Hampshire 10Q 2006 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 September 30, 2006


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from to

Commission File Number: 000-20201

HAMPSHIRE GROUP, LIMITED

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		06-0967107 (I.R.S. Employer Identification No.)

1924 Pearman Dairy Road Anderson, South Carolina (Address of principal executive offices)		29625-1303 (Zip Code)

(864) 231-1200
Registrant’s telephone number, including area code

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. Yeso Noþ

Indicate by check mark whether 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.

Large accelerated filero Accelerated filerþ Non-accelerated filero

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

Number of shares of Common Stock outstanding as of July 31, 2007: 7,860,105

EXPLANATORY NOTE

On November 9, 2006, we filed a Form NT 10-Q indicating that we would not be able to file our Form 10-Q for the quarterly period ended September 30, 2006 pending completion by the Audit Committee of the Board of Directors (“Audit Committee”) of an investigation (“Audit Committee Investigation”) related to, among other things, the misuse and misappropriation of assets for personal benefit, certain related party transactions, tax reporting, internal control deficiencies and financial reporting, and accounting for expense reimbursements, in each case involving certain members of the Company’s management. On May 25, 2007, the Audit Committee concluded its investigation. On May 31, 2007, the Company filed Amendment No. 1 to its Form 10-K for the fiscal year ended December 31, 2005 (the “Form 10-K/A”) to, among other things, restate its consolidated financial statements for the three years then ended. The Form 10-K/A includes restated unaudited quarterly financial information for all quarters of 2005. Consistent with the restated unaudited quarterly financial information in the Form 10-K/A, the financial statements for the three and nine months ended October 1, 2005 included in this Quarterly Report on Form 10-Q have been restated. For additional information on the restatement and other adjustments and reclassifications, see Note 2 to the financial statements included in Part I, Item 1 in this Form 10-Q.

HAMPSHIRE GROUP, LIMITED

QUARTERLY REPORT ON FORM 10-Q

For the Quarterly Period Ended September 30, 2006


“SAFE HARBOR” STATEMENT	iii

PART I. FINANCIAL INFORMATION		1

Item 1. Financial Statements		1

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3. Quantitative and Qualitative Disclosures About Market Risk		27

Item 4. Controls and Procedures		27

PART II. OTHER INFORMATION		29

Item 1. Legal Proceedings		29

Item 1A. Risk Factors		29

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		29

Item 3. Defaults Upon Senior Securities		29

Item 4. Submission of Matters to a Vote of Security Holders		29

Item 5. Other Information		29

Item 6. Exhibits		30

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

“SAFE HARBOR” STATEMENT

UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

From time to time, we make oral and written statements that may constitute “forward looking statements” (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission (the “SEC”) in its rules, regulations and releases, including Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We desire to take advantage of the “safe harbor” provisions in the Private Securities Litigation Reform Act of 1995 for forward looking statements made from time to time, including, but not limited to, the forward looking statements made in this filing, as well as those made in other filings with the SEC.

Forward looking statements can be identified by our use of forward looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue” or other similar words. Such forward looking statements are based on our management’s current plans and expectations and are subject to risks, uncertainties and changes in plans that could cause actual results to differ materially from those described in the forward looking statements. Important factors that could cause actual results to differ materially from those anticipated in our forward looking statements include, but are not limited to, those described in Part I, Item 2 of this Form 10-Q and underRisk Factorsset forth in Part I, Item 1A of our Form 10-K/A Amendment No. 1 for the fiscal year ended December 31, 2005.

We expressly disclaim any obligation to release publicly any updates or any changes in our expectations or any changes in events, conditions or circumstances on which any forward-looking statement is based.

As used herein, except as otherwise indicated by the context, the terms “Hampshire” and “Company” are used to refer to Hampshire Group, Limited and its wholly-owned subsidiaries.

iii

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Hampshire Group, Limited and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets


(In thousands, except par value)	September 30, 2006			December 31, 2005
Current assets:
Cash and cash equivalents	$	428		$	65,791
Short-term investments		—			10,054
Accounts receivable, net		83,457			27,997
Other receivables		320			864
Inventories, net		56,251			13,960
Deferred tax assets		9,643			9,468
Other current assets		1,524			1,121

Total current assets		151,623			129,255
Fixed assets, net		2,007			2,056
Goodwill		8,392			8,392
Deferred compensation funds invested in trading securities		3,019			2,243
Other assets		4,956			568

Total assets	$	169,997		$	142,514


Current liabilities:
Current portion of long-term debt	$	46		$	46
Borrowings under credit facility		10,400			—
Accounts payable		23,332			9,337
Accrued expenses and other liabilities		28,656			27,142

Total current liabilities		62,434			36,525

Long-term debt less current portion		27			61
Deferred tax liabilities		—			198
Deferred compensation		3,637			2,765
Other long term liabilities		190			—

Total liabilities		66,288			39,549


Commitments and contingencies (Note 7)		—			—

Stockholders’ equity:
Preferred stock, $0.10 par value, 1,000,000 shares authorized; none issued		—			—
Common stock, $0.10 par value, 10,000,000 shares authorized; 8,243,784 shares issued at September 30, 2006 and December 31, 2005		824			824
Additional paid-in capital		35,038			34,824
Retained earnings		76,508			75,481
Treasury stock, 394,379 shares and 370,679 shares at cost at September 30, 2006 and December 31, 2005, respectively		(8,661	)		(8,164	)

Total stockholders’ equity		103,709			102,965

Total liabilities and stockholders’ equity	$	169,997		$	142,514

See accompanying notes to the financial statements.

Hampshire Group, Limited and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations


	For the Three Months Ended						For the Nine Months Ended
				(Restated,						(Restated,
				see Note 2)						see Note 2)
	September 30,			October 1,			September 30,			October 1,
(In thousands, except per share data)	2006			2005			2006			2005
Net sales	$	112,622		$	123,592		$	229,551		$	220,305
Cost of goods sold		82,610			93,492			172,607			167,254

Gross profit		30,012			30,100			56,944			53,051
Selling, general, and administrative expenses		21,124			18,286			55,425			45,643
Investigation, restatement, and related expenses		4,046			—			4,467			—
Recovery of improper payments		—			—			—			(6,013	)

Income (loss) from operations		4,842			11,814			(2,948	)		13,421
Other income (expense):
Interest income		80			153			1,110			1,102
Interest expense		(74	)		(106	)		(101	)		(365	)
Other, net		(5	)		53			177			81

Income (loss) before income taxes and extraordinary item		4,843			11,914			(1,762	)		14,239
Provision (benefit) for income taxes		2,927			5,653			(1,065	)		6,620

Income (loss) before extraordinary item		1,916			6,261			(697	)		7,619
Extraordinary item – gain on acquisition		—			—			1,800			—

Net income (loss)	$	1,916		$	6,261		$	1,103		$	7,619


Income (loss) per share before extraordinary item:
Basic	$	0.24		$	0.77		$	(0.09	)	$	0.93

Diluted	$	0.24		$	0.77		$	(0.09	)	$	0.93

Income per share from extraordinary item:
Basic	$	—		$	—		$	0.23		$	—

Diluted	$	—		$	—		$	0.23		$	—

Net income (loss) per share:
Basic	$	0.24		$	0.77		$	0.14		$	0.93

Diluted	$	0.24		$	0.77		$	0.14		$	0.93

Weighted average number of shares outstanding: (1)
Basic weighted average number of common shares outstanding		7,849			8,155			7,857			8,180

Diluted weighted average number of common shares outstanding		7,856			8,166			7,864			8,196


(1)		Weighted average number of shares outstanding and net income (loss) per share reflects the two-for-one stock split effective June 28, 2005.

