Barry R G 10-Q 2007 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 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 001-08769

R. G. BARRY CORPORATION

(Exact name of registrant as specified in its charter)

OHIO	31-4362899
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)
13405 Yarmouth Road NW, Pickerington, Ohio	43147
(Address of principal executive offices)	(Zip Code)

614-864-6400

(Registrant’s telephone number, including area code)

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ      Noo

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

Large accelerated filero       Accelerated filero       Non-accelerated filerþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso      Noþ

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

Common Shares, $1 Par Value, Outstanding as of May 4, 2007– 10,108,837

Index to Exhibits at page 27

TABLE OF CONTENTS

ITEM 4 — Controls and ProceduresITEM 4T — Controls and Procedures

EX-31.1

EX-31.2

EX-32.1

 EX-31.1

 EX-31.2

 EX-32.1

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PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

R. G. BARRY CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

	March 31, 2007			July 1, 2006
	(unaudited)
ASSETS:
Cash and cash equivalents	$	16,939		$	988
Accounts receivable (less allowances of $4,255 and $2,180, respectively)		11,366			6,683
Inventory		12,440			25,977
Current deferred income taxes		8,967			—
Prepaid expenses		662			1,161
Total current assets		50,374			34,809
Property, plant and equipment, at cost		11,789			11,214
Less accumulated depreciation and amortization		9,215			8,795
Net property, plant and equipment		2,574			2,419
Non-current deferred income taxes		4,746			—
Other assets		3,017			3,216
Total assets	$	60,711		$	40,444
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Short-term notes payable		2,200			2,200
Current installments of long-term debt		333			395
Accounts payable		4,502			9,085
Accrued expenses		5,850			7,136
Total current liabilities		12,885			18,816
Long-term debt, excluding current installments		290			439
Accrued retirement costs and other		11,039			12,193
Total liabilities		24,214			31,448
Shareholders’ equity:
Preferred shares, $1 par value per share: Authorized 3,775 Class A shares, 225 Series I Junior Participating Class A Shares, and 1,000 Class B Shares, none issued		—			—
Common shares, $1 par value per share: Authorized 22,500 shares; issued and outstanding 10,098 and 10,017 shares, respectively (excluding treasury shares of 1,000 and 969, respectively)		10,098			10,017
Additional capital in excess of par value		13,683			13,192
Accumulated other comprehensive loss		(4,241	)		(4,353	)
Retained earnings (deficit)		16,957			(9,860	)
Total shareholders’ equity		36,497			8,996
Total liabilities and shareholders’ equity	$	60,711		$	40,444

See accompanying notes to consolidated financial statements.

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R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

	Thirteen weeks ended						Thirty-nine weeks ended
	March 31,			April 1,			March 31,			April 1,
	2007			2006			2007			2006
Net sales	$	19,176		$	17,160		$	97,572		$	89,439
Cost of sales		12,460			10,405			60,117			52,081
Gross profit		6,716			6,755			37,455			37,358
Selling, general and administrative expenses		6,812			6,855			24,061			26,739
Gain on disposal of land		—			—			(878	)		—
Restructuring and asset impairment charges		91			41			163			1,310
Operating profit (loss)		(187	)		(141	)		14,109			9,309
Other income		35			124			131			419
Interest income (expense), net		164			(67	)		(391	)		(716	)
Income (loss) from continuing operations, before income tax		12			(84	)		13,849			9,012
Income tax expense (benefit)		(196	)		27			(12,968	)		82
Earnings (loss) from continuing operations	$	208		$	(111	)	$	26,817		$	8,930
Earnings from discontinued operations		—			—			—			22
Net earnings (loss)	$	208		$	(111	)	$	26,817		$	8,952
Earnings (loss) per common share: continuing operations
Basic	$	0.02		$	(0.01	)	$	2.67		$	0.90
Diluted	$	0.02		$	(0.01	)	$	2.58		$	0.87
Earnings (loss) per common share: discontinued operations
Basic		—			—			—		“nm”
Diluted		—			—			—		“nm”
Earnings (loss) per common share: total
Basic	$	0.02		$	(0.01	)	$	2.67		$	0.90
Diluted	$	0.02		$	(0.01	)	$	2.58		$	0.87
Average number of common shares outstanding
Basic		10,069			9,930			10,043			9,909
Diluted		10,482			9,930			10,395			10,257

See accompanying notes to consolidated financial statements.

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R. G. BARRY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

	Thirty-nine weeks ended
	March 31, 2007			April 1, 2006
Operating activities:
Net earnings	$	26,817		$	8,952
Earnings from discontinued operations		—			22
Earnings from continuing operations		26,817			8,930
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization of property, plant and equipment		369			388
Deferred income tax benefit		(13,713	)		—
Stock-based compensation expense		440			72
Loss on disposal of property, plant and equipment		26			132
Gain on disposal of land		(878	)		—
Changes in:
Accounts receivable		(4,569	)		(4,157	)
Inventory		13,628			1,177
Prepaid expenses and other		704			400
Accounts payable		(4,648	)		(1,753	)
Accrued expenses		(1,406	)		1,344
Accrued retirement costs and other, net		(1,155	)		(2,266	)
Net cash provided by continuing operations		15,615			4,267
Net cash provided by discontinued operations		—			22
Net cash provided by operating activities		15,615			4,289
Investing activities:
Purchases of property, plant and equipment		(540	)		(308	)
Proceeds from the sale of property, plant and equipment		888			4
Net cash provided by (used in) investing activities		348			(304	)
Financing activities:
Repayment of debt		(228	)		(4,259	)
Proceeds from common shares issued		202			215
Net cash used in financing activities		(26	)		(4,044	)
Effect of exchange rates on cash		14			18
Net increase (decrease) in cash		15,951			(41	)
Cash at the beginning of the period		988			1,029
Cash and cash equivalents at the end of the period	$	16,939		$	988
Supplemental cash flow disclosures:
Interest paid	$	651		$	768
Income taxes paid		236			193

See accompanying notes to consolidated financial statements.

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R. G. BARRY CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
for the thirteen-week and thirty-nine-week periods ended March 31, 2007 and April 1, 2006
(dollar amounts in thousands, except per share data)

1. Basis of Presentation:

The Company designs, purchases, markets and distributes accessories footwear. The Company no longer manufactures footwear, except through its wholly-owned French subsidiaries, Escapade, S.A. and Fargeot et Compagnie, S.A. (together, “Fargeot”). Unless the context requires otherwise, references in this report to “we,” “us,” “our,” and the “Company” refer to R.G. Barry Corporation (the registrant) and its subsidiaries.

The accompanying unaudited consolidated financial statements include the accounts of the Company and have been prepared in accordance with the United States of America (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of SEC Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the financial condition and results of operations at the dates and for the interim periods presented, have been included.

On May 17, 2006, the Board of Directors approved a change in the Company’s fiscal year-end to the Saturday nearest June 30 from the Saturday nearest December 31. This change aligns the Company’s fiscal year more closely with the seasonal nature of its business. Accordingly, the Company is presenting unaudited consolidated financial statements for the thirteen-week and thirty-nine-week periods ended on March 31, 2007 (“third quarter of fiscal 2007” and “thirty-nine-week period of fiscal 2007”, respectively), and for the comparable thirteen-week and thirty-nine-week periods ended April 1, 2006.

The reporting year of the Company is either a fifty-two or fifty-three-week period (“fiscal year”), ending annually on the Saturday nearest to June 30. The Company’s current reporting year will end on June 30, 2007 (“fiscal 2007”) and is comprised of fifty-two weeks. As a result of the change in the Company’s fiscal year end, the 2006 transition period began on January 1, 2006 and ended on July 1, 2006 (the “2006 transition period”) and was a twenty-six-week period. The Company’s 2005 reporting year ended on December 31, 2005 (“fiscal 2005”) and was a fifty-two-week period.

A comparative view of the six-month 2006 transition period and the comparative period of the prior year is provided below:

	Transition period			Comparable six-month period
	ended July 1, 2006			ended July 2, 2005
Net sales	$	32,883		$	33,209
Gross profit		12,865			13,666
Income tax expense		34			57
Loss from continuing operations		(4,199	)		(1,082	)
Earnings from discontinued
operations		—			68
Net loss	$	(4,199	)	$	(1,014	)
Loss per share-continuing operations:
Basic	$	(0.42	)	$	(0.11	)
Diluted	$	(0.42	)	$	(0.11	)
Earnings per share-discontinued operations:
Basic	$	—		$	0.01
Diluted	$	—		$	0.01
Loss per share-total:
Basic	$	(0.42	)	$	(0.10	)
Diluted	$	(0.42	)	$	(0.10	)

Operating results for the third quarter of fiscal 2007 and thirty-nine-week period of fiscal 2007 ended on March 31, 2007 are not necessarily indicative of the results that may be expected for fiscal 2007. For further information, refer to the consolidated financial statements and notes thereto included in “Item 8 – Financial Statements and Supplementary Data” of R.G. Barry Corporation’s Transition Report on Form 10-K for the 2006 transition period.

