”* We have not determined whether we will elect earlyadoption, and we have not evaluated the 

 

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impact, if any, on our financial condition or the results of ouroperations that may be caused by our adoption of SFAS 159.

 

In June 2006, the FASB issued Interpretation No. 48 (“FIN48”), *“Accounting for Uncertainty in Income Taxes.”*FIN 48 requires the use of a two-step approach for recognizing and measuringtax benefits taken or expected to be taken in an income tax return anddisclosures regarding uncertainties in income tax positions. Only tax positionsthat meet the “more likely than not” recognition threshold at the effectivedate may be recognized upon adoption of FIN 48. We are required to adopt FIN 48effective July 1, 2007. The cumulative effect of initial adoption of FIN 48, ifany, will be recorded as an adjustment to beginning retained earnings in theyear of adoption and will be presented separately. We are currently evaluatingthe impact that FIN 48 will have on our financial condition and the results ofour operations.

 

We have reviewed all other recently issued, but notyet effective, accounting pronouncements and do not believe the future adoptionof any such pronouncements may be expected to cause a material impact on ourfinancial condition or the results of our operations.

 

**Results of Operations**

 

The following table sets forth the percentage of netsales represented by items included in or derived from our statements of incomefor fiscal years ended June 30, 2007, 2006 and 2005, 2004 and 2003. Theconsolidated statements of operations data for the fiscal years ended June 30,2007 and 2006, include the amounts of Sport Haley and Reserve Apparel.

 
| ** **                                                                                                       | ** ** | **Fiscal Year Ended June 30, (2007 and 2006 Consolidated)** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| **Results of Operations Data**                                                                    | ** ** | **2007**                                                                                            | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** |   | **2003** |   |
| Net sales                                                                                                        |       | 100.0                                                                                               | %          | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| Total cost of  goods sold                                                                                        |       | 64.6                                                                                                |       | 67.0 |   | 71.2 |   | 65.5 |   | 61.9 |   |
| Gross profit                                                                                                     |       | 35.4                                                                                                |       | 33.0 |   | 28.8 |   | 34.5 |   | 38.1 |   |
| Total other  operating costs                                                                                     |       | 43.8                                                                                                |       | 38.3 |   | 44.6 |   | 42.0 |   | 41.8 |   |
| Loss from  operations                                                                                            |       | (8.4                                                                                                | )          | (5.3 | ) | (15.8 | ) | (7.5 | ) | (3.7 | ) |
| Other income and  expenses, net                                                                                  |       | 1.9                                                                                                 |       | 2.1 |   | 0.9 |   | 0.6 |   | 0.7 |   |
| Loss from  operations before minority interest in subsidiary loss and (provision for) benefit  from income taxes |       | (6.5                                                                                                | )          | (3.2 | ) | (14.9 | ) | (6.9 | ) | (3.0 | ) |
| Minority  interest in subsidiary income/loss                                                                     |       | (0.2                                                                                                | )          | 1.2 |   | 0.0 |   | 0.0 |   | 0.0 |   |
| (Provision for)  benefit from income taxes                                                                       |       | (0.2                                                                                                | )          | (0.0 | ) | (0.0 | ) | (3.6 | ) | 1.0 |   |
| Net loss                                                                                                         |       | (6.9                                                                                                | )%         | (2.0 | )% | (14.9 | )% | (10.5 | )% | (2.0 | )% |

 

**Comparison of Fiscal Years Ended June 30, 2007 and2006**

 

Total net sales for fiscal 2007 were $18,893,000, adecrease of $2,069,000, or 10%, as compared with sales of $20,962,000 forfiscal 2006. Net sales of fashion apparel for fiscal 2007 were $17,708,000, adecrease of $781,000, or 4%, as compared with fashion apparel sales of$18,489,000 for fiscal 2006. Net sales of branded apparel for fiscal 2007 were$1,185,000, a decrease of $1,288,000, or 52%, as compared with branded apparelsales of $2,473,000 for fiscal 2006. The remainder of our net sales for fiscal2007 and 2006 were comprised of embroidery and shipping revenues.

 

Our consolidated 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. Our gross margins also include, on a consolidatedbasis, the operations of Reserve Apparel, which distributes Top-Flite® brandedapparel to the mass retail market at much lower price points 

 

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and gross margins than those expected to be achieved in the premium andmid-price markets where we distribute our SPORT HALEY® and Ben Hogan® fashionapparel brands. Other fashion apparel companies within the golf industry may ormay not also operate within the lower price markets. We include royaltypayments, relating to sales of licensed apparel, in selling, general andadministrative expenses.

 

*Fashion Apparel*

 

For fiscal 2007, net sales of SPORT HALEY® women’sfashion apparel were $6,913,000, an increase of $375,000, or 6%, from net salesof $6,538,000 for fiscal 2006. We believe that the shrinking market for women’sfashion golf apparel bottomed out in 2006, as evidenced not only by ourincrease in net sales of women’s fashion apparel in fiscal 2007 but alsobecause we continue to experience increases in advance orders for our women’scollections. We believe that the continued increase in advance orders indicatesthat the trend of increasing sales of women’s apparel will continue throughoutfiscal 2008.

 

For fiscal 2007, net sales of Ben Hogan® men’s fashionapparel were $10,175,000, a decrease of $1,024,000, or 9%, from net sales of$11,199,000 for fiscal 2006. We attribute the decrease primarily to changes inthe country club and resort markets in which we operate. Historically, thecountry club and resort markets preferred to sell high-quality apparel that wasnot broadly distributed in other retail markets. However, with the introductionand broad market acceptance of moisture-wicking and other performance garmentswithin golf apparel markets, country clubs and resorts have begun to carryapparel brands such as Nike and Adidas, which are primarily comprised ofperformance fabrics and are globally distributed into numerous markets otherthan country clubs and resorts. We believe that the penetration of Nike andAdidas into golf apparel markets has diluted the value with regard to the exclusivityof brands such as our Ben Hogan® fashion apparel brand, at least on a temporarybasis. In order to bolster future sales of our Ben Hogan® fashion apparel, wehave concentrated our marketing efforts to upscale retail stores and tocorporate markets. We expect that our efforts will at a minimum generate salesof Ben Hogan® fashion apparel to two or three new upscale retail stores infiscal 2008. Ben Hogan® men’s fashion apparel is marketed in accordance with alicense agreement we maintain with Callaway, which we consider to be a keycomponent of our overall business strategies.

 

As a percentage of sales, gross profit of our fashionapparel was 36% for fiscal 2007 and was 37% for fiscal 2006. Gross profit offashion apparel has remained relatively unchanged since fiscal 2006 primarilybecause we recorded comparatively similar write-downs of fashion apparelinventories in fiscal 2007 and 2006, and because negotiated prices for finishedapparel purchased from foreign suppliers have remained relatively constant overthe same period. Excess inventories are common within the fashion apparelindustry. We market excess fashion apparel inventories at reduced wholesaleprices to our customers in the normal course of business. Remaining excessinventories are liquidated through other markets. The valuation of excessinventories, when the market price for such inventories is lower than cost,negatively impacts our gross profit percentage, because a reduction ofinventory value causes a corresponding increase in our cost of goods sold,thereby reducing our gross profit. Gross profit with regard to our fashionapparel was negatively impacted by $312,000 and $313,000 for fiscal 2007 and2006, respectively, by the adjustment of our finished goods inventories to thelower of cost or market. The disposition of excess inventories also negativelyimpacts our gross profit percentage, even when such inventories are properlyvalued to the lower of cost or market, because such valuation causes sales tobe recorded with gross profit at or near zero. In fiscal 2007, we recorded netsales of $543,000 and loss of $176,000 with regard to the disposition of excessfashion apparel inventories. Comparatively, in fiscal 2006, we recorded netsales of $495,000 and loss of $80,000 with regard to the disposition of excessfashion apparel inventories.

 

Selling, general and administrative expenses withregard to fashion apparel were $6,705,000 for fiscal 2007, an increase of$84,000, or 1%, from $6,621,000 in fiscal 2006. During fiscal 2007, comparativeincreases in advertising and personnel expenses were partially offset bycomparative decreases in insurance, legal and investment banking expenses. Theincrease in advertising expenses primarily related to expanding ourparticipation in various golf or retail related tradeshows throughout thefiscal year. The increase in personnel expenses included comparatively highersalaries paid to our chief executive and other officers and key employeesduring fiscal 2007 as compared with fiscal 2006 plus salary and benefits withregard to a person we hired in August 2006 to implement 

 

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corporate sales initiatives to potentially bolster sales of fashionapparel. The comparative decrease in insurance expenses primarily related todecreased premiums for directors and officers insurance coverage. Legal andinvestment banking expenses declined primarily because, in fiscal 2007, afterwe completed the self tender offer as a means of increasing shareholder value,we for the time being suspended our efforts to pursue strategic alternativesincluding but not limited to selling the Company, seeking joint venturepartners, engaging in recapitalization, reviving our stock repurchase plan orpursuing another extraordinary transaction such as taking the Company private.As a percentage of net fashion apparel sales, related selling, general andadministrative expenses were 38% for fiscal 2007 as compared with 36% forfiscal 2006.

 

We recorded royalty expense of $675,000 for fiscal2007, a decrease of $93,000, or 12%, as compared with royalty expense of$768,000 for fiscal 2006. The decrease in royalty expense generally correspondsto the decrease in sales of Ben Hogan® fashion apparel over the comparativeperiod. Royalty expense with regard to fashion apparel is due to Callaway inaccordance with the license they previously granted us to market men’s fashionapparel bearing the Ben Hogan® label. Historically, our sales have generatedroyalties which have consistently exceeded the minimum annual royaltiesrequired by the license agreement with regard to Ben Hogan® fashion apparel.

 

As previously reported, in September 2006, we recordedgoodwill of $270,000 with regard to our purchase of the minority interest inReserve Apparel from Explorer Gear. At June 30, 2007, we determined that thegoodwill was sufficiently impaired per the guidance offered by Statement ofFinancial Accounting Standards No. 142, *“Goodwill and OtherIntangible Assets,”* to warrant impairing the entire balance, becausesince purchasing the minority interest we have been unable to locate asignificant customer for our Top-Flite® apparel.

 

Primarily due to the factors discussed above, income(loss) from operations with regard to fashion apparel was ($1,262,000) for fiscal2007, a difference of ($671,000), or 114%, from ($591,000) for fiscal 2006.

 

*Branded Apparel*

 

We have considered Top-Flite® branded apparel, whichwe market pursuant to our licensing agreement with Callaway for such apparel,to be a key component in our overall business strategies, designed to returnthe Company to sustained profitability. Net sales of Top-Flite® branded apparelfor fiscal 2007 were $1,185,000, including sales to Wal-Mart of $1,000,000. Webegan shipping Top-Flite® branded apparel exclusively to Wal-Mart in March2006, and we recorded sales of $2,473,000 to Wal-Mart in fiscal 2006. Aspreviously reported, in late September 2006, Wal-Mart discontinued purchasingTop-Flite® branded apparel from us, opting instead to develop a line of golfapparel under a private label. Throughout fiscal 2007, we redesigned ourTop-Flite® apparel collection to include garments primarily comprised of avariety of performance fabrics, and we aggressively marketed the redesignedTop-Flite® branded apparel to a number of other mass retailers and certainbig-box type high sales volume retail stores. To date, we have received anorder for Top-Flite® apparel from one such retailer for a test in 50 of itsstores, which we began to deliver in September 2007. While our intensivemarketing efforts have continued, we are not certain that we will be able toobtain any other significant customers for Top-Flite® branded apparel for theremainder of fiscal 2008.

 

Our distribution of Top-Flite® branded apparel to themass retail market generally generates gross margins lower than those expectedto be achieved in the premium and mid-price markets where we distribute ourSPORT HALEY® and Ben Hogan® fashion apparel brands. Branded apparel isgenerally sold at much lower prices than for higher quality fashion apparel,and gross margins are also expected to be lower for branded apparel than forfashion apparel. Other companies within the golf apparel industry may or maynot operate within the lower-price branded apparel markets. As a percentage ofnet branded apparel sales, gross margins with respect to sales of brandedapparel were 25% and 5% for fiscal 2007 and 2006, respectively. As previouslyreported, gross margins of Top-Flite® branded apparel sales for fiscal 2006were negatively impacted by production delays, extraordinary shipping chargesand mark down money paid to Wal-Mart. We did not incur any such unexpectedextraordinary expenses in fiscal 2007. Gross margins achieved in fiscal 2007with respect to branded apparel sales were more in line with managementexpectations than gross margins achieved in fiscal 2006.

 

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Selling, general and administrative expenses were$382,000 with regard to branded apparel for fiscal 2007, a decrease of $87,000,or 19%, from $469,000 for fiscal 2006, primarily due to differences between thefiscal years in allocated management costs, which totaled $77,000 in fiscal2007 versus $327,000 in fiscal 2006. The $250,000 decrease in allocatedmanagement costs related to changes in the ownership of Reserve Apparel and theloss of the Wal-Mart account. Prior to our purchase of the minority interest inReserve Apparel from Explorer Gear in September 2006, allocated managementcosts included a portion of Sport Haley’s costs with regard to managing ReserveApparel and certain reimbursable expenses incurred by Explorer Gear on behalfof Reserve Apparel. Because Wal-Mart ceased purchasing Top-Flite® brandedapparel from us shortly after we purchased the minority interest, the businessoperations of Reserve Apparel were significantly reduced and we discontinuedour allocation of Sport Haley management costs to Reserve Apparel. Fiscal 2007selling, general and administrative expenses with regard to branded apparel includedwages and benefits of $126,000 paid to a person we hired in November 2006 toactively market Top-Flite® branded apparel to the mass retail and big-boxmarket suitable for such apparel. Prior to November 2006, this person providedconsulting services to us with regard to marketing our branded apparel toWal-Mart and other mass retailers from approximately May 2006 to October 2006.Selling, general and administrative expenses with regard to branded apparel infiscal 2007 also included travel and other costs related to our marketingefforts and expenses related to our participation in various industry-relatedtradeshows. As a percentage of net branded apparel sales, related selling,general and administrative expenses were 32% for fiscal 2007 and were 19% forfiscal 2006.

 

We recorded royalty expense of $242,000 and $159,000with regard to Top-Flite® branded apparel for fiscal 2007 and 2006,respectively. Royalty expense is due to Callaway in accordance with the licensethey previously granted us to market branded apparel bearing the Top-Flite®label. Because we anticipated that sales of Top-Flite® branded apparel would beinsufficient to meet the contractual minimum royalty requirement of $188,000for calendar 2007 for such apparel, we accrued a contingent liability androyalty expense of $178,000 at June 30, 2007. The remainder of our fiscal 2007royalty expense with regard to branded apparel related to sales of Top-Flite®apparel that we recorded during the three months ended September 30, 2006. Salesof Top-Flite® branded apparel were sufficient to meet the minimum royaltyrequirement under the license agreement for calendar 2006.

 

Primarily due the factors listed above, income (loss)from operations with regard to branded apparel for fiscal 2007 was ($324,000),an improvement of $191,000, or 37%, from ($514,000) for fiscal 2006.

 

*Other income*

 

Total other income, net, for fiscal 2007 was $360,000,a decrease of $78,000, or 18%, from $438,000 for fiscal 2006. Historically, ourother income, net, has been comprised of interest earned on cash and cashequivalent balances held at various financial institutions. Interest earned oncash and cash equivalent balances remained nearly constant between fiscal 2007and 2006. Other income, net, for fiscal 2006 included $157,000 of the $173,000recovered in the settlement we reached with our auditors from prior to fiscal2000. We offset legal expenses for fiscal 2006 with the remainder of thesettlement amount of $16,000.

 

*Net income (loss)*

 

Net loss for fiscal 2007 was ($1,301,000), adifference of ($886,000), or 213%, from ($415,000) for fiscal 2006. We hadfederal and state net operating loss carry forwards of $6,847,000 and$9,038,000 at June 30, 2007, that we estimated may be recoverable at income taxrates of 34% and 5%, respectively. In accordance with SFAS 109 and based upon areview at June 30, 2007, of our utilization of deferred tax assets, wemaintained a valuation allowance that effectively reduces our net deferred taxassets to zero. While we continue to explore various strategies to return theCompany to profitability, including expanding our SPORT HALEY® and Ben Hogan®fashion apparel distribution channels within retail and corporate markets andfinding alternative markets for our Top-Flite® branded apparel, we cannot becertain that our efforts will result in the generation of future profitssufficient to offset our net operation loss carry forwards prior to theirexpirations. Accordingly, we did not record benefits from income taxesassociated with the corresponding losses for fiscal 2007 or 2006.

 

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*Earnings (loss) per share*

 

Basic and diluted loss per common share were ($0.50)and ($0.15) for fiscal 2007 and 2006, respectively. All securities options wereanti-dilutive and therefore excluded from the per share calculations withrespect to periods in which net losses were incurred.

 

*Book value*

 

Our book value per common share was $4.98 at June 30,2007, and was $5.42 at June 30, 2006.

 

**Comparison of Fiscal Years Ended June 30, 2006 and2005**

 

Total net sales for fiscal 2006 were $20,962,000, adecrease of $1,079,000, or 5%, as compared with sales of $22,041,000 for fiscal2005. Net sales of fashion apparel for fiscal 2006 were $18,489,000, a decreaseof $3,552,000, or 16%, as compared with fashion apparel sales of $22,041,000for fiscal 2005. Net sales of branded apparel for fiscal 2006 were $2,473,000.

 

For fiscal 2006, net sales of Ben Hogan® apparelcollections were $11,199,000, a decrease of $10,000, or 0%, from net sales of$11,209,000 in fiscal 2005, and net sales of SPORT HALEY® apparel collectionswere $6,538,000 for fiscal 2006, a decrease of $3,248,000, or 33%, from netsales of $9,786,000 for fiscal 2005. In fiscal 2006, we marketed Top-Flite® apparelexclusively to Wal-Mart, and net sales of Top-Flite® branded apparel were$2,473,000 for fiscal 2006. We began shipping Top-Flite® branded apparel toWal-Mart in March 2006.

 

The market for women’s golf apparel appeared to havebeen shrunk for a couple of years through fiscal 2006, which caused fiercecompetition among the brands vying for limited shelf space within the market.We were disappointed with the continued decrease in sales of our women’sfashion apparel collections, but we believed that the shrinking market may havebottomed out, and we anticipated that our sales of women’s apparel would beginto increase slightly in future periods beyond fiscal 2006. SPORT HALEY®continued to be a highly recognized brand within the women’s apparel market,and at the end of fiscal 2006 we continued to develop plans to improve thestrategic position of the SPORT HALEY® brand within the women’s market.

 

Because net sales of Ben Hogan® apparel collectionsappeared to have begun to flatten out, we implemented initiatives in fiscal2006 to bolster our overall fashion apparel sales. In fiscal 2006, we hired awestern regional sales manager with extensive experience within the golfapparel industry in the western geographical regions of the United States andHawaii. We believed that the western regional manager complemented the talentsof our eastern regional manager, who has a similar amount of experience withinthe golf apparel industry in the eastern geographical regions of the UnitedStates. Our regional sales managers are responsible for maximizing our fashionapparel sales within their respective geographical regions by training andsupervising our independent wholesale sales representatives and maintainingcontacts with key accounts. In fiscal 2006, we also hired a customer serviceliaison with extensive marketing experience within the golf apparel industry toprovide white glove service to our key accounts and to help us market our SPORTHALEY® and Ben Hogan® fashion apparel brands to prestigious country clubs andresorts which had not done business with us in the past.

 

Gross profit for fiscal 2006 was $6,912,000, anincrease of $560,000, or 9%, as compared with gross profit for fiscal 2005 of$6,352,000. The difference between the fiscal years was partially attributableto lower write-downs of fashion apparel inventories in fiscal 2006 as comparedwith fiscal 2005. Write-downs of fashion apparel inventories negativelyimpacted our gross margins by $408,000 in fiscal 2006 as compared withwrite-downs of $1,403,000 in fiscal 2005. The difference between the fiscalyears was also partially attributable to consolidating sales of fashion apparelwith sales of branded apparel in fiscal 2006.

 

Gross profit for fiscal 2006 with regard to sales ofbranded apparel was $114,000, which yielded a 5% gross margin on brandedapparel net sales for the respective period. We expected that our sales ofTop-Flite® branded apparel should yield gross margins of 25% or greater. Grossprofit relating to Top-Flite® branded apparel sales for fiscal 2006 wasnegatively impacted by production delays, extraordinary shipping charges andmark down money due

 

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to Wal-Mart. Production delays caused us to incur inbound freightcharges of $70,000. Because the Top-Flite® merchandise was continually receivedlate from our suppliers, Wal-Mart required that we ship the orders directly toeach store rather than to respective Wal-Mart distribution centers asoriginally planned. We estimated that additional shipping costs, incurred toship orders directly to Wal-Mart stores rather than to distribution centers,were in excess of $200,000 for fiscal 2006. Periodically, per our vendoragreement, Wal-Mart reserves the right to request that we reimburse them formark downs they have taken or plan to take on Top-Flite® apparel we sold tothem. It is our understanding that Wal-Mart typically requests mark down moneywhen sales of merchandise do not reasonably meet their internal expectations.Because we shipped Top-Flite® apparel for a Father’s Day promotion five weekslate due to production delays, Wal-Mart lost early sales opportunities for themerchandise, and sell-through of the Top-Flite® apparel produced for thatpromotion did not reasonably meet their expectations. We recorded salesdiscounts of $168,000 in fiscal 2006 relating to mark down concessions grantedto Wal-Mart with respect to the Father’s Day promotion that adversely affectedour gross profit, accordingly. By June 30, 2006, we consolidated the operationsof Reserve Apparel to move substantially all of its operations to our Denver,Colorado facility. Before moving the operations to Denver, the productdevelopment, sourcing, logistics and sales invoicing operations of ReserveApparel had been performed in Toronto, Ontario, Canada, by employees ofExplorer Gear, the former minority interest. By consolidating the operations ofReserve Apparel into our Denver operations, and utilizing suppliers other thanthose which caused repeated production delays, we expected to improve themanagement of the entire production process and to achieve more reasonablemargins on sales of Top-Flite® branded apparel in periods beyond fiscal 2006.Wal-Mart informed us in September 2006 that they no longer intend to purchaseTop-Flite® branded apparel.

 

Selling, general and administrative expenses were$7,090,000 in fiscal 2006, a decrease of $1,946,000, or 22%, from $9,036,000 infiscal 2005. The decrease was attributable to various factors. Included infiscal 2005 expenses were severance and other compensation expenses paid to ourlate Chairman and former Chief Executive Officer. Subsequent to the death ofour Chairman in September 2004, we paid $650,000 in severance and othercompensation to the late Chairman’s estate. Similarly, upon the departure ofour former Chief Executive Officer in October 2004, we accrued $520,000 inseverance and other compensation that is generally payable to the formerexecutive over a three-year period ending in March 2008. The severance andother compensation amounts paid to our late Chairman and former Chief ExecutiveOfficer increased our selling, general and administrative costs in fiscal 2005by $1,170,000. The severance and other compensation expense paid to our formerChief Executive Officer had no effect on our selling, general andadministrative expenses in fiscal 2006. Salary and other payroll relatedexpenses, net of severance and other compensation costs, totaled $3,116,000 infiscal 2006, a decrease of $225,000, or 7%, from $3,341,000 in fiscal 2005. Weattributed the remainder of the decrease in selling, general and administrativeexpenses to our continued efforts to streamline our operations and to findadditional ways to decrease our overall operating expenses. As a percentage ofsales, our selling, general and administrative expenses were 34% and 41% forfiscal 2006 and 2005, respectively.

 

Royalty expense for fiscal 2006 was $927,000, anincrease of $130,000, or 16%, from $797,000 for fiscal 2005. The increase inroyalty expense was primarily attributable to the introduction of Top-Flite®branded apparel in fiscal 2006. Royalty expense is due to Callaway inaccordance with the license agreement they previously granted to us to marketgolf apparel bearing the Ben Hogan® and Top-Flite® labels.

 

Total other income, net, for fiscal 2006 was $438,000,an increase of $230,000, or 111%, from $208,000 in fiscal 2005. The increase inother income, net, was primarily attributable to higher rates of interestearned during fiscal 2006 as compared with fiscal 2005 on cash and cashequivalent balances held at various financial institutions. Other income forfiscal 2006 also included $157,000 of the $173,000 recovered in the settlementwe reached with our auditors from prior to fiscal 2000. We offset legalexpenses for fiscal 2006 with the remainder of the settlement in the amount of$16,000.

 

Loss from operations before minority interest insubsidiary loss and provision for income taxes for fiscal 2006 was $667,000, animprovement of $2,606,000, or 80%, from a loss of $3,273,000 in fiscal 2005.While a substantial amount of the improvement was due to the factors discussedabove, such as better controls over fashion apparel inventories that resultedin lower write-downs of obsolete or discontinued inventories in fiscal 2006,severance and other compensation expense incurred in fiscal 2005 and not infiscal 2006, lower overall payroll and 

 

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related expenses in fiscal 2006, higher rates of interest earned oncash and cash equivalents in fiscal 2006 and the settlement recovery from ourformer auditors in fiscal 2006, we believed that the improvement was alsoindicative of management’s concerted efforts to return the Company toprofitability. Of the $667,000 loss incurred in fiscal 2006, only $150,000related to the operations of Sport Haley, as compared with $3,273,000 in fiscal2005. The remaining $517,000 of the $667,000 fiscal 2006 loss was attributableto the operations of Reserve Apparel.