See accompanying notes to the financial statements.

Hampshire Group, Limited and Subsidiaries
Unaudited Condensed Consolidated Statement of Stockholders’ Equity


					Additional											Total
	Common Stock				Paid-in		Retained			Treasury Stock						Stockholders’
(In thousands, except shares)	Shares		Amount		Capital		Earnings			Shares			Amount			Equity
Balance at December 31, 2005		8,243,784		824		34,824		75,481			370,679			(8,164	)		102,965
Net loss		—		—		—		1,103			—			—			1,103
Purchases of treasury stock		—		—		—		—			28,100			(593	)		(593	)
Shares issued under the Company stock plans		—		—		—		(76	)		(4,400	)		96			20
Tax benefit of options exercised, as restated		—		—		214		—			—			—			214

Balance at September 30, 2006		8,243,784	$	824	$	35,038	$	76,508			394,379		$	(8,661	)	$	103,709

See accompanying notes to the financial statements.

Hampshire Group, Limited and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows


	For the Nine Months Ended
				(Restated,
				see Note 2)
(In thousands)	September 30, 2006			October 1, 2005
Cash flows from operating activities:
Net (loss) income	$	1,103		$	7,619
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Extraordinary gain on acquisition		(1,800	)		—
Depreciation and amortization		1,042			693
Loss on disposition of fixed assets		10			—
Deferred income tax provision, net		633			441
Deferred compensation expense, net		753			714
Tax benefit of stock options exercised		214			317
Changes in operating assets and liabilities:
Receivables, net		(42,404	)		(54,887	)
Inventories, net		(31,699	)		(37,789	)
Other assets		(1,824	)		(1,079	)
Current liabilities		5,475			15,204

Net cash provided by (used in) continuing operating activities		(68,497	)		(68,767	)


Cash flows from investing activities:
Proceeds from the sale of short-term investments		10,395			76,867
Purchases of short-term investments		(341	)		(27,427	)
Proceeds from sales of securities for deferred compensation		(657	)		(1,800	)
Cash used for business acquisitions, net of cash acquired		(2,768	)		—
Capital expenditures		(535	)		(1,185	)
Proceeds on the disposition of fixed assets		22			—

Net cash provided by (used in) continuing investing activities		6,116			46,455


Cash flows from financing activities:
Proceeds from credit facility		20,800			—
Repayments of credit facility		(10,400	)		—
Advances repaid to factor		(12,775	)		—
Purchase of treasury stock, net		(593	)		(985	)
Repayment of long-term debt		(34	)		(2,858	)
Proceeds from issuance of stock under the Company stock plans		20			439

Net cash provided by (used in) continuing financing activities		(2,982	)		(3,404	)

Net increase (decrease) in cash and cash equivalents		(65,363	)		(25,716	)
Cash and cash equivalents at beginning of period		65,791			31,214

Cash and cash equivalents at end of period	$	428		$	5,498

See accompanying notes to the financial statements.

Note 1 – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Hampshire Group, Limited and its Subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and according to instructions from the United States Securities and Exchange Commission (“SEC”) for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements and should be read in conjunction with the restated audited financial statements included in the Company’s Form 10-K/A Amendment No. 1 (“Form 10-K/A”) for the fiscal year ended December 31, 2005. The December 31, 2005 financial information was derived from Form 10-K/A.

The information included herein is not necessarily indicative of the annual results that may be expected for the year ended December 31, 2006, but does reflect all adjustments (which are of a normal and recurring nature) considered, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. In addition, the Company’s revenues are usually highly seasonal, causing significant fluctuations in financial results for interim periods. The Company sells apparel throughout the year but approximately 70% of its annual sales historically occur in the third and fourth quarters, primarily due the large concentration of sweaters in the product mix and seasonality of the apparel industry in general.

Stock Options

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Statement (“FAS”) No. 123(R), “Share-Based Payment” (“FAS 123R”). This Statement is a revision of FAS No. 123, “Accounting for Stock-Based Compensation”(“FAS 123”), and supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and its related implementation guidance. FAS 123R requires a company to measure the grant date fair value of equity awards given to employees in exchange for services and recognize that cost over the period that such services are performed. FAS No. 123(R) was effective for interim or annual reporting periods beginning on or after January 1, 2006. The Company recorded no expense related to FAS No. 123(R) as there were no options granted to employees during the quarter and nine periods ended September 30, 2006 or the years ended December 31, 2005 and 2004 and 2,000 options were granted during the year ended December 31, 2003. The expense for previously granted unvested options during the quarter and nine month periods ended September 1, 2006 was immaterial to the Company’s financial position, results of operations, and cash flows.

Recent Accounting Standards

In June of 2005, the FASB issued FAS No. 154, “Accounting Changes and Error Corrections – a replacement of APB No. 20 and FASB Statement No. 3” (“FAS 154”). This Statement generally requires retrospective application to prior periods’ financial statements of changes in accounting principle. Previously, Opinion No. 20 required that most voluntary changes in accounting principle were recognized by including the cumulative effect of changing to the new accounting principle in net income of the period of the change. FAS 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. This Statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company complied with the provisions of FAS 154 as it relates to the restatement discussed in Note 2 –Restatement of Previously Issued Consolidated Financial Statements.

In November of 2005, the FASB issued FASB Staff Position No. 123(R)-3 “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.” (“FSP No. 123(R)-3”) FSP No. 123(R)-3 provides an alternative method of calculating the excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of FAS No. 123(R). The Company adopted FSP No. 123(R)-3 in the first quarter of 2006 and implemented the method contained in the original announcement and it did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

In June of 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - - an interpretation of FAS Statement No.109” (“FIN 48”), which clarifies the accounting for uncertainty in income tax positions. This Interpretation requires that the financial statement effects of a tax position taken or expected to be taken in a tax return are to be recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination, including resolution of any related appeals or litigation processes. FIN 48 is effective for fiscal years beginning after December 15, 2006, and we will be required to adopt this interpretation in the first quarter of fiscal year 2007. The Company is currently evaluating the impact of FIN 48 on its financial statements.

In September of 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (“FAS No. 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles in the United States and expands disclosures about fair value measurements. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact of FAS No. 157 on our financial statements, but does not expect it to have a material impact on its financial statements.

On September 13, 2006, the SEC issued 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 interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 requires registrants to quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 is effective for registrants’ financial statements for fiscal years ending on or after November 15, 2006, with early application encouraged. The adoption of SAB 108 is not expected to have a material effect on the Company’s financial statements.

