##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 (NO FEE REQUIRED)
 For the transition period from  to
 Commission File Number: 000-20201
 HAMPSHIRE GROUP, LIMITED
 (Exact name of registrant as specified in its charter)
 Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    06-0967107
(I.R.S. Employer
Identification No.)1924 Pearman Dairy Road Anderson, South Carolina
(Address of principal executive offices)
    
    29625-1303
(Zip Code)
 (864) 231-1200
Registrants telephone number, including area code
 o þ
  o þ o
 o þ




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##### Table of Contents



EXPLANATORY NOTE
   i




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##### 



HAMPSHIRE GROUP, LIMITED
 QUARTERLY REPORT ON FORM 10-Q
 For the Quarterly Period Ended September 30, 2006
 SAFE HARBOR STATEMENT
    
    iiiPART I. FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27PART II. OTHER INFORMATION
    
    
    29Item 1. Legal Proceedings
    
    
    29Item 1A. Risk Factors
    
    
    29Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    29Item 3. Defaults Upon Senior Securities
    
    
    29Item 4. Submission of Matters to a Vote of Security Holders
    
    
    29Item 5. Other Information
    
    
    29Item 6. Exhibits
    
    
    30Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   ii




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SAFE HARBOR STATEMENT
 UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
  Risk
Factors
  
  iii




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PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 Hampshire Group, Limited and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
 (In thousands, except par value)
    
    September 30, 2006
    
    
    December 31, 2005Current assets:Cash and cash equivalents
    
    $
    428
    
    
    $
    65,791Short-term investments
    
    
    
    
    
    
    10,054Accounts receivable, net
    
    
    83,457
    
    
    
    27,997Other receivables
    
    
    320
    
    
    
    864Inventories, net
    
    
    56,251
    
    
    
    13,960Deferred tax assets
    
    
    9,643
    
    
    
    9,468Other current assets
    
    
    1,524
    
    
    
    1,121Total current assets
    
    
    151,623
    
    
    
    129,255Fixed assets, net
    
    
    2,007
    
    
    
    2,056Goodwill
    
    
    8,392
    
    
    
    8,392Deferred compensation funds invested in trading securities
    
    
    3,019
    
    
    
    2,243Other assets
    
    
    4,956
    
    
    
    568Total assets
    
    $
    169,997
    
    
    $
    142,514Current liabilities:Current portion of long-term debt
    
    $
    46
    
    
    $
    46Borrowings under credit facility
    
    
    10,400
    
    
    
    Accounts payable
    
    
    23,332
    
    
    
    9,337Accrued expenses and other liabilities
    
    
    28,656
    
    
    
    27,142Total current liabilities
    
    
    62,434
    
    
    
    36,525Long-term debt less current portion
    
    
    27
    
    
    
    61Deferred tax liabilities
    
    
    
    
    
    
    198Deferred compensation
    
    
    3,637
    
    
    
    2,765Other long term liabilities
    
    
    190
    
    
    
    Total liabilities
    
    
    66,288
    
    
    
    39,549Commitments and contingencies (Note 7)
    
    
    
    
    
    
    Stockholders equity:Preferred stock, $0.10 par value, 1,000,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock, $0.10 par value, 10,000,000 shares authorized; 8,243,784 shares
issued at September 30, 2006 and December 31, 2005
    
    
    824
    
    
    
    824Additional paid-in capital
    
    
    35,038
    
    
    
    34,824Retained earnings
    
    
    76,508
    
    
    
    75,481Treasury stock, 394,379 shares and 370,679 shares at cost at September 30,
2006 and December 31, 2005, respectively
    
    
    (8,661
    )
    
    
    (8,164
    )Total stockholders equity
    
    
    103,709
    
    
    
    102,965Total liabilities and stockholders equity
    
    $
    169,997
    
    
    $
    142,514
   1




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Hampshire Group, Limited and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
 For the Three Months Ended
    
    
    For the Nine Months Ended(Restated,
    
    
    
    
    
    
    (Restated,see Note 2)
    
    
    