 

Basic and diluted losses per share were ($0.15) and($1.29) for fiscal years 2006 and 2005, respectively. Due to the net losses forthe respective periods, all outstanding options were anti-dilutive andtherefore excluded from the loss per share calculations.

 

**Liquidity and Capital Resources**

 

Our primary sources of liquidity are derived from ouravailable cash and cash equivalents, cash flows from operations and a revolvingline of credit with a commercial bank, which is fully cash secured. We requirecash for our general working capital purposes. We do not anticipate requiringmaterial amounts of cash for capital expenditures over the next 12 months. To the extent our cash balance isinsufficient to finance our working capital needs, we may also make periodicborrowings under our revolving line of credit. Our working capitalrequirements are highly seasonal in nature, with greater requirements fromapproximately August through October and February through April of each fiscalyear due to the purchases of fashion apparel inventories for the spring/summerand fall/holiday selling seasons, respectively.

 

Working capital was$10,980,000 and $14,455,000 at June 30, 2007 and 2006, respectively. Cash andcash equivalents plus marketable securities totaled $ 4,464,000 and $8,492,000at June 30, 2007 and 2006, respectively. For purposes of the statements of cashflows, we consider all highly liquid instruments purchased with an original maturityof three months or less to be cash equivalents, if they are readily convertibleto known amounts of cash and present an insignificant risk of change in valuedue to changes in interest rates.

 

Net cash provided by(used in) operating activities totaled ($1,277,000), $1,139,000 and $3,134,000for fiscal years 2007, 2006 and 2005, respectively. The primary components ofadjustments to reconcile net loss to cash provided by (used in) operatingactivities were changes between fiscal years relating to impairments andwrite-downs, provisions for doubtful accounts and sales returns, accountsreceivable, inventories, accounts payable, and accrued commissions and otherexpenses.

 

•                  Adjustments for impairments and write-downs affectednet cash provided by (used in) operating activities by $760,000 in fiscal 2007,$408,000 in fiscal 2006 and $1,403,000 in fiscal 2005. The effects on net cashprovided by (used in) operating activities caused by impairments andwrite-downs represent the expense effects of recording impairments andwrite-downs in the respective fiscal years. Because of the seasonal nature ofthe fashion apparel business, excess inventories left over at the end of eachselling season (“previous seasons’ inventories”) are common within theindustry. Throughout each fiscal year, we market previous seasons’ inventoriesthrough our ordinary marketing channels. At or near the end of each fiscalquarter, we identify and revalue obsolete inventories, primarily consisting ofprevious seasons’ fashion apparel inventories, to estimated disposition values.In fiscal 2004, we enacted initiatives directed to significantly reduce thelevels of finished goods inventories in order to minimize the adverse financialeffects associated with the devaluation of obsolete fashion apparelinventories. In fiscal 2005, we sold a significant portion of our previousseasons’ fashion apparel inventories and refined our procedures to betterestimate the recoverability our finished goods inventories, and we establishednew procedures for purchasing fashion apparel inventories designed to minimizethe quantities expected to remain at the end of each selling season. In 2006,$95,000 of the $408,000 inventory write-down related to branded apparel inventorieson hand at June 30, 2006. Generally, branded apparel inventories arenot prone to impairment, because we usually order branded apparel in exactquantities to sufficiently satisfy specific customer orders. In fiscal 2007, wesold all remaining branded apparel inventories on hand at June 30, 2006,without recording a significant gain or loss on the sale. In fiscal 2007, inaccordance with SFAS 142, we impaired $270,000 in goodwill which had beenrecorded upon our purchase of the minority interest in Reserve Apparel fromExplorer Gear in September 2006. 

 

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At June 30, 2007, wedetermined that the goodwill was sufficiently impaired per the guidance offeredby SFAS 142 to warrant impairing the entire balance, because since purchasingthe minority interest we have not been able to locate a significant customerfor our Top-Flite® branded apparel.

 

•                  The effects on net cash provided by operatingactivities caused by changes in provisions for doubtful accounts and salesreturns primarily represent the net expense effects of the changes inallowances for doubtful accounts and sales returns between the respectiveyears. As of June 30, our allowances for doubtful accounts were $235,000 infiscal 2007, $291,000 in fiscal 2006 and $377,000 in fiscal 2005. Theallowances for 2007, 2006 and 2005 included specific reserves of $116,000,$116,000 and $151,000, respectively, with respect to certain customer accountsreceivable. We believe that the trend which indicates a general decrease in therequired allowance amount is primarily attributable to the changes incollection methods that we instituted in fiscal 2004. The changes in ourcollection methods help us to shorten the collection process with regard topast due accounts, thereby minimizing potentially uncollectible amounts. Ourallowances for customer sales returns at June 30 were $139,000 in fiscal 2007,$155,000 in fiscal 2006 and $286,000 in fiscal 2005. The percentage of salesreturns decreased dramatically in fiscal 2006 and remained relatively unchangedfrom fiscal 2006 through fiscal 2007. We attribute the decrease from 2006through 2007 to enhancements within our order reservation and shipping systemsin late fiscal 2005 that generally ensure our customers that they will receivemerchandise they have ordered in advance from us within a very few days fromthe specific receipt date they have requested. We believe that the systemenhancements have significantly reduced the amount of our sales returns withrespect to late and/or incomplete shipments. Provisions for doubtful accountsand sales returns affected net cash provided by (used in) operating activitiesby ($13,000) in fiscal 2007, ($71,000) in fiscal 2006 and ($205,000) in fiscal2005.

 

•                  Accounts receivable, not including the effects ofprovisions for doubtful accounts and sales returns, provided operating cash of$897,000 in fiscal 2007, provided operating cash of $616,000 in fiscal 2006 andprovided operating cash of $1,656,000 in fiscal 2005. Accounts receivable, netof allowances, decreased from $3,950,000 at June 30, 2006 to $3,066,000 atJune 30, 2007. The decrease in fiscal 2007, as compared with thefiscal 2006 receivable balance, was primarily attributable to a correspondingdecrease in net sales between fiscal 2007 and fiscal 2006.

 

•                  Inventories, not including the effects of inventoryimpairments and write-downs, used operating cash of $1,351,000 in fiscal 2007,used operating cash of $1,030,000 in fiscal 2006, and provided operating cashof $3,252,000 in fiscal 2005. Our inventories increased in fiscal 2006, from$4,775,000 at June 30, 2006, to $5,814,000 at June 30, 2007. The net increaseof $1,039,000 primarily related to earlier receipt of fall fashion apparelinventories and deposits on fashion apparel inventories at June 30, 2007, as comparedwith June 30, 2006. We had no branded apparel inventories or deposits at June30, 2007. In fiscal 2005, we disposed of significant amounts of our obsolete oraging finished goods inventories and implemented initiatives designed tofurther minimize the quantities of unsold inventories expected to remain at theend of a selling season, which we believe have allowed us to maintainreasonable inventory levels since fiscal 2006.

 

•                  Accounts payable used operating cash of $270,000 infiscal 2007, provided operating cash of $1,255,000 in fiscal 2006, and usedoperating cash of $799,000 in fiscal 2005. Accounts payable decreased from$1,836,000 at June 30, 2006, to $1,566,000 at June 30, 2007. Changes inaccounts payable relate to differences in the timing between the years in therecording and payments of expenditures for inventory purchases, ordinarybusiness expenses and other.

 

•                  Accrued commissions and other expenses used operatingcash of $119,000 in fiscal 2007, used operating cash of $49,000 in fiscal 2006,and provided operating cash of $402,000 in fiscal 2005. Accrued commissions andother expenses decreased from $1,120,000 at June 30, 2006, to $1,001,000 atJune 30, 2007. The decrease primarily relates to lower royalties due oncorrespondingly lower Ben Hogan® sales for the fourth fiscal quarter,comparatively between the 2007 and 2006 fiscal years, and a decrease of$164,000 in accrued severance compensation payable to our former chiefexecutive officer, comparatively between June 30, 2007 and 2006. At June 30,2007, we recorded a contingent liability and royalty expense of

 

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$178,000 with regard toour license agreement for Top-Flite® branded apparel, which requires minimumroyalty of $188,000 for such apparel in calendar year 2007, because weanticipated that sales of Top-Flite® branded apparel would be insufficient tomeet the contractual calendar year minimum requirement. Sales of Top-Flite®branded apparel were sufficient to meet the minimum royalty requirement underthe license agreement for calendar 2006.

 

Net cash provided by(used in) investing activities totaled ($419,000), ($28,000), and $363,000 forfiscal years 2007, 2006, and 2005, respectively. The primary components of netcash provided by (used in) investing activities were maturities (purchases) ofmarketable securities and purchases and disposals of fixed assets.

 

•                  Purchase of minority interest used investingactivities cash of $375,000 in fiscal 2007. In September 2006, Sport Haley enteredinto an agreement with Explorer Gear to purchase its 49% interest in ReserveApparel for a lump sum payment of $375,000, since which time Reserve Apparelhas been a wholly-owned subsidiary of Sport Haley.

 

•                  Net maturities (purchases) of marketable securitiesprovided investing activities cash of $539,000 in fiscal 2005. No marketablesecurities were purchased during fiscal 2006 or 2007. Marketable securitiesprimarily consisted of United States government and mortgage-backed debtsecurities that matured within one year or less. Due to the short-term natureof the investments, we did not recognize material unrealized gains or losses onmarketable securities in fiscal 2007, 2006 or 2005. Therefore, the carryingvalues of marketable securities approximated their fair values.

 

•                  Purchases of fixed assets used investing activitiescash of $44,000, $44,000 and $176,000, in fiscal 2007, 2006, and 2005,respectively. Property and equipment, at cost, decreased from $4,417,000 atJune 30, 2006, to $4,461,000 at June 30, 2007. As of June 30, 2007, asignificant portion of the fixed assets used in our operations were fullydepreciated. We do not anticipate making any significant fixed asset additionsin the near future.

 

Dispositions of fixed assetsprovided investing activities cash of $0 in fiscal 2007, $16,000 in fiscal 2006and $0 in fiscal 2005, respectively. We do not have a significant amount ofunutilized fixed assets, and we do not anticipate any significant assetdispositions in the near future.

 

Net cash provided by(used in) financing activities totaled ($2,332,000), ($340,000), and $334,000for fiscal 2007, 2006, and 2005, respectively. The primary components of netcash provided by (used in) financing activities were borrowings and repaymentsunder our line of credit, repurchase of common stock, cash dividend on commonshares and stock option exercises.

 

•                  Since April 1994, we have maintained a revolving lineof credit agreement with a commercial bank. The revolving line of credit,renewed by amendment through December 5, 2007, provides for a maximum loanamount of $3,000,000, collateralized by a certificate of deposit held at thecommercial bank in the amount of $3,000,000, which earns a market rate ofinterest. Borrowings under the line of credit agreement accrue interest at thebank’s prime rate. We generally maintain the line of credit to facilitate theissuance of letters of credit for inventory purchases from offshore suppliersand, if necessary, to fund any temporary working capital needs. As of June 30,2007 and 2006, we had outstanding letters of credit totaling $2,173,000 and$509,000, respectively, relating to commitments to purchase finished goodsinventories from various offshore suppliers. Amounts outstanding on letters ofcredit reduce the amount available for borrowing under the line of credit. Infiscal 2007, we borrowed $300,000 and repaid $300,000 under the line of creditagreement to fund temporary working capital needs. We made no borrowings underthe line of credit agreement in either fiscal 2006 or 2005. We had nooutstanding borrowings under the line of credit at either June 30, 2007 or2006.

 

•                  In January 2007, we commenced a modified “DutchAuction” tender offer to purchase shares of our common stock. In February 2007,in accordance with the terms of the related Offer to Purchase agreement, weused 

 

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cash of $2,332,000 topurchase 485,762 shares of our common stock that had been properly tendered.Upon completion of the tender offer, we had 2,284,490 shares of our commonstock outstanding.

 

•                  In fiscal 2006, we declared and paid a cash dividendto common shareholders, which used financing activities cash of $693,000, andamounts advanced to Reserve Apparel by Explorer Gear, the minority interest, inexcess of their proportionate share of Reserve Apparel’s net loss providedfinancing activities cash of $56,000. No dividends were declared or paid ineither fiscal 2007 or 2005.

 

•                  Historically, gross proceeds from the exercise ofstock options have fluctuated significantly from year to year. We realizedproceeds of $353,000 and $334,000 from the exercise of stock options in fiscal2006 and 2005, respectively. No stock options were exercised in fiscal 2007.

 

Our long-term debt at June 30, 2006, consisted of thebalance of amounts advanced to Reserve Apparel by Explorer Gear. We had nolong-term debt at June 30, 2007.

 

Substantially all of our purchases from offshoremanufacturers and sales to foreign distributors are U.S. Dollar denominatedand, consequently, we have no material currency exchange risk. We believe thatinflation has not materially affected the results of our operations during thethree most recent fiscal years.

 

**Off-Balance Sheet Arrangements**

 

During fiscal years 2007 and 2006, we did not have anyrelationships or arrangements with unconsolidated entities or financialpartnerships, such as entities often referred to as structured finance orspecial purpose entities, which would have been established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes.

 

**Contractual Obligations**

 

The following table summarizes our significantcontractual cash obligations as of June 30, 2007. Certain of these contractualobligations are reflected in our balance sheet, while others are disclosed asfuture obligations under accounting principles generally accepted in the UnitedStates.

 
| ** **                                                                               | ** ** | ** ** | ** ** | **Payments due by Period** | ** ** | ** **     | ** ** |
|------------------------------------------------------------------------------------------|------------|------------|------------|-------------------------------------------|------------|----------------|------------|
| **Contractual Cash   Obligations**                                             | ** ** | **Total**  | ** ** | **Less  than 1  year**               | ** ** | **1-3  years** | ** ** | **3-5 Years** | ** ** | **More  than 5  Years** | ** ** |
| ** **                                                                               | ** ** | ** ** | ** ** | ** **                                | ** ** | ** **     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Long Term Debt  Obligations                                                              |       | $          | —     |                                      | $          | —         |       | $ | — |   | $ | — |   | $ | — |   |
| Capital Lease  Obligations                                                               |       | —     |       | —                                    |       | —         |       | — |   | — |   |
| Operating Lease  Obligations                                                             |       | 1,244,000  |       | 284,000                                   |       | 864,000        |       | 96,000 |   | — |   |
| Purchase  Obligations Under Outstanding Purchase Orders                                  |       | 2,173,000  |       | 2,173,000                                 |       | —         |       | — |   | — |   |
| Minimum Royalty  Obligations Under License Arrangements                                  |       | 4,129,000  |       | 687,000                                   |       | 2,887,000      |       | 555,000 |   | — |   |
| Other Long-Term  Liabilities Reflected on the Registrant’s Balance Sheet under GAAP |       | —     |       | —                                    |       | —         |       | — |   | — |   |
| Total                                                                                    |       | $          | 7,546,000  |                                      | $          | 3,144,000      |       | $ | 3,751,000 |   | $ | 651,000 |   | $ | — |   |

 

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**ITEM 7A.  QUANTITATIVE AND QUALITATIVEDISCLOSURE ABOUT MARKET RISK**

 

Market risk represents the risk of loss that may impactthe financial position, results of operations or cash flows due to adversechanges in financial and commodity market prices and rates. We are exposed tomarket risk with regard to changes in United States interest rates. Thisexposure is directly related to our normal operating and funding activities.Historically and as of June 30, 2007, we have not used derivatives instrumentsor engaged in hedging activities. Our market risk has not changed significantlyfrom June 30, 2006.

 

**Interest Rate Risk**

 

We maintain a revolving line of credit agreement witha commercial bank that provides for interest at the bank’s prime rate. Theagreement provides for a maximum loan amount of $3,000,000 collateralized by acertificate of deposit held at the commercial bank in the amount of $3,000,000.We generally maintain the line of credit to facilitate the issuance of lettersof credit for inventory purchases from offshore suppliers and, if necessary, tofund any temporary working capital needs. We did not have any outstandingborrowings under the line of credit at June 30, 2007. Increases in the bank’sprime rate could, however, increase the interest expense with respect to futureborrowings, including borrowings under the line of credit. Outstanding lettersof credit reduce the amount available for borrowing under the line of credit.We had outstanding letters of credit of $2,173,000 at June 30, 2007.

 

From time to time, we maintain short-term investmentsin low risk and no risk financial instruments, readily convertible into cash,which earn interest at variable rates. We regularly maintain cash balances at acommercial bank in excess of the Federal Deposit Insurance Corporationinsurance limit of $100,000 per account.

 

**ITEM 8.   FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 
| **INDEX**                                                | ** ** | ** ** |
|----------------------------------------------------------|------------|------------|
|                                                     |       |       |
| Index to Financial Statements                            |       |       |
|                                                     |       |       |
| Report of Independent Registered Public Accounting  Firm |       |       |
|                                                     |       |       |
| Report of Independent Registered Public Accounting  Firm |       |       |
|                                                     |       |       |
| Consolidated  Balance Sheets                             |       |       |
|                                                     |       |       |
| Consolidated Statements of Operations                    |       |       |
|                                                     |       |       |
| Consolidated Statement of Shareholders’ Equity      |       |       |
|                                                     |       |       |
| Consolidated Statements of Cash Flows                    |       |       |
|                                                     |       |       |
| Notes to Consolidated Financial Statements               |       |       |
|                                                     |       |       |
| Schedule II – Valuation and Qualifying Accounts     |       |       |

 
| **ITEM 9.** | ** ** | **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE** |
|-------------|------------|-------------------------------------------------------------------------------------------|

 

As previously reported, on October 19, 2006, ourindependent registered accountants, Hein & Associates LLP (“Hein”),declined to stand for re-election after the completion of the audit for theyear ended June 30, 2006, and 

 

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the Audit Committee of our Board of Directors engaged the firm Gordon,Hughes & Banks, LLP to act as our independent registered public accountantsfor the year ended June 30, 2007.

 

During the two most recent previous fiscal years, andany subsequent interim period preceding Hein’s declination to stand forre-election, we did not have any disagreements with Hein on any matter ofaccounting principles or practices, financial statement disclosure or auditscope or procedure, which if not resolved to the satisfaction of Hein wouldhave caused them to make reference to the subject matter of such a disagreementin connection with the issuance of this report on Form 10-K. Further, therewere no reportable events (as defined in Regulation S-K Item 301(a)(1)(v)) inconnection with our two most recent prior fiscal year audits, or in anysubsequent interim period preceding Hein’s declination, except that, aspreviously reported, upon implementation of our operations software in January2004 and continuing through the fiscal quarter ended March 31, 2006,programming and human errors discovered which caused us to report a material weaknessin our internal controls over financial reporting with respect to inventoryvaluation.

 

**ITEM 9A.****      CONTROLSAND PROCEDURES**

 

**(a)****           Evaluation ofDisclosure Controls and Procedures.**Our management, with the participationof our Chief Executive Officer and our Chief Financial Officer, conducted anevaluation of the effectiveness of our disclosure controls and procedurespursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the endof the period covered by this report. Based on that evaluation, management,including the Chief Executive Officer and Chief Financial Officer, concludedthat, as of the end of the period covered by this report, our disclosurecontrols and procedures were effective in reaching a reasonable level ofassurance that: (a) all material information relating to the Company, requiredto be disclosed in this report, was made known to management in a timelymanner; and (b) information was recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and regulations.

 

**(b)****           Changes in InternalControl Over Financial Reporting.**During the last quarter of fiscal 2007,we did not implement any significant changes in our internal controls overfinancial reporting as defined in Rules 13a-15(f) or 15d-15(f) that materiallyaffected, or are reasonably likely to materially affect, our internal controlsover financial reporting.

 

Our management, includingour Chief Executive Officer and our Chief Financial Officer, does not expectthat our disclosure controls and procedures or our internal controls overfinancial reporting will, in all instances, prevent all errors and all fraud. Acontrol system, no matter how well conceived or operated, can only providereasonable, not absolute, assurance that the objectives of the control systemare met. While our control systems provide a reasonable assurance level, thedesign of our control systems reflects the fact that there are resourceconstraints, and the benefits of such controls were considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the financial reports of Sport-Haley,Inc. have been detected. These inherent limitations include the realities thatjudgments in decision-making can be faulty, and that breakdowns can occurbecause of simple errors or mistakes. Additionally, a control can becircumvented by the individual act of some person, by collusion of two or morepersons, or by management’s override of a specific control. The design of anysystem of controls is also based in part on certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.Because of the inherent limitations in a cost-effective control system,misstatements due to error or fraud may occur and not be detected.

 

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**PART III**

 

**ITEM 10.  DIRECTORS, EXECUTIVE OFFICERSAND CORPORATE GOVERNANCE**

 
| **Name**                       | ** ** | **Age** | ** ** | **Position**                                        | ** ** |
|--------------------------------|------------|---------|------------|-----------------------------------------------------|------------|
|                           |       |    |       |                                                |       |
| Donald W. Jewell               |       | 56      |       | Chief Executive Officer, President and Director     |       |
|                           |       |    |       |                                                |       |
| Patrick W. Hurley              |       | 55      |       | Chief Financial Officer, Secretary and Treasurer    |       |
|                           |       |    |       |                                                |       |
| Catherine B. Blair             |       | 56      |       | Vice President - Merchandising/Design               |       |
|                           |       |    |       |                                                |       |
| Ronald J. Norick (2)(3)(4)     |       | 65      |       | Director and Chairman of the Board                  |       |
|                           |       |    |       |                                                |       |
| James R. TenBrook (1)(3)(4)    |       | 59      |       | Director and Chairman of the Audit Committee        |       |
|                           |       |    |       |                                                |       |
| Mark J. Stevenson (1)(2)(3)(4) |       | 68      |       | Director and Chairman of the Compensation Committee |       |
|                           |       |    |       |                                                |       |
| James H. Everest (2)(3)(4)     |       | 58      |       | Director                                            |       |
|                           |       |    |       |                                                |       |
| William O. Johnstone (1)(3)(4) |       | 59      |       | Director                                            |       |

 

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(1)          Member of the AuditCommittee

(2)          Member of theCompensation Committee

(3)          Member of the NominatingCommittee

(4)          The Board of Directorshas determined that this director is independent pursuant to the applicableFINRA rules

 

Officers are appointed by and serve at the discretionof the Board of Directors. Each Director holds office until the next annualmeeting of shareholders or until a successor has been duly elected andqualified, subject to the terms and conditions of their respective employmentagreements. All of our officers devote full-time to our business and affairs.

 

*Donald W. Jewell*was appointed byour Board of Directors in October 2004 to serve as our Interim Chief ExecutiveOfficer. Mr. Jewell was appointed in April 2005 to serve as our President and has served as our Senior Vice Presidentsince February 2001. Mr. Jewell served as President for a term consistent withthat of his service as our Interim Chief Executive Officer. In September 2006,Mr. Jewell agreed to serve as our Chief Executive Officer and President on apermanent basis, and he will no longer serve as our Senior Vice President. InFebruary 2007, Mr. Jewell was elected to serve as a Director. From 1996 untiljoining us, Mr. Jewell was the founder, president and director of JewellApparel Group, a Canadian distributor of premium and mid-priced men’s golfapparel. Mr. Jewell began designing, sourcing and marketing golf apparel in1993 while serving as the president and chief executive officer of Jewell-Rung,positions that he held from 1980 to 1996.

 

*Patrick W. Hurley* has served asour Secretary and Treasurer since November 1999, as our Controller fromNovember 1999 to August 2006 and as our Chief Financial Officer since December2000. Prior to joining us, Mr. Hurley was employed as a senior staff accountantat Saltzman Hamma Nelson Massaro LLP, Denver, Colorado, where among otherthings, he supervised or participated in the preparation of audited andunaudited financial statements and income tax returns, and provided advice andtraining for business clients regarding selection and implementation ofaccounting systems and procedures. Mr. Hurley is a certified public accountantand received a bachelor of science degree in accounting in 1991. Mr. Hurley isalso a member of the American Institute of Certified Public Accountants and theColorado Society of Certified Public Accountants.

 

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*Catherine B. Blair* has served asour Vice President - Merchandising/Design since her appointment in May 1996.Ms. Blair has been part of our design team since 1992, and was appointedDirector of Design in 1995. Prior to joining us, Ms. Blair was a designer for agolfwear company and also worked as a freelance designer for companies such asMacy’s, Bloomingdale’s, Ann Taylor and The Gap.

 

**Key Employees**

 

*George E. (“Tom”) Tomlinson* hasserved as our Director – Operations and Production since December 1997.Previously, Mr. Tomlinson served as our warehouse distribution manager fromJanuary 1993 until December 1997. Prior to joining the Company in 1993, Mr.Tomlinson held various positions in other companies, including purchasing forBelle Bonfils Memorial Blood Center. Mr. Tomlinson is the brother of our lateChairman and Chief Executive Officer, Robert G. Tomlinson, and the uncle of ourformer Chief Executive Officer, Kevin M. Tomlinson.