Note 2 – Restatement of Previously Issued Financial Statements

On June 22, 2006, the Company announced that the Audit Committee of its Board of Directors (“Audit Committee) commenced an investigation (“Audit Committee Investigation”) related to, among other things, the misuse and misappropriation of assets for personal benefit, certain related party transactions, tax reporting, internal control deficiencies and financial reporting, and accounting for expense reimbursements, in each case involving certain members of the Company’s management. The Audit Committee retained external legal counsel to conduct the investigation. Pending the outcome of the investigation, the Board of Directors (“Board”) placed Ludwig Kuttner, the Company’s Chief Executive Officer; Charles Clayton, the Company’s Executive Vice President, Treasurer and former Chief Financial Officer; Roger Clark, the Company’s Vice President of Finance and Principal Accounting Officer; and two personal assistants on administrative leave.

On September 25, 2006, the Company announced that it had terminated the employment of Mr. Kuttner as a result of findings that, among other things, indicated Mr. Kuttner had submitted expense reports to the Company for approximately $1,450,000 covering approximately 10 years, a substantial portion of which were fraudulent or not substantiated in accordance with Company policy. Approximately $2,000, $901,000, and $173,000 were submitted and reimbursed in fiscal years 2005, 2004, and 2003, respectively. The Board also terminated the employment of Mr. Clayton on that date.

On October 30, 2006, the Board established an Executive Committee consisting of all directors other than Mr. Kuttner, and granted the Executive Committee all of the powers of the Board, except as limited by law.

As part of the Audit Committee Investigation, the Company undertook a review of its accounting and disclosure policies and internal controls. On December 13, 2006, the Company announced that, among other things, it would restate the annual financial statements for the years 2003 through 2005 as well as for the quarter ended April 1, 2006, and advised that all financial statements and related reports of the Company’s independent registered public accounting firm should no longer be relied upon. On December 31, 2006, the Company terminated the employment of the Company’s Vice President of Finance and Principal Accounting Officer and the two personal assistants placed on administrative leave on June 22, 2006.

On May 25, 2007, the Audit Committee concluded its investigation. On May 31, 2007, the Company filed Amendment No. 1 to Form 10-K for the fiscal year ended December 31, 2005 to, among other things, restate its financial statements for each of the three years in the period then ended. The Company has also amended its Form 10-Q for the quarter ended April 1, 2006, to, among other things, restate its financial statements for the periods covered therein.

The SEC and the United States Attorney of the Southern District of New York (“U.S. Attorney’s Office”) are currently investigating certain issues identified during the Audit Committee Investigation. For the quarter and nine month period ended September 30, 2006, the Company had incurred fees and expenses of approximately $4,046,000 and $4,467,000, respectively, in connection with the Audit Committee Investigation, restatement of financial statements, the investigations by the SEC’s and the U.S. Attorney’s Office, and related matters. The expenses are listed as “Investigation, restatement, and related expenses” in the Statement of Operations.

Restatement Adjustments for the Quarter and Nine Months Ended October 1, 2005

Tax (non-income) Liabilities

The improperly reimbursed expense reports of Mr. Kuttner brought about the review of expense reimbursements to other employees, and the Company determined that certain expenses were not a part of an accountable plan under Internal Revenue Service (“IRS”) regulations and that the Company would likely incur tax liabilities related to payroll tax withholdings. Employee benefit plans were reviewed as part of the investigation and determined that certain employee deferred compensation plans may not have met regulatory criteria and that the Company would likely incur tax liabilities related to payroll tax withholdings. In addition, certain other likely non-income tax liabilities were identified as part of the investigation. Adjustments were recorded as a result of the findings that increased selling, general, and administrative expenses, which totaled approximately $144,000 and $445,000 for the quarter and nine months ended October 1, 2005, respectively.

Expense Accruals

The Audit Committee Investigation included the review of expense recognition and the corresponding accrued liabilities. Accruals related to employee bonuses, employee benefit plans, professional fees, royalties, and receipt of vendor products were recorded in periods prior or subsequent to the period in which the liability was incurred. Vendor rebates on unsold accessories improperly overstated selling, general, and administrative expenses totaling approximately $152,000 and certain other expenses were under accrued by approximately $96,000 resulting in reduction of approximately $56,000 of selling, general, and administrative expenses in the quarter ended October 1, 2005. These items resulted in additional costs of approximately $225,000 for the nine months ended October 1, 2005.

Income Taxes and Net Income

Income tax benefits related to the adjustments were approximately $578,000 and $370,000 for the quarter and nine months ended October 1, 2005, respectively. The net effect of correcting the errors identified as a result of the Audit Committee Investigation was a decrease in net income of approximately $666,000 or $0.08 per basic and per diluted share and $1,040,000 or $0.13 per basic and $0.12 per diluted share for the quarter and nine months ended October 1, 2005, respectively.

Unaudited Condensed Consolidated Statements of Operations Adjustments

The following table sets forth the effect of the restatement adjustments on the applicable line items within the Company’s unaudited condensed consolidated statement of operations for the quarter ended October 1, 2005:


	As Previously			Restatement
(In thousands, except per share data)	Reported			Adjustments			Restated
Net sales	$	123,592		$	—		$	123,592
Cost of goods sold (a)		93,659			(167	)		93,492

Gross profit		29,933			167			30,100
Selling, general, and administrative expenses (a)		18,031			255			18,286
Recovery of improper payments		—			—			—

Income from operations		11,902			(88	)		11,814
Other income (expense):
Interest income		153			—			153
Interest expense		(106	)		—			(106	)
Other, net		53			—			53
Non-recurring income		—			—			—

Income before income taxes		12,002			(88	)		11,914
Provision for income taxes		5,075			578			5,653

Net income	$	6,927		$	(666	)	$	6,261

Net income per share:
Basic	$	0.85		$	(0.08	)	$	0.77

Diluted	$	0.85		$	(0.08	)	$	0.77

Weighted average number of shares outstanding:
Basic weighted average number of common shares outstanding		8,155			—			8,155

Diluted weighted average number of common shares outstanding (b)		8,186			(20	)		8,166

The Company also changed the classification of certain financial statement amounts and changed certain share amounts, which are described in the following notes:

(a)		Vendor rebates for approximately $167 on accessories were reclassified from selling, general, and administrative expenses to cost of goods sold.

(b)		Approximately 39,100 options that expired in May of 2004 were improperly included as part of the diluted weighted average number of common shares outstanding.


	As Previously			Restatement
(In thousands except per share data)	Reported			Adjustments			Restated
Net sales	$	220,305		$	—		$	220,305
Cost of goods sold (a)		167,433			(179	)		167,254

Gross profit		52,872			179			53,051
Selling, general, and administrative expenses (b)		43,403			2,240			45,643
Recovery of improper payments (b)		—			(6,013	)		(6,013	)

Income from operations		9,469			3,952			13,421
Other income (expense):
Interest income		1,102			—			1,102
Interest expense		(365	)		—			(365	)
Other, net		81			—			81
Non-recurring income (b)		4,622			(4,622	)		—

Income before income taxes		14,909			(670	)		14,239
Provision for income taxes		6,250			370			6,620

Net income	$	8,659		$	(1,040	)	$	7,619

Net income per share:
Basic	$	1.06		$	(0.13	)	$	0.93

Diluted	$	1.05		$	(0.12	)	$	0.93

Weighted average number of shares outstanding:
Basic weighted average number of common shares outstanding		8,180			—			8,180

Diluted weighted average number of common shares outstanding (c)		8,216			(20	)		8,196

The Company also changed the classification of certain financial statement amounts and changed certain share amounts, which are described in the following notes:

(a)		Vendor rebates for approximately $179 on accessories were reclassified from selling, general, and administrative expenses to cost of goods sold.