    
    
    
    see Note 2)September 30,
    
    
    October 1,
    
    
    September 30,
    
    
    October 1,(In thousands, except per share data)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    112,622
    
    
    $
    123,592
    
    
    $
    229,551
    
    
    $
    220,305Cost of goods sold
    
    
    82,610
    
    
    
    93,492
    
    
    
    172,607
    
    
    
    167,254Gross profit
    
    
    30,012
    
    
    
    30,100
    
    
    
    56,944
    
    
    
    53,051Selling, general, and administrative expenses
    
    
    21,124
    
    
    
    18,286
    
    
    
    55,425
    
    
    
    45,643Investigation, restatement, and related expenses
    
    
    4,046
    
    
    
    
    
    
    
    4,467
    
    
    
    Recovery of improper payments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,013
    )Income (loss) from operations
    
    
    4,842
    
    
    
    11,814
    
    
    
    (2,948
    )
    
    
    13,421Other income (expense):Interest income
    
    
    80
    
    
    
    153
    
    
    
    1,110
    
    
    
    1,102Interest expense
    
    
    (74
    )
    
    
    (106
    )
    
    
    (101
    )
    
    
    (365
    )Other, net
    
    
    (5
    )
    
    
    53
    
    
    
    177
    
    
    
    81Income (loss) before income taxes and extraordinary item
    
    
    4,843
    
    
    
    11,914
    
    
    
    (1,762
    )
    
    
    14,239Provision (benefit) for income taxes
    
    
    2,927
    
    
    
    5,653
    
    
    
    (1,065
    )
    
    
    6,620Income (loss) before extraordinary item
    
    
    1,916
    
    
    
    6,261
    
    
    
    (697
    )
    
    
    7,619Extraordinary item  gain on acquisition
    
    
    
    
    
    
    
    
    
    
    1,800
    
    
    
    Net income (loss)
    
    $
    1,916
    
    
    $
    6,261
    
    
    $
    1,103
    
    
    $
    7,619Income (loss) per share before extraordinary item:Basic
    
    $
    0.24
    
    
    $
    0.77
    
    
    $
    (0.09
    )
    
    $
    0.93Diluted
    
    $
    0.24
    
    
    $
    0.77
    
    
    $
    (0.09
    )
    
    $
    0.93Income per share from extraordinary item:Basic
    
    $
    
    
    
    $
    
    
    
    $
    0.23
    
    
    $
    Diluted
    
    $
    
    
    
    $
    
    
    
    $
    0.23
    
    
    $
    Net income (loss) per share:Basic
    
    $
    0.24
    
    
    $
    0.77
    
    
    $
    0.14
    
    
    $
    0.93Diluted
    
    $
    0.24
    
    
    $
    0.77
    
    
    $
    0.14
    
    
    $
    0.93Weighted average number of shares outstanding: (1)Basic weighted average number of common shares outstanding
    
    
    7,849
    
    
    
    8,155
    
    
    
    7,857
    
    
    
    8,180Diluted weighted average number of common shares
outstanding
    
    
    7,856
    
    
    
    8,166
    
    
    
    7,864
    
    
    
    8,196
 (1)
    
    Weighted average number of shares outstanding and net income (loss) per share reflects the two-for-one stock split effective June 28, 2005.
   2




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Hampshire Group, Limited and Subsidiaries
Unaudited Condensed Consolidated Statement of Stockholders Equity
 Additional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Treasury Stock
    
    
    Stockholders(In thousands, except shares)
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Shares
    
    
    Amount
    
    
    EquityBalance at December 31, 2005
    
    
    8,243,784
    
    
    
    824
    
    
    
    34,824
    
    
    
    75,481
    
    
    
    370,679
    
    
    
    (8,164
    )
    
    
    102,965Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,103
    
    
    
    
    
    
    
    
    
    
    
    1,103Purchases of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,100
    
    
    
    (593
    )
    
    
    (593
    )Shares issued under the Company stock plans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76
    )
    
    
    (4,400
    )
    
    
    96
    
    
    
    20Tax benefit of options exercised, as restated
    
    
    
    
    
    
    
    
    
    
    214
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    214Balance at September 30, 2006
    