 

*Barry L. Hyman* has served as ourEastern Regional Sales Manager since February 2004 and served on an interimbasis as our Western Regional Sales Manager from December 2005 to February2006. Mr. Hyman was an independent wholesale sales representative for our BenHogan® apparel lines from 2001 until his appointment as Eastern Regional SalesManager. From 1990 to 2001, Mr. Hyman was an independent sales representativefor various companies in the golf apparel industry, including Jewell Apparel Group,Precept Golf, Greg Norman and the Ben Hogan® Company.

 

*Michael D. Doris* has served asour Western Regional Sales Manager since February 2006. Prior to joining theCompany, Mr. Doris was the western regional sales manager for Cutter &Buck, Inc. from 2002 to 2005 and a sales representative for Cutter & Buck,Inc. from 1997 to 2002. Mr. Doris served as head golf professional and managerof various golf courses from 1994 to 1997. From 1986 to 1994, Mr. Doris servedas a sales representative for such companies as The Ben Hogan® Company andSlazenger Golf USA.

 

*Steve S. Barr* has served as ourManaging Director of Sales - Retail Division since November 2006 withresponsibilities including identifying, opening and developing new accounts forour Ben Hogan® fashion apparel and Top-Flite® branded apparel within departmentstore, specialty retail store and mass retail store markets. From May 2006through October 2006, Mr. Barr provided consulting services to us regarding ourmanagement of the Wal-Mart account for our Top-Flite® branded apparel. FromApril 2005 through April 2006, Mr. Barr was the vice-president of sales for themen’s private label sportswear division of Oxford Industries, withresponsibilities including managing Oxford Industries’ Wal-Mart account and forestablishing accounts with other mass retailers. From 1998 until March 2005,Mr. Barr was employed by Tropical Sportswear Int’l, a leading maker of bothprivate label and branded apparel, serving as sales director and most recentlyas senior vice president with responsibility for supervising the mass retaildivision. Mr. Barr received a bachelor of science degree in accounting in 1984.

 

**Independent Directors**

 

*Ronald J. Norick* has been aDirector since November 1993. In October 2004, subsequent to the death ofRobert G. Tomlinson, Mr. Norick was appointed by the Board of Directors to fillthe newly-created non-officer position of Chairman of the Board. Mr. Norickalso serves on the Compensation and Nominating Committees of the Board andserved on the Audit Committee of the Board until February 2007. From April 1987until April 1998, Mr. Norick served as the elected Mayor of the City ofOklahoma City, Oklahoma. From 1960 to 1992, Mr. Norick served in variouscapacities, including serving as president from 1981 to 1992, of a closely-heldprinting company, which was acquired by Reynolds & Reynolds in June 1992.Mr. Norick serves on a number of civic, community, educational, corporate andpublic boards, commissions and committees and is a director of BancFirstCorporation, a publicly-held corporation based in Oklahoma City, Oklahoma. Mr.Norick also serves as controlling manager of Norick Investments Company LLC, afamily-owned limited liability company, which is engaged in investments.

 

*James R. TenBrook* has been aDirector since March 2004. Mr. TenBrook has served as the Chairman of the AuditCommittee since March 2004 and also serves on the Nominating Committee. Mr.TenBrook is the president and a shareholder of Karsh Consulting, P.C. ofDenver, Colorado, has been a certified public accountant since 1973, receivedhis personal financial specialist certification in 1994 and is a certifiedvaluation analyst. Mr. TenBrook’s 

 

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practice consists primarily of litigation support, tax and estateplanning. Mr. TenBrook is a member of the Colorado Society of Certified PublicAccountants (“CSCPA”), served on the CSCPA’s board of directors from 1996-1999and served on the CSCPA Personal Financial Planning Committee from 1991-1994(serving as Chairman of the Committee in 1993 and 1994). Mr. TenBrook is also amember of the American Institute of Certified Public Accountants. KarshConsulting, P.C. has performed income tax services for several years for ourcurrent Chief Executive Officer and President, our former Chief ExecutiveOfficer and an entity related to our former Chairman. The fees paid to KarshConsulting, P.C. for these tax services have not exceeded $8,000 per year inthe aggregate. While services rendered by Karsh Consulting, P.C. result in somepecuniary benefit to Mr. TenBrook, the amount of which is difficult toquantify, Mr. TenBrook believes that the direct compensation to him as a resultof these particular engagements has been less than $1,000 per year. We believethat Mr. TenBrook nevertheless meets the definition of independence under bothSEC and FINRA Rules.

 

*Mark J. Stevenson* has been aDirector since November 1993. Mr. Stevenson serves on the Audit Committee, theCompensation Committee (as its Chairman) and the Nominating Committee. Mr.Stevenson served as president and chief executive officer of ZenodataCorporation, a Colorado based financial services software company, from March2001 until his retirement in April 2005. In May 2005, Zenodata Corporation madean assignment for the benefit of creditors. Mr. Stevenson held the positions ofchairman of the board, president and chief executive officer of ElectronicManufacturing Systems, Longmont, Colorado, a contract manufacturer serving thecomputer, data storage, telecommunications and medical equipment industries,from June 1994 until that company was merged into E-M-Solutions in January1999. At that time, Mr. Stevenson was appointed executive chairman and chairmanof the board of E-M-Solutions, which filed for bankruptcy protection in theNorthern District of California in approximately November 2001 and wasimmediately purchased by Sanmina/SCI. From 1992 to 1994, Mr. Stevenson servedas chairman of the board for Micro Insurance Software, Inc., Boulder, Colorado,a manufacturer of computer software oriented to the insurance industry. Mr.Stevenson served on the Colorado Governor’s Commission on Science andTechnology for five years ending in 2004 and currently serves on the AdvisoryCouncil of the University of Colorado Deming Center for Entrepreneurship. Mr.Stevenson formerly served as chairman of the American Electronics Association,the nation’s largest high technology trade association.

 

*James H. Everest* has been aDirector since November 1993. Mr. Everest serves on the Compensation andNominating Committees and served on the Audit Committee until March 2004. Mr.Everest has served as president of the Jean I. Everest Foundation, OklahomaCity, Oklahoma, since 1991. The Jean I. Everest Foundation was organized by Mr.Everest’s father to conduct charitable activities. Since 1984, Mr. Everest hasbeen the managing partner of Everest Brothers, a general partnership active inoil and gas exploration and development and has also been engaged in managinghis personal investments. Mr. Everest is a member of the Oklahoma BarAssociation and the American Bar Association and serves in a number ofcapacities for various civic and community organizations.

 

*William O. Johnstone* has servedas a Director since February 2007. Mr. Johnstone is the manager and chiefexecutive officer of Council Oaks Partners, LLC, a private equity firm inOklahoma City, Oklahoma. Mr. Johnstone is a director and vice chairman ofBancFirst Corporation, a publicly-traded banking corporation based in OklahomaCity, Oklahoma, of which Mr. Norick is also a director. Council Oaks Partners,LLC, is a subsidiary of BancFirst Corporation. Mr. Johnstone is also the chiefexecutive officer of Council Oak Investment Corporation and Council Oak Real Estate,Inc., both of which are subsidiaries of BancFirst Corporation. From 1996 to2001, Mr. Johnstone served as chairman and co-chief executive officer of C-Teq,Inc., a company that provided data processing services to financialinstitutions. From 1985 until 1996, Mr. Johnstone served as president andchairman of the board for City Bankshares, Inc. and its subsidiary, City Bank& Trust, Oklahoma City, Oklahoma.

 

**Compliance with Section 16(a) of the Exchange Act**

 

Under the securities laws of the United States, ourdirectors, executive officers and any persons holding more than ten percent ofour common stock are required to report their initial ownership of common stockand other equity securities and any subsequent changes in that ownership to theSecurities and Exchange Commission and to Sport-Haley, Inc. Specific due datesfor these reports have been established and we are required to disclose in thisannual report on Form 10-K any failure to file, or late filing, of such reportswith respect to the period ended June 30, 2007. 

 

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Based solely upon our review of the reports furnished to us and writtenrepresentations that no other reports were required during fiscal 2007, webelieve that our officers, directors and beneficial owners of more than tenpercent of our common stock complied with all Section 16(a) requirements.

 

**Board Committees**

 

The Board of Directors has delegated certain of itsauthority to an Audit Committee, a Compensation Committee and a NominatingCommittee. The Audit Committee is comprised of Messrs. TenBrook, Stevenson andJohnstone. The Compensation Committee is comprised of Messrs. Stevenson, Norickand Everest. The Nominating Committee is comprised of Messrs. Norick, TenBrook,Stevenson, Everest and Johnstone. Mr. TenBrook serves as Chairman of the AuditCommittee and Mr. Stevenson serves as Chairman of the Compensation Committee.No member of these three committees is a current or former officer or employeeof Sport-Haley, Inc. or its current or former subsidiaries. We have determinedthat each member of the Audit Committee, Compensation Committee and NominatingCommittee qualifies as an “independent” director under the applicable FINRARules.

 

*Audit Committee*

 

The major functions of the Audit Committee are todiscuss the scope of audit procedures employed, to review and approve the auditreports rendered by our independent auditors and to approve the audit feecharged by the independent auditors. In addition, pursuant to the Sarbanes-OxleyAct of 2002 and rules promulgated thereunder, the Audit Committee isresponsible for, among other things, pre-approving all audit and non-auditservices performed by the independent auditors, approving the engagement of theauditors and receiving certain reports from the independent auditors prior tothe filing of the audit report. The Audit Committee reports to the Board ofDirectors with respect to such matters and recommends the selection ofindependent auditors. James R. TenBrook has served as the Chairman of the AuditCommittee since March 2004.

 

Since March 2004, when James R. TenBrook was electedas Director and appointed to the Audit Committee as its Chairman, the Board hasdetermined that Mr. TenBrook meets the definition of an audit committee financialexpert, as defined by SEC regulations. In addition, the board has determinedthat Mr. TenBrook also meets the requirements for independence under SEC rulesand the applicable FINRA Rules.

 

*Compensation Committee*

 

The primary function of the Compensation Committee isto review and make recommendations to the Board with respect to thecompensation, including bonuses, of our officers and to administer our StockOption Plan. See *“Compensation Committee Report”*included in Item 11 below.

 

*Nominating Committee*

 

The Nominating Committee recommends to the Board thepersons to be nominated for election as Directors at any meeting ofstockholders, develops and recommends to the Board a set of corporategovernance principles applicable to the Company and oversees the evaluation ofthe Board. The Board has determined that each of the members of the NominatingCommittee is “independent,” as that term is defined by applicable FINRA Rules

 

Since forming the Nominating Committee, adopting aformal charter, and adopting nomination procedures, there have been no materialchanges to the procedures by which security holders may recommend nominees toour Board of Directors.

 

**Code of Ethics**

 

In January 2004, we adopted a Code of Ethics forSenior Financial Officers, which applies to all senior financial officers ofthe Company, including the Chief Executive Officer, the Chief FinancialOfficer, the Treasurer and any other person performing similar functions. Inaddition, in May 2004, we adopted a Code of Conduct and Ethics for Directors,Officers and Employees, which is applicable to all of our directors, officersand employees. A 

 

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copy of these codes may be obtained without charge by written requestfor copies of them addressed to: Corporate Secretary, Sport-Haley, Inc., 4600E. 48th Avenue, Denver, CO  80216-3215.

 

**ITEM 11.  EXECUTIVE COMPENSATION**

 

**Compensation Discussion and Analysis**

 

The following discussion and analysis providesinformation regarding our executive compensation objectives and principles,procedures, practices and decisions, and is provided to help give perspectiveto the numbers and narratives that follow the tables in this section. Thisdiscussion will focus on our objectives, principles, practices and decisionswith regard to the compensation of the following three named executive officers(the “NEOs”):

 

•  DonaldW. Jewell – Chief Executive Officer and President

•  PatrickW. Hurley – Chief Financial Officer, Secretary and Treasurer

•  CatherineB. Blair – Vice President – Merchandising/Design

 

Compensation programs for our NEOs are determined andproposed by our Compensation Committee and are approved by the Board ofDirectors. None of the NEOs are members of the Compensation Committee orotherwise had any role in determining the compensation for themselves or otherNEOs, although the Compensation Committee does receive input from the NEOs whenconsidering adjustments to base salary and other compensation components andthe Chief Executive Officer’s recommendations with respect to compensation ofthe other NEOs. The Compensation Committee conducts an annual review****of our executive compensation programs to ensure that theymeet the objectives described below. The Compensation Committee relies on itsjudgment in making compensation decisions after reviewing our performance andevaluating each executive’s performance against established goals, leadershipability and responsibilities, and current compensation arrangements. Whensetting total compensation for each of the NEOs, the Compensation Committeereviews each NEO’s current compensation, including equity and non-equity basedcompensation. The Compensation Committee also evaluates through local surveysand human resource publications comparable base and incentive compensationranges for similar job descriptions.

 

**Executive Compensation Objectives and Overview**

 

The overall objective of our executive compensationprogram is to create long-term value for our stockholders by attracting andretaining talented executives, rewarding superior operating and financialperformance, and aligning the long-term interests of our executives with thoseof our stockholders. Accordingly, our executive compensation programincorporates the following principles:

 

•                  Compensationshould be based on individual job responsibility, demonstrated leadershipability, management experience, individual performance and achieving Companyfinancial goals. Employees in positions of leadership and broad responsibilityare generally compensated by elements that are linked to our overallperformance.

 

•                  Compensationshould reflect the fair market value of the services received. We believe thata fair and competitive pay package for the NEOs is essential to attract andretain talented executives in key positions.

 

•                  Compensationis designed to reward NEOs based on both our short-term and long-termperformance. Base salary is tied to individual performance and marketconditions for similar positions. Bonuses, if any, are tied to achievement ofshort-term quantitative performance goals that we believe closely correlate toshare value. Long-term performance has historically been rewarded throughequity-based awards such as stock options, the value of which depends on futureshare prices, and the realization of which is contingent on satisfaction ofvesting schedules requiring continued service with us.

 

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**Elements of Executive Compensation**

 

Our current executive compensation program is basedupon four main components, designed to be consistent with our compensationobjectives: (1) base salary; (2) annual incentive bonuses; (3) grants of stockoptions; and, (4) perquisites and other benefits.

 

The following is a more detailed explanation of theprimary components of our executive compensation program.

 

*Base Salary.*Base salaries areset initially in each NEO’s respective executive employment agreement, and arereviewed annually by the Compensation Committee. Base salaries serve as theguaranteed cash portion of executive compensation. A base salary is intended tocompensate an executive for performing his or her job responsibilities on aday-to-day basis and is intended to reflect that executive’s skill set as wellas the market value for that position. The Compensation Committee sets the basepay of the Chief Executive Officer. Base pay for other NEOs is set by theCompensation Committee after reviewing the recommendation of the ChiefExecutive Officer. Annual adjustments are influenced by growth of our operations,revenues and profitability, individual performance, changes in responsibilityand other factors.

 

Each NEO’s base salary is generally fixed at the timethe executive is first hired or is promoted to the executive officer level. Insetting the base salary, the Compensation Committee reviews job requirementsand performance expectations, and conducts an informal market survey todetermine the competitiveness of the base salary. The Compensation Committeereviews base salaries annually and adjustments are made as appropriate torecognize outstanding individual performance, expanded duties, or changes inthe competitive marketplace. In 2007, we increased the base salary of our ChiefExecutive Officer, Donald W. Jewell, to $325,000, as he was appointed to theposition of Chief Executive Officer on a permanent basis. Mr. Jewell alsoserves as our President and retains responsibility for designing and sourcingour Ben Hogan® men’s fashion apparel. We did not adjust the base salary of anyof our other NEOs in 2007.

 

The base salary for each of the named executiveofficers during 2007, according to their respective effective employmentagreement, was as follows:

 
| Donald W. Jewell    |   | Chief Executive Officer and President            |   | $ | 325,000 |   |
|---------------------|--------|--------------------------------------------------|--------|---|---------|--------|
| Patrick W.  Hurley  |   | Chief Financial Officer, Secretary and Treasurer |   | $ | 125,000 |   |
| Catherine B.  Blair |   | Vice President – Merchandising/Design       |   | $ | 130,000 |   |

 

*Cash Bonuses.* The employmentagreements of each of our NEOs contain provisions allowing for annual incentivebonuses, at the discretion of the Compensation Committee, of up to 30% of theexecutive’s base salary, in accordance with our bonus plan.****Eachyear, depending upon the Company’s annual financial performance and otherobjectives, a determination is made as to whether an annual bonus is anecessary part of the overall executive compensation package. In those yearswhere it is determined that an annual bonus is required, a bonus serves as theshort-term incentive compensation element of the executive compensation programand is intended to provide an incentive for an executive to achieve a highlevel of corporate and individual performance. The payout of annual bonuses toNEOs is subject to the approval of the Compensation Committee following itsreview of executives’ performances against the designated corporate andindividual performance criteria.****No bonuseswere awarded to our NEOs in 2007, since key revenue and profit objectives werenot achieved. During 2006, we awarded a cash bonus to Mr. Jewell of $50,000 andtransferred title in a Company automobile to him (with an estimated fair valueof $14,000); we awarded Mr. Hurley a cash bonus of $12,000; and, we awarded Ms.Blair a cash bonus of $3,000.

 

*Long Term Incentives – Stock Options.*Historically,we have granted common stock options to our executive officers and directors asa form of long-term incentives. Sport Haley adopted an Amended and RestatedStock Option Plan in 1993 (the “Option Plan”). The Option Plan provided for thegranting of incentive stock options within the meaning of Section 422 of theInternal Revenue Code of 1986, as amended, non-qualified stock options andstock appreciation rights (“SARs”). Options granted under the Option Plantypically vested over three years, which provided the recipient some incentiveto remain with the Company.

 

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The Option Plan is administered by the CompensationCommittee. Upon termination of a participant’s employment or consultingrelationship with Sport-Haley, all unvested options terminate and are no longerexercisable. Vested options remain exercisable for a specified period of timefollowing the termination date. The length of such an extended exercise periodgenerally ranges from 30 days to one year, depending on the nature and circumstancesof the termination.

 

Each of our NEOs has previously been granted optionsunder the Option Plan, all of which are currently vested and exercisable. Theoptions granted to our NEOs under the Option Plan will expire, based upon thedate of their issuance, from January 2010 through February 2012. TheCompensation Committee did not utilize a specific formula as the basis forgranting awards under our Option Plan. No options could be granted under theOption Plan subsequent to February 28, 2003, when the Option Plan expired byits terms. Thus, no options were granted to our NEOs or directors during 2007.

 

Options granted pursuant to the Option Plan prior toits expiration remain exercisable according to the terms of their issuance. Allof the options previously granted under the Option Plan are now fully vested.The exercise price of each incentive option granted under the Option Plan musthave been at least equal to the fair market value of the common stock ofSport-Haley on the date of grant. In the case of an optionee who owned stockpossessing more than ten percent of the total combined voting power of allclasses of stock of Sport Haley, the exercise price of incentive options couldnot be less than 110% of the fair market value of the Common Stock on the dateof grant. The exercise price of all non-qualified stock options granted underthe Option Plan was determined by the Compensation Committee, but could not beless than 85% of the fair market value of the Common Stock.

 

As of June 30, 2007, a total of 593,500 non-qualifiedoptions were outstanding, with exercise prices ranging from $2.71 to $9.78 pershare and a weighted average exercise price per share of $3.22. During thequarter ended June 30, 2007, no options were exercised and no options expired.

 

The Compensation Committee believes that option grantsprovide significant performance incentives and is considering adopting a newoption plan. We believe that long-term equity-based compensation is animportant element of our overall compensation program because it helps focusour executives on our long-term financial goals and operational performance andalso aligns the interests of our executives with those of our shareholders. Thepotential financial value offered through such options, along with the typicalvesting period, is also an important retention tool.

 

*Perquisites and Other Benefits.*Other benefits are provided to the NEOs include basic group health carecoverage (the Company pays 80% of the NEO’s prorated premium for group medicalinsurance exclusive of spousal and dependent coverage), life insurance (theCompany pays the premium for $50,000 of term life insurance per salariedemployee in a group plan), paid vacations and 401(k) plan employercontributions (the Company matches employee contributions up to 3% of theirannual compensation plus 50% of their contributions from 3 to 5% of theirannual compensation, within applicable federal limits). The CompensationCommittee believes that those benefits, which are detailed in the Summary CompensationTable under the heading “All Other Compensation,” are reasonable, competitiveand consistent with our overall executive compensation program. In addition,for our Chief Executive Officer, we also pay for certain automobile expenses,his golf club membership dues and for a personal assistant, who primarilyprovides him with non-business related personal services.

 

**Termination and Severance Benefits**

 

The Company has entered into an employment agreementwith each of the NEOs. The Company’s executive employment contracts aregenerally based upon a standard form of agreement with various modifications,depending on the position. Each employment agreement generally requires theexecutive officer to devote his or her full productive time and best efforts tothe Company and to hold in confidence all trade secrets and proprietaryinformation he or she receives from the Company. The employment agreements setforth the base salary, incentive compensation, benefits and perquisites thatthe executive officer is entitled to as described above. The employmentagreements also set forth the benefits and rights the executive officers areentitled to upon termination of employment and upon a change-in-control of theCompany. These rights are described below.

 

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*Donald W. Jewell.*****With respect to our Chief Executive Officer and President,Donald W. Jewell, if we elect to terminate his employment for other than “cause”(as defined in the employment agreement), or if Mr. Jewell were to terminatethe agreement for cause, Mr. Jewell would be entitled to receive severancecompensation equal to twelve months salary and 50% of the last annual bonuspaid to him. During the time he were to receive any such severancecompensation, Mr. Jewell is eligible to participate in all employee benefitplans, at our expense. If there were to be a non-negotiated change in controlof Sport-Haley, Inc., and either we or Mr. Jewell terminate the agreementwithin sixty days of the change of control, then Mr. Jewell would be entitledto lump sum severance compensation equal to three times his annual salary andbonus payments during the preceding 12 months. In the event of termination dueto a non-negotiated change in control, options previously granted to Mr. Jewellwould become fully vested and exercisable on the date of termination. In theevent of a termination by either party without cause, options previouslygranted would vest and become exercisable on a prorated basis from the date ofgrant to the date of termination.

 

*Patrick W. Hurley.* If we elect toterminate the executive employment agreement with Patrick W. Hurley, our ChiefFinancial Officer, Secretary and Treasurer, without “cause” (as defined in theagreement) or not to renew the agreement upon its expiration, or if Mr. Hurleyterminates the agreement with or without cause, he is entitled to receiveseverance compensation equal to six months’ salary, plus 50% of the last annualbonus paid to him. During the time he were to receive any such severancecompensation, Mr. Hurley is entitled to participate in all employee benefitplans, at our expense. If there were to be a non-negotiated change in controlof Sport-Haley, Inc., and either we or Mr. Hurley terminate the agreementwithin sixty days of the change of control, then Mr. Hurley is entitled to lumpsum severance compensation equal to three times his annual salary and bonuspayments during the preceding 12 months. In the event of termination due to anon-negotiated change in control of Sport-Haley, Inc., options previouslygranted to Mr. Hurley would become fully vested and exercisable on the date oftermination. In the event of a termination by either party without cause,options previously granted would vest and become exercisable on a proratedbasis from the date of grant to the date of termination.

 

*Catherine B. Blair.* If we electto terminate her executive employment agreement with Catherine B. Blair, ourVice President of Merchandising/Design, without “cause” (as defined in theagreement) or not to renew the agreement upon its expiration, or if Ms. Blairterminates the agreement with or without cause, she is entitled to receiveseverance compensation equal to fifteen months’ salary, plus 50% of the bonus,if any, paid to her in the preceding 12 months. During the time she were toreceive any such severance compensation, Ms. Blair is entitled to participatein all employee benefit plans, at our expense. If there were to be anon-negotiated change in control of Sport-Haley, Inc., and either we or Ms.Blair terminate the agreement within sixty days of the change of control, thenMs. Blair is entitled to lump sum severance compensation equal to three timesher annual salary and bonus payments during the preceding 12 months. In theevent of termination due to a non-negotiated change in control of Sport-Haley,Inc., options previously granted to Ms. Blair would become fully vested andexercisable on the date of termination. In the event of a termination by eitherparty without cause, options previously granted would vest and become exercisableon a prorated basis from the date of grant to the date of termination.

 

**Tax and Accounting Considerations**

 

*Deductibility of Executive Compensation*

 

Section 162(m) of the Internal Revenue Code, asamended, generally limits the deductibility of certain compensation in excessof $1,000,000 paid in any one year to either the Chief Executive Officer or anyof the other three highest paid executive officers. Qualified performance-basedcompensation is not subject to limit if certain requirements are met. TheCompensation Committee periodically reviews and considers the deductibility ofexecutive compensation under Section 162(m) in designing our compensationprograms and arrangements. While we will continue to monitor our compensationprograms in light of Section 162(m), the Compensation Committee intends toretain the flexibility necessary to provide total compensation that isconsistent with our competitors and the market, our compensation philosophy andthe Company’s best interests. As a result, the Compensation Committee mayconclude that paying compensation at levels that are not deductible underSection 162(m) is nevertheless in the best interests of the Company and ourstockholders.

 

 

40

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*Accounting for Stock-Based Compensation*

 

Effective July 1, 2005, we adopted Statement ofFinancial Accounting Standards No. 123(R), “*Share-Based Payment*”,which requires that we recognize as compensation expense the fair value of allstock-based awards, including stock options, granted to employees and others inexchange for services, over the requisite service period, under our stockoption plan.