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2. Stock-Based Compensation:

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Shared-Based Payment,” (“SFAS 123R”), effective January 1, 2006. SFAS 123R requires the recognition of the fair value of stock-based compensation in the results of operations. The Company recognizes stock-based compensation expense over the requisite service period of the individual grantees, which generally equals the vesting period. All of our stock-based compensation is accounted for as an equity instrument. Prior to January 1, 2006, the Company followed Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, including FASB Interpretation No. 44 (Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB No. 25) in accounting for employee stock options.

The Company elected the modified prospective transition method for adopting SFAS 123R. Under this method, the provisions of SFAS 123R apply to all awards granted or modified after the date of adoption. The unrecognized expense of outstanding awards not yet vested at the date of adoption of SFAS 123R by the Company will be recognized in the Company’s results of operations in the periods after the date of the adoption using the same valuation method, Black-Scholes, and assumptions determined under the original provisions of SFAS 123, “Accounting for Stock-Based Compensation,” (“SFAS 123”), as disclosed in our previous filings.

The 2005 Long-Term Incentive Plan (the “2005 Plan”), approved by the shareholders of R.G. Barry Corporation in May 2005, is the Company’s only equity-based compensation plan under which future awards may be made to employees of the Company and non-employee directors of R.G. Barry Corporation, other than the employee stock purchase plan in which employees of the Company may participate. The Company’s previous equity-based compensation plans remained in effect with respect to the then outstanding awards following the approval of the 2005 Plan.

The 2005 Plan provides for the granting of nonqualified stock options (“NQs”), incentive stock options (“ISOs”) that qualify under Section 422 of the Internal Revenue Code of 1986, as amended, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), stock grants, stock units and cash awards, each as defined in the 2005 Plan. Grants of restricted stock, RSUs, stock units and cash awards may also be performance-based awards, as defined in the 2005 Plan.

Under the provisions of SFAS 123R, the Company recorded, as part of selling, general and administrative expenses, $152 and $440 of stock-based compensation expense for the third quarter of fiscal 2007 and the thirty-nine-week period of fiscal 2007, respectively. The Company utilizes the Black-Scholes valuation model for estimating the fair value of the stock-based compensation granted after the adoption of SFAS 123R. The Company did not grant any stock-based compensation awards during the third quarter of fiscal 2007.

SFAS 123R requires the Company to present pro forma information for the comparative periods prior to the adoption of SFAS 123R by the Company as if the Company had accounted for all stock options under the fair value method of SFAS 123. Had the Company elected to recognize stock-based compensation expense based on the fair value of the stock options granted at the grant date as prescribed by SFAS 123, the Company’s net earnings for the thirty-nine-week period ended April 1, 2006 would approximate the pro forma amounts indicated below:

	Thirty-nine weeks ended
	April 1, 2006
Net earnings:
As reported	$	8,952
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect		(385	)
Pro forma	$	8,567
Net earnings per share:
Basic – as reported	$	0.90
Basic – pro forma	$	0.86
Diluted – as reported	$	0.87
Diluted – pro forma	$	0.84

No pro forma adjustment was needed for the thirteen-week period ended April 1, 2006 since the Company adopted SFAS 123R on January 1, 2006.

The amortization of stock-based compensation has been recognized under SFAS 123R for the period after its adoption by the Company and under APB No. 25 or SFAS 123 (pro forma disclosure) for the period prior to the adoption of SFAS 123R. Total

7

compensation cost of stock options granted but not yet vested as of March 31, 2007 was approximately $317, and is expected to be recognized over a weighted average period of approximately 2 years.

Prior to the approval of the 2005 Plan, the Company had various equity-based compensation plans, under which ISOs and NQs were granted, some of which remain outstanding. All stock options granted under the 2005 Plan and other previous plans are currently exercisable for periods of up to 10 years from date of grant at prices not less than fair market value of the underlying common shares on the date of grant. Plan activity for grants under the 2005 Plan and the other equity-based compensation plans under which ISOs and NQs have been granted for the thirty-nine-week period ended March 31, 2007 is as follows:

	Number of			Number of			Weighted-
	common shares			common shares			average
	subject to ISOs			subject to NQs			exercise price
Outstanding at July 1, 2006		556,100			552,800		$	5.27
Granted		5,000			—		$	7.25
Exercised		(62,600	)		(50,000	)	$	2.93
Expired/Cancelled		(27,600	)		—		$	4.03
Outstanding at March 31, 2007		471,000			502,800		$	5.59
Options exercisable at March 31, 2007		388,800			349,500

The following is a summary of the status of the Company’s RSUs as of March 31, 2007 and activity during the thirty-nine-week period then ended:

				Grant Date
	Shares			Fair Value
Nonvested at July 1, 2006		106,200		$	6.18
Granted		10,800		$	7.25
Vested		—			—
Forfeited		(15,000	)	$	6.18
Nonvested at March 31, 2007		102,000		$	6.29

Total compensation cost of RSUs granted but not yet vested as of March 31, 2007 was approximately $336, and is expected to be recognized over a weighted average period of 3 years.

3. Income Taxes:

Income tax expense (benefit) for the thirty-nine-week periods ended March 31, 2007 and April 1, 2006 differed from the amounts computed by applying the U. S. federal income tax rate of 34 percent to income from continuing operations before income taxes as a result of the following:

	Thirty-nine weeks ended
	March 31,			April 1,
	2007			2006
Computed “expected” tax expense	$	4,709		$	3,072
State income taxes benefit, net of federal income taxes		394			483
Change in valuation allowance		(18,273	)		(4,359	)
Expiration of state net operating loss carry-forward		—			472
Effect of liquidation of Mexico-based subsidiaries		—			303
Effect of state tax rate revision on deferred tax asset and liability valuation		(147	)		—
Other, net		349			113
Total expense (benefit)		(12,968	)		84
Total expense allocated to discontinued operations		—			2
Total expense (benefit) on continuing operations	$	(12,968	)	$	82

In accordance with the provisions of SFAS No. 109, Accounting for Income Taxes, the Company originally recorded a valuation allowance reflecting the full reservation of the value of its deferred tax assets at the close of fiscal 2003, ended on January 3, 2004. The Company’s valuation allowance against its net deferred tax assets and net operating loss carryforwards at the end of the 2006 transition period was $18,273.

8

The valuation allowance against deferred tax assets was maintained through the end of the first quarter of fiscal 2007. In the second quarter of fiscal 2007, the Company determined, based on the existence of sufficient positive evidence, represented primarily by three years of cumulative income before restructuring charges, that a valuation allowance against net deferred tax assets was no longer required because it is more likely than not that the Company’s deferred tax assets will be realized in future periods. Accordingly, the full amount of the valuation allowance was reversed and recognized as a benefit in the second quarter of fiscal 2007. The “Other, net” line item in the table above primarily includes the Company’s provision of $351, which was recorded in the second quarter of fiscal 2007, in anticipation of additional expense with respect to various tax contingency matters.

During the third quarter of fiscal 2007, we recorded approximately $196 as an income tax benefit, primarily due to a revision in the projected effective tax rate applicable for fiscal 2007.

For the thirty-nine week period ended April 1, 2006, the Company’s normal income tax expense was offset by its tax loss carryforwards subject to federal alternative minimum tax. This alternative minimum tax is a deferred tax asset for the Company, which consistent with its policy, was subjected to a full valuation reserve during the comparable prior year thirty-nine week period. The alternative minimum tax is recoverable against future tax payments once all of the Company’s tax loss carryforwards have been utilized. Establishing a full valuation reserve against the alternative minimum tax resulted in net income tax expense for the thirty-nine week period ended on April 1, 2006 for the Company’s U.S. operations. This expense was offset in the consolidated results by an income tax benefit reported by the Fargeot subsidiary. Fargeot’s tax benefit was due primarily to tax credits recognized in the last half of calendar year 2005.

As previously reported, the Company has held several meetings with representatives of the Internal Revenue Service (“IRS”) with respect to certain adjustments, which, if sustained, would result in an additional tax obligation for the Company of up to approximately $4,000 plus interest. The proposed adjustments relate to the years 1998 through 2002. Substantially all of the proposed adjustments relate to the timing of certain deductions taken during that period. On January 29, 2007, the Company’s representatives met with representatives of the IRS to review the additional information that had been requested by the IRS. During that meeting, the Company presented detailed evidence to support the timing of the expenses questioned by the IRS. The Company is currently negotiating a resolution of this matter with the IRS. In the opinion of management, the resolution of this matter is not expected to have a material effect on the Company’s financial position or results of operations.

The IRS requested and the Company consented to an extension of the statute of limitations to December 31, 2007 with respect to the matter described above.

4. Net Earnings (Loss) Per Common Share:

Basic net earnings (loss) per common share have been computed based on the weighted average number of common shares outstanding during each period. Diluted net earnings (loss) per common share are based on the weighted average number of common shares outstanding during each period, plus, when their effect is dilutive, potential common shares consisting of certain common shares subject to stock options and RSUs.