    
    8,243,784
    
    
    $
    824
    
    
    $
    35,038
    
    
    $
    76,508
    
    
    
    394,379
    
    
    $
    (8,661
    )
    
    $
    103,709
   3




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##### Table of Contents



Hampshire Group, Limited and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
 For the Nine Months Ended(Restated,see Note 2)(In thousands)
    
    September 30, 2006
    
    
    October 1, 2005Cash flows from operating activities:Net (loss) income
    
    $
    1,103
    
    
    $
    7,619Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:Extraordinary gain on acquisition
    
    
    (1,800
    )
    
    
    Depreciation and amortization
    
    
    1,042
    
    
    
    693Loss on disposition of fixed assets
    
    
    10
    
    
    
    Deferred income tax provision, net
    
    
    633
    
    
    
    441Deferred compensation expense, net
    
    
    753
    
    
    
    714Tax benefit of stock options exercised
    
    
    214
    
    
    
    317Changes in operating assets and liabilities:Receivables, net
    
    
    (42,404
    )
    
    
    (54,887
    )Inventories, net
    
    
    (31,699
    )
    
    
    (37,789
    )Other assets
    
    
    (1,824
    )
    
    
    (1,079
    )Current liabilities
    
    
    5,475
    
    
    
    15,204Net cash provided by (used in) continuing operating
activities
    
    
    (68,497
    )
    
    
    (68,767
    )Cash flows from investing activities:Proceeds from the sale of short-term investments
    
    
    10,395
    
    
    
    76,867Purchases of short-term investments
    
    
    (341
    )
    
    
    (27,427
    )Proceeds from sales of securities for deferred compensation
    
    
    (657
    )
    
    
    (1,800
    )Cash used for business acquisitions, net of cash acquired
    
    
    (2,768
    )
    
    
    Capital expenditures
    
    
    (535
    )
    
    
    (1,185
    )Proceeds on the disposition of fixed assets
    
    
    22
    
    
    
    Net cash provided by (used in) continuing investing
activities
    
    
    6,116
    
    
    
    46,455Cash flows from financing activities:Proceeds from credit facility
    
    
    20,800
    
    
    
    Repayments of credit facility
    
    
    (10,400
    )
    
    
    Advances repaid to factor
    
    
    (12,775
    )
    
    
    Purchase of treasury stock, net
    
    
    (593
    )
    
    
    (985
    )Repayment of long-term debt
    
    
    (34
    )
    
    
    (2,858
    )Proceeds from issuance of stock under the Company stock plans
    
    
    20
    
    
    
    439Net cash provided by (used in) continuing financing
activities
    
    
    (2,982
    )
    
    
    (3,404
    )Net increase (decrease) in cash and cash equivalents
    
    
    (65,363
    )
    
    
    (25,716
    )Cash and cash equivalents at beginning of period
    
    
    65,791
    
    
    
    31,214Cash and cash equivalents at end of period
    
    $
    428
    
    
    $
    5,498
   4




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Note 1  Basis of Presentation
   Stock Options
 
 Recent Accounting Standards
 Restatement of Previously Issued Consolidated
Financial Statements
   5




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Note 2  Restatement of Previously Issued Financial Statements
        6




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Restatement Adjustments for the Quarter and Nine Months Ended October 1, 2005
 Tax (non-income) Liabilities
  Expense Accruals
  Income Taxes and Net Income
   7




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Unaudited Condensed Consolidated Statements of Operations Adjustments
  As Previously
    
    
    Restatement(In thousands, except per share data)
    
    Reported
    
    
    Adjustments
    
    
    RestatedNet sales
    
    $
    123,592
    
    
    $
    
    
    
    $
    123,592Cost of goods sold (a)
    
    
    93,659
    
    
    
    (167
    )
    
    
    93,492Gross profit
    
    
    29,933
    
    
    
    167
    
    
    
    30,100Selling, general, and administrative expenses (a)
    
    
    18,031
    
    
    
    255
    
    
    
    18,286Recovery of improper payments
    
    
    
    
    
    
    
    
    
    
    Income from operations
    
    
    11,902
    
    
    