 

**Equity or other Security Ownership Requirements orGuidelines**

 

We do not require our executive officers or directorsto maintain ownership of any specified amounts of our common stock. None of ourNEOs own shares of our common stock. Two of our directors, directly and/orbeneficially, own shares of our common stock. *See*“Item 12. Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters” below.

 

**Report of the Compensation Committee**

 

The following statement made by the CompensationCommittee shall not be deemed incorporated by reference into any filing underthe Securities Act of 1933, as amended, or the Securities Exchange Act of 1934,as amended, and shall not otherwise be deemed filed under either of these Acts.

 

The Compensation Committee has reviewed and discussedwith management the Compensation Discussion and Analysis required by Item 402(b)of Regulation S-K, which precedes this report (see “Item 11. ExecutiveCompensation — Compensation Discussion and Analysis” above). Based on suchreview and discussion, the Compensation Committee recommended to our Board thatthe Compensation Discussion and Analysis section be included in this annualreport on  Form 10-K.

 

*By the Compensation Committee ofthe Board of Directors of Sport-Haley, Inc.*

Mark J. Stevenson, Chairman

Ronald J. Norick

James H. Everest

 

**Compensation Committee Interlocks and InsiderParticipation**

 

The following non-employee directors currently serveon the Compensation Committee of the Board of Directors: Mark J. Stevenson(Chairman), Ronald J. Norick and James H. Everest. There are no interlocks ofexecutive officers or directors of the Company serving on the CompensationCommittee or equivalent committee of another entity, which has any director orexecutive officer serving on the Compensation Committee, other committees orthe Board of Directors of the Company.

 

**Summary Compensation Table**

 

The following table sets forth compensationinformation regarding our named executive officers for the last three fiscalyears ended June 30, 2007.

 

Elements of compensation for our NEOs include salary,discretionary cash bonuses, options to purchase shares of our common stockunder our expired stock option plan and other perquisites and benefits. We donot have a pension plan, do not pay non-equity incentive plan basedcompensation and do not offer nonqualified deferred compensation arrangements.We also did not grant stock awards in fiscal year 2007. As a result, columnsrelated to these items have been omitted from the table above. *See* “Compensation Discussion and Analysis,” above.

 

 

41

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| **Name  And  Principal  Position** | ** ** | **Year** | ** ** | **Salary** | ** ** | **Bonus** | ** ** | **All Other  Compensation** | ** ** | **Total** | ** ** |
|------------------------------------|------------|----------|------------|------------|------------|-----------|------------|----------------------------------|------------|-----------|------------|
|                               |       |     |       | **($)**    |       | **($)**   |       | **($)**                          |       | **($)**   |       |
| Donald W. Jewell  (1)              |       | 2007     |       | $          | 325,000    |      | $          | —                           |       | $         | 78,000     | (2) | $ | 403,000 |   |
| Chief Executive Officer            |       | 2006     |       | 200,000    |       | 64,000    | (3)        | 32,000                           | (2)        | 296,000   |       |
| and President                      |       | 2005     |       | 198,000    |       | —    |       | 3,000                            | (4)        | 201,000   |       |
|                               |       |     |       |       |       |      |       |                             |       |      |       |
| Patrick W.  Hurley                 |       | 2007     |       | 121,000    |       | —    |       | 3,000                            | (4)        | 124,000   |       |
| Chief Financial                    |       | 2006     |       | 110,000    |       | 12,000    | (5)        | 2,000                            | (4)        | 124,000   |       |
| Officer, Secretary   and Treasurer |       | 2005     |       | 101,000    |       | —    |       | 1,000                            | (4)        | 102,000   |       |
|                               |       |     |       |       |       |      |       |                             |       |      |       |
| Catherine B.  Blair                |       | 2007     |       | 125,000    |       | —    |       | 7,000                            | (4)        | 132,000   |       |
| Vice President –              |       | 2006     |       | 111,000    |       | 3,000     | (5)        | 2,000                            | (4)        | 116,000   |       |
| Merchandising /   Design           |       | 2005     |       | 106,000    |       | —    |       | 2,000                            | (4)        | 108,000   |       |
|                                    |            |          |            |            |            |           |            |                                  |            |           |            |  |  |  |  |

 

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| (1) | Mr. Jewell has served as our Senior Vice President  since February 2001, our Interim Chief Executive Officer since November 2004  and our President since April 2005. In September 2006, we appointed Mr.  Jewell as our permanent Chief Executive Officer and President, and after that  time he no longer served as our Senior Vice President.                                                                                                                                                                                                                       |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Mr. Jewell’s Other Compensation for 2007 consisted  of life insurance premiums paid by the Company, 401(k) plan contributions,  medical insurance premiums, country club membership fees, automobile  expenses, unreimbursed personal expenses and payments and benefits for a  personal assistant ($53,000). Mr. Jewell’s Other Compensation for 2006  consisted of life insurance premiums paid by the Company, 401(k) plan  contributions, medical insurance premiums, automobile expenses and payments  and benefits for a personal assistant ($20,000). |
| (3) | Comprised of cash bonus of $50,000 paid in October  2005 plus transfer of title to a Company vehicle with an estimated fair value  of $14,000, effective September 30, 2005.                                                                                                                                                                                                                                                                                                                                                                                           |
| (4) | Comprised of contributions by the Company to the  Named Officer’s 401(k) account plus term life insurance premiums paid by the  Company.                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (5) | Comprised of cash bonus paid in October 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

 

**Executive Employment Agreements**

 

We have entered into the following executive employment agreements withour NEOs:

 

*Donald W. Jewell* EffectiveFebruary 1, 2001, we entered into an employment agreement with Donald W. Jewellto serve as our Senior Vice President. In January 2006, we and Mr. Jewellentered into an agreement, effective November 1, 2005, whereby Mr. Jewellagreed, in addition to his duties, responsibilities and benefits under hisexisting employment agreement, to serve as our Interim Chief Executive Officerthrough June 30, 2005, subject to automatic monthly extensions. In April 2005,Mr. Jewell was appointed to serve as our President. The agreement, as amended,requires that Mr. Jewell devote his full business time as our Interim ChiefExecutive Officer, President and Senior Vice President, at an annual salary of$200,000 and such bonuses, as awarded by our Board of Directors, and extendsfor a two-year term, subject to automatic one-year extensions at the end ofeach year. In September 2006, we appointed Mr. Jewell as our permanent ChiefExecutive Officer for a salary of $325,000, retroactive to July 1, 2006, and heno longer serves as our Senior Vice President. Until such time as a newemployment agreement is finalized, the terms of the February 2001 agreement, asamended, will generally remain in effect. In addition, we agreed with Mr.Jewell that we would provide for a personal assistant, with benefits, for hisuse and personal service and to pay the membership dues for a golf club thatMr. Jewell uses primarily for business purposes. The agreement contains anon-competition provision for twelve months following termination, providedthat Mr. Jewell could be released from the non-competition clause if he wereterminated without cause and if he had elected to forego any severance pay. IfMr. Jewell becomes disabled during the term of the agreement, his full salarywill be continued for one year from the date of disability.

 

42

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*Patrick W. Hurley* EffectiveDecember 1, 2000, we entered into an employment agreement with Patrick W.Hurley. The agreement, as amended, requires that Mr. Hurley devote his fullbusiness time as our Chief Financial Officer, Secretary and Treasurer at anannual salary of $125,000 and such bonuses, as awarded by our Board of Directors,and extends for a one-year term, subject to automatic one-year extensions aftereach year. If Mr. Hurley becomes disabled during the term of the agreement, hisfull salary will be continued for one year from the date of disability.

 

*Catherine B. Blair* Effective June1, 2005, we agreed to amend our employment agreement with Catherine B. Blairthat was originally effective July 1, 1997. The amended agreement requires thatMs. Blair devote her full business time as our Vice President ofMerchandising/Design at an annual salary of $130,000 and such bonuses, asawarded by our Board of Directors, and extends for a one-year term, subject toautomatic extensions after each year. If Ms. Blair becomes disabled during theterm of the agreement, her full salary will be continued for one year from thedate of disability.

 

**Outstanding Equity Awards at 2007 Fiscal Year End**

 

The following table sets forth information regardingthe outstanding equity awards to our NEOs at June 30, 2007. We have not grantedany stock awards to our NEOs during 2007 and, accordingly, we had nooutstanding stock awards during 2007. Thus, the columns related to stock awardshave been omitted from the following table.

 
| **Name**                               | ** ** | **Number of Securities  Underlying  Unexercised Options  (#)  Exercisable** | ** ** | **Option Awards  Number of Securities  Underlying  Unexercised Options   (#)  Unexercisable** | ** ** | **Option  Exercise  Price** | ** ** | **Option  Expiration  Date** | ** ** |
|----------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
|                                   |       |                                                                                       |       |                                                                                                                   |       | **($)**                     |       |                         |       |
| Donald W. Jewell                       |       | 25,000                                                                                     |       | —                                                                                                                 |       | 3.00                        |       | 08/01/11                     |       |
| Chief Executive Officer  and President |       | 25,000                                                                                     |       | —                                                                                                                 |       | 3.60                        |       | 02/12/12                     |       |
| Patrick W.  Hurley                     |       | 15,000                                                                                     |       | —                                                                                                                 |       | 3.00                        |       | 01/05/10                     |       |
| Chief Financial  Officer,              |       | 20,000                                                                                     |       | —                                                                                                                 |       | 3.00                        |       | 07/02/11                     |       |
| Secretary and  Treasurer               |       | 15,000                                                                                     |       | —                                                                                                                 |       | 3.60                        |       | 02/12/12                     |       |
| Catherine B.  Blair                    |       | 15,000                                                                                     |       | —                                                                                                                 |       | 3.00                        |       | 01/05/10                     |       |
| VP –  Merchandising and           |       | 15,000                                                                                     |       | —                                                                                                                 |       | 3.00                        |       | 07/02/11                     |       |
| Design                                 |       | 20,000                                                                                     |       | —                                                                                                                 |       | 3.60                        |       | 02/12/12                     |       |

 

**Director Compensation**

 

The following table shows certain compensationinformation with respect to our non-employee directors for 2007. Our onlydirector who is an employee of the Company, Donald W. Jewell, does not receiveany additional compensation for serving as a director. Each of our non-employee directors receivesan annual fee of $10,000 for serving as director. The Chairman of the Board,Chairman of the Audit Committee and Chairman of the Compensation Committee werescheduled to receive additional fees of $50,000, $10,000 and $2,500 in 2007,respectively. In February 2007, effective April 1, 2007, the Chairman of theBoard voluntarily requested that we reduce his additional compensation forserving in such capacity to $30,000 per year. Director fees are paid quarterly.We did not grant any stock awards or options to purchase our commonstock our directors during 2007. Further, we do not have a non-equity incentiveplan or pension plan for our directors, nor do our directors receive anyperquisites or other benefits, other than reimbursement of travel expenses.Accordingly, columns related to these items were deleted from the followingtable.

 
| **Name**                                             | ** ** | **Fees earned or  paid in cash** | ** ** | **Total** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|-----------|------------|
| ** **                                           | ** ** | **($)**                                              | ** ** | **($)**   | ** ** |
| Ronald J.  Norick, Chairman of the Board (1)         |       | $                                                    | 52,500     |      | $          | 52,500 |   |
| James R.  TenBrook, Audit Committee Chair (2)        |       | 20,000                                               |       | 20,000    |       |
| Mark J.  Stevenson, Compensation Committee Chair (3) |       | 12,500                                               |       | 12,500    |       |
| James H. Everest                                     |       | 10,000                                               |       | 10,000    |       |
| William O.  Johnstone (4)                            |       | 3,500                                                |       | 3,500     |       |
|                                                      |            |                                                      |            |           |            |  |  |

 

43

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| (1) | Mr. Norick received $42,500 in compensation for  serving as the Chairman of the Board in addition to the $10,000 per year fee  paid to all non-employee directors.                                     |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Mr. TenBrook received an additional $10,000 in  compensation for serving as Chairman of the Audit Committee in addition to  the $10,000 per year fee paid to all non-employee directors.               |
| (3) | Mr. Stevenson received an additional $2,500 in  compensation for serving as Chairman of the Compensation Committee in  addition to the $10,000 per year fee paid to all non-employee directors.        |
| (4) | Mr. Johnstone was elected as a director in February  2007 and, as such, received a prorated portion of the $10,000 per year fee  paid to all non-employee directors from March 2007 through June 2007. |

 

Three of our non-employeedirectors received options to purchase our common stock prior to the expirationof our Option Plan in February 2003. As of June 30, 2007, each non-employeedirector had the following number of fully-vested options to purchase ourcommon stock:

 
| **Name**              | ** ** | **Options Outstanding at  June 30, 2007** | ** ** |
|-----------------------|------------|---------------------------------------------------------------|------------|
| Ronald J. Norick      |       | 150,000                                                       |       |
| James H. Everest      |       | 150,000                                                       |       |
| Mark J.  Stevenson    |       | 75,000                                                        |       |
| James R.  TenBrook    |       | —                                                        |       |
| William O.  Johnstone |       | —                                                        |       |

 
| **ITEM 12.** | ** ** | **SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS  AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |
|--------------|------------|-----------------------------------------------------------------------------------------------------|

 

The following table sets forth certain informationregarding beneficial ownership of our common stock as of September 15, 2007,by: (i) each person known by Sport-Haley, Inc. to own beneficially more than 5%of the outstanding common stock; (ii) each director or nominee; and, (iii) allexecutive officers and directors as a group. The information with respect toinstitutional investors is generally derived from statements filed with theSecurities and Exchange Commission under §13(d) or §13(g) of the SecuritiesExchange Act. Each person has sole voting and sole investment or dispositivepower with respect to the shares shown except as noted.

 
| ** **                                                                                                                                                        | ** ** | **Shareholdings on September 15, 2007** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **Name and Address (1)**                                                                                                                                          | ** ** | **Number  of Shares (2)**                                   | ** ** | **Percent  of Class (3)** | ** ** |
| Donald W. Jewell  (4)                                                                                                                                             |       | 50,000                                                      |       | 2.14 | % |
| Patrick W.  Hurley (4)                                                                                                                                            |       | 50,000                                                      |       | 2.14 |   |
| Catherine B.  Blair (4)                                                                                                                                           |       | 50,000                                                      |       | 2.14 |   |
| Ronald J. Norick  (5)                                                                                                                                             |       | 260,617                                                     |       | 10.71 |   |
| James R.  TenBrook                                                                                                                                                |       | -0-                                                         |       | * |   |
| Mark J.  Stevenson (4)                                                                                                                                            |       | 75,000                                                      |       | 3.18 |   |
| James H. Everest  (6)                                                                                                                                             |       | 240,000                                                     |       | 9.86 |   |
| William O.  Johnstone                                                                                                                                             |       | -0-                                                         |       | * |   |
| Daniel Zeff,  Zeff Holding Co., LLC,   Zeff Capital Partners ILP and   Spectrum Galaxy Fund Ltd. (7)   50 California Street, Suite 1500   San Francisco, CA 94111 |       | 415,736                                                     |       | 18.20 |   |
| MicroCapital,  LLC, Ian P. Ellis   and MicroCapital Fund, LP (8)   623 Fifth Avenue, Suite 2502   New York, NY 10022                                              |       | 253,327                                                     |       | 11.09 |   |
| Hillson Partners  Limited Partnership (9)   6900 Wisconsin Avenue, Suite 501   Bethesda, MD 20815                                                                 |       | 218,293                                                     |       | 9.56 |   |
| Dimensional Fund  Advisors Inc. (10)   1299 Ocean Avenue, 11th Floor   Santa Monica, CA 90401                                                                     |       | 210,195                                                     |       | 9.20 |   |
| Tilson Growth  Fund, LP, Tilson Capital Partners, LLC   and Whitney Tilson (11)   175 East 62nd Street, #11A,   New York, NY 10021                                |       | 142,700                                                     |       | 6.25 |   |
| All directors  and officers as a group   (Eight persons in total) (12)                                                                                            |       | 675,617                                                     |       | 24.48 |   |

 

 

44

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| *    |   | Less than 1%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1)  |   | Except as noted above, the address for all persons  listed is 4600 E. 48th Avenue, Denver, Colorado 80216.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (2)  |   | Ownership includes both outstanding common stock and  shares issuable upon exercise of options that are currently exercisable or  will become exercisable within 60 days after September 15, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| (3)  |   | All percentages are calculated based on the number  of outstanding shares in addition to shares which a person or group has the  right to acquire within 60 days of September 15, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| (4)  |   | Consists solely of shares subject to currently  exercisable options or options which will become exercisable within 60 days  after the date hereof.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (5)  |   | Includes 150,000 shares subject to currently  exercisable options or options which will become exercisable within 60 days  after the date hereof and 110,617 shares owned of record by entities  affiliated with Mr. Norick.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (6)  |   | Includes 150,000 shares subject to currently  exercisable options or within 60 days after the date hereof and includes  50,000 shares owned by a trust for which Mr. Everest acts as trustee, for  which he disclaims beneficial ownership.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| (7)  |   | Daniel Zeff is the sole  manager and member of Zeff Holding Company, LLC, which serves as the general  partner of Zeff Capital Partners I LP. Mr. Zeff provides discretionary  investment management services to Zeff Capital Offshore Fund, a class of  shares of Spectrum Galaxy Fund Ltd., a company incorporated in the British  Virgin Islands. Mr. Zeff beneficially owns 415,736 shares of common stock,  comprised of 151,874 shares held by Spectrum Galaxy Fund Ltd. and 263,862  shares held by Zeff Capital Partners I LP. Mr. Zeff and Zeff Holding Company,  LLC each disclaim, for purposes of Section 16 of the Securities Exchange Act  of 1934, beneficial ownership of such securities reported, except to the extent  of his/its indirect pecuniary interest therein. Each of Zeff Holding Company,  LLC and Zeff Capital Partners I LP disclaims beneficial ownership over all  shares held by Spectrum Galaxy Fund Ltd. |
| (8)  |   | MicroCapital LLC is a  Delaware limited liability company and a registered investment adviser.  MicroCapital LLC acts as investment advisor and general partner to  MicroCapital Fund LP and investment advisor to MicroCapital Fund Ltd., a  Cayman Islands company. MicroCapital LLC, the general partner of MicroCapital  Fund LP, and Ian P. Ellis, the managing member of MircroCapital LLC, have the  right or the power to direct the receipt of dividends from common stock and  the proceeds from the sale of common stock to MicroCapital Fund LP and  MicroCapital Ltd. MicroCapital LLC and Mr. Ellis each beneficially own  253,327 shares of common stock, including 165,751 shares held by MicroCapital  Fund LP. MicroCapital LLC and Mr. Ellis each disclaim, for purposes of  Sections 13(d) and 13(g) of the Securities Act of 1934, beneficial ownership  of such securities reported.                                    |
| (9)  |   | Hillson Partners Limited  Partnership has sole voting power and sole dispositive power of 218,293  shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (10) |   | Dimensional Fund Advisors  LP (“Dimensional”) is a registered investment advisor which beneficially owns  210,195 shares. Dimensional furnishes investment advice to four investment  companies registered under the Investment Company Act of 1940, and serves as  investment manager to certain other commingled group trusts and separate  accounts. These investment companies, trusts and accounts are collectively  referred to as the “Funds.” In its role as investment advisor or manager,  Dimensional possesses investment and/or voting power over the 210,195 common  shares described herein and may be deemed to be the beneficial owner of the  shares of the Issuer held by the Funds. However, all securities reported in  this schedule are owned by the Funds. Dimensional disclaims beneficial  ownership of such securities.                                                                        |
| (11) |   | Tilson Growth Fund, LP, a  Delaware limited partnership, Tilson Capital Partners, LLC, a Delaware  limited liability company and Whitney Tilson have shared voting and  dispositive power over 142,700 shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (12) |   | Includes 525,000 shares of  common stock subject to currently exercisable options or options which  will become exercisable within 60 days after September 15, 2007. Excludes shares of common stock as to  which officers and directors disclaim beneficial ownership.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

45

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###### **EquityCompensation Plan Information**

###### ** **

The only equitycompensation plan maintained by Sport-Haley, Inc. is our Amended and Restated1993 Stock Option Plan (the “Option Plan”). The Option Plan was approved by ourshareholders in 1993 and was amended in 1997. The Option Plan expired by itsown terms on February 28, 2003. The following table contains informationregarding the equity compensation plan as of June 30, 2007.

 
| ** **                                                      | ** ** | **(a) **                                                                                                                                              | ** ** | **(b) **                                                                                               | ** ** | **(c) **                                                                                                                                                                                                                      | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan Category**                                          | ** ** | **Number of Securities to be  issued upon exercise of   outstanding options,  warrants and rights** | ** ** | **Weighted-average exercise  price of outstanding  options, warrants and  rights** | ** ** | **Number of securities  remaining available for   future issuance under   equity compensation plans   (excluding securities  reflected in column (a))** | ** ** |
| ** **                                                      | ** ** | ** **                                                                                                                                                 | ** ** | ** **                                                                                                  | ** ** | ** **                                                                                                                                                                                                                         | ** ** |
| **Equity compensation plans approved by security holders**      | ** ** | 593,500                                                                                                                                                    | (1)        | $                                                                                                           | 3.22       | (2)                                                                                                                                                                                                                                | —     | (3) |
| **Equity  compensation plans not approved by security holders** |       | —                                                                                                                                                     |       | —                                                                                                      |       | —                                                                                                                                                                                                                             |       |
| **Total**                                                       |       | 593,500                                                                                                                                                    |       | $                                                                                                           | 3.22       |                                                                                                                                                                                                                               | —     |   |

 

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| (1) |   | The total number of securities to be issued upon  exercise of outstanding options, warrants and rights consists of options for  the purchase of Sport-Haley, Inc. common stock granted pursuant to the Option  Plan to directors, officers, employees, consultants and golf tour  professionals. All options were fully vested as of June 30, 2007. |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | The outstanding options issued under the Option Plan  range in exercise price from $2.71 to $9.78 per share.                                                                                                                                                                                                                                        |
| (3) |   | The Option Plan, as amended, expired by its terms on  February 28, 2003. Therefore, no further options to purchase Sport-Haley,  Inc. common stock may be granted under the Plan after that date.                                                                                                                                                   |

 

**ITEM 13. CERTAIN RELATIONSHIPS,RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE**

 

We adopted a policy that requires Board approval by adisinterested majority of the directors voting for any transaction in which oneof our directors, nominees for director, executive officers or greater thanfive percent stockholders, or their immediate family members, have a materialinterest. All of our directors and executive officers are required at alltimes, but not less than annually, to disclose all relationships they have withcompanies or individuals that have conducted business with, or had an interestin, our Company. Our executive officers monitor our operations, givingconsideration to the disclosed relationships, and refer potential transactionsto the Board of Directors for approval. The Board of Directors considers arelated party transaction for its potential economic benefit to us, to ensurethe transaction is, among other things, on terms no less favorable to us thanthose involving unrelated parties, in accordance with our policies andprocedures, and that it is properly disclosed in our reports to shareholders.

 

Other than the employment arrangements describedelsewhere in this report and the transactions described below, since July 1,2006, there has not been, nor is there currently proposed, any transaction orseries of similar transactions to which we were or will be a party:

 

•        inwhich the amount involved exceeds $120,000; and,

 

•        in whichany director, nominee for director, executive officer, shareholder whichbeneficially owns five percent or more of our common stock or any member oftheir immediate family members, had or will have a direct or indirect materialinterest.