The following table presents a reconciliation of the denominator for each period in computing basic and diluted earnings (loss) per share:

	Thirteen weeks ended					Thirty-nine weeks ended
	March 31,		April 1,			March 31,		April 1,
	2007		2006			2007		2006
Numerator:
Net earnings (loss)	$	208	$	(111	)	$	26,817	$	8,952
Denominator:
Weighted average common shares outstanding		10,069		9,930			10,043		9,909
Effect of potentially dilutive securities:
employee stock options and RSUs		413		—			352		348
Weighted average common shares outstanding, assuming dilution		10,482		9,930			10,395		10,257
Basic earnings (loss) per common share	$	0.02	$	(0.01	)	$	2.67	$	0.90
Diluted earnings (loss) per common share	$	0.02	$	(0.01	)	$	2.58	$	0.87

9

The Company excluded options to purchase approximately 109 common shares from the calculation of diluted earnings per share for the thirteen-week period ended March 31, 2007 due to the anti-dilutive nature of these options, measured using the average market price during that quarterly period, and excluded options to purchase approximately 1,191 common shares from the calculation of diluted earnings per share for the thirteen-week period ended April 1, 2006 due to the net loss reported for that period.

The Company excluded options to purchase approximately 266 and 285 common shares for the thirty-nine week periods ended March 31, 2007 and April 1, 2006, respectively, due to the anti-dilutive nature of these options, measured using the average market price during the respective periods.

5. Inventories:

Inventory by category consisted of the following:

	March 31, 2007		July 1, 2006
Raw materials	$	759	$	724
Work in process		127		174
Finished goods		11,554		25,079
Total inventory	$	12,440	$	25,977

Inventory write-downs, recognized as a part of cost of sales, were $202 and $49 for the thirteen-week periods, and were $1,113 and $1,248 for the thirty-nine-week periods, ended March 31, 2007 and April 1, 2006, respectively.

6. Restructuring and Asset Impairment Charges:

During the 2006 transition period and through the end of the third quarter of fiscal 2007, the Company did not engage in any new restructuring activities. During the thirty-nine-week period of fiscal 2007, as shown below, and consistent with prior reporting periods, the Company recorded restructuring charges as part of its operating expenses. These charges and adjustments to estimates for the thirty-nine-week period of fiscal 2007 mainly represent minor continuing legal and other administrative type costs associated with liquidating the Company’s subsidiaries in Mexico.

								Non-Cash
								Write-Offs &
	As of		Charges in		Estimate			Paid in		As of
	July 1, 2006		Fiscal 2007		Adjustments			Fiscal 2007		March 31, 2007
Employee separations	$	335	$	—	$	(1	)	$	334	$	—
Other exit costs		—		131		—			131		—
Noncancelable lease costs		2,909		1		32			2,942		—
Total restructuring costs	$	3,244	$	132	$	31		$	3,407	$	—

7. Segment Information:

The Company primarily designs, purchases, markets and distributes accessories footwear. The Company considers “Barry Comfort” groups in North America and in Europe as its two operating segments. The accounting policies of the operating segments are the same, except that the disaggregated information has been prepared using certain management reports, which by their very nature require estimates. In addition, certain items reported within administrative functions from these management reports have not been allocated between the operating segments.

Thirteen weeks ended	North
March 31, 2007	America			Europe		Total
Net sales	$	16,375		$	2,801	$	19,176
Income (loss) from continuing operations, before income taxes		(119	)		131		12

Thirteen weeks ended	North
April 1, 2006	America			Europe		Total
Net sales	$	14,490		$	2,670	$	17,160
Income (loss) from continuing operations, before income taxes		(166	)		82		(84	)

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Thirty-nine weeks ended	North
March 31, 2007	America		Europe		Total
Net sales	$	91,192	$	6,380	$	97,572
Income from continuing operations, before income taxes		13,488		361		13,849
Total assets		56,437		4,274		60,711

Thirty-nine weeks ended	North
April 1, 2006	America		Europe		Total
Net sales	$	83,503	$	5,936	$	89,439
Income from continuing operations, before income taxes		8,869		143		9,012
Total assets		35,281		3,768		39,049

8. Employee Retirement Plans:

In making the annually required pension computations, the Company uses a measurement date of March 31, effective with the 2006 transition period and the related change in its fiscal year-end.

The Company anticipates total payments of $2,149 will be made in fiscal 2007 to the funded, qualified associate retirement plan and to meet its current year payment obligation on the unfunded, nonqualified supplemental retirement plans. Through the thirty-nine-week period of fiscal 2007, actual payments of approximately $1,092 were made into the funded, qualified associate retirement plan and actual payments of approximately $485 were made to the current participants in the unfunded, nonqualified supplemental retirement plans.

The components of net periodic benefit cost for the retirement plans in the aggregate during each period noted below consisted of the following:

	Thirteen weeks ended						Thirty-nine weeks ended
	March 31,			April 1,			March 31,			April 1,
	2007			2006			2007			2006
Service cost	$	19		$	17		$	56		$	17
Interest cost		445			538			1,334			1,636
Expected return on plan assets		(370	)		(474	)		(1,111	)		(1,398	)
Net amortization		107			133			320			358
Total pension expense	$	200		$	214		$	599		$	613

9. Comprehensive income (loss):

Comprehensive income (loss), which is reflected as a component of shareholders’ equity, includes net earnings (loss) and foreign currency translation adjustments, as follows:

	Thirteen weeks ended					Thirty-nine weeks ended
	March 31,		April 1,			March 31,		April 1,
	2007		2006			2007		2006
Net earnings (loss)	$	208	$	(111	)	$	26,817	$	8,952
Minimum pension liability adjustment		—		—			—		(2,007	)
Foreign currency translation adjustments		21		(29	)		111		(3	)
Total comprehensive income (loss)	$	229	$	(140	)	$	26,928	$	6,942

The components of accumulated other comprehensive income (loss) adjustments at the end of the reporting periods were as follows:

	March 31, 2007			July 1, 2006
Accumulated foreign currency translation adjustments	$	338		$	226
Minimum pension liability, net of taxes		(4,579	)		(4,579	)
Accumulated other comprehensive loss	$	(4,241	)	$	(4,353	)

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10. Related Party Transactions:

The Company and its non-executive chairman (“chairman”) are parties to an agreement under which the Company is obligated for up to two years after the death of the chairman to purchase, if the estate elects to sell, up to $4,000 of the Company’s common shares at their fair market value. To fund its potential obligation to purchase such common shares, the Company purchased a $5,000 life insurance policy on the chairman. In addition, the Company maintains another policy insuring the life of the chairman. The cumulative cash surrender value of these policies approximates $2,600, which is included in other assets in the accompanying consolidated balance sheets. Effective March 2004 and continuing through March 31, 2007, the Company has borrowed against the cash surrender value of these policies. There were no changes in the agreement between the Company and its chairman during the thirty-nine-week period of fiscal 2007.

On August 11, 2005 (the “Effective Date”), the Company and the mother of the chairman entered into an agreement whereby she transferred all of her product designs and patent rights to the Company as of the Effective Date; provided a covenant not to compete during the period payments are owed to her under the agreement and for one year thereafter; and released all unpaid claims that would have accrued under a previous agreement and through the Effective Date, for the sum of $600. This amount is to be paid in 24 quarterly payments of $25 each to the mother of the chairman and, following her death, to the successor trust she designated. The quarterly payments with respect to this agreement began on the Effective Date and have been and will be due and payable on the last business day of each and every October, January, April, and July until the last business day in April 2011. On the Effective Date, the net present value of this obligation was computed at approximately $495, discounted at 7%, and this amount was charged to earnings. As of March 31, 2007, the Company reported $79 of the then outstanding net present value amount as current installments of long-term debt and the remaining $290 as long-term debt.

11. Contingent Liabilities:

The Company has been named as defendant in various lawsuits arising from the ordinary course of its business. In the opinion of management, the resolution of such matters is not expected to have a material adverse effect on the Company’s financial position or results of operations.

12. Recently Issued Accounting Standards:

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109.This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes.This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. Earlier adoption of the provisions of this Interpretation is encouraged if the enterprise has not yet issued financial statements, including interim financial statements, in the period this Interpretation is adopted. This Interpretation will be effective for the Company’s fiscal year beginning on July 1, 2007. The Company does not expect the application of the provisions of this Interpretation to have a significant impact on the Company’s financial position or results of operations.

In September 2006, the FASB released Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements. This standard becomes effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. Earlier application is encouraged, provided financial statements have not yet been issued for that fiscal year, including financial statements for an interim period within that fiscal year. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 will be effective for the Company’s fiscal year beginning on June 29, 2008. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. The Company does not expect the application of the provisions of SFAS No. 157 to have a significant effect on its financial position or its results of operations.

In September 2006, the FASB released SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132 (R), (“SFAS 158”). SFAS 158 revises the measurement approach to net pension funded status by changing pension liability measurement to a projected view based on estimated future pay levels used to determine pension benefits to be paid, as opposed to the use of current pay levels to estimate the pension liability. This change impacts the funded status measurement of pension plans. SFAS 158 requires the funded status as measured to be reflected entirely in

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the statement of financial position. Impacts from reporting the full pension funding status into the statement of financial position will be reflected as comprehensive gain or loss adjustments within the equity section of the statement of financial position. Further changes include the elimination of intangible pension assets and the requirement for all companies to base pension plan measurements as of their fiscal year end, and eliminates any choice on measurement date that existed under prior standards.