    (88
    )
    
    
    11,814Other income (expense):Interest income
    
    
    153
    
    
    
    
    
    
    
    153Interest expense
    
    
    (106
    )
    
    
    
    
    
    
    (106
    )Other, net
    
    
    53
    
    
    
    
    
    
    
    53Non-recurring income
    
    
    
    
    
    
    
    
    
    
    Income before income taxes
    
    
    12,002
    
    
    
    (88
    )
    
    
    11,914Provision for income taxes
    
    
    5,075
    
    
    
    578
    
    
    
    5,653Net income
    
    $
    6,927
    
    
    $
    (666
    )
    
    $
    6,261Net income per share:Basic
    
    $
    0.85
    
    
    $
    (0.08
    )
    
    $
    0.77Diluted
    
    $
    0.85
    
    
    $
    (0.08
    )
    
    $
    0.77Weighted average number of shares outstanding:Basic weighted average number of common shares outstanding
    
    
    8,155
    
    
    
    
    
    
    
    8,155Diluted weighted average number of common shares outstanding
(b)
    
    
    8,186
    
    
    
    (20
    )
    
    
    8,166
  (a)
    
    Vendor rebates for approximately $167 on accessories were reclassified from selling, general, and administrative expenses to
cost of goods sold.(b)
    
    Approximately 39,100 options that expired in May of 2004 were improperly included as part of the diluted weighted average number
of common shares outstanding.
  8




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As Previously
    
    
    Restatement(In thousands except per share data)
    
    Reported
    
    
    Adjustments
    
    
    RestatedNet sales
    
    $
    220,305
    
    
    $
    
    
    
    $
    220,305Cost of goods sold (a)
    
    
    167,433
    
    
    
    (179
    )
    
    
    167,254Gross profit
    
    
    52,872
    
    
    
    179
    
    
    
    53,051Selling, general, and administrative
expenses (b)
    
    
    43,403
    
    
    
    2,240
    
    
    
    45,643Recovery of improper payments (b)
    
    
    
    
    
    
    (6,013
    )
    
    
    (6,013
    )Income from operations
    
    
    9,469
    
    
    
    3,952
    
    
    
    13,421Other income (expense):Interest income
    
    
    1,102
    
    
    
    
    
    
    
    1,102Interest expense
    
    
    (365
    )
    
    
    
    
    
    
    (365
    )Other, net
    
    
    81
    
    
    
    
    
    
    
    81Non-recurring income (b)
    
    
    4,622
    
    
    
    (4,622
    )
    
    
    Income before income taxes
    
    
    14,909
    
    
    
    (670
    )
    
    
    14,239Provision for income taxes
    
    
    6,250
    
    
    
    370
    
    
    
    6,620Net income
    
    $
    8,659
    
    
    $
    (1,040
    )
    
    $
    7,619Net income per share:Basic
    
    $
    1.06
    
    
    $
    (0.13
    )
    
    $
    0.93Diluted
    
    $
    1.05
    
    
    $
    (0.12
    )
    
    $
    0.93Weighted average number of shares
outstanding:Basic weighted average number of common
shares outstanding
    
    
    8,180
    
    
    
    
    
    
    
    8,180Diluted weighted average number of
common shares outstanding (c)
    
    
    8,216
    
    
    
    (20
    )
    
    
    8,196
  (a)
    
    Vendor rebates for approximately $179 on accessories were reclassified from selling, general, and
administrative expenses to cost of goods sold.(b)
    
    A settlement received of $6,013 net of expenses incurred was reclassified as recovery of improper payments
from non-recurring income of $4,622 and selling, general, and administrative expenses of $1,391.(c)
    
    Approximately 39,100 options that expired in May of 2004 were improperly included as part of the diluted
weighted average number of common shares outstanding.
  9




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Unaudited Condensed Consolidated Statements of Cash Flows Adjustments
  As Previously
    
    
    Restatement(In thousands)
    
    Reported
    
    
    Adjustments
    
    
    RestatedCash flows from operating activities:Net income
    
    $
    8,659
    
    
    $
    (1,040
    )
    
    $
    7,619Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    693
    
    
    