 

46

----

 

We have determined that all of our directors, exceptDonald W. Jewell, are independent within applicable FINRA rules. Therefore, amajority of our Board of Directors, and each member of the Audit, Compensationand Nominating Committees are independent within applicable FINRA rules.Further, each member of our Audit Committee is also independent under SEC Rule10A-3.

 
| **ITEM 14.** | ** ** | **PRINCIPAL ACCOUNTANT FEES AND SERVICES**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **(1)**      | ** ** | **Audit Fees.** The aggregate fees  billed by Gordon, Hughes & Banks, LLP, our independent registered public  accountants, during fiscal year 2007 for the audit of our annual financial  statements, the reviews of our quarterly financial statements included in  Forms 10-Q for the corresponding quarterly periods or the services that are  normally provided by in connection with statutory and regulatory filings or  engagements for the 2007 fiscal year totaled $64,000.                                                                                                                                                                                                                          |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         |       | The aggregate fees billed by Hein & Associates  LLP, our former independent registered public accountants, during fiscal year  2007 for the audit of our annual financial statements or the services that  are normally provided by in connection with statutory and regulatory filings  or engagements for the 2007 fiscal year totaled $3,000.                                                                                                                                                                                                                                                                                                                                                              |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         |       | The aggregate fees billed by Hein & Associates  LLP, our former independent registered public accountants, during fiscal year  2006 for the audit of our annual financial statements, the reviews of our  quarterly financial statements included in Forms 10-Q for the corresponding quarterly  periods or the services that are normally provided by in connection with  statutory and regulatory filings or engagements for the 2006 fiscal year  totaled $119,000.                                                                                                                                                                                                                                        |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **(2)**      | ** ** | **Audit-related Fees.** The  aggregate fees billed by Gordon, Hughes & Banks, LLP, for assurance and  related services that are reasonably related to the performance of the audit  or review of our financial statements that are not included in the “Audit  Fees” described above totaled $3,000 for fiscal year 2007.                                                                                                                                                                                                                                                                                                                                                                           |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         |       | The aggregate fees billed by Hein & Associates  LLP for assurance and related services that are reasonably related to the  performance of the audit or review of our financial statements that are not  included in the “Audit Fees” described above totaled $3,000 for fiscal year  2007.                                                                                                                                                                                                                                                                                                                                                                                                          |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         |       | The aggregate fees billed by Hein & Associates  LLP for assurance and related services that are reasonably related to the  performance of the audit or review of our financial statements that are not  included in the “Audit Fees” described above totaled $8,000 for fiscal year  2006.                                                                                                                                                                                                                                                                                                                                                                                                          |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **(3)**      | ** ** | **Tax Fees.**The aggregate fees billed by Gordon, Hughes  & Banks, LLP in fiscal year 2007 for professional services rendered for  tax compliance, tax advice and tax planning totaled $4,000 and consisted  primarily of services with respect the preparation of federal and state  income tax returns.                                                                                                                                                                                                                                                                                                                                                                                                     |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|         |       | The aggregate fees billed  by Hein & Associates LLP in fiscal years 2007 and 2006 for professional  services rendered for tax compliance totaled $5,000 and $7,000, respectively,  and consisted primarily of services with respect the preparation of federal  and state income tax returns.                                                                                                                                                                                                                                                                                                                                                                                                                 |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **(4)**      | ** ** | **All Other Fees.** The aggregate  fees billed by Gordon, Hughes & Banks, LLP in fiscal year 2007 and Hein  & Associates LLP in fiscal year 2006, other than for the services  reported in “Audit Fees,” “Audit Related Fees” or “Tax Fees” described above,  totaled $0 and $0, respectively.                                                                                                                                                                                                                                                                                                                                                                              |
|         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| **(5)**      | ** ** | **Audit Committee Approval  Procedures.** Our independent registered public accountants  report to, and are engaged at the direction of, the Audit Committee, with  annual approval by the shareholders. Effective May 2003, the Audit Committee  implemented procedures for the pre-approval of audit and non-audit services  performed by the independent registered public accountants. The Audit  Committee has the sole authority to pre-approve all audit and non-audit  services provided by the independent registered public accountants and acts  to assure that the independent registered public accountants are not engaged  to perform specific non-audit services proscribed by law or regulation. |

 

47

----

 

**PART IV**

 
| **ITEM 15.**                                                                                                                                                                                   | ** ** | **EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**                        |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|
|                                                                                                                                                                                           |       |                                                                  |
| **(a)**                                                                                                                                                                                        | ** ** | **Exhibits, Financial Statements and Financial  Statement Schedules** |
|                                                                                                                                                                                           |       |                                                                  |
| The following documents  are filed herewith or have been included as exhibits to previous filings with  the Securities and Exchange Commission and are incorporated herein by this  reference: |
|                                                                                                                                                                                           |       |                                                                  |
| **(1)**                                                                                                                                                                                        | ** ** | **Financial Statements**                                              |
|                                                                                                                                                                                           |       |                                                                  |
|                                                                                                                                                                                           |       | Index to financial statements                                         |
|                                                                                                                                                                                           |       | Report of Independent Registered Public Accounting  Firm              |
|                                                                                                                                                                                           |       | Consolidated  Balance Sheets                                          |
|                                                                                                                                                                                           |       | Consolidated of Operations                                            |
|                                                                                                                                                                                           |       | Consolidated Statements of Shareholders’ Equity                  |
|                                                                                                                                                                                           |       | Consolidated Statements of Cash Flows                                 |
|                                                                                                                                                                                           |       | Notes to Consolidated Financial Statements                            |
|                                                                                                                                                                                           |       |                                                                  |
| **(2)**                                                                                                                                                                                        | ** ** | **Financial Statement Schedules**                                     |
|                                                                                                                                                                                           |       |                                                                  |
|                                                                                                                                                                                           |       | Schedule II — Valuation and Qualifying Accounts                  |
|                                                                                                                                                                                           |       |                                                                  |
| **(3)**                                                                                                                                                                                        | ** ** | **Exhibits**                                                          |

 
| **Exhibit No.** |   | **Document** |
|-----------------|--------|--------------|
| #*              |   | 3.1          |   | Amended and Restated By-laws of Sport-Haley, Inc.,  as adopted February 21, 2007. |
|            |   |         |   |   |
| */              |   | 3.1.2        |   | Amended and Restated Articles of Incorporation of  Sport-Haley, Inc. as filed on |
|            |   |         |   |   |
|            |   |         |   | March 7, 1994 with the Secretary of State for  the State of Colorado. |
| */              |   | 4.1          |   | Form of Specimen Certificate for Common Stock of  Sport-Haley, Inc. |
|            |   |         |   |   |
| #               |   | 10.1.3       |   | 1993 Stock Option Plan, effective March 1993, as  amended. |
|            |   |         |   |   |
| x               |   | 10.2.1       |   | Employment Agreement, dated January 1, 1997, by and  between Robert G. Tomlinson and Sport-Haley, Inc. |
|            |   |         |   |   |
| III             |   | 10.2.4       |   | Employment Agreement, dated December 1, 1999, by and  between Kevin Tomlinson and Sport-Haley, Inc. |
|            |   |         |   |   |
| xx              |   | 10.2.4.1     |   | Employment Agreement, dated March 18, 2002, by and  between Kevin M. Tomlinson and Sport-Haley, Inc. |
|            |   |         |   |   |
| **              |   | 10.2.5       |   | Employment Agreement, dated July 1, 1997, by and  between Catherine B. Blair and Sport-Haley, Inc. |
|            |   |         |   |   |
| x               |   | 10.2.6       |   | Employment Agreement, dated January 1, 1997, by and  between Robert W. Haley and Sport-Haley, Inc. |
|            |   |         |   |   |
| ##              |   | 10.2.7       |   | Employment Agreement, dated February 1, 2001, by and  between Donald W. Jewell and Sport-Haley, Inc. |
|            |   |         |   |   |
| &           |   | 10.2.7.1     |   | Letter agreement effective November 1, 2004,  amending Employment Agreement of Donald W. Jewell and Sport-Haley, Inc. |

 

48

----

 
| ##     |   | 10.2.8   |   | Employment Agreement, dated December 1, 2000, by and  between Patrick W. Hurley and Sport-Haley.                                                                                                            |
|--------|--------|----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |     |   |                                                                                                                                                                                                        |
| &  |   | 10.2.8.1 |   | Amendment to Employment Agreement, effective  December 1, 2004, by and between Patrick W. Hurley and Sport-Haley, Inc.                                                                                      |
|   |   |     |   |                                                                                                                                                                                                        |
| &  |   | 10.2.10  |   | Employment Agreement, effective December 20, 2004,  by and between George E. Tomlinson and Sport-Haley, Inc.                                                                                                |
|   |   |     |   |                                                                                                                                                                                                        |
| &  |   | 10.2.11  |   | Employment Agreement, effective December 20, 2004,  by and between Barry L. Hyman and Sport-Haley, Inc.                                                                                                     |
| +*     |   | 10.2.12  |   | Employment agreement, effective February 7, 2006, by  and between Michael D. Doris and Sport-Haley, Inc.                                                                                                    |
|   |   |     |   |                                                                                                                                                                                                        |
| x      |   | 10.2.13  |   | Form of standard Endorsement Agreement by and  between various golf professionals and Sport-Haley.                                                                                                          |
|   |   |     |   |                                                                                                                                                                                                        |
| II     |   | 10.3.2   |   | Business Loan  Agreement, dated November 5, 1998, by and between U.S. Bank National  Association and Sport-Haley, Inc.                                                                                      |
|   |   |     |   |                                                                                                                                                                                                        |
| ##     |   | 10.3.5   |   | License Agreement, dated May 3, 2001, between  Spalding Sports Worldwide, Inc. and Sport-Haley, Inc. [*]                                                                                                    |
|   |   |     |   |                                                                                                                                                                                                        |
| x*     |   | 10.3.6   |   | Amendment to  License Agreement, dated June 27, 2002, between Spalding Sports Worldwide,  Inc. and Sport-Haley, Inc.                                                                                        |
|   |   |     |   |                                                                                                                                                                                                        |
| +++    |   | 10.3.7   |   | Amendment No. 2  to License Agreement, dated June 6, 2003, between Sport-Haley, Inc. and The  Top-Flite Golf Company [*]                                                                                    |
|   |   |     |   |                                                                                                                                                                                                        |
| ++     |   | 10.4.1   |   | Lease Agreement, dated July 29, 1994, by and  among Thomas J. Hilb, individually, Thomas J. Hilb, as Trustee of the Connie  Hilb Trust, and Sport-Haley.                                               |
|   |   |     |   |                                                                                                                                                                                                        |   |   |
| x*     |   | 10.4.2   |   | Second Amendment to Lease Agreement, dated September  28, 2001, by and between Thomas J. Hilb, individually, and as trustee of the  Connie Hilb Trust, and Sport-Haley.                                     |
|   |   |     |   |                                                                                                                                                                                                        |
| ~*     |   | 10.4.3   |   | Third Amendment to Lease Agreement, dated July 11,  2006, by and between Thomas J. Hilb, individually, and as trustee of the  Connie Hilb Trust, and Sport-Haley.                                           |
|   |   |     |   |                                                                                                                                                                                                        |   |   |
| */     |   | 10.5     |   | Form of  Independent Sales Representative Agreement.                                                                                                                                                        |
|   |   |     |   |                                                                                                                                                                                                        |   |   |
| +      |   | 10.7     |   | Trademark Registrations, dated February 21,  1995, issued by the United States Patent and Trademark Office to Sport-Haley.                                                                             |
|   |   |     |   |                                                                                                                                                                                                        |
| ~*     |   | 10.8     |   | Trademark License Agreement, dated August 22, 2006,  issued by United States Patent and Trademark Office to Sport-Haley for our  script SPORT HALEY logo.                                                   |
|   |   |     |   |                                                                                                                                                                                                        |   |   |
| ~*     |   | 10.9     |   | Trademark License Agreement, dated August 22, 2006,  issued by United States Patent and Trademark Office to Sport-Haley for our  script SPORT HALEY logo superimposed over “SH” in block letters. |
|   |   |     |   |                                                                                                                                                                                                        |   |   |
| ~*     |   | 10.10    |   | Trademark License Agreement, dated August 22, 2006,  issued by United States Patent and Trademark Office to Sport-Haley for our  SPORT HALEY logo in block letters.                                         |
|   |   |     |   |                                                                                                                                                                                                        |   |   |
| *+     |   | 10.11    |   | Operating Agreement for Reserve Apparel Group LLC.                                                                                                                                                          |

 

 

49

----

 
| ~      |   | 10.12  |   | Agreement to Purchase Limited Liability Company  Membership Interest, Settlement and Mutual Releases, dated September 21,  2006.                                 |
|--------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                             |   |   |
| *#     |   | 14.1   |   | Code of Ethics for Senior Financial Officers.                                                                                                                    |
|   |   |   |   |                                                                                                                                                             |   |   |
| &  |   | 14.2   |   | Code of Conduct and Ethics for Directors, Officers  and Employees.                                                                                               |
|   |   |   |   |                                                                                                                                                             |   |   |
| ***    |   | 31.1   |   | Certification of Donald W. Jewell pursuant to  Exchange Act Rule 13a-14(a)/15d-14(a).                                                                            |
|   |   |   |   |                                                                                                                                                             |   |   |
| ***    |   | 31.2   |   | Certification of Patrick W. Hurley pursuant to  Exchange Act Rule 13a-14(a)/15d-14(a).                                                                           |
|   |   |   |   |                                                                                                                                                             |   |   |
| ***    |   | 32.1   |   | Certification 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 |

 

----

| *      | Certain confidential portions of this Exhibit were  omitted by means of redacting a portion of the text where indicated. This  exhibit, including the omitted portions, has been filed separately with the  Secretary of the Securities and Exchange Commission pursuant to an  application requesting confidential treatment under Rule 24b-2 of the  Securities Exchange Act of 1934. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| */     | Incorporated by reference from Sport-Haley, Inc.’s  Registration Statement on Form SB-2  (File No. 33-74876-D)                                                                                                                                                                                                                                                      |
| +      | Incorporated by reference from Sport-Haley, Inc.’s  Form 10-KSB filed October 6, 1995  (File No. 33-74876-D)                                                                                                                                                                                                                                                   |
| ++     | Incorporated by reference from Sport-Haley, Inc.’s  Form 10-KSB filed September 14, 1994  (File No. 33-74876-D)                                                                                                                                                                                                                                                |
| – | Incorporated by reference from Sport-Haley, Inc.’s  Form 10-QSBA/1 filed February 2, 1996  (File No. 33-74876-D)                                                                                                                                                                                                                                               |
| #      | Incorporated by reference from Sport-Haley, Inc.’s  Form 10-QSB filed on May 12, 1997  (File No. 33-74876-D)                                                                                                                                                                                                                                                             |
| x      | Incorporated by reference from Sport-Haley, Inc.’s  Form 10-KSB filed on September 29,1997  (File No. 33-74876-D)                                                                                                                                                                                                                                                        |
| II     | Incorporated by reference from Sport-Haley, Inc.’s  Form 10-Q filed on February 16, 1999  (File No. 333-18831)                                                                                                                                                                                                                                                           |
| III    | Incorporated by reference from Sport-Haley, Inc.’s  Form 10-K filed on November 3, 2000  (File No. 03374876-D)                                                                                                                                                                                                                                                           |
| ##     | Incorporated by reference from Sport-Haley, Inc.’s  Form 10-K filed on October 9, 2001  (File No. 033-74876-D)                                                                                                                                                                                                                                                           |
| xx     | Incorporated by reference from Sport-Haley, Inc.’s  Form 10-Q filed on May 10, 2002  (File No. 033-74876-D)                                                                                                                                                                                                                                                              |
| x*     | Incorporated by reference from Sport-Haley, Inc.’s  Form 10-K filed on September 27, 2002  (File No. 033-74876-D)                                                                                                                                                                                                                                                        |
| +++    | Incorporated by reference from Sport-Haley, Inc.’s  Form 8-K filed on June 13, 2003  (File No. 033-74876-D)                                                                                                                                                                                                                                                              |
| *#     | Incorporated by reference from Sport-Haley, Inc.’s  Schedule 14A filed on February 27, 2004  (File No. 033-74876-D)                                                                                                                                                                                                                                                      |
| %      | Incorporated by reference from Sport-Haley, Inc.’s  Form 10-K filed on October 13, 2004  (File No. 033-74876-D)                                                                                                                                                                                                                                                          |
| &  | Incorporated by reference from Sport-Haley, Inc.’s  Form 10-Q fled on February 22, 2005  (File No. 033-74876-D)                                                                                                                                                                                                                                                          |
| **     | Incorporated by reference from Sport-Haley, Inc.’s  Form 10-K filed on October 13, 2005  (File No. 33-74876-D)                                                                                                                                                                                                                                                           |
| *+     | Incorporated by reference from Sport-Haley, Inc.’s  Form 8-K filed on November 8, 2005  (File No. 33-74876-D)                                                                                                                                                                                                                                                            |
| +*     | Incorporated by reference from Sport-Haley Inc.’s,  Form 10-Q filed on May 22, 2006  (File No. 0-51715)                                                                                                                                                                                                                                                                  |
| ~      | Incorporated by reference from Sport-Haley Inc.’s,  Form 8-K filed on September 26, 2006  (File No. 0-51715)                                                                                                                                                                                                                                                             |
| ~*     | Incorporated by reference from Sport-Haley, Inc.’s  Form 10-K filed on October 13, 2006  (File No. 0-51715)                                                                                                                                                                                                                                                              |
| #*     | Incorporated by reference from Sport-Haley Inc.’s,  Form 10-Q filed on May 14, 2007  (File No. 0-51715)                                                                                                                                                                                                                                                                  |
| ***    | Filed herewith.                                                                                                                                                                                                                                                                                                                                                                         |

 

50

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

 
|               |            SPORT-HALEY,  INC. |
|--------------------|--------------------------------------------------------------------------------------|
|               |                                                                                 |
|               |                                                                                 |
| September 28, 2007 | By:                                                                                  |  /s/PATRICK W. HURLEY |
|               |                                                                                 | Patrick W.  Hurley, Chief Financial Officer |

 

Pursuant to therequirements of the Securities Act of 1934, this report has been signed belowby the following persons on behalf of the registrant and in the capacities andon the dates indicated.

 
| **Signature**            | ** **                           | **Title**                | ** **         | **Date** |
|--------------------------|--------------------------------------|--------------------------|--------------------|----------|
|                     |                                 |                     |
| /s/ DONALD W. JEWELL     |                                 | Chief Executive Officer, | September 28, 2007 |
| Donald W. Jewell         | President and  Director              |                     |
|                     |                                 |                     |
| /s/ PATRICK W. HURLEY    |                                 | Chief Financial Officer, | September 28, 2007 |
| Patrick W.  Hurley       | Secretary and  Treasurer             |                     |
|                     |                                 |                     |
| /s/ RONALD J. NORICK     |                                 | Director                 | September 28, 2007 |
| Ronald J. Norick         | and Chairman of  the Board           |                     |
|                     |                                 |                     |
| /s/ JAMES R. TENBROOK    |                                 | Director                 | September 28, 2007 |
| James R.  TenBrook       | and Audit  Committee Chairman        |                     |
|                     |                                 |                     |
| /s/ MARK J. STEVENSON    |                                 | Director                 | September 28, 2007 |
| Mark J.  Stevenson       | and Compensation  Committee Chairman |                     |
|                     |                                 |                     |
| /s/ JAMES H. EVEREST     |                                 | Director                 | September 28, 2007 |
| James H. Everest         |                                 |                     |
|                     |                                 |                     |
| /s/ WILLIAM O. JOHNSTONE |                                 | Director                 | September 28, 2007 |
| William O.  Johnstone    |                                 |                     |
|                          |                                      |                          |                    |          |  |  |  |  |  |  |

 

51

----

 

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| **Report  of Independent Registered Public Accounting Firm** |   |
|--------------------------------------------------------------|--------|
|                                                         |   |
| **Report  of Independent Registered Public Accounting Firm** |   |
|                                                         |   |
| **Consolidated  Balance Sheets**                             |   |
|                                                         |   |
| **Consolidated  Statements of Operations**                   |   |
|                                                         |   |
| **Consolidated  Statement of Shareholders’ Equity**     |   |
|                                                         |   |
| **Consolidated  Statements of Cash Flows**                   |   |
|                                                         |   |
| **Notes to Consolidated Financial Statements**               |   |
|                                                         |   |
| **Schedule II -  Valuation and Qualifying Accounts**         |   |

 

 

F-1

----

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

 

To the Board of Directors

Sport-Haley, Inc.

Denver, Colorado

 

We have audited the accompanying consolidated balance sheet ofSport-Haley, Inc. as of June 30, 2007 and the related consolidatedstatements of operations, shareholders’ equity, and cash flows for the yearthen ended. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audit.

 

We conducted our audit in accordance with standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting. Our audit included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion of the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position ofSport-Haley, Inc. as of June 30, 2007 and the results of its operations and itscash flows for the year then ended in conformity with accounting principlesgenerally accepted in the United States of America.

 

Our audit was made for the purpose of forming an opinion on the basicconsolidated financial statements taken as a whole. The schedule listed in theindex of financial statements is presented for purposes of complying with theSecurities and Exchange Commission’s rules and is not part of the basicconsolidated financial statements. This schedule has been subjected to theauditing procedures applied in the audits of the basic consolidated financialstatements and, in our opinion, fairly states in all material respect thefinancial data required to be set forth therein in relation to the basicconsolidated financial statements taken as a whole.

 

 

/s/ Gordon, Hughes & Banks, LLP

Greenwood Village, Colorado

 

September 17, 2007

 

F-2

----

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

 

Board of Directors

Sport-Haley, Inc. and Subsidiary

Denver, Colorado

 

We have audited the accompanying consolidated balance sheet ofSport-Haley, Inc. and Subsidiary as of June 30, 2006, and the relatedconsolidated statements of operations, shareholders’ equity and cash flows foreach of the two years in the period ended June 30, 2006. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance with standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audits to obtain reasonable assurance aboutwhether the consolidated financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the consolidated financial statements. An auditalso includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the consolidated financial positionof Sport-Haley, Inc. as of June 30, 2006, and the consolidated results of theiroperations and their cash flows for each of the two years in the period endedJune 30, 2006, in conformity with accounting principles generally accepted inthe United States of America.

 

Our audits were made for the purpose of forming an opinion on the basicconsolidated financial statements taken as a whole. The schedule listed in theindex of consolidated financial statements is presented for the purposes ofcomplying with the Securities and Exchange Commissions’ rules and is not partof the basic consolidated financial statements. This schedule has beensubjected to the auditing procedures applied in the audits of the basicconsolidated financial statements and, in our opinion, fairly states in allmaterial respects the financial data required to be set forth therein inrelation to the basic consolidated financial statements taken as a whole.

 

 

/S/HEIN & ASSOCIATES LLP

 

Denver, Colorado

September 11, 2006

 

F-3

----

 

***SPORT-HALEY,INC.***

 

**CONSOLIDATEDBALANCE SHEETS**

 
| ** **                                                                                                                      | ** ** | **JUNE 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|
|                                                                                                                            |       | **2007**          | ** ** | **2006** |   |
| **ASSETS**                                                                                                                      |       |              |       |   |   |
| **CURRENT ASSETS:**                                                                                                             |       |              |       |   |   |
| Cash and cash  equivalents                                                                                                      |       | $                 | 4,464,000  |   | $ | 8,492,000 |   |
| Accounts  receivable, net of allowances of $374,000 and $446,000, respectively                                                  |       | 3,066,000         |       | 3,950,000 |   |
| Inventories                                                                                                                     |       | 5,814,000         |       | 4,775,000 |   |
| Prepaid expenses  and other                                                                                                     |       | 203,000           |       | 194,000 |   |
| Total current  assets                                                                                                           |       | 13,547,000        |       | 17,411,000 |   |
|                                                                                                                            |       |              |       |   |   |
| **PROPERTY  AND EQUIPMENT, net**                                                                                                |       | 399,000           |       | 613,000 |   |
| **OTHER  ASSETS**                                                                                                               |       | 3,000             |       | 3,000 |   |
|                                                                                                                            |       |              |       |   |   |
| **TOTAL  ASSETS**                                                                                                               |       | $                 | 13,949,000 |   | $ | 18,027,000 |   |
|                                                                                                                            |       |              |       |   |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                   | ** ** | ** **        | ** ** | ** ** | ** ** |
| **CURRENT  LIABILITIES:**                                                                                                       |       |              |       |   |   |
| Accounts payable                                                                                                                |       | $                 | 1,566,000  |   | $ | 1,836,000 |   |
| Accrued  royalties payable                                                                                                      |       | 181,000           |       | 386,000 |   |
| Accrued  commissions payable                                                                                                    |       | 214,000           |       | 211,000 |   |
| Accrued payroll                                                                                                                 |       | 249,000           |       | 386,000 |   |
| Other                                                                                                                           |       | 179,000           |       | 137,000 |   |
| Total current  liabilities                                                                                                      |       | 2,389,000         |       | 2,956,000 |   |
| **LONG-TERM  LIABILITIES:**                                                                                                     |       |              |       |   |   |
| Loan payable to  affiliate                                                                                                      |       | —            |       | 34,000 |   |
| Total long-term  liabilities                                                                                                    |       | —            |       | 34,000 |   |
| **COMMITMENTS  AND CONTINGENCIES** (Notes 8 and 9)                                                                              |       |              |       |   |   |
| Minimum  royalties payable                                                                                                      |       | 178,000           |       | — |   |
| Total contingent  liabilities                                                                                                   |       | 178,000           |       | — |   |
| **TOTAL  LIABILITIES**                                                                                                          |       | 2,567,000         |       | 2,990,000 |   |
|                                                                                                                            |       |              |       |   |   |
| **MINORITY  INTEREST**                                                                                                          |       | —            |       | 22,000 |   |
|                                                                                                                            |       |              |       |   |   |
| **SHAREHOLDERS’  EQUITY:**                                                                                                 |       |              |       |   |   |
| Preferred stock,  no par value; 1,500,000 shares authorized; none issued and outstanding                                        |       | —            |       | — |   |
| Common stock, no  par value; 15,000,000 shares authorized; 2,284,490 and 2,770,252 shares  issued and outstanding, respectively |       | 8,481,000         |       | 10,813,000 |   |
| Additional  paid-in capital                                                                                                     |       | 1,621,000         |       | 1,621,000 |   |
| Retained  earnings                                                                                                              |       | 1,280,000         |       | 2,581,000 |   |
| Total  shareholders’ equity                                                                                                |       | 11,382,000        |       | 15,015,000 |   |
|                                                                                                                            |       |              |       |   |   |
| **TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                            |       | $                 | 13,949,000 |   | $ | 18,027,000 |   |

 

***Seeaccompanying notes to these consolidated financial statements.***

 

F-4

----

 