Under SFAS 158, reporting changes will be implemented on a prospective basis as of the end of the fiscal year ending after December 15, 2006 for publicly held companies. The change of measurement date is required for fiscal years ending after December 15, 2008, with earlier adoption permitted. With the Company’s pension plans substantially frozen, there is no significant difference in the measurement of pension liability under SFAS 158 and the former governing standards in SFAS No. 87,Employers’ Accounting for Pensions. The Company does not expect the application of SFAS 158 to have a significant impact in its presentation of financial position.

In September 2006, the Securities and Exchange Commission released Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on quantifying financial statement misstatements and requires a company to quantify misstatements using both the balance sheet and income statement approaches and to evaluate whether either approach results in quantifying an error that is material. The Company is required to adopt SAB 108 at the end of fiscal 2007. The Company does not expect the adoption of SAB 108 to have a material impact on its consolidated financial statements.

In February 2007, the FASB released SFAS No. 159,The Fair Value for Financial Assets and Liabilities–Including an amendment of FASB Statement No. 115, which becomes effective for fiscal years beginning after November 15, 2007. The new standard permits entities to measure selected financial instruments at fair value that are not currently required to be measured at such value. This election can be made on an instrument by instrument basis, within certain limitations. In additional, this standard establishes presentation and disclosure requirements designed to support comparative use of financial statement disclosures. The Company does not expect the application of SFAS 159 to have a significant impact on its financial position or results of operations.

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R.G. BARRY CORPORATION AND SUBSIDIARIES

ITEM 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995:

Some of the disclosure in this Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” or words with similar meanings. These statements, which are forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995, are based upon our current plans and strategies and reflect our current assessment of the risks and uncertainties related to our business. You should read the disclosure that contains forward-looking statements carefully because these statements (1) discuss our future expectations; (2) contain projections of our future results of operations or of our future financial condition; or (3) state other “forward-looking” information. The risk factors described in “Item 1A. Risk Factors” of Part II of this Quarterly Report on Form 10-Q and in “Item 1A. Risk Factors” of Part I of our Transition Report on Form 10-K for the transition period from January 1, 2006 to July 1, 2006, as well as any other cautionary language in this Quarterly Report on Form 10-Q, give examples of the types of uncertainties that may cause actual performance to differ materially from the expectations we describe in our forward-looking statements. You should know that if the events described (a) in “Item 1A. Risk Factors” of Part II, and elsewhere in this Quarterly Report on Form 10-Q or (b) in “Item 1A. Risk Factors” of Part I of our Transition Report on Form 10-K for the transition period from January 1, 2006 to July 1, 2006 occur; they could have a material adverse effect on our business, operating results and financial condition.

Introduction

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide investors and others with information we believe is necessary to understand the Company’s financial condition, changes in financial condition, results of operations and cash flows. Our MD&A should be read in conjunction with the Company’s Consolidated Financial Statements and related Notes to Consolidated Financial Statements and other information included in this Quarterly Report on Form 10-Q. This Quarterly Report on Form 10-Q should also be read in conjunction with our Transition Report on Form 10-K for the transition period from January 1, 2006 to July 1, 2006.

Change in Fiscal Year End

On May 17, 2006, our Board of Directors approved a change in the Company’s fiscal year-end to the Saturday nearest June 30 from the Saturday nearest December 31. This change aligns our fiscal year more closely with the seasonal nature of our business. In view of this change, this MD&A compares the unaudited consolidated financial statements as of and for the thirteen-week and thirty-nine-week periods ended March 31, 2007 (“third quarter of fiscal 2007” and “thirty-nine-week period of fiscal 2007”, respectively), with the unaudited consolidated financial statements as of and for the comparable thirteen-week and thirty-nine week periods ended April 1, 2006.

As a result of the change in our fiscal year-end, the 2006 transition period began on January 1, 2006 and ended on July 1, 2006 (the “2006 transition period”) and was a twenty-six-week period. Our 2005 reporting year ended on December 31, 2005 (“fiscal 2005”) and was a fifty-two-week period.

Results of Operations

During the third quarter of fiscal 2007, consolidated net sales were $19.2 million, representing a $2.0 million or approximately 12.0% increase over the comparable quarter in the 2006 transition period. For the thirty-nine-week period of fiscal 2007, consolidated net sales were $97.6 million, approximately $8.1 million or 9.1% higher than the comparable thirty-nine-week period ended April 1, 2006. Approximately 94% and 95% of the quarter-on-quarter and thirty-nine-week period increases in net sales, respectively, were reported in our Barry Comfort North America business.

The quarterly increase in net sales of $2.0 million in the North America business resulted from an increase of approximately $2.3 million in net shipments in the period, which were partially offset by an increase of $300 thousand in customer promotion and sales incentive costs incurred during the period. For the thirty-nine-week period of fiscal 2007, the increase in net sales of $7.7 million in the North America business was due primarily to $8.5 million in higher net shipments, which were partially offset by an increase of $800 thousand in promotion and sales incentive costs incurred during the thirty-nine-week period. The increases in net shipments in

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our North America business for the quarter was due principally to an increase in volume with two of our mass merchandising customers, while the increase in net shipments for the thirty-nine-week period was due mainly to increases in volume across most of our key channels of distribution. The corresponding increases in promotion and sales incentive costs during the quarter and thirty-nine-week period are consistent with our business practice of collaborating with key retailing partners to stimulate sell-through and reduce returns.

Net sales for Barry Comfort Europe were $2.8 million in the third quarter of fiscal 2007 and $2.7 million in the comparable period of the 2006 transition period. For the thirty-nine-week period of fiscal 2007, net sales for Barry Comfort Europe were $6.4 million and $5.9 million in the comparable nine-month period ended April 1, 2006.

All references made in the remainder of this discussion of the results of operations are on a consolidated basis.

Gross profit for the third quarter of fiscal 2007 was $6.7 million or 35.0% of net sales, compared to $6.8 million or 39.4% of net sales for the comparable period of the 2006 transition period. Gross profit for the thirty-nine-week period of fiscal 2007 was $37.5 million or 38.4% of net sales, compared to $37.4 million or 41.8% of net sales for the comparable thirty-nine-week period ended April 1, 2006. The decreases in gross profit as a percent of net sales for the quarter and the thirty-nine-week period were due primarily to increases in the average product costs over those reporting periods. The increases in our product costs were directly impacted by the increase in the price of oil and as well as affected by the strengthening of the Chinese Yuan against the US Dollar. Increases in the price of oil primarily affects the raw materials that go into our products as well as freight costs incurred in transporting the goods to the U.S. Approximately 70% of the purchase price of our goods is represented by raw materials. Our purchases of finished goods from third-party suppliers are contracted in US dollars. However, the strengthening of the Chinese Yuan against the US Dollar by approximately 6.6%, as measured over the last 18 months, has resulted in price increases in our sourced goods. We will continue to work with our current finished goods supplier base as well as continue to explore other sources of manufacturing capacity to ensure that our product costs remain competitive.

Lastly, our gross profit results for the quarter and the thirty-nine-week period were affected by the continued support to our customers with promotions and sales incentives to stimulate sell-through during and after the 2006 holiday season as well as during the spring season of calendar 2007.

Selling, general and administrative (“SG&A”) expenses for the third quarter of fiscal 2007 were $6.8 million, reflecting a decrease of $100 thousand from approximately $6.9 million in the comparable quarter of the 2006 transition period. In addition, SG&A expenses, as a percent of net sales, decreased from 39.9% in the comparable quarter in the 2006 transition period to 35.5% in the third quarter of fiscal 2007.

The quarter-on-quarter net decrease in SG&A expenses of $100 thousand was due primarily to the following:

q	a $346 thousand decrease in shipping expenses, which resulted primarily from our continued improvements in handling and shipping product to our customers; and
q	a $283 thousand increase in incentive bonus expense.

The quarter-on-quarter decrease in SG&A expenses as a percent of sales of 4.4 percentage points was due primarily to the increase in net sales over the quarterly period.

SG&A expenses for the thirty-nine-week period of fiscal 2007 were $24.1 million, representing a $2.6 million decrease or 9.7% from approximately $26.7 million in the comparable period in the 2006 transition period. SG&A expenses, as a percent of net sales, decreased from 29.9% in the comparable thirty-nine-week period ended April 1, 2006 to 24.7% in the thirty-nine-week period of fiscal 2007.

The thirty-nine-week period net decrease of $2.6 million in SG&A expenses was due primarily to the following:

q	a $2.0 million reduction in shipping expenses, which resulted primarily from our improved efficiencies in handling and shipping product to customers;
q	a $426 thousand one-time charge to earnings, recorded in the third quarter of fiscal 2005, which ended October 1, 2005; the one-time charge represented the net present value of the obligation resulting from the purchase from the mother of our chairman of all of her product designs and patent rights;

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q	a $407 thousand reduction in recruiting agency and relocation costs, which resulted mainly from a reduced level of recruiting and related relocating activities over the comparable thirty-nine week period ended April 1, 2006; and
q	the decreases above were offset by $268 thousand of share-based compensation expense, which resulted from the implementation of SFAS 123R, effective January 1, 2006.