    
    
    
    
    693Deferred income tax benefit (a)
    
    
    
    
    
    
    441
    
    
    
    441Deferred compensation expense, net
    
    
    1,041
    
    
    
    (327
    )
    
    
    714Tax benefit of stock options exercised (a)
    
    
    
    
    
    
    317
    
    
    
    317Changes in operating assets and liabilities:Receivables, net
    
    
    (54,887
    )
    
    
    
    
    
    
    (54,887
    )Inventories, net
    
    
    (37,934
    )
    
    
    145
    
    
    
    (37,789
    )Other assets (a)
    
    
    701
    
    
    
    (1,780
    )
    
    
    (1,079
    )Current liabilities (a)
    
    
    12,956
    
    
    
    2,248
    
    
    
    15,204Net cash provided by (used in) operating activities
    
    
    (68,771
    )
    
    
    4
    
    
    
    (68,767
    )Cash flows from investing activities:Proceeds from the sale of short-term investments
    
    
    76,867
    
    
    
    
    
    
    
    76,867Purchases of short-term investments
    
    
    (27,427
    )
    
    
    
    
    
    
    (27,427
    )Purchase of securities in deferred compensation fund (a)
    
    
    (1,796
    )
    
    
    (4
    )
    
    
    (1,800
    )Capital expenditures
    
    
    (1,185
    )
    
    
    
    
    
    
    (1,185
    )Net cash provided by (used in) investing activities
    
    
    46,459
    
    
    
    (4
    )
    
    
    46,455Cash flows from financing activities:Proceeds from line of credit
    
    
    
    
    
    
    
    
    
    
    Repayment of line of credit
    
    
    
    
    
    
    
    
    
    
    Repayment of long-term debt
    
    
    (985
    )
    
    
    
    
    
    
    (985
    )Purchase of treasury stock, net
    
    
    (2,858
    )
    
    
    
    
    
    
    (2,858
    )Proceeds from issuance of treasury stock
    
    
    439
    
    
    
    
    
    
    
    439Net cash provided by (used in) financing activities
    
    
    (3,404
    )
    
    
    
    
    
    
    (3,404
    )Net increase (decrease) in cash and cash equivalents
    
    
    (25,716
    )
    
    
    
    
    
    
    (25,716
    )Cash and cash equivalents at beginning of period
    
    
    31,214
    
    
    
    
    
    
    
    31,214Cash and cash equivalents at end of period
    
    $
    5,498
    
    
    $
    
    
    
    $
    5,498
  (a)
    
    Reclassifications made for items previously shown on a net basis.
  10




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##### Table of Contents



Note 3  Inventories
  (In thousands)
    
    September 30, 2006
    
    
    December 31, 2005Finished goods
    
    $
    64,281
    
    
    $
    17,347Work-in-process
    
    
    469
    
    
    
    Raw materials and supplies
    
    
    1,102
    
    
    
    70Total cost
    
    
    65,852
    
    
    
    17,417Less: reserves
    
    
    (9,601
    )
    
    
    (3,457
    )Inventory, net
    
    $
    56,251
    
    
    $
    13,960
 Note 4  Revolving Credit Facility
 Subsequent Events
  Subsequent Events
  11




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Note 5  Earnings (Loss) Per Share
  Numerator
    
    
    Denominator
    
    
    Per Share(In thousands, except per share data)
    
    Income (Loss)
    
    
    Shares
    
    
    AmountQuarter ended September 30, 2006:Basic net income
    
    $
    1,916
    
    
    
    7,849
    
    
    $
    0.24Effect of dilutive securities:Stock options
    
    
    
    
    
    
    7
    
    
    
    Diluted net income
    
    $
    1,916
    
    
    
    7,856
    
    
    $
    0.24Quarter ended October 1, 2005:Basic net income
    
    $
    6,261
    
    
    
    8,155
    
    
    $
    0.77Effect of dilutive securities:Stock options
    
    
    
    
    
    
    11
    
    
    
    Diluted net income
    
    $
    6,261
    
    
    
    8,166
    
    
    $
    0.77Nine months ended September 30, 2006:Net loss before extraordinary item
    