(b)		A settlement received of $6,013 net of expenses incurred was reclassified as “recovery of improper payments” from non-recurring income of $4,622 and selling, general, and administrative expenses of $1,391.

(c)		Approximately 39,100 options that expired in May of 2004 were improperly included as part of the diluted weighted average number of common shares outstanding.

Unaudited Condensed Consolidated Statements of Cash Flows Adjustments

The following table sets forth the effect of the restatement adjustments on the applicable line items within the Company’s unaudited condensed consolidated statement of cash flows for the nine months ended October 1, 2005:


	As Previously			Restatement
(In thousands)	Reported			Adjustments			Restated
Cash flows from operating activities:
Net income	$	8,659		$	(1,040	)	$	7,619
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		693			—			693
Deferred income tax benefit (a)		—			441			441
Deferred compensation expense, net		1,041			(327	)		714
Tax benefit of stock options exercised (a)		—			317			317
Changes in operating assets and liabilities:
Receivables, net		(54,887	)		—			(54,887	)
Inventories, net		(37,934	)		145			(37,789	)
Other assets (a)		701			(1,780	)		(1,079	)
Current liabilities (a)		12,956			2,248			15,204

Net cash provided by (used in) operating activities		(68,771	)		4			(68,767	)

Cash flows from investing activities:
Proceeds from the sale of short-term investments		76,867			—			76,867
Purchases of short-term investments		(27,427	)		—			(27,427	)
Purchase of securities in deferred compensation fund (a)		(1,796	)		(4	)		(1,800	)
Capital expenditures		(1,185	)		—			(1,185	)

Net cash provided by (used in) investing activities		46,459			(4	)		46,455

Cash flows from financing activities:
Proceeds from line of credit		—			—			—
Repayment of line of credit		—			—			—
Repayment of long-term debt		(985	)		—			(985	)
Purchase of treasury stock, net		(2,858	)		—			(2,858	)
Proceeds from issuance of treasury stock		439			—			439

Net cash provided by (used in) financing activities		(3,404	)		—			(3,404	)

Net increase (decrease) in cash and cash equivalents		(25,716	)		—			(25,716	)
Cash and cash equivalents at beginning of period		31,214			—			31,214

Cash and cash equivalents at end of period	$	5,498		$	—		$	5,498

In addition to the restatement items discussed above, the Company also changed the classification of certain financial statement amounts, which are described in the following note:

(a)

Reclassifications made for items previously shown on a net basis.

Note 3 – Inventories

Inventories consist of the following:


(In thousands)	September 30, 2006			December 31, 2005
Finished goods	$	64,281		$	17,347
Work-in-process		469			—
Raw materials and supplies		1,102			70

Total cost		65,852			17,417
Less: reserves		(9,601	)		(3,457	)

Inventory, net	$	56,251		$	13,960

Note 4 – Revolving Credit Facility

The Company has a Revolving Credit Agreement (“Credit Facility”) with six participating commercial banks. The Credit Facility, which matures on December 31, 2007 (See Note 9 –Subsequent Events), provides for secured borrowings up to $100,000,000 in revolving line of credit borrowings and letters of credit. Advances under the line of credit are limited to the lesser of: (1) $100,000,000 less outstanding letters of credit; or (2) the sum of 85% of eligible accounts receivable, 50% of eligible inventory (subject to seasonal limits), 50% of outstanding eligible letters of credit issued pursuant to the Credit Facility, and cash on deposit in a pledged account, if any.

Advances under the Credit Facility bear interest at either the bank’s prime rate less 0.25% or, at the option of the Company, a fixed rate of the London Interbank Offered Rate or LIBOR plus 1.80%, for a fixed term. The loan is collateralized by the trade accounts receivable, inventory, cash on deposit in a pledged account, if any, and a pledge of the common stock of the subsidiaries. At September 30, 2006, the Company had outstanding borrowings of $10,400,000 and $36,252,000 outstanding under letters of credit under its revolving line of credit. At September 30, 2006, the Company had availability under the Revolving Credit Facility for borrowing of approximately $53,348,000.

The Credit Facility contains financial covenants and covenants that restrict certain payments by the Company. The financial performance covenants require, among other things, that the Company maintain specified levels of consolidated net worth, not to exceed a specified consolidated leverage ratio, achieve a specified fixed charge ratio and limit capital expenditures, restricted payments to a specified maximum amount, and requires the Company to provide periodic financial statements to the banks.. The repurchase of the Company’s common stock is limited to an aggregate of $10,000,000. As of September 30, 2006, the Company was in compliance with the financial performance covenants and restrictions. See Note 9 –Subsequent Eventsregarding covenant waivers.

Note 5 – Earnings (Loss) Per Share

Set forth in the table below is the reconciliation by year of the numerator (income or loss) and the denominator (shares) for the computation of basic and diluted earnings per share (“EPS”):


	Numerator			Denominator		Per Share
(In thousands, except per share data)	Income (Loss)			Shares		Amount
Quarter ended September 30, 2006:
Basic net income	$	1,916			7,849	$	0.24
Effect of dilutive securities:
Stock options		—			7		—

Diluted net income	$	1,916			7,856	$	0.24

Quarter ended October 1, 2005:
Basic net income	$	6,261			8,155	$	0.77
Effect of dilutive securities:
Stock options		—			11		—

Diluted net income	$	6,261			8,166	$	0.77

Nine months ended September 30, 2006:
Net loss before extraordinary item	$	(697	)		7,857	$	(0.09	)
Extraordinary item – gain on acquisition		1,800					0.23

Basic net income	$	1,103			7,857	$	0.14
Effect of dilutive securities:
Stock options		—			7		—

Diluted net income	$	1,103			7,864	$	0.14

Nine months ended October 1, 2005:
Basic net income	$	7,619			8,180	$	0.93
Effect of dilutive securities:
Stock options		—			16		—

Diluted net income	$	7,619			8,196	$	0.93

Note 6 – Stock Split and Buyback

On March 17, 2005, the Board of the Company approved a two-for-one stock split of issued common stock payable June 28, 2005 to stockholders of record at the close of business as on May 31, 2005. As a result of the stock split, stockholders of record received one additional share of common stock for each share of common stock held on the record date. The stock split resulted in the distribution of 4,121,892 additional shares of common stock, which included 640,082 shares used from the Company’s treasury stock account. Upon completion of the stock split, the number of issued shares of common stock was 8,243,784 of which 83,400 shares were held as treasury stock.