As noted above, we have made significant improvements in reducing SG&A expenses both in dollars and as a percent of net sales for the thirty-nine-week period of fiscal 2007 as compared to the same thirty-nine-week period ended April 1, 2006. While we will continue to look for opportunities to make our business model more efficient across all functional areas, and reduce expenses where feasible, we do not expect to achieve similar comparative expense reductions going forward.

During the third quarter of fiscal 2007, we recorded $91 thousand as a restructuring charge, compared to approximately $41 thousand recorded in the comparable quarter of the 2006 transition period. During the thirty-nine-week period of fiscal 2007 and the comparable thirty-nine-week period ended April 1, 2006, restructuring charges were $163 thousand and $1.3 million, respectively. The quarter-on-quarter increase in restructuring charges was primarily due an increase in professional fees associated with advisory services with respect to customs issues for one of our former subsidiaries in Mexico. The decrease in restructuring charges for the thirty-nine week period of fiscal 2007 as compared to the comparable nine-month period ended April 1, 2006 was due primarily to a reduction in the costs associated with our former distribution facility in Mexico. As reported in our Transition Report on Form 10-K for the 2006 transition period, we reached an agreement with the landlord of our former distribution facility in Nuevo Laredo, Mexico with respect to the lease agreement for that facility. See also Note 6 of the Notes to Consolidated Financial Statements for additional information relating to restructuring and asset impairment charges.

A gain of $878 thousand on the disposal of 4.4 acres of land is reflected in our consolidated statement of operations for the thirty-nine week period of fiscal 2007. The property was disposed of and the related gain was recorded during the second quarter of fiscal 2007. This property is adjacent to our headquarters office and was not being used as part of our business activities.

During the thirteen-week period ended March 31, 2007, we recorded net interest income of $164 thousand, compared to net interest expense of $67 thousand in the comparable quarter of the 2006 transition period. Net interest expense was $391 thousand and $716 thousand for the thirty-nine-week period of fiscal 2007 and the comparable period ended April 1, 2006, respectively. The decreases in net interest expense for the quarter and thirty-nine-week periods were primarily due to our profitability over the last twelve months, which resulted in lower borrowing levels under the former CIT ABL Facility (discussed further below) and the investment of funds during most of the thirty-nine-week period of fiscal 2007.

During the third quarter of fiscal 2007, we recorded approximately $196 thousand as consolidated income tax benefit, primarily due to a revision in our effective tax rate applicable for fiscal 2007.

As reported previously, we recorded a valuation allowance reflecting the full reservation of the value of our deferred tax assets at the end of fiscal 2003 because we deemed then that it was more likely than not that our deferred tax assets would not be realized. In the second quarter of fiscal 2007, we determined, based on the existence of sufficient positive evidence, represented primarily by three years of cumulative income before restructuring charges, that a valuation allowance against net deferred tax assets was no longer required because it is more likely than not that the deferred tax assets will be realized in future periods.

Based on the results of operations noted above, we reported net earnings of $208 thousand or $0.02 per diluted share for the third quarter of fiscal 2007 and a net loss of $111 thousand or $0.01 per diluted share for the comparable quarter in the 2006 transition period. For the thirty-nine-week period in fiscal 2007 and the comparable thirty-nine-week period ended April 1, 2006, we reported net earnings of approximately $26.8 million or $2.58 per diluted share, which included the reversal of the deferred tax assets valuation allowance referred to above, and $9.0 million or $0.87 per diluted share, respectively.

Looking ahead to the remainder of fiscal 2007 and beyond

Fiscal 2007 is the first annual reporting period since we changed to a new fiscal year. We believe this change aligns our business cycle more closely with the seasonal nature of our core business, enhances our ability to more accurately plan and forecast our business and offers investors additional clarity about our operating performance earlier in the fiscal year.

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At the beginning of our fiscal 2007, we forecasted annual increases of 5-to-7 percent in net sales and 8-to-12 percent in net earnings for fiscal 2007, as compared to our fiscal 2005. These forecasts were based upon our open order position at the time and our 2007 growth initiatives. As previously reported, our performance for the first half of fiscal 2007 outpaced our expectations and thus we updated our forecasts anticipating that our fiscal 2007 annual net sales should increase in the range of 6-to-8 percent and income from continuing operations before income taxes and excluding the one-time gain on the disposal of land should increase in the range of 28-to-32 percent, as compared to our fiscal 2005.

After closing the third quarter of fiscal 2007, we now believe that our net sales should increase by approximately 8.0 percent and income from continuing operations before income taxes and excluding the one-time gain on the disposal of land should increase by 38.0 percent, as compared to our fiscal 2005.

Looking ahead to the remainder of fiscal 2007 and beyond, we will continue to pursue certain strategic initiatives with the goal of providing measurable and sustainable net sales and profit growth.

These initiatives are focused on the following:

§	Sustained innovation within our product lines;
§	Continuing efforts to strengthen our relationships with existing retailing partners and to expand distribution of products into new retail channels;
§	Further enhancement of the image of our brands; and
§	Introduction of new licensed brands.

However, as our business continues to be highly seasonal and dependent on the holiday selling season, there is still significant inherent risk in the current business model. See the risk factors described in “Item 1A. Risk Factors” of Part II of this Quarterly Report on Form 10-Q and in “Item 1A. Risk Factors” of Part I of our Transition Report on Form 10-K for the transition period from January 1, 2006 to July 1, 2006.

Liquidity and Capital Resources

We utilize a variety of assets in the development, sourcing, marketing, warehousing, distribution, and sales of our products. Most of our assets are current assets and include cash and cash equivalents, trade receivables, and inventory.

All references made in this section are on a consolidated basis. As of the end of the third quarter of fiscal 2007, we had $37.5 million in net working capital. This compares with $20.3 million at the end of the comparable quarter of the 2006 transition period, and $16.0 million at the end of the 2006 transition period. The quarter-on-quarter increase in net working capital is primarily due to net earnings reported for the past twelve months and the reduction in finished goods inventories as discussed in further detail below.

The primary components of and changes in net working capital are as follows:

§

We ended the third quarter of fiscal 2007 with $16.9 million in cash and cash equivalents, compared to $1.0 million in cash at the end of the comparable quarter of the 2006 transition period, and $1.0 million in cash at the end of the 2006 transition period. The significant increase in cash and cash equivalents of approximately $15.9 million as compared to the previous reporting periods just noted is due mainly to net earnings reported for the past twelve months and the reduction in finished goods inventories.

§

Net accounts receivable increased to $11.4 million at the end of fiscal 2007’s third quarter from $9.4 million at the end of the comparable quarter in the 2006 transition year. The $2.0 million quarter-on-quarter increase in net accounts receivable is due primarily to a decrease in our reserve for customer returns at the end of the third quarter of fiscal 2007. The reduction in the reserve for customer returns is consistent with our ongoing approach to collaborate with key retailing partners to reduce or eliminate returns. Net accounts receivable were $6.7 million at the end of the 2006 transition period. The increase in net accounts receivable of approximately $4.7 million from the end of the 2006 transition period to the end of the third quarter of fiscal 2007 was principally due to the seasonality of our business.

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• Net inventories at the third quarter-end of fiscal 2007, the comparable quarter-end of the 2006 transition period, and at the end of the 2006 transition period were $12.4 million, $21.8 million and $26.0 million, respectively. The quarter-on-quarter decrease in inventories of $9.4 million occurred primarily in finished goods, and reflected the improvement in the timing of ordering and receipt of product from our third-party suppliers and shipment of goods to our customers, as well as the effect of lower levels of closeout inventory on hand at quarter-end.

• Due to the reversal of our deferred tax valuation allowance noted earlier, which was recorded during the second quarter of the fiscal 2007 year, our current deferred income tax assets were $9.0 million at the end of the third quarter of fiscal 2007. We had maintained a full valuation allowance against our deferred assets from the end of fiscal 2003 through the end of the first quarter of fiscal 2007.

• At the end of the third quarter of fiscal 2007, the comparable quarter of the 2006 transition period, and the end of the 2006 transition period, we had no borrowings outstanding under the New Facility (described below) or under the CIT ABL Facility, when applicable. The amount owed under the CIT ABL Facility or the New Facility, when applicable, is reported as short-term notes payable. We ended the third quarter of fiscal 2007 with $2.2 million in short-term notes payable, compared with $2.5 million at the end of the comparable quarter in the 2006 transition period, and $2.2 million at the end of the 2006 transition period. At the end of the third quarter of fiscal 2007, the comparable quarter in the 2006 transition period, and the end of the 2006 transition period, short term notes payable included $2.2 million, borrowed against the cash surrender value of life insurance policies on our chairman. At the end of comparable quarter of the 2006 transition period, there were $300 thousand in short-term borrowings by our Fargeot subsidiary.