***SPORT-HALEY,INC.***

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
| ** **                                                                                            | ** ** | **FOR THE YEARS ENDED   JUNE 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                                            | ** ** | **2007**                                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                  |       |                                                        |       |   |   |   |   |
| **NET  SALES**                                                                                        |       | $                                                           | 18,893,000 |   | $ | 20,962,000 |   | $ | 22,041,000 |   |
|                                                                                                  |       |                                                        |       |   |   |   |   |
| **COST OF  GOODS SOLD**                                                                               |       |                                                        |       |   |   |   |   |
| Cost of goods  sold                                                                                   |       | 11,893,000                                                  |       | 13,642,000 |   | 14,286,000 |   |
| Inventory  impairments                                                                                |       | 312,000                                                     |       | 408,000 |   | 1,403,000 |   |
| Total cost of  goods sold                                                                             |       | 12,205,000                                                  |       | 14,050,000 |   | 15,689,000 |   |
|                                                                                                  |       |                                                        |       |   |   |   |   |
| **GROSS  PROFIT**                                                                                     |       | 6,688,000                                                   |       | 6,912,000 |   | 6,352,000 |   |
|                                                                                                  |       |                                                        |       |   |   |   |   |
| **OTHER  OPERATING COSTS:**                                                                           |       |                                                        |       |   |   |   |   |
| Selling, general  and administrative expenses                                                         |       | 7,087,000                                                   |       | 7,090,000 |   | 9,036,000 |   |
| Royalty expense                                                                                       |       | 917,000                                                     |       | 927,000 |   | 797,000 |   |
| Goodwill  impairment                                                                                  |       | 270,000                                                     |       | — |   | — |   |
| Total other  operating costs                                                                          |       | 8,274,000                                                   |       | 8,017,000 |   | 9,833,000 |   |
| **LOSS  FROM OPERATIONS**                                                                             |       | (1,586,000                                                  | )          | (1,105,000 | ) | (3,481,000 | ) |
|                                                                                                  |       |                                                        |       |   |   |   |   |
| **OTHER  INCOME AND (EXPENSE):**                                                                      |       |                                                        |       |   |   |   |   |
| Interest income                                                                                       |       | 275,000                                                     |       | 271,000 |   | 107,000 |   |
| Other income                                                                                          |       | 104,000                                                     |       | 182,000 |   | 123,000 |   |
| Interest expense                                                                                      |       | (11,000                                                     | )          | — |   | — |   |
| Other expense                                                                                         |       | (8,000                                                      | )          | (15,000 | ) | (22,000 | ) |
| Total other  income, net                                                                              |       | 360,000                                                     |       | 438,000 |   | 208,000 |   |
|                                                                                                  |       |                                                        |       |   |   |   |   |
| **LOSS  FROM OPERATIONS BEFORE MINORITY INTEREST IN SUBSIDIARY LOSS AND PROVISION FOR  INCOME TAXES** |       | (1,226,000                                                  | )          | (667,000 | ) | (3,273,000 | ) |
|                                                                                                  |       |                                                        |       |   |   |   |   |
| Minority  Interest in Subsidiary (Income) Loss                                                        |       | (46,000                                                     | )          | 259,000 |   | — |   |
|                                                                                                  |       |                                                        |       |   |   |   |   |
| Provision for  income taxes                                                                           |       | (29,000                                                     | )          | (7,000 | ) | (8,000 | ) |
|                                                                                                  |       |                                                        |       |   |   |   |   |
| **NET  LOSS**                                                                                         |       | $                                                           | (1,301,000 | ) | $ | (415,000 | ) | $ | (3,281,000 | ) |
|                                                                                                  |       |                                                        |       |   |   |   |   |
| **NET  LOSS PER SHARE:**                                                                              |       |                                                        |       |   |   |   |   |
| Basic and  diluted                                                                                    |       | $                                                           | (0.50      | ) | $ | (0.15 | ) | $ | (1.29 | ) |
|                                                                                                  |       |                                                        |       |   |   |   |   |
| **WEIGHTED  AVERAGE SHARES OUTSTANDING:**                                                             |       |                                                        |       |   |   |   |   |
| Basic and  diluted                                                                                    |       | 2,580,000                                                   |       | 2,749,000 |   | 2,548,000 |   |

 

***Seeaccompanying notes to these consolidated financial statements.***

 

F-5

----

 

***SPORT-HALEY,INC.***

 

**STATEMENTOF SHAREHOLDERS’ EQUITY**

 
| ** **                           | ** ** | **COMMON STOCK** | ** ** | **ADDITIONAL  PAID-IN** | ** ** | **RETAINED** | ** ** | **TOTAL  SHAREHOLDERS’** | ** ** |
|--------------------------------------|------------|-----------------------|------------|-------------------------|------------|--------------|------------|-------------------------------|------------|
| ** **                           | ** ** | **SHARES**            | ** ** | **AMOUNT**              | ** ** | **CAPITAL**  | ** ** | **EARNINGS**                  | ** ** | **EQUITY** | ** ** |
|                                 |       |                  |       |                    |       |         |       |                          |       |   |   |
| **BALANCES,  July 1, 2004**          |       | 2,525,252             |       | $                       | 10,126,000 |         | $          | 1,527,000                     |       | $ | 6,970,000 |   | $ | 18,623,000 |   |
|                                 |       |                  |       |                    |       |         |       |                          |       |   |   |
| Stock options  exercised             |       | 120,000               |       | 334,000                 |       | —       |       | —                        |       | 334,000 |   |
| Stock-based  compensation            |       | —                |       | —                  |       | 63,000       |       | —                        |       | 63,000 |   |
| Net loss                             |       | —                |       | —                  |       | —       |       | (3,281,000                    | )          | (3,281,000 | ) |
|                                 |       |                  |       |                    |       |         |       |                          |       |   |   |
| **BALANCES,  June 30, 2005**         |       | 2,645,252             |       | 10,460,000              |       | 1,590,000    |       | 3,689,000                     |       | 15,739,000 |   |
|                                 |       |                  |       |                    |       |         |       |                          |       |   |   |
| Stock options  exercised             |       | 125,000               |       | 353,000                 |       | —       |       | —                        |       | 353,000 |   |
| Stock-based  compensation            |       | —                |       | —                  |       | 31,000       |       | —                        |       | 31,000 |   |
| Cash dividend  paid on common shares |       | —                |       | —                  |       | —       |       | (693,000                      | )          | (693,000 | ) |
| Net loss                             |       | —                |       | —                  |       | —       |       | (415,000                      | )          | (415,000 | ) |
|                                 |       |                  |       |                    |       |         |       |                          |       |   |   |
| **BALANCES,  June 30, 2006**         |       | 2,770,252             |       | 10,813,000              |       | 1,621,000    |       | 2,581,000                     |       | 15,015,000 |   |
|                                 |       |                  |       |                    |       |         |       |                          |       |   |   |
| Repurchase  common stock             |       | (485,762              | )          | (2,332,000              | )          | —       |       | —                        |       | (2,332,000 | ) |
| Net loss                             |       | —                |       | —                  |       | —       |       | (1,301,000                    | )          | (1,301,000 | ) |
|                                 |       |                  |       |                    |       |         |       |                          |       |   |   |
| **BALANCES,  June 30, 2007**         |       | 2,284,490             |       | $                       | 8,481,000  |         | $          | 1,621,000                     |       | $ | 1,280,000 |   | $ | 11,382,000 |   |

 

***Seeaccompanying notes to these consolidated financial statements.***

 

F-6

----

 

***SPORT-HALEY,INC.***

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
| ** **                                                                                       | ** ** | **FOR THE YEARS ENDED JUNE 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2007**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                             |       |                                                      |       |   |   |   |   |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                       |       |                                                      |       |   |   |   |   |
| Net loss                                                                                         |       | $                                                         | (1,301,000 | ) | $ | (415,000 | ) | $ | (3,281,000 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in)  operating activities: |       |                                                      |       |   |   |   |   |
| Depreciation and  amortization                                                                   |       | 258,000                                                   |       | 324,000 |   | 352,000 |   |
| Inventory impairments  and write-downs                                                           |       | 312,000                                                   |       | 408,000 |   | 1,403,000 |   |
| Goodwill  impairment                                                                             |       | 270,000                                                   |       | — |   | — |   |
| Provisions for  doubtful accounts and sales returns                                              |       | (13,000                                                   | )          | (71,000 | ) | (205,000 | ) |
| Stock-based  compensation expense                                                                |       | —                                                    |       | 31,000 |   | 63,000 |   |
| Gain/loss on  disposal of assets                                                                 |       | —                                                    |       | 12,000 |   | 22,000 |   |
| Minority  interest in subsidiary loss                                                            |       | 49,000                                                    |       | 56,000 |   | — |   |
| Changes in  assets and liabilities:                                                              |       |                                                      |       |   |   |   |   |
| Accounts  receivable                                                                             |       | 897,000                                                   |       | 616,000 |   | 1,656,000 |   |
| Inventory                                                                                        |       | (1,351,000                                                | )          | (1,030,000 | ) | 3,252,000 |   |
| Prepaid expenses  and other assets                                                               |       | (9,000                                                    | )          | 2,000 |   | 269,000 |   |
| Accounts payable                                                                                 |       | (270,000                                                  | )          | 1,255,000 |   | (799,000 | ) |
| Accrued  commissions and other                                                                   |       | (119,000                                                  | )          | (49,000 | ) | 402,000 |   |
| Net cash  provided by (used in) operating activities                                             |       | (1,277,000                                                | )          | 1,139,000 |   | 3,134,000 |   |
|                                                                                             |       |                                                      |       |   |   |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                       |       |                                                      |       |   |   |   |   |
| Purchase of  fixed assets                                                                        |       | (44,000                                                   | )          | (44,000 | ) | (176,000 | ) |
| Maturities  (purchases) of marketable securities                                                 |       | —                                                    |       | — |   | 539,000 |   |
| Proceeds from  the disposal of fixed assets                                                      |       | —                                                    |       | 16,000 |   | — |   |
| Purchase of  minority interest                                                                   |       | (375,000                                                  | )          | — |   | — |   |
| Net cash  provided by (used in) investing activities                                             |       | (419,000                                                  | )          | (28,000 | ) | 363,000 |   |
|                                                                                             |       |                                                      |       |   |   |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                       |       |                                                      |       |   |   |   |   |
| Borrowings under  line of credit                                                                 |       | 300,000                                                   |       | — |   | — |   |
| Repayments under  line of credit                                                                 |       | (300,000                                                  | )          | — |   | — |   |
| Repurchase  common stock                                                                         |       | (2,332,000                                                | )          | — |   | — |   |
| Cash dividend  paid on common shares                                                             |       | —                                                    |       | (693,000 | ) | — |   |
| Stock option  exercises                                                                          |       | —                                                    |       | 353,000 |   | 334,000 |   |
| Net cash  provided by (used in) financing activities                                             |       | (2,332,000                                                | )          | (340,000 | ) | 334,000 |   |
|                                                                                             |       |                                                      |       |   |   |   |   |
| **NET  INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**                                        |       | (4,028,000                                                | )          | 771,000 |   | 3,831,000 |   |
|                                                                                             |       |                                                      |       |   |   |   |   |
| **CASH  AND CASH EQUIVALENTS,** Beginning of year                                                |       | 8,492,000                                                 |       | 7,721,000 |   | 3,890,000 |   |
|                                                                                             |       |                                                      |       |   |   |   |   |
| **CASH  AND CASH EQUIVALENTS,** End of year                                                      |       | $                                                         | 4,464,000  |   | $ | 8,492,000 |   | $ | 7,721,000 |   |
|                                                                                             |       |                                                      |       |   |   |   |   |
| **SUPPLEMENTAL  CASH FLOW INFORMATION:**                                                         |       |                                                      |       |   |   |   |   |
| Cash payments  for:                                                                              |       |                                                      |       |   |   |   |   |
| Interest                                                                                         |       | $                                                         | 1,000      |   | $ | — |   | $ | — |   |
| Income taxes                                                                                     |       | $                                                         | 29,000     |   | $ | 7,000 |   | $ | 8,000 |   |

 

***Seeaccompanying notes to these consolidated financial statements.***

 

F-7

----

 

***SPORT-HALEY,INC.***

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

1.                             **ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES**:

 

*Principles of Consolidation* –Included in the 2007 and 2006 consolidated financial statements are theaccounts of Sport-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 of Operations* – SportHaley, organized as a Colorado corporation in January 1991, designs, purchases,contracts for the manufacture of, markets and distributes men’s and women’sfashion golf apparel and outerwear under the SPORT HALEY® and Ben Hogan®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 United Statesand by certain distributors within various international markets. Ben Hogan®fashion golf apparel is distributed per the terms of a license agreement withCallaway Golf Company (“Callaway”).

 

Reserve Apparel, formed in November 2005, designs,purchases, contracts for the manufacture of, markets and distributes golfapparel and outerwear under the Top-Flite® label to mass retailers and otherbig-box, high sales volume retail stores. Top-Flite® branded golf apparel isdistributed per the terms of a license agreement with Callaway. In accordancewith the Reserve Apparel operating agreement, Sport Haley owned a 51% interestin Reserve Apparel and Explorer Gear USA, Inc. (“Explorer Gear”) owned a 49%interest. On September 21, 2006, Sport Haley entered into an agreement withExplorer Gear to purchase its 49% interest in Reserve Apparel for a lump sumpayment of $375,000, since which time Reserve Apparel has been a wholly-ownedsubsidiary of Sport Haley.

 

*Reclassification* – Certainprior amounts have been reclassified to conform to the year 2007 presentation,but such reclassifications had no affect on net loss.

 

*Marketable Securities* –Marketable securities generally consisted of United States government andmortgage-backed debt securities that matured within one year or less and wereclassified as held-to-maturity. Due to the short-term nature of theinvestments, there were no material unrealized gains or losses on theseinvestments. As a result, the carrying values of marketable securitiesapproximated their fair market values. No marketable securities were held,purchased or matured during 2007 or 2006.

 

*Receivables and Credit Policies*– Trade receivables consist of uncollateralized customer obligations due undernormal trade terms, generally requiring payment within 30 days of the invoicedate. In most cases, individual trade receivables apply to a specificidentifiable sales invoice. Periodically, management reviews the estimatedrecoverability of trade receivables and reduces their carrying amount byutilizing a valuation allowance that reflects management’s best estimate of theamount that may not be collectible. From time to time, management alsoidentifies delinquent customer accounts and other receivables for which aspecific reserve is required. At both June 30, 2007 and 2006, our allowance fordoubtful accounts of $235,000 and $291,000, respectively, included a specificreserve of $116,000 with respect to the potential non-recovery of the netamount due to Sport Haley from a former inventory supplier to Reserve Apparel.

 

*Inventories*– Inventories are generally stated at the lower of cost (weighted average) ormarket. Costs include amounts paid to suppliers for packaged apparel and/ormaterials and labor, import costs, such as customs 

 

F-8

----

 

duties, freight-in andother miscellaneous costs, and allocated overhead. Inventories are written downto market value as adjustments to reserves for inventory obsolescence. Changesin the reserves for inventory obsolescence are reflected in total cost of goodssold during the periods in which the reserve is recorded and the obsolete inventoryis sold, respectively. Write-downs as a result of inventory obsolescencetotaled $312,000, $408,000 and $1,403,000 for 2007, 2006 and 2005,respectively.

 

*Property and Equipment* –Property and equipment are stated at historical cost. Depreciation is generallyrecorded over the estimated useful lives of the assets, ranging from three totwelve years, using the straight-line method. Leasehold improvements are statedat historical cost and are generally amortized over the remaining life of thelease, using the straight-line method. Material expenditures that increase thelife of an asset are capitalized and depreciated over the estimated remaininguseful life of the asset. The costs of normal maintenance and repairs arecharged to operating expenses as incurred. Upon the disposition of assets, therelated cost and accumulated depreciation are removed from the books and therealized gain or loss, if any, is recognized in the year of the disposition.

 

*Impairment of Long-Lived Assets*– The carrying values of long-lived assets are reviewed for impairment wheneverevents or changes in circumstances indicate that such carrying values may notbe recoverable. We do not perform periodic assessments of assets for impairmentin the absence of such information or indicators. Currently, management has noindication of any events or circumstances that would significantly impair anyof our long-lived assets, primarily furniture, fixtures and equipment. Animpairment charge, if any, would be recorded for the excess of the carryingvalue of an asset over its estimated fair value, as determined based uponestimates of future cash flows, third-party valuation or other measuresdetermined appropriate for the circumstances.

 

*Revenue Recognition* – TheCompany recognizes revenue in accordance with Securities and ExchangeCommission Staff Accounting Bulletin No. 104, *“RevenueRecognition, corrected copy,”* which requires that four basiccriteria must be met before revenue can be recognized: (1) persuasive evidenceof an arrangement exists; (2) delivery has occurred or services have beenrendered; (3) the seller’s price to the buyer is fixed or determinable; and,(4) collectibility is reasonably assured. We generally record revenue uponshipment, primarily transported via common carrier with terms of FOB at thepoint of delivery to the carrier. Occasionally, we may implement limitedconsignment programs with certain of our customers. We generally recognizerevenue on consignment sales at the time of collection from the customer. On avery limited basis, we also offer certain customers the right of return forcertain inventory, which we include as a component within our estimate ofallowance for sales returns.

 

*Sales Incentives* –The typesof incentives that we offer to our customers generally include sales discounts,terms discounts and free goods, which we include in the net sales line of ourstatement of operations. In the ordinary course of our business, we may offerour customers sales discounts of up to 25%, terms discounts of up to 10% orfree goods of up to 5% off of our stated wholesale prices. The revenue effectsof sales discounts and free goods are recorded upon invoicing our customer forthe related merchandise. We record terms discounts, if applicable, upon receiptof payment from the customer. On a limited basis, we also participate incooperative advertising with certain of our customers. Charges for cooperativeadvertising are recorded as advertising expense in the period in which ourpayment is made or when we issue credit to the customer’s account.

 

F-9

----

 

*Cost of Goods Sold* – Ourgross margins may not be comparable to other companies within the golf apparelindustry. We have consistently included the cost of merchandise sold, includingimport charges, in-bound freight, allocated overhead and other charges, customembroidery costs and freight-out in our cost of goods sold. Amounts invoiced toour customers for custom embroidery as well as shipping and handling chargesare included as components of our net sales. Our overhead allocation includescertain of our distribution costs, such as receiving, inspection and shippingcosts, but we include some of the other costs of distribution, such as aportion of our warehousing and other handling costs, in selling, general andadministrative expense. Our gross margins also include, on a consolidatedbasis, the operations of Reserve Apparel, which distributes Top-Flite® apparelto the mass retail market at much lower price points and gross margins thatthose expected to be achieved in the premium and mid-price markets where wedistribute our SPORT HALEY® and Ben Hogan® apparel brands. Other companieswithin the golf apparel industry may or may not operate within the premium andmid-price markets as well as the mass retail market. We include royaltypayments, relating to sales of licensed apparel, in other operating costs.

 

*Advertising* – We expense theproduction costs of advertising the first time the advertising takes place,except for direct-response advertising, which is capitalized and amortized overits expected period of future benefits. We had no capitalized direct responseadvertising for 2007, 2006 or 2005. We include costs for the following inadvertising expenses: sales catalogs; tradeshows; apparel used in promotionalactivities; print ads in golf and other publications; marketing group fees;co-operative advertising; market research; amounts paid to professionalgolfers; and, various other items. Advertising expense was $879,000, $837,000,and $946,000 for 2007, 2006, and 2005, respectively.

 

*Deferred Taxes* – Deferredincome taxes are recognized for the tax consequences in future years fordifferences between the tax bases of assets and liabilities and their financialreporting amounts, based on enacted tax laws and statutory tax rates applicableto the periods in which the differences are expected to affect taxable income.Our significant deferred tax assets are related to net operating loss carryforwards for federal and state income tax purposes, stock-based compensationand an unrealized loss for tax purposes on a common stock investment. Governingregulations require that our operating losses be carried forward for income taxpurposes. We maintain a valuation allowance to reduce our deferred tax assetsto the net amount expected to be recovered in future periods. The estimates fordeferred tax assets and the corresponding valuation allowance require us toexercise complex judgments. We periodically review and adjust those estimatesbased upon the most current information available. In accordance with Statementof Financial Accounting Standards No. 109, *“Accounting for IncomeTaxes,”* and based upon a review at June 30, 2007, of our utilizationof deferred tax assets, we maintained a valuation allowance that effectivelyreduces our net deferred tax assets to zero. While we continue to explorevarious strategies to return the Company to profitability, including findingadditional markets for our Top-Flite® branded golf apparel, we cannot be certainthat our efforts will result in the generation of future profits. Because therecoverability of deferred tax assets is directly dependent upon futureoperating results, actual recoverability of deferred tax assets may differmaterially from our estimates.

 

*Use of Estimates* – Thepreparation of financial statements in conformity with generally acceptedaccounting principles in the United States of America requires management tomake estimates and assumptions that affect certain reported amounts and disclosures.Among others, significant estimates include our allowance for doubtfulaccounts, allowance for sales returns, inventory reserves and valuationallowances associated with our deferred tax assets. Accordingly, actual resultscould differ from those estimates.

 

F-10

----

 

*Certain Risks and Concentrations*– Our operations consist of designing, purchasing, contracting for themanufacture of, marketing and wholesale distribution of golf apparel for menand women. Our headquarters are located in Denver, Colorado, and our customersare located throughout the United States and abroad. As of June 30, 2007, 2006and 2005, the majority of our receivables were from customers in the golfingindustry. We perform on-going credit evaluations, and management believes thatwe maintain adequate allowance for potential credit losses.

 

We place significant reliance on foreign suppliersthat provide finished and packaged apparel, which heightens the risk that ourrevenues could be adversely affected if a foreign shipment or shipments werereceived late or lost. We maintain insurance for risk of loss relating to goodsshipped from our foreign and domestic suppliers. However, our significantreliance on foreign suppliers heightens the risk that we may be left withinadequate or unsatisfactory recourse should the goods received from theforeign suppliers be nonconforming. In 2007, 2006 and 2005, we purchasedsignificant amounts of our finished apparel from various foreign suppliers. Ifwe were to lose or terminate the services of any of these significantsuppliers, our short-term ability to fulfill customers’ orders on a timelybasis could be substantially impaired, thereby negatively affecting the resultsof our operations. In 2007, we purchased 63%, 9% and 6% of our finished apparelfrom three separate foreign suppliers. In 2006, we purchased 57%, 7%, 7%, 6%and 5%, and, in 2005, 40%, 12%, 9%, 7%, 6% and 5% of our finished apparel fromfive and six separate foreign suppliers, respectively.

 

*Statements of Cash Flows* –For purposes of the statements of cash flows, we consider all highly liquidinstruments purchased with original maturities of three months or less, thatare readily convertible to known amounts of cash and present an insignificantrisk of change in value due to changes in interest rates, to be cashequivalents.

 

*Financial Instruments* – Weregularly maintain cash balances at a commercial bank in excess of the FederalDeposit Insurance Corporation insurance limit of $100,000.

 

*Comprehensive Income (Loss)* –Comprehensive income is defined as all changes in shareholders’ equity(deficit), exclusive of transactions with owners, such as capital investments.Comprehensive income includes net income (loss) and income or loss from changesin certain assets and liabilities that are reported directly in equity. We hadno items of other comprehensive income for 2007, 2006, or 2005, except for netloss.

 

*Net Income (Loss) Per Share* –Basic earnings per share (EPS) is calculated by dividing the income or lossavailable to common shareholders by the weighted average number of commonshares outstanding for the period. Diluted EPS reflects the potential dilutionthat could occur if securities or other contracts to issue common stock were exercisedor converted into common stock. Due to losses reported in 2007, 2006 and 2005,all of our stock options outstanding were anti-dilutive, and thus excluded fromthe loss per share calculations.

 

F-11

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*Stock-Based Compensation*– Our StockOption Plan (the “Plan”) expired by its terms on February 28, 2003. Optionagreements that were issued in accordance with the 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 June 30, 2007, there were outstanding options topurchase 593,500 shares of our common stock at exercise prices ranging from$2.71 to $9.78 per share and expiration dates between November 2007 and January2013. During the year ended June 30, 2007, no options were exercised and 85,000options expired.

 

In December 2004, theFinancial Accounting Standards Board issued Statement of Financial AccountingStandards No. 123(R) (“SFAS 123R”), *“Share-Based Payment,”*which is a revision of Statement of Financial Accounting Standards No. 123 (“SFAS123”), *“Accounting for Stock-Based Compensation.”*SFAS 123R is effective for annual periods beginning after July 1, 2005,supersedes Accounting Principles Board Opinion No. 25 (“APB 25”), *“Accounting for Stock Issued to Employees,”* and amendsStatement of Financial Accounting Standards No. 95, *“Statementof Cash Flows.”* SFAS 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in thestatement of operations based upon their fair values and rescinds theacceptance of pro forma disclosure. SFAS 123R permits two methods of adoption,a “modified prospective” method and a “modified retrospective” method. Underthe modified prospective method, stock-based compensation cost is recognized,beginning with the effective date, based on the requirements of SFAS 123R forall share-based payments granted after the effective date and for all awardsgranted prior to the effective date that remain unvested on the effective date.The modified retrospective method includes the requirements of the modifiedprospective method and also permits restatement of prior periods based onamounts previously reported in pro forma disclosures pursuant to SFAS 123 foreither all periods presented or for only prior interim periods of the year ofadoption. We adopted the modified prospective method prescribed in SFAS 123R,effective July 1, 2005.