    $
    (697
    )
    
    
    7,857
    
    
    $
    (0.09
    )Extraordinary item  gain on acquisition
    
    
    1,800
    
    
    
    
    
    
    
    0.23Basic net income
    
    $
    1,103
    
    
    
    7,857
    
    
    $
    0.14Effect of dilutive securities:Stock options
    
    
    
    
    
    
    7
    
    
    
    Diluted net income
    
    $
    1,103
    
    
    
    7,864
    
    
    $
    0.14Nine months ended October 1, 2005:Basic net income
    
    $
    7,619
    
    
    
    8,180
    
    
    $
    0.93Effect of dilutive securities:Stock options
    
    
    
    
    
    
    16
    
    
    
    Diluted net income
    
    $
    7,619
    
    
    
    8,196
    
    
    $
    0.93
 Note 6  Stock Split and Buyback
    12




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Note 7
 Commitments and Contingencies
    Note 8  Acquisitions
 Shane Hunter
  (In thousands)
    
    January 5, 2006AssetsCash and cash equivalents
    
    $
    1Accounts receivable, net
    
    
    10,955Inventories, net
    
    
    9,700Other current assets
    
    
    802Fixed assets
    
    
    123Identified intangibles(1)
    
    
    2,148Total assets acquired
    
    $
    23,729LiabilitiesAdvances due factor
    
    $
    12,775Accounts payable
    
    
    8,096Accrued expenses and other liabilities
    
    
    867Total liabilities assumed
    
    $
    21,738Purchase price (net assets acquired)
    
    $
    1,991
 (1)
    
    The identified intangibles relate primarily to
non-competition agreements, which will be amortized over six
years.
  13




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##### Table of Contents



Marisa Christina
  (In thousands)
    
    May 20, 2006AssetsCash and cash equivalents
    
    $
    4,056Accounts receivable, net
    
    
    1,557Inventories, net
    
    
    892Other current assets
    
    
    384Deferred tax assets
    
    
    1,006Total assets acquired
    
    $
    7,895LiabilitiesAccounts payable
    
    
    394Accrued expenses and other liabilities
    
    
    867Total liabilities assumed
    
    $
    1,261Net assets acquired
    
    $
    6,634Purchase price
    
    
    4,834Extraordinary gain on acquisition
    
    $
    1,800
  Note 9  Subsequent Events
 Audit Committee Investigation and Related Matters
    14




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Report For Period Ended
    
    Extended Delivery DateApril 1, 2006 (Restated)
    
    August 15, 2007July 1, 2006
    
    August 15, 2007September 30, 2006
    
    August 15, 2007December 31, 2006
    
    August 31, 2007March 31, 2007
    
    September 28, 2007June 30, 2007
    
    October 31, 2007
   Other Matters
    15




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 The following discussion contains statements that are forward-looking. These statements are based
on expectations and assumptions that are subject to risks and uncertainties. Actual results could
differ materially because of factors discussed elsewhere in this report. This discussion should be
read in conjunction with the discussion of forward-looking statements, the financial statements,
and the related notes and the other statistical information included in this report.
 DISCUSSION OF FORWARD-LOOKING STATEMENTS
 Risk Factors
 
    
    Decreases in business from or the loss of any one of our key customers;
    
    Financial instability experienced by our customers;
    
    Loss or inability to renew certain licenses;
    
    Change in consumer preferences and fashion trends, which could negatively affect
acceptance of our products by retails and consumers;
    
    Use of foreign suppliers for raw materials and manufacture of our products;
    
    Failure of our manufacturers to use acceptable ethical business practices;
    
    Failure to deliver quality products in a timely manner;
    
    Problems with our distribution system and our ability to deliver products;
    
    Labor disruptions at port or our suppliers or manufacturers or distribution facilities;
    
    Chargebacks and margin support payments;
    
    Failure, inadequacy, interruption or security lapse of our information technology;
    
    Failure to compete successfully in a highly competitive and fragmented industry;
    
    Challenges integrating the David Brooks, Shane Hunter, and Marisa Christina
businesses or any other businesses we may acquire;
    