• Accounts payable at the end of the third quarter of fiscal 2007 were $4.5 million, compared to $4.6 million at the end of the comparable quarter of the 2006 transition period and $9.1 million at the end of the 2006 transition period. The $4.6 million decrease in accounts payable from the end of the 2006 transition period reflects the seasonal timing of purchases and payments over the thirty-nine-week period of fiscal 2007.

• We reported $5.9 million in accrued expenses at the end of the third quarter of fiscal 2007, compared to $5.5 million at the end of the comparable quarter of the 2006 transition period, and $7.1 million at the end of the 2006 transition period. The quarter-on-quarter $400 thousand increase in accrued expenses primarily reflected the net of a reduction in reorganization lease loss and related accruals of $1.2 million and an increase in payroll costs related accruals of $1.4 million. Compared to the end of the 2006 transition period, the third quarter of fiscal 2007 accrual is lower due primarily to a $3.2 million reduction in reorganization lease loss accruals due to the agreement reached with the landlord of our former distribution facility in Nuevo Laredo, Mexico. This reduction was offset by a $1.4 million increase in accrued payroll costs, primarily related to incentive expense and an increase of $600 thousand associated with accruals in a wide range of other expense areas.

• Capital expenditures during the thirty-nine-week period of fiscal 2007 were $540 thousand, compared with $308 thousand during the same thirty-nine-week period ended April 1, 2006. Capital expenditures in both periods were funded from working capital and reflected a significant reduction in capital asset spending compared to years prior to fiscal 2005, when we operated our own manufacturing plants. We expect future capital expenditures to be in line with the current business model going forward.

CIT Facilities

Our two-year, asset-based committed facility (the “CIT ABL Facility”), underwritten by The CIT Group/Commercial Services, Inc (“CIT”), expired on March 31, 2007 and was replaced by a new credit agreement as described in further detail below. During the third quarter of fiscal 2007, we satisfied all the applicable financial covenants under the CIT ABL Facility. These covenants remained the same since we entered into the CIT ABL Facility and, along with other important aspects of the CIT ABL Facility, have been disclosed in detail in previous quarterly and annual filings.

As mentioned in this MD&A earlier, we had no borrowings outstanding as part of the CIT ABL Facility during the third quarter of fiscal 2007. However, during the third quarter of fiscal 2007 and the comparable quarter in the 2006 transition period, we incurred unused line fees of approximately $43 thousand and $54 thousand, respectively, as provided for in the CIT ABL Facility. During the thirty-nine-week period of fiscal 2007 and the comparable thirty-nine-week period ended April 1, 2006, we incurred unused line fees of approximately $109 thousand and $110 thousand, respectively.

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As of March 29, 2007, the date we terminated our CIT ABL Facility, we had approximately $17.4 million available under that facility. At April 1, 2006, we had approximately $18.9 million available under the CIT ABL Facility.

New Revolving Credit Agreement

On March 29, 2007, we entered into an unsecured Revolving Credit Agreement (the “New Facility”) with The Huntington National Bank (“Huntington”). The New Facility replaces the CIT ABL Facility discussed above. Under the terms of the New Facility, Huntington is obligated to advance us funds for a period of three years in the following amounts:

Year 1 — $20 million from July to December; $5 million from January to June;
Year 2 — $16 million from July to December; $5 million from January to June; and
Year 3 — $12 million from July to December; $5 million from January to June

The termination and maturity date of the New Facility is March 31, 2010, but it may be extended for one-year periods upon the agreement of the Company and Huntington. Under the terms of the New Facility, we are required to satisfy certain financial covenants, including (a) satisfying a minimum fixed charge coverage ratio test of not less than 1.25 to 1.0, which is calculated quarterly on a trailing 12-month basis, and (b) maintaining a consolidated net worth of at least $29 million, increased annually by an amount equal to 50% of our consolidated net income subsequent to June 30, 2007. Further, the New Facility must be rested for at least 30 consecutive days beginning on February 1st of each year and borrowings under the New Facility may not exceed 80% of the Company’s eligible accounts receivable and 50% of its eligible inventory at any given time. The interest rate on the New Facility is a variable rate equal to LIBOR plus 1.20%. Additionally, we agreed to pay a quarterly fee for any unused amount of the New Facility equal to 1/4% of the average unused balance of the New Facility and annual origination facility fees of $5 thousand, which was due at closing, and $2.5 thousand due at the beginning of the following two years. At the end of the third quarter of fiscal 2007, we had $5.0 million available under the New Facility.

On April 16, 2007, we entered into a First Modification of the New Facility (the “First Modification”). The First Modification adds a new section to the New Facility and provides that Huntington will issue on behalf of the Company letters of credit with a maximum aggregate face value of up to $1.5 million. The aggregate dollar amount of outstanding letters of credit will be counted against the amount Huntington is obligated to advance under the New Facility. No other changes or modifications were made to the New Facility.

Other Long-Term Indebtedness and Current Installments of Long-Term Debt

As of March 31, 2007, we reported approximately $333 thousand as current installments of long-term debt on a consolidated basis. Approximately $254 thousand of this amount relates to the Company’s Fargeot subsidiary and the remaining $79 thousand represents the current portion of our obligation associated with the agreement entered into with the mother of our chairman as disclosed in Note 10 of the Notes to Consolidated Financial Statements. At the end of the third quarter of fiscal 2007, we reported approximately $290 thousand as consolidated long-term debt, all of which is related to the obligation with the mother of our chairman.

Off-Balance Sheet Arrangements and Contractual Obligations

There are no “Off-Balance Sheet Arrangements” and no material changes to “Contractual Obligations” since the end of the 2006 transition period, other than routine payments. For more detail on off-balance sheet arrangements and contractual obligations, please refer to our Transition Report on Form 10-K for the transition period from January 1, 2006 to July 1, 2006, under the caption “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation – Liquidity and Capital Resources — Other Matters Impacting Liquidity and Capital Resources”.

Critical Accounting Policies and Use of Significant Estimates

The preparation of financial statements in accordance with U.S. GAAP requires that we make certain estimates. These estimates can affect reported revenues, expenses and results of operations, as well as the reported values of certain assets and liabilities. We make these estimates after gathering as much information from as many resources, both internal and external, as are available at the time. After reasonably assessing the conditions that exist at the time, we make these estimates and prepare consolidated financial statements

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accordingly. These estimates are made in a consistent manner from period to period, based upon historical trends and conditions and after review and analysis of current events and circumstances. We believe these estimates reasonably reflect the current assessment of the financial impact of events whose actual outcomes will not become known to us with certainty until some time in the future.

The following discussion of critical accounting policies is intended to bring to the attention of readers those accounting policies that management believes are critical to the Company’s consolidated financial statements and other financial disclosures. It is not intended to be a comprehensive list of all of our significant accounting policies that are more fully described in Notes (1) (a) through (u) of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of Part II of our Transition Report on Form 10-K for the transition period from January 1, 2006 to July 1, 2006.

(a)	We recognize revenue when goods are shipped from our warehouses and other third-party distribution locations, at which point our customers take ownership and assume risk of loss; collection of the related receivable is probable; persuasive evidence of a sale arrangement exists; and the sales price is fixed and determinable. In certain circumstances, we sell products to customers under special arrangements, which provide for return privileges, discounts, promotions and other sales incentives. At the time we recognize revenue, we reduce our measurement of revenue by an estimated cost of potential future returns and allowable retailer promotions and incentives, and recognize a corresponding reduction in reported trade accounts receivable. These estimates have traditionally been, and continue to be, sensitive to and dependent on a variety of factors including, but not limited to, quantities sold to our customers and the related selling and marketing support programs; channels of distribution; sell-through rates at retail; the acceptance of the styling of our products by consumers; the overall economic environment; consumer confidence leading towards and through the holiday selling season; and other related factors.
	Allowances established for returns were approximately $300 thousand, $2.0 million, and $900 thousand at the end of the third quarter of fiscal 2007, at the end of the comparable quarter of the 2006 transition period, and at the end of the 2006 transition period, respectively. The quarter-on-quarter decrease of $1.7 million in return allowances is consistent with our current business practice of collaborating more closely with our retailing partners to promote product sell-through during the season, thus reducing future returns. During the third quarter of fiscal 2007 and the comparable quarter of the 2006 transition period, we recorded approximately $1.7 million and $2.7 million, respectively, as the sales value of merchandise returned by customers. During the thirty-nine-week period of fiscal 2007 and the comparable nine-month period ended April 1, 2006, we recorded approximately $2.6 million and $2.9 million, respectively, as the sales value of merchandise returned by customers. The quarterly and nine-month period decreases of $1.0 million and $300 thousand, respectively, in the sales value of merchandise returned were due to the net of an increase in returns of branded merchandise from one customer, which transitioned to a private label program with us, and a reduction of returns during the fall 2006 selling season compared to the fall 2005 season, which is consistent with our ongoing approach to collaborate with key retailing partners to reduce or eliminate returns.
	During the third quarter of fiscal 2007 and the comparable period of the 2006 transition period, reductions in sales for future returns were $36 thousand and $318 thousand, respectively. During the thirty-nine-week period of fiscal 2007 and the comparable thirty-nine-week period ended April 1, 2006, reductions in sales for future returns were $1.9 million and $5.0 million, respectively. The decreases in the reductions in sales for future returns for the quarter and the thirty-nine-week period of $282 thousand and $3.1 million, respectively, are consistent with our current approach of collaborating closely with key retailing partners to reduce or eliminate returns.
	Allowances for promotions and other sales incentives established at the end of the third quarter of 2007 and the end of the comparable quarter of the 2006 transition period were approximately $3.7 million and $3.9 million, respectively, and $1.2 million at the end of the 2006 transition period. The $200 thousand quarter-on-quarter decrease in promotions and sales incentives allowances reflects primarily the net of an increase in customer claims recorded during the quarter in support of calendar 2007 spring business and a reduction in customer claims processed and paid at the end of the quarter associated primarily with fall 2006 business.
	Charges to earnings for consumer promotion and sales incentive activities for the third quarter of fiscal 2007 and the comparable quarter of the 2006 transition period were $1.0 million and $800 thousand, respectively. Charges to earnings for consumer promotion and sales incentives for the thirty-nine-week period of fiscal 2007 and the comparable nine-month period ended April 1, 2006, were $10.0 million and $9.2 million, respectively. The increases in consumer promotion and sales incentives in the comparative quarter and nine-month periods of $200 thousand and $800 thousand, respectively, were primarily due to a higher than expected level of support provided to our retailing partners to stimulate sell-through during and after the 2006 holiday season, as well as increased sales support for the calendar 2007 spring season. The increased support associated with the 2006 holiday season primarily resulted from warmer than expected weather during that season.