 

Priorto July 1, 2005, we accounted for stock-based compensation using the intrinsicvalue method prescribed in APB 25 and related interpretations and elected toapply the disclosure-only provisions of SFAS 123, as amended by SFAS No. 148, “*Accounting for Stock-Based Compensation*–*Transition andDisclosure*.”Under the intrinsic value method, compensation expense for stock options wasrecognized over the vesting period of the grant based on the excess, if any, ofthe market price of our common stock at the date of grant over the stock optionexercise price. As governed by the Plan, stock options were generally grantedat or near fair market value on the date of grant.

 

The Plan expired by its terms in February 2003.Accordingly, no options were granted in 2007, 2006 or 2005. The expected lifewas determined based on the Plan’s vesting period and exercise behavior of theemployees.

 

Uponour adoption of the modified prospective method prescribed in SFAS 123R,effective July 1, 2005, we recorded $31,000 in stock-based compensation expenseusing the fair value method. We have not been required to recognize anyadditional stock-based compensation expense, because upon recording the $31,000the fair value of all employee-related options had been fully amortized.Therefore, we have omitted the comparison of pro forma amounts of net income(loss) and net income (loss) per share applicable to common stock for 2007.

 

F-12

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| ** **                                                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                       |       |     |       |     |       |
| Net loss - as  reported                                                    |       | $        | (415,000   | )        | $          | (3,281,000 | ) |
| Effect of  employee stock-based compensation included in reported net loss |       | 31,000   |       | 63,000   |       |
| Effect of  employee stock-based compensation per SFAS 123             |       | (31,000  | )          | (423,000 | )          |
| Net loss  applicable to common stock - pro forma                           |       | $        | (415,000   | )        | $          | (3,641,000 | ) |
|                                                                       |       |     |       |     |       |
| Basic and  Diluted:                                                        |       |     |       |     |       |
| Loss per share –  as reported                                         |       | $        | (0.15      | )        | $          | (1.29 | ) |
| Effect of  employee stock-based compensation included in reported net loss |       | 0.01     |       | 0.03     |       |
| Effect of  employee stock-based compensation per SFAS 123             |       | (0.01    | )          | (0.17    | )          |
| Net loss  applicable to common stock - pro forma                           |       | $        | (0.15      | )        | $          | (1.43 | ) |
|                                                                            |            |          |            |          |            |  |  |  |  |

 

*Recent Pronouncements* – InFebruary 2007, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 159 (“SFAS 159”), *“The Fair Value Option for Financial Assets and Financial Liabilities –Including an Amendment of FASB Statement No. 115.”* SFAS 159 permitsan entity to measure financial instruments and certain other items at estimatedfair value as of specific election dates. The fair value option: (i) maygenerally be applied instrument by instrument; (ii) is irrevocable unless a newelection date occurs; and, (iii) must be applied to the entire instrument andnot to only a portion of the instrument. Most of the provisions of SFAS 159 areelective. However, the amendment to SFAS 115, *“Accountingfor Certain Investments in Debt and Equity Securities,”* applies toall entities that own securities that are classified as trading or availablefor sale. SFAS 159 is effective for fiscal years beginning after November 15,2007. Early adoption of SFAS 159 is permitted if the entity: (i) chooses earlyadoption within the first 120 days of its fiscal year; (ii) has not yet issuedfinancial statements for any interim period of such fiscal year; and (iii)elects to apply the provisions of FASB No. 157, *“Fair ValueMeasurements.”* We have not determined whether we will elect earlyadoption, and we have not evaluated the impact, if any, on our financialcondition or the results of our operations that may be caused by our adoptionof SFAS 159.

 

In June 2006, the FASB issued Interpretation No. 48 (“FIN48”), *“Accounting for Uncertainty in Income Taxes.”*FIN 48 requires the use of a two-step approach for recognizing and measuringtax benefits taken or expected to be taken in an income tax return anddisclosures regarding uncertainties in income tax positions. Only tax positionsthat meet the “more likely than not” recognition threshold at the effectivedate may be recognized upon adoption of FIN 48. We are required to adopt FIN 48effective July 1, 2007. The cumulative effect of initial adoption of FIN 48, ifany, will be recorded as an adjustment to beginning retained earnings in theyear of adoption and will be presented separately. We are currently evaluatingthe impact that FIN 48

 

 

F-13

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will have on our financial condition and the resultsof our operations.

 

We have reviewed all other recently issued, but notyet effective, accounting pronouncements and do not believe the future adoptionof any such pronouncements may be expected to cause a material impact on ourfinancial condition or the results of our operations.

 

2.                             **FAIR VALUE OF FINANCIAL INSTRUMENTS:**

 

Thecarrying values of our financial instruments, principally consisting of cashand cash equivalents, accounts receivable and accounts payable, approximatetheir fair market values due to their short-term maturities.

 

3.                             **CASH AND CASH EQUIVALENTS**:

 

Cash and cash equivalents consist of the following atJune 30:

 
| ** **                                                           | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|----------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                                 |       |      |       |      |       |
| Cash in banks                                                        |       | $         | 1,417,000  |      | $          | 5,483,000 |   |
| Short-term  securities (original maturities of three months or less) |       | 3,047,000 |       | 3,009,000 |       |
| Total cash and  cash equivalents                                     |       | $         | 4,464,000  |      | $          | 8,492,000 |   |

 

4.                             **INVENTORIES**:

 

Inventories consisted of the following at June 30:

 
| ** **                  | ** ** | **2007**  | ** ** | **2006**  | ** ** |
|-----------------------------|------------|-----------|------------|-----------|------------|
|                        |       |      |       |      |       |
| Component  inventories      |       | $         | 283,000    |      | $          | 366,000 |   |
| Finished goods  inventories |       | 5,531,000 |       | 4,409,000 |       |
| Total  inventories          |       | $         | 5,814,000  |      | $          | 4,775,000 |   |

 

Included infinished goods inventories balances are allowances for inventory write-downs of$236,000 and $276,000 for 2007 and 2006, respectively.

 

5.                             **PROPERTY AND EQUIPMENT**:

 

Property andequipment are recorded at historical cost and are comprised of the following atJune 30:

 

 

F-14

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| ** **                                                   | ** ** | **2006**   | ** **    | **2006**   | ** ** |
|--------------------------------------------------------------|------------|------------|---------------|------------|------------|
|                                                         |       |       |          |       |       |
| Furniture and  fixtures                                      |       | $          | 1,419,000     |       | $          | 1,417,000 |   |
| Plant equipment                                              |       | 1,314,000  |          | 1,314,000  |       |
| Computer  software and equipment                             |       | 1,299,000  |          | 1,265,000  |       |
| Leasehold  improvements                                      |       | 418,000    |          | 410,000    |       |
| Other                                                        |       | 11,000     |          | 11,000     |       |
| Total property  and equipment                                |       | 4,461,000  |          | 4,417,000  |       |
| Less accumulated  depreciation, amortization, and impairment |       | (4,062,000 | )             | (3,804,000 | )          |
| Property and  equipment, net                                 |       | $          |  399,000 |       | $          |  613,000 |   |

 

Depreciation and amortization expense for 2007, 2006,and 2005 was $258,000, $324,000 and $352,000, respectively.

 

6.                             **LINE OF CREDIT AGREEMENT**:

 

We maintain a revolving line of credit agreement with a commercial bank.The revolving line of credit agreement, renewed by amendment through December5, 2007, provides for a maximum loan amount of $3,000,000, collateralized by acertificate of deposit held at the commercial bank in the amount of $3,000,000,which earns a market rate of interest. Borrowings under the line of creditagreement accrue interest at the bank’s prime 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. We did not have any balances due on the line of creditat June 30, 2007 or 2006, respectively.

 

Outstanding letters of credit reduce the amountavailable for borrowing under the line of credit agreement. At June 30, 2007and 2006, we had outstanding letters of credit of $2,173,000 and $509,000,respectively, issued for purchase obligations under outstanding purchaseorders.

 

7.                             **INCOME TAXES**:

 

The differences between the U.S. Federal statutoryrate and our effective rate are as follows at June 30:

 
| ** **                                        | ** ** | **2007** | ** ** | **2006** | ** ** | **2005**  | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
|                                              |       |     |       |     |       |      |       |
| U.S. Federal  statutory rate                      |       | $        | (321,000   | )        | $          | (154,000  | )          | $ | (1,150,000 | ) |
| State income  taxes                               |       | (44,000  | )          | (19,000  | )          | (157,000  | )          |
| Change in  deferred tax valuation allowance       |       | 389,000  |       | 142,000  |       | 1,254,000 |       |
| Permanent  differences and other                  |       | 5,000    |       | 38,000   |       | 61,000    |       |
| Total current  and deferred tax expense (benefit) |       | $        | 29,000     |     | $          | 7,000     |       | $ | 8,000 |   |

 

 

F-15

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The components of income taxexpense (benefit) are as follows at June 30:

 
| ** **                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |     |       |
| Federal                       |       | $        | —     |     | $          | —   |       | $ | — |   |
| State                         |       | 29,000   |       | 7,000    |       | 8,000    |       |
| Deferred                      |       | —   |       | —   |       | —   |       |
| Income tax  expense (benefit) |       | $        | 29,000     |     | $          | 7,000    |       | $ | 8,000 |   |

 

Thecomponents of the net deferred tax asset and net deferred tax liabilityrecognized in the accompanying balance sheets are as follows at June 30:

 
| ** **                                         | ** ** | **2007**    | ** ** | **2006**   | ** ** |
|----------------------------------------------------|------------|-------------|------------|------------|------------|
| ** **                                         | ** ** | ** **  | ** ** | **Long-**  | ** ** | ** ** | ** ** | **Long-** | ** ** |
| ** **                                         | ** ** | **Current** | ** ** | **Term**   | ** ** | **Current** | ** ** | **Term** | ** ** |
|                                               |       |        |       |       |       |   |   |   |   |
| Deferred tax  assets                               |       | $           | 268,000    |       | $          | 3,041,000 |   | $ | 262,000 |   | $ | 2,658,000 |   |
| Deferred tax  liabilities                          |       | —      |       | —     |       | — |   | — |   |
| Net deferred tax  asset before valuation allowance |       | 268,000     |       | 3,041,000  |       | 262,000 |   | 2,658,000 |   |
| Valuation  allowance                               |       | (268,000    | )          | (3,041,000 | )          | (262,000 | ) | (2,658,000 | ) |
| Net deferred tax  asset                            |       | $           | —     |       | $          | — |   | $ | — |   | $ | — |   |

 

The types of temporary differences between the taxbases of assets and liabilities and their financial reporting amounts that giverise to a significant portion of the deferred tax asset and liability and theirappropriate tax effects are as follows at June 30:

 
| ** **                                         | ** ** | ** **     | ** ** | **2007**    | ** ** | ** ** | ** ** | **2006**       | ** ** |
|----------------------------------------------------|------------|----------------|------------|-------------|------------|------------|------------|----------------|------------|
| ** **                                         | ** ** | **Temporary**  | ** ** | ** **  | ** ** | **Long-**  | ** ** | **Temporary**  | ** ** | ** ** | ** ** | **Long-** | ** ** |
| ** **                                         | ** ** | **Difference** | ** ** | **Current** | ** ** | **Term**   | ** ** | **Difference** | ** ** | **Current** | ** ** | **Term** | ** ** |
| Allowance for  doubtful accounts                   |       | $              | 119,000    |        | $          | 44,000     |       | $              | —     |   | $ | 175,000 |   | $ | 65,000 |   | $ | — |   |
| Allowance for  doubtful accounts – Subsidiary |       | 116,000        |       | 43,000      |       | —     |       | 59,000         |       | 22,000 |   | — |   |
| Reserve for  sales returns                         |       | 139,000        |       | 51,000      |       | —     |       | 155,000        |       | 57,000 |   | — |   |
| Accrued vacation                                   |       | 158,000        |       | 59,000      |       | —     |       | 129,000        |       | 47,000 |   | — |   |
| Accumulated  depreciation                          |       | 173,000        |       | —      |       | 64,000     |       | 121,000        |       | — |   | 45,000 |   |
| Stock option  compensation                         |       | 389,000        |       | —      |       | 144,000    |       | 389,000        |       | — |   | 144,000 |   |
| Unrealized loss  on investment                     |       | 234,000        |       | —      |       | 87,000     |       | 234,000        |       | — |   | 87,000 |   |
| Inventory costs                                    |       | 191,000        |       | 71,000      |       | —     |       | 191,000        |       | 71,000 |   | — |   |
| Federal net  operating losses                      |       | 6,847,000      |       | —      |       | 2,328,000  |       | 5,904,000      |       | — |   | 2,007,000 |   |
| State net  operating losses                        |       | 9,038,000      |       | —      |       | 418,000    |       | 8,095,000      |       | — |   | 375,000 |   |
| Net deferred tax  asset before valuation allowance |       |           |       | 268,000     |       | 3,041,000  |       |           |       | 262,000 |   | 2,658,000 |   |
| Valuation  allowance                               |       |           |       | (268,000    | )          | (3,041,000 | )          |           |       | (262,000 | ) | (2,658,000 | ) |
| Net deferred tax  asset                            |       |           |       | $           | —     |       | $          | —         |       |   |   | $ | — |   | $ | — |   |
|                                                    |            |                |            |             |            |            |            |                |            |  |  |  |  |  |  |  |  |  |  |

 

 

F-16

----

 

The changes in deferred tax valuation allowances for2007, 2006 and 2005 were $389,000, $142,000 and $1,254,000, respectively.

 

Federal net operating loss carry forwards expire from2023 through 2027. State net operating loss carry forwards expire from 2021through 2027.

 

8.                            **OPERATING LEASES**:

 

The Company leases its corporate offices, productionand warehouse facilities under an operating lease that was extended throughOctober 2011.

 

Rentexpenses for 2007, 2006, and 2005, were $272,000, $264,000 and $255,000,respectively.

 

The future minimum lease payments under non-cancelableleases with initial terms of one year or more as of June 30, 2007, are asfollows:

 
| **Years Ending   June 30,** | ** ** | **Amount** | ** ** |
|--------------------------------------------|------------|------------|------------|
|                                       |       |       |       |
| 2008                                       |       | 284,000    |       |
| 2009                                       |       | 286,000    |       |
| 2010                                       |       | 289,000    |       |
| 2011                                       |       | 289,000    |       |
| 2012                                       |       | 96,000     |       |
| Thereafter                                 |       | —     |       |
| Total                                      |       | $          | 1,244,000  |   |
|                                            |            |            |            |  |

 

9.                            **COMMITMENTS AND CONTINGENCIES**:

 

*Potential Claims* – We are subject to various legalproceedings and claims that arise in the ordinary course of our business. Basedupon the information that is currently available, management does not believethat the total impact of legal proceedings will materially affect our financialposition or the results of our operations.

 

*Touring Professionals* – From time to time we maintain marketingagreements with certain touring professionals, whereby we provide theprofessionals with golf apparel. We did not maintain any such agreements and wedid not compensate any tour professionals in cash in 2007.

 

*Employment Agreements*– We maintain several employment and non-compete agreements with officers andkey employees of the Company. The agreements are subject to automatic one-yearextensions. For 2007, employment and non-compete agreements provided forminimum salary levels totaling $910,000, excluding discretionary bonuses andseverance payments upon termination of employment without cause.

 

As previously reported,in October 2004, our Board of Directors approved a resolution not to renew theexecutive employment agreement of Kevin M. Tomlinson, our then Chief ExecutiveOfficer, President and 

 

F-17

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Director, beyond the endof the term of the agreement on March 17, 2005. Per its terms, upon thenon-renewal of the agreement, Mr. Tomlinson is entitled to receive severancecompensation for a term of 36 months upon a termination of the agreement, equalto salary and bonus payments as shall have been paid to him during the mostrecent twelve-month period, and other compensation, including certain costsrelating to Mr. Tomlinson’s participation in all employee benefit plans duringthe time he is receiving such severance compensation. Included in our accruedpayroll liabilities at June 30, 2007 and 2006, are $121,000 and $285,000,respectively, relating to amounts due to Mr. Tomlinson with regard to severanceand other compensation. In accordance with the terms of the employmentagreement, Mr. Tomlinson is scheduled to receive monthly payments for severanceand other compensation through March 17, 2008.

 

*License Agreements*– In May 2001, we entered into a license agreement with Spalding Sports Worldwide,Inc. (“Spalding”) for the rights to market a line of men’s premium golf apparelunder the Ben Hogan® brand name.

 

In July 2002, we reachedan agreement with Spalding to amend the license agreement to expand theapplicable territory covered by the agreement to include the United Kingdom,Sweden, Mexico and various Caribbean countries. The original license agreementpreviously granted us the right to market Ben Hogan® apparel within the UnitedStates. We paid Spalding $50,000 in cash and an additional retail value of$50,000 in finished goods (at a cost to us of approximately $29,000) for therights to market Ben Hogan® apparel for a five year period ending December 31,2006, and a subsequent renewal period ending December 31, 2011.

 

In May 2003, Spaldingchanged its corporate name to The Top-Flite Golf Company, Inc. (“Top-Flite Golf”).

 

In June 2003, we reachedan agreement with Top-Flite Golf to amend the license agreement to grant us theright to market lines of golf apparel under the Top-Flite® brand name withinthe United States, Sweden, Mexico and various Caribbean countries. We paidTop-Flite Golf $25,000 in cash for the rights to market Top-Flite® apparel forthe balance of the licensing period ending December 31, 2006, and a subsequentrenewal period ending December 31, 2011.

 

In September 2003,Callaway Golf Company (“Callaway”) purchased substantially all of the assets ofTop-Flite Golf including the Ben Hogan® and Top-Flite® brand names licensed tous.

 

In October 2005, Callawaygranted permission for Reserve Apparel Group LLC to distribute Top-Flite®branded apparel to Wal-Mart Stores, Inc. (“Wal-Mart”) through December 31,2006, subject to certain terms and conditions. Subsequently, Callaway hasgranted us permission to market Top-Flite® apparel to numerous other largeretailers throughout the remaining term of the license agreement.

 

The original and amendedagreements require us to pay royalties based upon sales. We record royaltypayments governed by the license agreement with Callaway as other operatingcosts in the periods when such sales are recognized. Royalty payments withrespect to sales of apparel under the license agreements totaled $739,000,$927,000 and $797,000 for 2007, 2006 and 2005, respectively. The agreementsalso provide for minimum royalty payments on a calendar year basis. While weexpect that royalties generated on sales of Ben Hogan® fashion apparel willexceed its minimum royalty requirement for calendar 2007, we anticipate thatsales of Top-Flite® branded apparel will be insufficient to meet thecontractual minimum royalty requirement of $188,000 for calendar 2007 withregard to Top-Flite®. At June 30, 2007, we accrued a contingent liability

 

F-18

----

 

and royalty expense of$178,000 with regard to the Top-Flite® minimum royalty due to Callaway forcalendar 2007. Sales of Top-Flite® branded apparel were sufficient to meet theminimum royalty requirements under the Callaway license for calendar 2006. Minimumroyalty obligations under license agreements totaled $4,129,000 and $4,654,000at June 30, 2007 and 2006, respectively.

 

10.                    **SHAREHOLDERS’ EQUITY**:

 

*Repurchase of Common Stock*– Our Board of Directors previously authorized the repurchase of up to 2,820,000shares of our issued and outstanding common stock. The shares may berepurchased from time to time in open market transactions at prevailing marketprices or privately negotiated transactions. All shares repurchased by us arerequired to be canceled and returned to the status of authorized but unissuedcommon stock. We have no commitment or obligation to repurchase all or anyportion of the shares, and we did not repurchase any shares during 2007 or2006. Through June 30, 2007, we had cumulatively repurchased a total of2,512,800 shares of our common stock at a cost of $13,488,000, not includingthe “Dutch Auction” tender offer described below.

 

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

 

We engaged ComputershareTrust Company, the transfer agent for our common stock, to serve as theDepositary for the tender offer. None of the Company, our Board of Directors orthe Depositary made any recommendation to any shareholder as to whether totender or refrain from tendering any shares or as to the price or prices atwhich shareholders chose to tender shares. Our Board of Directors and executiveofficers each advised that they did not intend to tender in the offer sharesthey held individually or through an affiliated entity. Shareholders were urgedto read the Tender Offer Statement on Schedule TO, which included as exhibitsthe Offer to Purchase and the related Letter of Transmittal, as well as anyamendments or supplements to the Tender Offer Statement when they becameavailable. On January 12, 2007, we submitted an amended Schedule TO and anamended Offer to Purchase to the Commission. We filed further amendments to theSchedule TO on February 6 and February 9, 2007.

 

On February 6, 2007, theDepositary provided us with the final tabulation of the tender offer results.In total, 1,357,698 shares were properly tendered and not withdrawn at pricesfrom $4.80 to $5.30 per share. Of the total, 485,762 shares were tendered at$4.80 per share, which exceeded by 13,762 shares the 472,000 shares we soughtin the tender offer. In Section 1 of the Offer to Purchase, we reserved theright, in our sole discretion, to purchase in the tender offer an additionalnumber of shares over the 472,000 shares we sought in the tender offer, not toexceed 2% of our outstanding common shares, without amending or extending the 

 

F-19

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tender offer. On February7, 2007, we exercised our right, under Section 1 of the Offer to Purchase andapplicable SEC regulations, to accept for purchase all 485,762 shares tenderedat $4.80 per share, without proration. The 485,762 shares accepted for purchasein the tender offer represented approximately 171⁄2 percent of the common sharesoutstanding as of January 3, 2007.

 

On February 8, 2007, wetransferred $2,332,000 to the Depositary to fund the purchase of 485,762 sharesof our common stock at a price of $4.80 per share. The Depositary wasinstructed to promptly pay for the shares accepted for purchase in the tenderoffer and to return all other shares tendered which were not accepted forpurchase or withdrawn. Upon completion of the tender offer, we had 2,284,490shares of common stock outstanding.

 

*Preferred Stock–*The Articles of Incorporation of the Company authorize the issuance of amaximum of 1,500,000 shares of preferred stock. The Articles of Incorporationvest our Board of Directors with authority to divide the class of preferredstock into separate series and to fix and determine the relative rights andpreferences of the shares of any such series so established to the full extentpermitted by the laws of the State of Colorado and the Articles ofIncorporation. As of June 30, 2007, we had no preferred stock issued oroutstanding.

 

*Common Stock Options*– In March 1993, we adopted a Stock Option Plan (the “Plan”). The Plan, asoriginally adopted, provided for the reservation of 750,000 shares of ourcommon stock for issuance pursuant to the Plan. Since its adoption, as a resultof various actions, the number of shares reserved for issuance under the Planincreased to 2,150,000 shares. The Plan expired by its terms in February 2003.

 

Under the Plan, we couldgrant to employees, directors and consultants of the Company, and anysubsidiary thereof, options to purchase common stock. Generally, grantedoptions vest over three years, were granted at fair market value on the date ofgrant, expire 10 years from that date, are non-transferable and cannot beexercised for a period of one year from the date of grant. The Plan, asrestated, is administered by the Compensation Committee, which, at itsdiscretion, determined the number of options granted and applicable exerciseperiods. Option agreements issued in accordance with the Plan prior to itsexpiration in February 2003 will generally remain in force until the earlier oftheir exercise, their expiration or the termination of an employmentrelationship with the Company.

 

We granted 400,000 options in 2003 at approximately85% of market price, and 304,000 options were granted in 2002 at approximately80% of market price, with weighted average fair values of $1.24 and $1.71 atthe grant dates, respectively. All other options were granted at exerciseprices that approximated the market prices on the dates of grant.

 

We followed theprovisions of SFAS 123**for allissuances of stock options to non-employees of the Company through June 30,2005. We followed the provisions of APB 25 for all grants of stock options toour employees prior to the expiration of the Plan by its terms in February2003. Generally, all stock options granted to our employees, pursuant to thePlan, were not compensatory. We adopted the modified prospective methodprescribed in SFAS 123R, effective July 1, 2005, and recognized $31,000 instock-option compensation expense during our quarter ended September 30, 2005,accordingly. During 2007, 2006 and 2005, we recognized $0, $31,000 and $63,000,respectively, in stock-based compensation expense.

 

At June 30, 2007, theCompany had outstanding options equal to 593,500 shares of common stock atprices 

 

F-20

----

 

ranging from $2.71 to$9.78 with expiration dates between November 2007 and January 2013. In 2007, nooptions were exercised and 85,000 options expired.