    Unanticipated expenses beyond the amount reserved on our balance sheet or
unanticipated cash payments related to the ultimate resolution of income and other
possible tax liabilities;
    
    Ownership of a significant portion of our common stock by Mr. Kuttner could
determine the outcome of matters presented to stockholders for approval;
    
    Future defaults under our credit facility;
    
    Loss of certain key personnel which could negatively impact our ability to manage our business;
    
    Material weaknesses in our internal control over financial reporting;
    
    Investigations by the SEC and the United States Attorney of the Southern District of
New York (U.S. Attorneys Office);
    
    Potential future restatements of our prior financial statements; and
    
    The Companys dispute with Mr. Kuttner.
  17




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RESTATEMENTS AND RELATED MATTERS
          Restatement Adjustments for the Quarter and Nine Months Ended October 1, 2005
 Tax (non-income) Liabilities
  18




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Expense Accruals
  Income Taxes and Net Income
  Legal and Compliance Matters
    Delisting
   19




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OTHER MATTERS
 Indemnification Obligations
   Acquisitions
    Revolving Credit Facility Extension
   20




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Related Party Transaction
  New Facility Lease and Related Credit Facility Amendment
   (in thousands)
    
    Total
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    ThereafterFacility lease
    
    $
    59,815
    
    
    $
    2,904
    
    
    $
    3,485
    
    
    $
    3,645
    
    
    $
    3,677
    
    
    $
    3,677
    
    
    $
    42,427
   Rescheduled Credit Facility Reporting Requirements
  Report For Period Ended
    
    Extended Delivery DateApril 1, 2006 (Restated)
    
    August 15, 2007July 1, 2006
    
    August 15, 2007September 30, 2006
    
    August 15, 2007December 31, 2006
    
    August 31, 2007March 31, 2007
    
    September 28, 2007June 30, 2007
    
    October 31, 2007
   21




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OVERVIEW
        RESULTS OF OPERATIONS
   22




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Three Months Ended September 30, 2006 and October 1, 2005
 Net Sales
  Gross Profit
  Selling, General, and Administrative Expenses
  Investigation, Restatement, and Related Expenses
  Income Taxes
  Nine Months Ended September 30, 2006 and October 1, 2005
 Net Sales
  Gross Profit
   23




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Selling, General, and Administrative Expenses
  Investigation, Restatement, and Related Expenses
  Recovery of Improper Payments
  Income Taxes
  Extraordinary Income
 Acquisitions Acquisitions
 LIQUIDITY AND CAPITAL RESOURCES
     24




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OFF-BALANCE SHEET ARRANGEMENTS
  CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  RECENT ACCOUNTING PRONOUNCEMENTS
 Restatement of
Previously Issued Consolidated Financial Statements
  25




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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4. Controls and Procedures.
    
    
    Control EnvironmentCertain of the Companys controls including certain entity level controls within its control
environment were not effectively designed or applied to prevent certain members of former
management, including Mr. Kuttner and Mr. Clayton, from having the ability, which in certain
instances was utilized, to circumvent or override certain controls and affect preparation of
accounting entries and certain transactions including expense reimbursements to certain
employees. In addition, discussion and thorough legal, accounting, or other professional
analysis did not occur in all instances. This material weakness contributed to the
restatement of the Companys financial statements and increased the likelihood of a material
misstatement occurring within the Companys interim and annual financial statements not
being prevented or detected.
    
    Controls Over the Financial Statement Preparation and Disclosure ProcessThe Companys design and operation of controls with respect to the process of preparing and
reviewing the annual and interim financial statements are ineffective. Deficiencies
identified include the lack of appropriate review of the footnotes, reconciliations, and
supporting schedules. The Company also lacked adequate controls related to complying with
disclosure requirements such as the use of disclosure checklists, lacked adequate controls
over spreadsheets used in the financial close and reporting process, and lacked an
independent review of journal entries. This material weakness contributed to the restatement
of the Companys provision for income taxes, accrued expenses and other liabilities, as well
as expense reimbursements to certain employees.
    