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	We have been successful thus far in our initiatives of collaborating with our retail partners to achieve mutually satisfactory sell-through rates by providing sales incentives for goods in season, thus positively impacting the level of returns. However, due to the continuing seasonal nature of our business, it is possible that allowances for returns, promotions and other sales incentives, and the related charges reported in our consolidated results of operations could be different than those estimates noted above.
(b)	We value inventories using the lower of cost or market, based upon the first-in, first-out (“FIFO”) costing method. We evaluate our inventories for any reduction in realizable value in light of the prior selling season, the overall economic environment, and our expectations for the upcoming selling seasons, and we record the appropriate write-downs based on this evaluation. At the end of the third quarter of fiscal 2007 and at the end of the comparable quarter of the 2006 transition period, we estimated the FIFO cost of a portion of our inventory exceeded the estimated net realizable value of that inventory by $200 thousand, as compared with a similar estimate of $463 thousand at the end of the 2006 transition period
	Inventory write-downs, recognized as part of cost of sales for continuing operations, were $200 thousand and $49 thousand during the third quarter of fiscal 2007 and the comparable quarter of the 2006 transition period, respectively. Inventory write-downs, recognized as part of cost of sales for continuing operations, were $1.1 million and $1.2 million during the thirty-nine-week period of fiscal 2007 and the comparable nine-month period ended April 1, 2006.
	Approximately $600 thousand and $900 thousand of inventory that had been previously written down was sold during the third quarter of fiscal 2007 and the comparable quarter of the 2006 transition period, respectively. Similarly, $5.1 million and $5.2 million of inventory that had been previously written down was sold during the thirty-nine-week period of fiscal 2007 and the comparable nine-month period ended April 1, 2006, respectively.
(c)	We make an assessment of the amount of income taxes that will become currently payable or recoverable for the just concluded period, and what deferred tax costs or benefits will become realizable for income tax purposes in the future, as a consequence of differences between results of operations as reported in conformity with U.S. GAAP, and the requirements of the income tax codes existing in the various jurisdictions where we operate. In evaluating the future benefits of deferred tax assets, we examine our capacity for refund of federal income taxes due to our net operating loss carry-forward position, and our projections of future profits. We recorded a valuation allowance when it was more likely than not that some portion or all of our deferred tax assets would not be realized. Accordingly, beginning with year-end fiscal 2003, we established a valuation allowance against the value of those deferred tax assets. At that time, there was not sufficient historical assurance that future taxable income would be generated to offset these deferred deductible items. Accordingly, we established a valuation allowance against the net deferred tax assets in the amount of $18.3 million at the end of the 2006 transition period.
	This full valuation allowance reserve was maintained through the first quarter of fiscal 2007. In the second quarter of fiscal 2007, the Company determined, based on the existence of sufficient positive evidence, represented primarily by three years of cumulative income before restructuring charges, a valuation allowance against net deferred tax assets was no longer required because it is more likely than not that the Company’s deferred tax assets will be realized in future periods. Accordingly, a complete reversal of the valuation allowance was recognized in closing out the second quarter of fiscal 2007. This action resulted in and accounts for substantially most of the net income tax benefit of $13.0 million reflected in our results for the thirty-nine week period of fiscal 2007.
	In addition, we make ongoing assessments of income tax exposures that may arise at the federal, state or local tax levels. As a result of these evaluations, any exposure deemed probable will be quantified and accrued as tax expense during the period and reported in a tax contingency reserve. Any identified exposures will be subjected to continuing assessment and estimates will be revised accordingly as information becomes available to us. Our tax contingency reserve at the end of the third quarter of fiscal 2007 was $500 thousand, representing an increase of $351 thousand for the thirty-nine week period of fiscal 2007.

Actual results may vary from any of these estimates as a consequence of activities after the period-end estimates have been made. These subsequent activities will have either a positive or negative impact upon the results of operations in a period subsequent to the period when we originally made the estimate.

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Recently Issued Accounting Standards

The following represent accounting standards that have been recently issued and that are applicable to our business.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109.This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes.This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. Earlier adoption of the provisions of the Interpretation is encouraged if the enterprise has not yet issued financial statements, including interim financial statements, in the period this Interpretation is adopted. This Interpretation will be effective for the Company’s fiscal year beginning on July 1, 2007. We do not expect the application of the provisions of this Interpretation to have any significant impact on the financial position or results of operations of our company.

In September 2006, the FASB released Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements. This standard becomes effective for fiscal years beginning after November 15, 2007 and interim periods within those years. Earlier application is encouraged, provided financial statements have not yet been issued for that fiscal year, including financial statements for an interim period within that fiscal year. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. We do not expect the implementation of SFAS No. 157 to have a significant effect on the financial position or results of operations of our company.

In September 2006, the FASB released SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132 (R), (“SFAS 158”). SFAS 158 revises the measurement approach to net pension funded status by changing pension liability measurement to a projected view based on estimated future pay levels used to determine ultimate pension benefits to be paid, as opposed to the use of current pay levels to estimate the pension liability. This change impacts the funded status measurement of pension plans. SFAS 158 requires the funded status as measured to be reflected entirely in the balance sheet of the Company, and eliminates alternative footnote presentations of this status. Impacts from reporting the full pension funding status into the financial position of the Company will be reflected as comprehensive gain or loss within the equity section of the balance sheet. Further changes include the elimination of intangible pension assets and the requirement for all companies to base pension plan measurements as of their fiscal year end date, and eliminates any alternative choice on measurement date that existed under prior standards.

Under SFAS 158, reporting changes will be implemented on a prospective basis as of the end of the fiscal year ending after December 15, 2006 for publicly held companies. The change of measurement date is required for fiscal years ending after December 15, 2008, with earlier adoption permitted. With the Company’s pension plans substantially frozen, there is no significant difference in the measurement of pension liability under SFAS No. 158 and the former governing standards in SFAS No. 87,Employers’ Accounting for Pensions. We do not expect the application of SFAS 158 to have a significant effect on the balance sheet presentation.

In September 2006, the Securities and Exchange Commission released Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on quantifying financial statement misstatements and requires a company to quantify misstatements using both the balance sheet and income statement approaches and to evaluate whether either approach results in quantifying an error that is material. We are required to adopt SAB 108 at the end of the current fiscal year. We do not expect the adoption of SAB 108 to have a material impact on our consolidated financial statements.

In February 2007, the FASB released SFAS 159,The Fair Value for Financial Assets and Liabilities - Including an amendment of FASB Statement No. 115, which becomes effective for fiscal years beginning after November 15, 2007. The new standard permits entities to measure selected financial instruments at fair value that are not currently required to be measured at such value. Such an election can be made on an instrument by instrument basis, within certain limitations.. In additional, this standard establishes presentation and disclosure requirements designed to support comparative use of financial statement disclosures. The Company does not expect the application of the provisions of this Interpretation to have a significant impact on its financial position or results of operations.

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ITEM 3 — Quantitative and Qualitative Disclosures About Market Risk

Market Risk Sensitive Instruments — Foreign Currency

Substantially all of our sales were conducted in North America and denominated in US Dollars during the thirty-nine-week period of fiscal 2007. For any significant sales transactions denominated in other than US Dollars, our established policy guidelines require us to hedge against currency exposure on a short-term basis, using foreign exchange contracts as a means to protect our operating results from adverse currency fluctuations. At the end of the third quarter of fiscal 2007 and at the end of the 2006 transition period, the Company did not have any such foreign exchange contracts outstanding.