On April 26, 2006, the Board of the Company approved the repurchase of up to 1,000,000 shares of the Company’s outstanding common stock through open market or privately negotiated transactions over an indefinite period. The Company suspended purchases under this program upon the commencement of the Audit Committee Investigation.

Note 7 – Commitments and Contingencies

Prior to 2003, the Company was advised that certain of its suppliers would not be able to deliver finished product as agreed. In connection with this situation, the Company established a reserve in the amount of $7,515,000 during 2002 for costs of past inventory purchases which had not yet been paid to the supplier and other matters arising from these events and has accordingly adjusted the reserve for ongoing activity. At September 30, 2006, these matters remain unresolved.

The Company has bonus agreements with certain members of current and former management which are contingent upon the release of the reserve established for supplier disputes. If the Company determined that this reserve was no longer needed and was released, the bonus payments could be as much as $1,000,000.

In addition, see Note 9 for a description of litigation and certain related matters.

Note 8 – Acquisitions

Shane Hunter

On January 5, 2006, the Company, through its wholly owned subsidiary SH Holding Company, a Delaware corporation, purchased substantially all of the net assets and business of Shane-Hunter, Inc. as of January 1, 2006. The purchase price for the net assets and business was $1,991,000. SH Holding Company changed its name to Shane Hunter, Inc. (“Shane Hunter”). Shane Hunter is based in San Francisco, California and is primarily engaged in the sale of junior’s and children’s apparel to mass merchant retailers. The principals of Shane-Hunter, Inc. have continued with the business as its co-presidents and are responsible for the operation of the business. The estimated fair market values of assets acquired and liabilities assumed were as follows:


(In thousands)	January 5, 2006
Assets
Cash and cash equivalents	$	1
Accounts receivable, net		10,955
Inventories, net		9,700
Other current assets		802
Fixed assets		123
Identified intangibles⁽¹⁾		2,148

Total assets acquired	$	23,729


Liabilities
Advances due factor	$	12,775
Accounts payable		8,096
Accrued expenses and other liabilities		867

Total liabilities assumed	$	21,738


Purchase price (net assets acquired)	$	1,991


⁽¹⁾		The identified intangibles relate primarily to non-competition agreements, which will be amortized over six years.

Marisa Christina

On May 20, 2006, the Company, through a wholly owned subsidiary, acquired Marisa Christina, Incorporated (“Marisa Christina”) as part of the expansion of its women’s better market strategy by prior management, after which time it continued to operate as a wholly-owned subsidiary of Hampshire Group. Upon completion of the acquisition, each outstanding share of Marisa Christina common stock was converted into the right to receive $0.65 per share less a pro rata portion of the transaction costs incurred by Marisa Christina, representing an aggregate purchase price of approximately $4,834,000. The Company determined an overall net asset value for Marisa Christina of $6,634,000, which assets included $4,056,000 of cash acquired. Therefore, pursuant to FAS No. 141, “Business Combinations,” the Company recorded a $1,800,000 extraordinary gain for the amount by which the net assets acquired exceeded the purchase price. The estimated fair market values of assets acquired and liabilities assumed were as follows:


(In thousands)	May 20, 2006
Assets
Cash and cash equivalents	$	4,056
Accounts receivable, net		1,557
Inventories, net		892
Other current assets		384
Deferred tax assets		1,006

Total assets acquired	$	7,895


Liabilities
Accounts payable		394
Accrued expenses and other liabilities		867

Total liabilities assumed	$	1,261


Net assets acquired	$	6,634
Purchase price		4,834

Extraordinary gain on acquisition	$	1,800

In May of 2007, the Company made the determination to discontinue domestic operations and sales of Marisa Christina but continues to license the label internationally. In addition, the Company is evaluating strategic alternatives for this entity.

Note 9 — Subsequent Events

Audit Committee Investigation and Related Matters

On December 13, 2006, the Company announced that it would restate the annual and quarterly financial statements for the years 2003 through 2005 as well as for the quarter ended April 1, 2006, and advised that all financial statements and related reports of the Company’s independent registered public accounting firm should no longer be relied upon. On December 31, 2006, the Company terminated the employment of the Company’s Vice President of Finance and Principal Accounting Officer and the two personal assistants placed on administrative leave on June 22, 2006.

As a part of the restatement, the Company identified issues with its deferred compensation plans that require remediation. The Company will take remediation steps during 2007 regarding the deferred compensation plans of Mr. Kuttner and Mr. Clayton, which may include acceleration in payment of the deferred compensation plans. As a part of this remediation plan, the Company was required to accelerate the payment of the entire balance of Eugene Warsaw’s deferred compensation plan during 2006 due to a violation of Internal Revenue Code Section 409(A) regarding payment of deferred compensation funds within six months of his retirement. Mr. Warsaw is a former Chief Executive Officer of a subsidiary of the Company. The violation resulted in a 20% penalty to Mr. Warsaw on his entire deferred compensation balance as well as immediate payment of taxes on the deferred compensation. During December of 2006, the Board approved payment to cover the penalty in the form of an income tax gross up of the penalty for approximately $484,000.

On January 17, 2007, the Company announced that its common stock would be delisted from The Nasdaq Global Market, effective January 19, 2007, as a result of the Company’s failure to file its Quarterly Reports on Form 10-Q. There is no longer an established public trading market for our common stock. The Company’s common stock is currently quoted on the Pink Sheets under the symbol “HAMP.PK.” The Pink Sheets is a centralized quotation service that collects and publishes market maker quotes for over-the-counter securities in real time.

In February of 2007, the Company entered into a voluntary disclosure agreement with certain state and local taxing authorities to resolve income nexus tax liabilities. The total amount of these settlements was approximately $805,000 including interest.

On May 25, 2007, the Audit Committee concluded its investigation. On May 31, 2007, the Company filed an amended Form 10-K for the year ended December 31, 2005 that, among other things, restated its financial statements for the fiscal years ended December 31, 2005, 2004 and 2003. The Company has also amended its Form 10-Q for the quarter ended April 1, 2006, to, among other things, restate its financial statements for the periods therein.

As of July 25, 2007, the Company entered into Waiver to Credit Agreement (the “ Waiver “) with respect to that certain Credit Agreement and Guaranty (the “Credit Facility”), dated as of August 15, 2003 and amended as of December 29, 2004, November 10, 2005, August 8, 2006, October 13, 2006, December 29, 2006, March 30, 2007, and July 11, 2007, by and among the Company, the Guarantors party thereto, HSBC Bank USA, National Association, as Agent for the banks, and the banks named therein (the “Banks”). Pursuant to the Waiver the Banks and the Company agreed, in consideration for $25,000 and the payment of the Agent’s legal fees and expenses, to postpone further the requirement to deliver to the Banks the Company’s financial statements as long as it meets rescheduled reporting requirements according to the following schedule:


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

In addition, to the extent a breach of a representation or other term of the Credit Facility is caused by the restatement of the Company’s prior financial statements, the Banks waived compliance with such provisions as long as the restated financial statements are delivered in accordance with the rescheduled requirements and the restated financial statements do not demonstrate non-compliance with any financial covenant as of any quarter-end test date occurring subsequent to June 29, 2006. The Company was in compliance with financial covenants related to financial statements for quarter-end test dates subsequent to June 29, 2006.