    Controls Over the Provision for Income TaxesThe Company failed to maintain effective controls to provide reasonable assurance that the
provision for income taxes was appropriately determined, including adequate reserves for
certain tax liabilities. The Company had potential tax liabilities for deductions related to
highly-compensated executive officers of a publicly-held company related to Internal Revenue
Code Section 162(m) for incentive compensation, deductions for non-accountable plan expense
reimbursements under IRS regulations, certain executive deferred compensation plans that may
not have conformed to federal regulations due to actions by Mr. Kuttner and Mr. Clayton, and
certain other tax matters, including state and local income tax nexus issues.
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
    
    Controls Over Accrued Expenses and Other LiabilitiesThe Company failed to maintain effective internal controls related to the review of accrued
liabilities. Accordingly, accruals related to employee bonuses, certain employee benefit
plans, and receipt of vendor products were recorded in periods prior or subsequent to the
period in which the liability was incurred. In addition, the Company had unrecorded payroll
tax liabilities related to, among other things, certain employee deferred compensation
plans.
 Changes in Internal Control Over Financial Reporting
  Remediation of Material Weaknesses in Internal Controls Over Financial Reporting
  
    
    With respect to the control environment material weakness, the Company terminated the
employment of two members of former management who were responsible for the preparation of
financial statements.
  
    
    Implemented enhanced procedures and controls around the financial
statement preparation and disclosure process as well as the
financial review process at the corporate level. These
enhancements include but are not limited to dedicating personnel
with technical knowledge of SEC reporting to the financial
statement preparation process; providing such personnel access to
applicable training; obtaining database software to assist in the
research of complex accounting and disclosure matters; and
formalization of the procedures for tracking disclosure matters.
 
    
    Implemented extensive procedures and controls around the income
tax provision process. These enhancements include but are not
limited to dedicating personnel to the tax provision process with
technical knowledge of the Companys tax filings and FAS 109 
Accounting for Income Taxes; providing such personnel access to
applicable training; obtaining database software to assist in the
research of complex tax matters; and formalization of the
procedures for preparation of the tax provision.
 
    
    Implemented enhanced procedures and controls around acquisition
accounting, accrued liabilities, management for and accounting of
benefit plans, and management expense reports.
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PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings.
 Subsequent Events Legal and Compliance
Matters Restatements and Related Matters
 
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 ISSUER PURCHASES OF EQUITY SECURITIES
COMMON STOCK, $0.10 PAR VALUE
 Total Number of
    
    
    Maximum NumberTotal
    
    
    
    
    
    
    Shares Purchased
    
    
    of Shares that MayNumber of
    
    
    Average
    
    
    as Part of Publicly
    
    
    Yet be PurchasedShares
    
    
    Price Paid
    
    
    Announced Plans
    
    
    Under Such Plans orPeriod
    
    Purchased
    
    
    per Share
    
    
    or Programs
    
    
    ProgramsJuly 3  July 28,
2006
    
    
    
    
    
    
    
    
    
    
    July 31  Sept. 1, 2006
    
    
    
    
    
    
    
    
    
    
    Sept. 4  Sept. 30, 2006
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    44,621
  
 Item 3. Defaults Upon Senior Securities.
 Subsequent Events Revolving Credit Facility Extension Restatements and Related Matters
 
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
   29




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Item 6. Exhibits.
 (a)
    
    The following exhibits are filed as part of this Report:
             30




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SIGNATURES
  Hampshire Group, LimitedDate: August 9, 2007
    
    By:
    
    /s/ Michael S. Culang

Michael S. CulangInterim Chief Executive Officer and President/s/ Jonathan W. Norwood

Jonathan W. NorwoodVice President and Chief Financial Officer
(principal financial and accounting officer)
  31




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INDEX TO EXHIBITS
 EXHIBITNUMBER
    
    DESCRIPTION31.1
    
    Certification of Interim Chief Executive Officer pursuant to Item 601(b) (31) of
Regulation S-K as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 200231.2
    
    Certification of Chief Financial Officer pursuant to Item 601(b) (31) of Regulation S-K
as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 200232.1
    
    Certification of Interim Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32