Market Risk Sensitive Instruments — Interest Rates

Our principal market risk exposure relates primarily to the impact of changes in short-term interest rates that may result from the floating rate nature of the New Facility. At March 31, 2007, we had no borrowings outstanding under the New Facility. However, based on a projected annual average loan outstanding amount of $3.0 million for the next 12-month period and assuming that interest rates were to increase or decrease by 100 basis points, we estimate that interest expense would increase or decrease by approximately $30 thousand on an annualized basis. Currently, we do not hedge our exposure to floating interest rates.

ITEM 4 — Controls and Procedures

Evaluation of Disclosure Controls and Procedures

With the participation of the President and Chief Executive Officer (the principal executive officer) and the Senior Vice President-Finance, Chief Financial Officer and Secretary (the principal financial officer), the Company’s management has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s President and Chief Executive Officer and the Company’s Senior Vice President-Finance, Chief Financial Officer and Secretary have concluded that:

a.	information required to be disclosed by the Company in this Quarterly Report on Form 10-Q and the other reports that it files or submits under the Exchange Act would be accumulated and communicated to the Company’s management, including its principal executive officer and its principal financial officer, as appropriate to allow timely decisions regarding required disclosure;
b.	information required to be disclosed by the Company in this Quarterly Report on Form 10-Q and the other reports that it files or submits under the Exchange Act would be recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms; and
c.	the Company’s disclosure controls and procedures were effective as of the end of the quarterly period covered by this Quarterly Report on Form 10-Q.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the Company’s quarterly period ended March 31, 2007, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 4T – Controls and Procedures

Not Applicable.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

As previously reported, the Company has held several meetings with representatives of the Internal Revenue Service (“IRS”) with respect to certain adjustments, which, if sustained, could result in an additional tax obligation for the Company of up to approximately $4.0 million plus interest. The proposed adjustments relate to the years 1998 through 2002. Substantially all of the proposed adjustments relate to the timing of certain deductions taken during that period. On January 29, 2007, the Company’s representatives met with representatives of the IRS to review the additional information that had been requested by the IRS. During that meeting, the Company presented detailed evidence to support the timing of the expenses questioned by the IRS. The Company is currently pursuing a resolution of this mater with the IRS. In the opinion of management, the resolution of this matter is not expected to have a material effect on the Company’s financial position or results of operations.

The IRS requested and the Company consented to an extension of the statute of limitations to December 31, 2007 with respect to the matter described above.

Item 1A. Risk Factors

There are certain risks and uncertainties in our business that could cause our actual results to differ materially from those anticipated. In “Item 1A. Risk Factors” of Part I of our Transition Report on Form 10-K for the transition period from January 1 to July 1, 2006 (the “2006 Form 10-K”), we included a detailed discussion of our risk factors. The following information updates certain of our risk factors and should be read in conjunction with the risk factors disclosed in the 2006 Form 10-K. These risk factors should be read carefully in connection with evaluating our business and in connection with the forward-looking statements contained in this Quarterly Report on Form 10-Q. Any of the risks described could materially adversely affect our business, our operating results, or our financial condition and the actual outcome of matters as to which forward-looking statements are made.

Our North America business, which is our primary business, is dependent on our ability to continue sourcing products from outside North America.

We do not own or operate any manufacturing facilities in North America and depend upon third parties to manufacture all of our products. During the 2006 transition period and through the third quarter of fiscal 2007, nearly 100% of our products were manufactured in China. The inability of our Chinese manufacturers to ship orders of our products in a timely manner or to meet our quality standards could cause us to miss customer delivery date requirements and could result in cancellation of orders, refusals to accept deliveries, or harm to our ongoing business relationships. Furthermore, because quality is a leading factor when customers and retailers accept or reject goods, any decline in the quality of the products produced by our Chinese manufacturers could be detrimental not only to a particular order but to future relationships with our customers.

We compete with other companies for the production capacity of our manufacturers. Some of these competitors have greater financial and other resources than we have and may have an advantage in the competition for production from these manufacturers. If we experience a significant increase in demand for our products or if one of our existing manufacturers must be replaced, we may have to find additional third-party manufacturing capacity. There can be no assurance that this additional capacity will be available when required or will be available on terms that are similar to the terms that we have with our existing manufacturers or that are otherwise acceptable to us. If it is necessary for us to replace one or more of our manufacturers, particularly one that we rely on for a substantial portion of our products, we may experience an adverse financial or operational impact, such as increased costs for replacement manufacturing capacity or delays in distribution and delivery of our products to our customers, which could cause us to lose customers or revenues because of late shipments.

Our concentration of customers could have a material adverse effect on us, and our success is dependent on the success of our customers.

As a result of the continuing consolidation in the retail industry, our customer base has decreased, thus increasing the concentration of our customers. Our two largest customers combined accounted for over 40% of our consolidated net sales in fiscal 2005. We expect our business with these customers will be represented in the same proportion to our annual consolidated net sales for fiscal 2007. If either one of these customers reduced or discontinued its product purchases from us, it would adversely and materially affect our results of operations. Additionally, in recent years, several major department stores have experienced consolidation and ownership

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changes. In the future, retailers may undergo changes that could decrease the number of stores that carry our products, which could adversely affect our results.

Our success is also impacted by the financial results and success of our customers. If any of our major customers, or a substantial portion of our customers, generally, experiences a significant downturn in its business, fails to remain committed to our products or brands or realigns its affiliations with its suppliers or decides to purchase products directly from the manufacturer, then these customers may reduce or discontinue purchases from us which could have a material adverse effect on our business, results of operations and financial condition. We are also subject to the buying plans of our customers and if our customers do not inform us of changes in their buying plans until it is too late for us to make necessary adjustments to our product lines, we may be adversely affected. We do not have long-term contracts with our customers and sales normally occur on an order-by-order basis. As a result, customers can generally terminate their relationship with us at any time.

The footwear industry is highly competitive.

The footwear business is a highly competitive business and if we fail to compete effectively, we may lose market position. We operate in a relatively small segment of the overall footwear industry, supplying comfort footwear for use at- and around-the-home. We believe that we are the world’s largest marketer of comfort footwear for use at- and around-the-home. However, this is a very small component of the overall footwear industry. In recent years, companies that are engaged in other areas of the footwear industry and apparel companies have begun to provide at- and around-the-home comfort footwear, and many of these competitors have substantially greater financial, distribution and marketing resources than we do. In addition, many of the retail customers for our products are importing competitive products directly from manufacturers in China and elsewhere for sale in their stores on a private label basis. The primary methods of competition in our industry include product design, product performance, quality, brand image, price, marketing and promotion and our ability to meet delivery commitments to retailers obtaining access to retail outlets. A major marketing or promotional success or a technical innovation by one of our competitors could adversely impact our competitive position.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     (a) and (b) Not applicable

     (c) Neither R.G. Barry Corporation nor any “affiliated purchaser” of R.G. Barry Corporation as defined in Rule 10b -18 (a) (3) under the Securities Exchange Act of 1934, as amended, purchased any of the common shares of R.G. Barry Corporation during the quarterly period ended March 31, 2007. The Company does not currently have in effect a publicly announced repurchase plan or program.

Item 3. Defaults Upon Senior Securities

     (a), (b) Not Applicable

Item 4. Submission of Matters to a Vote of Security Holders

     (a) through (d) Not Applicable

Item 5. Other Information

     No response required

Item 6. Exhibits

     See Index to Exhibits at page 27.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	R. G. BARRY CORPORATION
	Registrant
Date: May 14, 2007
	/s/ Daniel D. Viren
	Daniel D. Viren
	Senior Vice President – Finance, Chief Financial Officer and Secretary (Principal Financial Officer) (Duly Authorized Officer)

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R.G. BARRY CORPORATION

INDEX TO EXHIBITS

Exhibit No.	Description	Location
10.1	Revolving Credit Agreement between R.G. Barry Corporation and The Huntington National Bank, made and entered into to be effective on March 29, 2007	Incorporated herein by reference to Exhibit 10.1 to R.G. Barry Corporation’s Current Report on Form 8-K dated April 3, 2007 and filed on April 4, 2007 (File No. 001-08769)
10.2	Revolving Credit Note given by R.G. Barry Corporation to The Huntington National Bank, dated March 29, 2007	Incorporated herein by reference to Exhibit 10.2 to R.G. Barry Corporation’s Current Report on Form 8-K dated April 3, 2007 and filed on April 4, 2007 (File No. 001-08769)
10.3	First Modification of Revolving Credit Agreement, made and entered into to be effective April 16, 2007, between R.G. Barry Corporation and The Huntington National Bank	Incorporated herein by reference to Exhibit 10.1 to R.G. Barry Corporation’s Current Report on Form 8-K dated April 17, 2007 and filed April 18, 2007 (File No. 001-08769)
31.1	Rule 13a-14(a)/15d-14(a) Certification (Principal Executive Officer)	Filed herewith
31.2	Rule 13a-14(a)/15d-14(a) Certification (Principal Financial Officer)	Filed herewith
32.1	Section 1350 Certifications (Principal Executive Officer and Principal Financial Officer)	Filed herewith

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