 

Activity under theCompany’s Plan is set forth below:

 
| ** **    | ** ** | **Employees**      | ** ** | **Non-Employees** | ** ** |
|---------------|------------|--------------------|------------|-------------------|------------|
| ** **    | ** ** | ** **         | ** ** | **Weighted**      | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **    | ** ** | ** **         | ** ** | **Average**       | ** ** | **Range of** | ** ** | ** ** | ** ** | **Average** | ** ** | **Range of** | ** ** |
| **Option**    | ** ** | **Number of** | ** ** | **Exercise**      | ** ** | **Exercise** | ** ** | **Number of** | ** ** | **Exercise** | ** ** | **Exercise** | ** ** |
| **Balances**  | ** ** | **Options**        | ** ** | **Price**         | ** ** | **Price** | ** ** | **Options** | ** ** | **Price** | ** ** | **Price** | ** ** |
|          |       |               |       |              |       |   |   |   |   |   |   |   |   |
| June 30, 2004 |       | 1,030,000          |       | $                 | 3.44       |   | $ 2.71 - $ 8.63 |   | 67,015 |   | $ | 7.11 |   | $ 3.00 - $ 9.78 |   |
|          |       |               |       |              |       |   |   |   |   |   |   |   |   |
| Exercised     |       | (120,000           | )          | $                 | 2.78       |   | $ 2.71 - $ 3.60 |   | — |   | — |   | — |   |
| Canceled      |       | (125,000           | )          | $                 | 3.29       |   | $ 3.00 - $ 3.60 |   | (13,515 | ) | $ | 7.50 |   | $ 7.50 |   |
| June 30, 2005 |       | 785,000            |       | $                 | 3.56       |   | $ 2.71 - $ 8.63 |   | 53,500 |   | $ | 6.95 |   | $ 3.00 - $ 9.78 |   |
|          |       |               |       |              |       |   |   |   |   |   |   |   |   |
| Exercised     |       | (125,000           | )          | $                 | 2.83       |   | $ 2.71 - $ 3.00 |   | — |   | — |   | — |   |
| Canceled      |       | (25,000            | )          | $                 | 3.60       |   | $ 3.60 |   | (10,000 | ) | $ | 9.25 |   | $ 9.25 |   |
| June 30, 2006 |       | 635,000            |       | $                 | 3.70       |   | $ 2.71 - $ 8.63 |   | 43,500 |   | $ | 6.42 |   | $ 3.00 - $ 9.78 |   |
|          |       |               |       |              |       |   |   |   |   |   |   |   |   |
| Exercised     |       | —             |       | —            |       | — |   | — |   | — |   | — |   |
| Canceled      |       | (75,000            | )          | $                 | 8.63       |   | $ 8.63 |   | (10,000 | ) | $ | 9.25 |   | $ 6.50 - $ 8.63 |   |
| June 30, 2007 |       | 560,000            |       | $                 | 3.04       |   | $ 2.71 - $ 3.60 |   | 33,500 |   | $ | 6.08 |   | $ 3.00 - $ 9.78 |   |

 

Options outstanding at June 30, 2007, vest as follows:

 
| ** **                  | ** ** | **Employees**      | ** ** | **Non-Employees** | ** ** |
|-----------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                  | ** ** | ** **         | ** ** | **Weighted**      | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                  | ** ** | ** **         | ** ** | **Average**       | ** ** | **Range of** | ** ** | ** ** | ** ** | **Average** | ** ** | **Range of** | ** ** |
| ** **                  | ** ** | **Number of** | ** ** | **Exercise**      | ** ** | **Exercise** | ** ** | **Number of** | ** ** | **Exercise** | ** ** | **Exercise** | ** ** |
| **Vesting**                 | ** ** | **Options**        | ** ** | **Price**         | ** ** | **Price** | ** ** | **Options** | ** ** | **Price** | ** ** | **Price** | ** ** |
|                        |       |               |       |              |       |   |   |   |   |   |   |   |   |
| Vested as of June  30, 2006 |       | 560,000            |       | $                 | 3.04       |   | $ 2.71 - $ 3.60 |   | 33,500 |   | $ | 6.08 |   | $ 3.00 - $ 9.78 |   |
|                        |       |               |       |              |       |   |   |   |   |   |   |   |   |
| Vested during 2007          |       | —             |       | —            |       | — |   | — |   | — |   | — |   |
|                        |       |               |       |              |       |   |   |   |   |   |   |   |   |
| Vested as of June  30, 2007 |       | 560,000            |       | $                 | 3.04       |   | $ 2.71 - $ 3.60 |   | 33,500 |   | $ | 6.08 |   | $ 3.00 - $ 9.78 |   |

 

F-21

----

 

If not exercised earlier,options outstanding as of June 30, 2007 will expire as follows:

 
| ** **       | ** ** | **Employees**      | ** ** | **Non-Employees** | ** ** |
|------------------|------------|--------------------|------------|-------------------|------------|
| ** **       | ** ** | ** **         | ** ** | **Weighted**      | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **       | ** ** | ** **         | ** ** | **Average**       | ** ** | **Range of** | ** ** | ** ** | ** ** | **Average** | ** ** | **Range of** | ** ** |
| ** **       | ** ** | **Number of** | ** ** | **Exercise**      | ** ** | **Exercise** | ** ** | **Number of** | ** ** | **Exercise** | ** ** | **Exercise** | ** ** |
| **Expiration**   | ** ** | **Options**        | ** ** | **Price**         | ** ** | **Price** | ** ** | **Options** | ** ** | **Price** | ** ** | **Price** | ** ** |
|             |       |               |       |              |       |   |   |   |   |   |   |   |   |
| Expiring during  |       |               |       |              |       |   |   |   |   |   |   |   |   |
|   2008 |       | —             |       | —            |       | — |   | 7,500 |   | $ | 8.63 |   | $ 8.63 |   |
|   2009 |       | —             |       | —            |       | — |   | 9,000 |   | $ | 9.78 |   | $ 9.78 |   |
|   2010 |       | 40,000             |       | $                 | 3.00       |   | $ 3.00 |   | — |   | — |   | — |   |
|   2011 |       | —             |       | —            |       | — |   | 10,000 |   | $ | 3.00 |   | $ 3.00 |   |
|   2012 |       | 295,000            |       | $                 | 3.31       |   | $ 3.00 - $ 3.60 |   | 7,000 |   | $ | 3.00 |   | $ 3.00 |   |
|   2013 |       | 225,000            |       | $                 | 2.71       |   | $ 2.71 |   | — |   | — |   | — |   |
|             |       |               |       |              |       |   |   |   |   |   |   |   |   |
| Totals           |       | 560,000            |       | $                 | 3.04       |   | $ 2.71 – $ 3.60 |   | 33,500 |   | $ | 6.08 |   | $ 3.00 - $ 9.78 |   |

 

11.                      **EARNINGS (LOSS) PER SHARE**:

 

In the reconciliation of basic to diluted earnings(loss) per share, there were no reconciling items affecting the numerator inany year presented. In 2007, 2006 and 2005, due to our net losses, all options,totaling 593,500, 678,500 and 838,500, respectively, were anti-dilutive andtherefore excluded from the earnings (loss) per share calculations.

 

12.                      **RETIREMENT PLAN**:

 

In January 1996, the Company adopted a definedcontribution savings plan (the “401(k) Plan”) to provide retirement income toour employees. The 401(k) Plan is funded by voluntary pre-tax salary deferralcontributions from employees and through matching contributions by the Company.Through December 31, 2006, the Company contributed $0.25 on the dollar foremployee deferrals of the first 5% of a participating employee’s annualcompensation. Effective January 1, 2007, the Company amended the 401(k) Plan toadopt a Safe Harbor matching contribution, since which the Company hascontributed dollar for dollar on employee deferrals of the first 3%, $0.50 onthe dollar for employee deferrals from 3% to 4% and $0.50 on the dollar foremployee deferrals from 4% to 5% of a participating employee’s annualcompensation, unless otherwise restricted by prevailing governmentalregulations. For 2007, 2006, and 2005, we contributed $44,000, $16,000 and$19,000, respectively, to the 401(k) Plan accounts of Company employees.

 

13.                        **SEGMENT INFORMATION**:

 

The consolidated Companyhas two operating segments: designing, purchasing or contracting for themanufacture of and wholesale sales of women’s and men’s (1) fashion golfapparel and outerwear and (2) branded golf apparel. Our SPORT HALEY® and BenHogan® fashion golf apparel and outerwear 

 

 

F-22

----

 

collections are marketedby Sport Haley in the premium and mid-priced markets through a network ofindependent wholesale sales representatives and distributors to golfprofessional shops, country clubs, resorts and exclusive department storeswithin the United States and on a limited basis by certain distributors withininternational markets. Our Top-Flite® men’s branded apparel is marketed byReserve Apparel to mass retailers and other big-box type high sales volumeretail stores. Ben Hogan® fashion apparel and Top-Flite® branded apparel aredistributed pursuant to a licensing agreement with Callaway.

 

In November 2005, Callawaygranted Sport Haley permission, with certain conditions, to allow ReserveApparel to distribute Top-Flite® branded apparel exclusively to Wal-MartStores, Inc. (“Wal-Mart”), within the United States. Reserve Apparel was formedto combine the perceived synergies between Sport Haley and Explorer Gear.Principal members of the management of Explorer Gear are also the principalmembers of management of Explorer Headgear, Inc., a Canadian company which hasdistributed Top-Flite® apparel to Wal-Mart in Canada for several years. OnSeptember 21, 2006, Sport Haley entered into an agreement with Explorer Gear topurchase its 49% membership interest in Reserve Apparel for a lump sum cashpayment of $375,000, since which time Reserve Apparel has been a wholly-ownedsubsidiary of Sport Haley.

 

Reserve Apparel distributed Top-Flite® apparelexclusively to Wal-Mart from March 2006 through August 2006, after which wewere notified that Wal-Mart had chosen to develop its own private label forgolf apparel and discontinue selling Top-Flite® apparel. We redesignedTop-Flite® branded apparel to include garments primarily comprised of a varietyof performance fabrics, and we have aggressively marketed our new Top-Flite®apparel line to a number of other mass retailers and certain big-box type highsales volume retail stores. We expect our marketing efforts will result in theestablishment of business relationships with one or more mass retailers andother big-box type high sales volume retail stores, and to date we have receivedone order for Top-Flite® apparel from such a retailer for a test in 50 of itsstores, which we expect we will ship beginning in approximately September 2007.Based upon our recent discussions, Callaway has given us verbal approval todistribute Top-Flite® apparel to this retailer, and we expect that Callawaywill also provide us with written approval in response to our request to expandour allowable channels of distribution to this and several other potentialcustomers for Top-Flite® apparel.

 

In fiscal 2007, in accordance with SFAS 142, weimpaired $270,000 in goodwill which had been recorded upon our purchase of theminority interest in Reserve Apparel from Explorer Gear in September 2006. AtJune 30, 2007, we determined that the goodwill was sufficiently impaired perthe guidance offered by SFAS 142 to warrant impairing the entire balance,because as of the filing date of our annual report on Form 10-K for the yearended June 30, 2007, we had been unable to locate a significant customer forour Top-Flite® branded apparel. At June 30, 2007, we also recorded a contingentliability and royalty expense of $178,000 with regard to minimum royalties duein accordance with our license agreement for Top-Flite® branded apparel, whichrequires minimum royalties of $188,000 for such apparel in calendar year 2007.Sales of Top-Flite® branded apparel were sufficient to meet the minimum royaltyrequirement under the license agreement for calendar 2006.

 

Condensed consolidated balance sheets information andcondensed consolidated statements of operations for each of our segments arepresented in the tables below. The first sales of Top-Flite® branded apparelwere made in March 2006. With regard to fiscal 2005, the comparison of ourfashion apparel and branded apparel segments has been omitted from theconsolidated balance sheets and statements of operations segment informationpresented below, since all of our operations related to branded apparel infiscal 2005.

 

F-23

----

 

*Consolidated Balance Sheets Segment Information asof June 30, 2007 and 2006:*

* *
| ** **                              | ** ** | **June 30, 2007** | ** ** | **June 30, 2006** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | **Fashion**                 | ** ** | **Branded**                 | ** ** | **Fashion** | ** ** | **Branded** | ** ** |
| ** **                              | ** ** | **Apparel**                 | ** ** | **Apparel**                 | ** ** | **Apparel** | ** ** | **Apparel** | ** ** |
|                                    |       |                        |       |                        |       |   |   |   |   |
| Cash and cash  equivalents              |       | $                           | 4,354,000  |                        | $          | 110,000 |   | $ | 6,590,000 |   | $ | 1,902,000 |   |
| Accounts  receivable, net of allowances |       | $                           | 2,713,000  |                        | $          | 353,000 |   | $ | 3,194,000 |   | $ | 756,000 |   |
| Inventories                             |       | $                           | 5,814,000  |                        | $          | — |   | $ | 4,440,000 |   | $ | 335,000 |   |
| Total assets                            |       | $                           | 13,482,000 |                        | $          | 467,000 |   | $ | 15,034,000 |   | $ | 2,993,000 |   |
| Total current  liabilities              |       | $                           | 2,152,000  |                        | $          | 237,000 |   | $ | 1,944,000 |   | $ | 1,012,000 |   |

 

*Statements of Operations Segment Information forthe Quarter and Year Ended June 30, 2007:*

* *
| ** **                                    | ** ** | **Quarter Ended**      | ** ** | **Year Ended**         | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **June 30, 2007** | ** ** | **June 30, 2007** | ** ** |
| ** **                                    | ** ** | **Fashion**                 | ** ** | **Branded**                 | ** ** | **Fashion** | ** ** | **Branded** | ** ** |
| ** **                                    | ** ** | **Apparel**                 | ** ** | **Apparel**                 | ** ** | **Apparel** | ** ** | **Apparel** | ** ** |
|                                          |       |                        |       |                        |       |   |   |   |   |
| Net sales                                     |       | $                           | 4,760,000  |                        | $          | — |   | $ | 17,708,000 |   | $ | 1,185,000 |   |
| Cost of goods  sold                           |       | $                           | 2,808,000  |                        | $          | — |   | $ | 11,008,000 |   | $ | 885,000 |   |
| Inventory  impairments                        |       | $                           | 186,000    |                        | $          | — |   | $ | 312,000 |   | $ | — |   |
| Gross profit                                  |       | $                           | 1,766,000  |                        | $          | — |   | $ | 6,388,000 |   | $ | 300,000 |   |
| Selling, general  and administrative expenses |       | $                           | 1,647,000  |                        | $          | 81,000 |   | $ | 6,705,000 |   | $ | 382,000 |   |
| Royalty expense                               |       | $                           | 181,000    |                        | $          | 178,000 |   | $ | 675,000 |   | $ | 242,000 |   |
| Goodwill  impairment                          |       | $                           | 270,000    |                        | $          | — |   | $ | 270,000 |   | $ | — |   |
| Income (loss)  from operations                |       | $                           | (332,000   | )                           | $          | (259,000 | ) | $ | (1,262,000 | ) | $ | (324,000 | ) |

 

*Statements of Operations Segment Information forthe Quarter and Year Ended June 30, 2006:*

* *
| ** **                                    | ** ** | **Quarter Ended**      | ** ** | **Year Ended**         | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **June 30, 2006** | ** ** | **June 30, 2006** | ** ** |
| ** **                                    | ** ** | **Fashion**                 | ** ** | **Branded**                 | ** ** | **Fashion** | ** ** | **Branded** | ** ** |
| ** **                                    | ** ** | **Apparel**                 | ** ** | **Apparel**                 | ** ** | **Apparel** | ** ** | **Apparel** | ** ** |
|                                          |       |                        |       |                        |       |   |   |   |   |
| Net sales                                     |       | $                           | 5,838,000  |                        | $          | 2,027,000 |   | $ | 18,489,000 |   | $ | 2,473,000 |   |
| Cost of goods  sold                           |       | $                           | 3,673,000  |                        | $          | 1,835,000 |   | $ | 11,378,000 |   | $ | 2,264,000 |   |
| Inventory  impairments                        |       | $                           | 28,000     |                        | $          | 95,000 |   | $ | 313,000 |   | $ | 95,000 |   |
| Gross profit                                  |       | $                           | 2,137,000  |                        | $          | 96,000 |   | $ | 6,798,000 |   | $ | 114,000 |   |
| Selling, general  and administrative Expenses |       | $                           | 1,638,000  |                        | $          | 331,000 |   | $ | 6,621,000 |   | $ | 469,000 |   |
| Royalty expense                               |       | $                           | 254,000    |                        | $          | 132,000 |   | $ | 768,000 |   | $ | 159,000 |   |
| Income (loss)  from operations                |       | $                           | 245,000    |                        | $          | (367,000 | ) | $ | (591,000 | ) | $ | (514,000 | ) |

 

 

F-24

----

 

13.                    **LEGAL PROCEEDINGS**:

 

In March 2007,Sport Haley and Reserve Apparel (the “Plaintiffs”) filed a lawsuit in theDistrict Court for the City and County of Denver in the State of Colorado. Thesuit alleges, among other things, that a former inventory broker to ReserveApparel, 1130746 Ontario Ltd., a Canadian corporation incorporated in theProvince of Ontario, Canada, d/b/a Originals Apparel Group Co., or OriginalsApparel Group, and Francis Tat-Mo Chan (the “Defendants”), knowingly,wrongfully and without authorization converted Plaintiff’s funds. Among otherthings, the Plaintiffs alleged that the Defendants misapplied an inventorydeposit of $291,000 paid to the Defendants in March 2006 by Sport Haley, whichthe Defendants used to offset certain amounts purportedly owed to theDefendants by Explorer Headgear, Inc., and that the Defendants failed to return$177,000 which was overpaid by Sport Haley as of July 2006. The Plaintiffs havealleged claims against the Defendants for conversion and violation of theColorado civil theft statute as well as for unjust enrichment. Plaintiffs seekrepayment of the $291,000 and $177,000 amounts and other relief. Based uponinformation that is currently available, we cannot determine whether thedecision or settlement of this lawsuit will materially affect our financialposition or the results of our operations.

 

 

14.                    **SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)**:

 

The following quarterly information is unaudited. Inthe opinion of management, all material adjustments necessary to present fairlythe results of operations of the Company, for the periods presented, have beenmade. All such adjustments were of a normal, recurring nature.

 
| ** **                         | ** ** | **Sep 30,** | ** ** | **Dec 31,** | ** ** | **Mar 31,** | ** ** | **Jun 30,** | ** ** |
|------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| **2007 Quarter Ended**   | ** ** | **2006**         | ** ** | **2006**         | ** ** | **2007**         | ** ** | **2007**         | ** ** |
|                               |       |             |       |             |       |             |       |             |       |
| Net sales                          |       | $                | 4,673,000  |             | $          | 4,190,000        |       | $                | 5,273,000  |   | $ | 4,757,000 |   |
| Total cost of  goods sold          |       | 3,171,000        |       | 2,635,000        |       | 3,408,000        |       | 2,991,000        |       |
| Gross profit                       |       | $                | 1,502,000  |             | $          | 1,555,000        |       | $                | 1,865,000  |   | $ | 1,766,000 |   |
| Total other  operating costs       |       | $                | 1,931,000  |             | $          | 1,843,000        |       | $                | 2,143,000  |   | $ | 2,087,000 |   |
| Net income  (loss)                 |       | $                | (397,000   | )                | $          | (221,000         | )          | $                | (218,000   | ) | $ | (465,000 | ) |
| Basic earnings  (loss) per share   |       | $                | (0.14      | )                | $          | (0.08            | )          | $                | (0.09      | ) | $ | (0.19 | ) |
| Diluted earnings  (loss) per share |       | $                | (0.14      | )                | $          | (0.08            | )          | $                | (0.09      | ) | $ | (0.19 | ) |

 
| ** **                         | ** ** | **Sep 30,** | ** ** | **Dec 31,** | ** ** | **Mar 31,** | ** ** | **Jun 30,** | ** ** |
|------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| **2006 Quarter Ended**   | ** ** | **2005**         | ** ** | **2005**         | ** ** | **2006**         | ** ** | **2006**         | ** ** |
|                               |       |             |       |             |       |             |       |             |       |
| Net sales                          |       | $                | 4,011,000  |             | $          | 4,429,000        |       | $                | 4,656,000  |   | $ | 7,866,000 |   |
| Total cost of  goods sold          |       | 2,706,000        |       | 2,792,000        |       | 2,919,000        |       | 5,633,000        |       |
| Gross profit                       |       | $                | 1,305,000  |             | $          | 1,637,000        |       | $                | 1,737,000  |   | $ | 2,233,000 |   |
| Total other  operating costs       |       | $                | 1,887,000  |             | $          | 1,613,000        |       | $                | 2,162,000  |   | $ | 2,355,000 |   |
| Net income  (loss)                 |       | $                | (528,000   | )                | $          | 99,000           |       | $                | (190,000   | ) | $ | 204,000 |   |
| Basic earnings  (loss) per share   |       | $                | (0.20      | )                | $          | 0.04             |       | $                | (0.07      | ) | $ | 0.08 |   |
| Diluted earnings  (loss) per share |       | $                | (0.20      | )                | $          | 0.03             |       | $                | (0.07      | ) | $ | 0.07 |   |

** **

 

F-25

----

 

**SCHEDULEII**

 

**SPORT-HALEY, INC.**

**VALUATION AND QUALIFYING ACCOUNTS**

 

** **
| **COLUMN A**                         | ** ** | **COLUMN B**     | ** ** | **COLUMN C**        | ** ** | **COLUMN D**   | ** ** | **COLUMN E** | ** ** |
|-------------------------------------------|------------|-----------------------|------------|--------------------------|------------|---------------------|------------|-------------------|------------|
| ** **                                | ** ** | ** **            | ** ** | **ADDITIONS**            | ** ** | ** **          | ** ** | ** **        | ** ** |
| ** **                                | ** ** | ** **            | ** ** | **Charged to**      | ** ** | ** **          | ** ** | ** **        | ** ** | ** ** | ** ** |
| ** **                                | ** ** | **Balance at**   | ** ** | **Revenues, Costs** | ** ** | **Charged to** | ** ** | ** **        | ** ** | **Balance** | ** ** |
| ** **                                | ** ** | **Beginning of** | ** ** | **and**                  | ** ** | **Other**           | ** ** | ** **        | ** ** | **at End** | ** ** |
| ** **                                | ** ** | **Period**            | ** ** | **Expenses**             | ** ** | **Accounts**        | ** ** | **Deductions**    | ** ** | **of  Period** | ** ** |
|                                      |       |                  |       |                     | ** ** | ** **          |       |              |       |   |   |
| **ALLOWANCE  FOR DOUBTFUL ACCOUNTS**      |       |                  |       |                     |       |                |       |              |       |   |   |
|                                      |       |                  |       |                     |       |                |       |              |       |   |   |
| June 30,                                  |       |                  |       |                     |       |                |       |              |       |   |   |
| 2005                                      |       | $                     | 454,000    |                     | $          | 180,000             |       | $                 | —     |   | $ | (257,000 | )(1) | $ | 377,000 |   |
| 2006                                      |       | $                     | 377,000    |                     | $          | 194,000             |       | $                 | —     |   | $ | (280,000 | )(1) | $ | 291,000 |   |
| 2007                                      |       | $                     | 291,000    |                     | $          | 26,000              |       | $                 | —     |   | $ | (82,000 | )(1) | $ | 235,000 |   |
|                                      |       |                  |       |                     |       |                |       |              |       |   |   |
| **ALLOWANCE  FOR SALES RETURNS**          |       |                  |       |                     |       |                |       |              |       |   |   |
|                                      |       |                  |       |                     |       |                |       |              |       |   |   |
| June 30,                                  |       |                  |       |                     |       |                |       |              |       |   |   |
| 2005                                      |       | $                     | 342,000    |                     | $          | 2,112,000           |       | $                 | —     |   | $ | (2,168,000 | )(2) | $ | 286,000 |   |
| 2006                                      |       | $                     | 286,000    |                     | $          | 573,000             |       | $                 | —     |   | $ | (704,000 | )(2) | $ | 155,000 |   |
| 2007                                      |       | $                     | 155,000    |                     | $          | 581,000             |       | $                 | —     |   | $ | (597,000 | )(2) | $ | 139,000 |   |
|                                      |       |                  |       |                     |       |                |       |              |       |   |   |
| **ALLOWANCE  FOR SAMPLE GARMENT RETURNS** |       |                  |       |                     |       |                |       |              |       |   |   |
|                                      |       |                  |       |                     |       |                |       |              |       |   |   |
| June  30,                                 |       |                  |       |                     |       |                |       |              |       |   |   |
| 2005                                      |       | $                     | 332,000    |                     | $          | 322,000             |       | $                 | —     |   | $ | (626,000 | )(2) | $ | 28,000 |   |
| 2006                                      |       | $                     | 28,000     |                     | $          | —              |       | $                 | —     |   | $ | (28,000 | )(2) | $ | — |   |
|                                      |       |                  |       |                     |       |                |       |              |       |   |   |
| **ALLOWANCE  FOR INVENTORY OBSOLESCENCE** |       |                  |       |                     |       |                |       |              |       |   |   |
|                                      |       |                  |       |                     |       |                |       |              |       |   |   |
| June 30,                                  |       |                  |       |                     |       |                |       |              |       |   |   |
| 2005                                      |       | $                     | 947,000    |                     | $          | 1,403,000           |       | $                 | —     |   | $ | (1,721,000 | )(3) | $ | 629,000 |   |
| 2006                                      |       | $                     | 629,000    |                     | $          | 313,000             |       | $                 | —     |   | $ | (761,000 | )(3) | $ | 181,000 |   |
| 2007                                      |       | $                     | 181,000    |                     | $          | 312,000             |       | $                 | —     |   | $ | (257,000 | )(3) | $ | 236,000 |   |

 

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(1) Written-off uncollectible accounts, net of recoveries of previouslywritten-off uncollectible accounts.

(2) Gross sales returns.

(3) Changes in allowance relating to sales and dispositions ofinventories previously written down.

 

F-26

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