The SEC and the U.S. Attorney’s Office are currently investigating certain issues identified during the Audit Committee Investigation. The Company is cooperating with both the investigations of the SEC and U.S. Attorney’s Office. As of July 1, 2007, the Company had incurred fees and expenses of approximately $9,626,000 in connection with the Audit Committee Investigation, restatement of financial statements, the investigations by the SEC and the U.S. Attorney’s Office, and related matters. The Company expects to incur additional costs to make current its SEC filing requirements and in connection with the investigations by the SEC and the U.S. Attorney’s Office, and related matters. The Company cannot predict the total cost but believes that future costs may be material.

Other Matters

On August 30, 2005, the Company entered into a twelve year lease for 100% of the space in a building in Anderson, South Carolina with a company in which Mr. Kuttner and Mr. Clayton are the beneficial owners commencing on February 1, 2007. During the fourth quarter of 2006, the Company entered into a sublease for a portion of this unused space and took a charge of approximately $47,000 due to the fact that the economic terms of the sublease were less favorable than the lease.

In May of 2007, the Company received a notice from the IRS that it was going to examine the Company’s 2005 tax return.

The Company entered into a fifteen year, six month lease of approximately 77,000 square feet of office space in New York, New York on July 11, 2007. The office space addresses present as well as future operational needs and allows the consolidation of operations currently dispersed over a number of locations in New York, which will provide certain divisions with the opportunity to capitalize on synergies currently unavailable to them. The Company believes that over the term of the lease its costs will be lower than had it elected to maintain the current leasing arrangements. The lease provides for minimum payments of $59,815,000 over the lease term, and the Company estimates capital expenditures related to the new facility will be made in fiscal year 2007 and fiscal year 2008 in an amount not to exceed $8,500,000, net of landlord allowances.

In connection with the new facility lease, the Company entered into entered into Amendment No. 6 to the Credit Facility (“Amendment No. 6”) with respect to the Credit Facility. Pursuant to Amendment No. 6, the Banks and the Company agreed that the expenditure by the Company of up to an aggregate of $8,500,000, net of landlord allowances, for tenant improvements to the leased premises (in addition to certain tenant improvements to the leased premises to be funded by the landlord) will not be deemed to be “Consolidated Capital Expenditures” within the meaning of the Credit Facility for purposes of determining the Company’s compliance with the consolidated fixed charge coverage ratio and the restriction on capital expenditures under the Credit Facility.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion contains statements that are forward-looking. These statements are based on expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed elsewhere in this report. This discussion should be read in conjunction with the discussion of forward-looking statements, the financial statements, and the related notes and the other statistical information included in this report.

DISCUSSION OF FORWARD-LOOKING STATEMENTS

This report contains statements which may constitute “forward-looking statements” (rather than historical facts) as defined in the Private Securities Litigation Reform Act of 1995 or by the SEC in its rules, regulations and releases, including Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements are based on our management’s current plans and expectations and are subject to risks, uncertainties and changes in plans that could cause actual results to differ materially from those described in the forward-looking statements. The words “may,” “will,” “expect,” “anticipate,” “estimate,” “believe,” “continue” or other similar words are meant to identify such forward-looking statements. Potential risks and uncertainties that could cause our actual results to differ from those anticipated in any forward-looking statements include, but are not limited to, those described in our Form 10-K/A Amendment No. 1 for the fiscal year ended December 31, 2005 under Item 1A —Risk Factors, and include the following risk factors:

	•		Decreases in business from or the loss of any one of our key customers;

	•		Financial instability experienced by our customers;

	•		Loss or inability to renew certain licenses;

	•		Change in consumer preferences and fashion trends, which could negatively affect acceptance of our products by retails and consumers;

	•		Use of foreign suppliers for raw materials and manufacture of our products;

	•		Failure of our manufacturers to use acceptable ethical business practices;

	•		Failure to deliver quality products in a timely manner;

	•		Problems with our distribution system and our ability to deliver products;

	•		Labor disruptions at port or our suppliers or manufacturers or distribution facilities;

	•		Chargebacks and margin support payments;

	•		Failure, inadequacy, interruption or security lapse of our information technology;

	•		Failure to compete successfully in a highly competitive and fragmented industry;

	•		Challenges integrating the David Brooks, Shane Hunter, and Marisa Christina businesses or any other businesses we may acquire;

	•		Unanticipated expenses beyond the amount reserved on our balance sheet or unanticipated cash payments related to the ultimate resolution of income and other possible tax liabilities;

	•		Ownership of a significant portion of our common stock by Mr. Kuttner could determine the outcome of matters presented to stockholders for approval;

	•		Future defaults under our credit facility;

	•		Loss of certain key personnel which could negatively impact our ability to manage our business;

	•		Material weaknesses in our internal control over financial reporting;

	•		Investigations by the SEC and the United States Attorney of the Southern District of New York (“U.S. Attorney’s Office”);

	•		Potential future restatements of our prior financial statements; and

	•		The Company’s dispute with Mr. Kuttner.

RESTATEMENTS AND RELATED MATTERS

On June 22, 2006, the Company announced that the Audit Committee of its Board of Directors (“Board”) commenced an investigation related to, among other things, the misuse and misappropriation of assets for personal benefit, certain related party transactions, tax reporting, internal control deficiencies and financial reporting and accounting for expense reimbursements, in each case involving certain members of the Company’s management. The Audit Committee retained Paul, Weiss, Rifkind, Wharton & Garrison, LLP to conduct the investigation. Pending the outcome of the investigation, the Board placed Ludwig Kuttner, the Company’s Chief Executive Officer, Charles Clayton, the Company’s Executive Vice President, Treasurer and former Chief Financial Officer, Roger Clark, the Company’s Vice President of Finance and Principal Accounting Officer, and two personal assistants on administrative leave.

On August 9, 2006, the Company announced that it intended to defer filing its Quarterly Report on Form 10-Q for the quarter ended July 1, 2006 with the SEC as a result of the pending investigation. On August 17, 2006 the Company announced that it received a notification from the Nasdaq Global Market indicating that due to the Company’s failure to file its Quarterly Report on a timely basis, the Company’s common stock was subject to delisting from the Nasdaq Global Market.

On September 25, 2006, the Company announced that it had terminated the employment of Mr. Kuttner as a result of findings that, among other things, indicated Mr. Kuttner had submitted expense reports to the Company for approximately $1,450,000 covering approximately 10 years, a substantial portion of which were fraudulent or not substantiated in accordance with Company policy. The Board also terminated the employment of Mr. Clayton on that date.

On December 13, 2006, the Company announced that it would restate the annual financial statements for the years 2003 through 2005 as well as for the quarter ended April 1, 2006, and advised that all financial statements and related reports of the Company’s independent registered public accounting firm should no longer be relied upon. On December 31, 2006, the Company terminated the employment of the Company’s Vice President of Finance and Principal Accounting Officer and the two personal assistants placed on administrative leave on June 22, 2006.

In of February 2007, the Company entered into a voluntary disclosure agreement with certain state and local taxing authorities to resolve income nexus tax liabilities. The total amount of these settlements was approximately $805,000 including interest.

On May 25, 2007, the Audit Committee concluded its investigation. On May 31, 2007, the Company filed an amended Form 10-K for the year ended December 31, 2005 that, among other things, restated its financial statements for the fiscal years ended December 31, 2005, 2004 and 2003. The Company is currently evaluating claims it may have against Mr. Kuttner and others, including claims for misappropriation, breach of fiduciary duty and, pursuant to the Sarbanes-Oxley Act, disgorgement of bonuses and net gain on stock sales.

Restatement Adjustments for the Quarter and Nine Months Ended October 1, 2005

Tax (non-income) Liabilities

The improperly reimbursed expense reports of Mr. Kuttner brought about the review of expense reimbursements to other employees, and the Company determined that certain expenses were not a part of an accountable plan under Internal Revenue Service (“IRS”) regulations and that the Company would likely incur tax liabilities related to payroll tax withholdings. Employee benefit plans were reviewed as part of the investigation and determined that certain employee deferred compensation plans may not have met regulatory criteria and that the Company would likely incur tax liabilities related to payroll tax withholdings. In addition, certain other non-income tax liabilities were identified as part of the investigation. Adjustments were recorded as a result of the findings that increased selling, general, and administrative expenses, which totaled approximately $144,000 and $445,000 for the quarter and nine months ended October 1, 2005, respectively.

Expense Accruals

The Audit Committee Investigation included the review expense recognition and the corresponding accrued liabilities. Accruals related to employee bonuses, employee benefit plans, professional fees, royalties, and receipt of vendor products were recorded in periods prior or subsequent to the period in which the liability was incurred. Vendor rebates on unsold accessories were improperly recognized as a reduction of selling, general, and administrative expenses totaling approximately $152,000 and certain other expenses were under accrued by approximately $96,000 resulting in reduction of approximately $56,000 of selling, general, and administrative expenses in the quarter ended October 1, 2005. These items resulted in additional costs to pre tax income for approximately $225,000 for the nine months ended October 1, 2005.

Income Taxes and Net Income

Legal and Compliance Matters

On July 18, 2006, a stockholder derivative suit was filed in the United States District Court for the District of South Carolina naming as defendants Mr. Kuttner and Mr. Clark and directors Joel Goldberg, Michael Jackson, Harvey Sperry, and Irwin Winter, as well as naming the Company as a nominal defendant. The complaint alleged, among other things, that the named individual defendants breached their fiduciary duties to the Company, abused control relationships, engaged in gross mismanagement of the Company, wasted Company assets and were unjustly enriched. On September 19, 2006, the defendants filed motions to dismiss the complaint for failure to meet the pleading requirements for derivative actions. The plaintiff filed an amended complaint on November 15, 2006, adding Mr. Clayton as a defendant, and the defendants again moved to dismiss. Following oral argument, the court provided the plaintiff an additional opportunity to amend her complaint. The plaintiff filed a second amended complaint on January 10, 2007, and the defendants renewed their motions to dismiss. On April 13, 2007, the court granted the defendants motions and dismissed the suit. No appeal was taken. On May 27, 2007, the Plaintiff’s counsel made a formal “demand” that the Company institute legal proceedings against certain of its current and/or former officers and directors within 90 days. The Company subsequently responded rejecting the demand for artificial deadlines and reaffirmed its commitment to take all necessary and appropriate actions in the best interests of its shareholders.

On August 17, 2006, Mr. Kuttner filed a Demand for Arbitration with the American Arbitration Association claiming that the suspension “effectively terminated” his employment with the Company without cause and that therefore he is entitled, pursuant to his employment agreement with the Company, to unpaid compensation, including salary, accrued bonus and unreimbursed expenses, a termination benefit and continued health, dental and life insurance coverage in the aggregate amount of $7,500,000. The arbitration proceeding was stayed in February 2007 at Mr. Kuttner’s request pending the outcome of discussions between Mr. Kuttner and the Company, but resumed in July when Mr. Kuttner filed an amended statement of claim. The Company intends to contest vigorously Mr. Kuttner’s claim. In addition, the Company is currently evaluating claims it may have against Mr. Kuttner, including claims for misappropriation, breach of duty of loyalty and, pursuant to the Sarbanes-Oxley Act, disgorgement of bonuses, and net gain on stock sales. In his amended claim, Mr. Kuttner seeks a declaratory judgment that he is not liable to the Company for such claims.

In May of 2007, the Company received a notice from the IRS that it was going to examine the Company’s 2005 tax return.

Delisting

Due to the potential impact on financial results of the Audit Committee Investigation, the Company did not file its Quarterly Reports on Form 10-Q for the periods ended July 1, 2006 and September 30, 2006 with the SEC, which is a Nasdaq Global Market listing requirement. On January 17, 2007, the Company announced that its common stock would be delisted from The Nasdaq Global Market, effective January 19, 2007, as a result of the Company’s failure to file its Quarterly Reports on Form 10-Q. There is no longer an established public trading market for our common stock. The Company’s common stock is currently quoted on the Pink Sheets under the symbol “HAMP.PK.” The Pink Sheets is a centralized quotation service that collects and publishes market maker quotes for over-the-counter securities in real time.

OTHER MATTERS

Indemnification Obligations

Under our Bylaws, we indemnify our directors, officers and employees for certain events or occurrences while the director, officer or employee is, or was serving, at our request in such capacity. The indemnification applies to all pertinent events and occurrences to the extent and under the circumstances permitted under Delaware law. During fiscal year 2006, we entered into indemnification agreements with Michael Culang, the Company’s interim President and Chief Executive Officer; Heath Golden, the Company’s Vice President and General Counsel; Jonathan Norwood, the Company’s Chief Financial Officer; and Maura McNerney, the Company’s Vice President — Compliance and Internal Audit (each an “Indemnitee”). During fiscal year 2007, we also entered into indemnification agreements with each of the following directors: Joel Goldberg, Michael Jackson, Harvey Sperry, and Irwin Winter.

Each Indemnification Agreement provides, among other things, that the Company will indemnify the Indemnitee if the Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that the Indemnitee is or was or has agreed to serve at the request of the Company as a director, officer, employee or agent of the Company or, while serving as a director or officer of the Company, is or was serving or has agreed to serve at the request of the Company as a director, officer, trustee, employee or agent of or in any other capacity with another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, or with respect to any action involving any of the individuals that are subjects of the Company’s Audit Committee Investigation described in the Form 8-K filed by the Company on June 22, 2006; provided, that the Indemnitee acted in good faith and in a manner the Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action, suit or proceeding, had no reasonable cause to believe the Indemnitee’s conduct was unlawful. In addition, the Company is required to advance expenses on behalf of the Indemnitee in connection with the Indemnitee’s defense of any such claim; provided, that the Indemnitee undertakes in writing to repay such amounts to the extent that it is ultimately determined that the Indemnitee is not entitled to indemnification by the Company. All Idemnitees have provided this undertaking.

Acquisitions

On January 5, 2006, the Company, through its wholly owned subsidiary SH Holding Company, a Delaware corporation, purchased substantially all of the assets and business of Shane-Hunter, Inc. as of January 1, 2006. The purchase price for the net assets and business was $1,991,000. SH Holding Company changed its name to Shane Hunter, Inc. (“Shane Hunter”). Shane Hunter is based in San Francisco, California and is primarily engaged in the sale of junior’s and children’s apparel to mass merchant retailers. The principals of Shane-Hunter, Inc. have continued with the business as its co-presidents and are responsible for the operation of the business.

After incurring ongoing losses in the Marisa Christina division due to deteriorating sales, the Company made the determination in May 2007 to discontinue domestic operations and sales of Marisa Christina but plans to continue to license the label in Japan. In addition, the Company is evaluating strategic alternatives for this entity.

Revolving Credit Facility Extension

As of March 30, 2007, the Company entered into Amendment No. 5 and Waiver to Credit Agreement (the “Amendment”) with respect to that certain Credit Agreement and Guaranty (the “Credit Facility”), dated as of August 15, 2003 and amended as of December 29, 2004, November 10, 2005, August 8, 2006, October 13, 2006 and December 29, 2006, by and among the Company, the Guarantors party thereto, HSBC Bank USA, National Association, as Agent for the Banks, and the Banks named therein (the “Banks”). Pursuant to the Amendment the Banks and the Company agreed, in consideration for $25,000 and the payment of the Agent’s legal fees and expenses, to, among other things, extend the term of the Facility to December 31, 2007.

Related Party Transaction

On August 30, 2005, the Company entered into a twelve year lease for 100% of the space in a building in Anderson, South Carolina with a company in which Mr. Kuttner and Mr. Clayton are the beneficial owners with a commencement date of February 1, 2006. During the fourth quarter of 2006, the Company entered into a sublease for a portion of this unused space and took a charge of approximately $47,000 due to the fact that the economic terms of the sublease were less favorable than the lease.

New Facility Lease and Related Credit Facility Amendment

The Company entered into a fifteen year, six month lease of approximately 77,000 square feet of office space in New York, New York on July 11, 2007. The office space addresses present as well as future operational needs and allows the consolidation of operations currently dispersed over a number of locations in New York, which will provide certain divisions with the opportunity to capitalize on synergies currently unavailable them. The Company believes that over the term of the lease its costs will be lower than had it elected to maintain the current leasing arrangements. The lease provides for minimum payments of $59,815,000 over the lease term, and the Company estimates capital expenditures related to the new facility will be made in fiscal year 2007 and fiscal year 2008 in an amount not to exceed $8,500,000, net of landlord allowances.

Future minimum contractual obligations related to the lease are as follows:


(in thousands)	Total		2008		2009		2010		2011		2012		Thereafter
Facility lease	$	59,815	$	2,904	$	3,485	$	3,645	$	3,677	$	3,677	$	42,427

The Company’s possession of the facility commences in 2007 and lease payments begin in 2008. The lease includes rent escalations commencing in 2010. The lease is being amortized on a straight-line basis over the expected lease term, including any rent holidays and rent escalations. The Company estimates it will incur approximately $1,286,000 in amortization expense in 2007 related to the lease.

In connection with the new facility lease, the Company entered into Amendment No. 6 to the Credit Facility (“Amendment No. 6”) with respect to the Credit Facility. Pursuant to Amendment No. 6, the Banks and the Company agreed that the expenditure by the Company of up to an aggregate of $8,500,000, net of landlord allowances, for tenant improvements to the leased premises (in addition to certain tenant improvements to the leased premises to be funded by the landlord) will not be deemed to be “Consolidated Capital Expenditures” within the meaning of the Credit Facility for purposes of determining the Company’s compliance with the consolidated fixed charge coverage ratio and the restriction on capital expenditures under the Credit Facility.

Rescheduled Credit Facility Reporting Requirements

As of July 25, 2007, the Company entered into Waiver to Credit Agreement (the “Waiver”) with respect to the Credit Facility. Pursuant to the Waiver the Banks and the Company agreed, in consideration for $25,000 and the payment of the Agent’s legal fees and expenses, to postpone further the requirement to deliver to the Banks the Company’s financial statements as long as it meets rescheduled reporting requirements according to the following schedule:


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

In addition, to the extent a breach of a representation or other term of the Credit Facility is caused by the restatement of the Company’s prior financial statements, the Banks waived compliance with such provisions as long as the restated financial statements are delivered in accordance with the rescheduled requirements and that the restated financial statements do not demonstrate non-compliance with any financial covenant as of any quarter-end test date occurring subsequent to June 29, 2006. The Company was in compliance with financial covenants related to financial statements for quarter-end test dates subsequent to June 29, 2006.

OVERVIEW

We are in the apparel business and conducts our business through four wholly owned subsidiaries: Hampshire Designers, which primarily designs and sells women’s and men’s sweaters; Item-Eyes, which designs and sells a broad line of women’s woven and knit related separates; SB Corporation, doing business as David Brooks, which designs and sells a “better” women’s product line; and Shane Hunter, which designs and sells apparel to mass retailers.

Our products, both branded and private label, are marketed in the moderate and better markets through multiple channels of distribution including national and regional department stores, mass market retailers and specialty stores. Customers in the United States represented more than 96% of revenues in each of the three years prior to 2006, a trend we expect to continue. Sales outside of the United States were principally to customers in Canada.

We believe that the Company, through Hampshire Designers and other divisions, is one of the largest designers and marketers of sweaters for women and men in North America. We sell apparel throughout the year, but approximately 70% of our annual sales historically occur in the third and fourth quarters, primarily due to the large concentration of sweaters in the product mix. Unseasonable weather, particularly warm weather in the autumn and winter, can disproportionately negatively impact our margins as sales of sweaters by our customers may require discounts or allowances. We diversified our product line with the purchases of Item-Eyes (2000), David Brooks (2005), and Shane Hunter (2006).

Our primary strength is our ability to design, develop, source and deliver quality products within a given price range, while providing superior levels of customer service. We have developed international sourcing abilities which permit us to deliver quality merchandise at a competitive price to our customers.

Our companies source the manufacture of their products through manufacturers primarily located in Southeast Asia. Our products are subject to increased prices for the products we source, but have historically been able to maintain our gross margin by achieving sourcing efficiencies, controlling costs in other parts of our operations and, when necessary, passing along a portion of our cost increases to our customers through higher selling prices. We purchase our products from international suppliers primarily using letters of credit in U.S. dollars, a method we expect to continue to employ in the future.

With our dependence on international sources, the failure of any of these manufacturers to ship products to in a timely manner, failure of the manufacturers to meet required quality standards, or delays in the shipments including clearing U. S. Customs could cause us to miss delivery dates to customers. The failure to make timely deliveries of quality products could result in customers either canceling the orders or demanding reduced prices for late delivery. Though historically not negatively influencing our margins, currency fluctuations could also expose us to higher costs.

The apparel market is highly competitive. Competition is primarily based on product design, price, quality and service. While we face competition from domestic manufacturers and distributors, our primary competition comes from manufacturers located in Southeast Asia, some of whom make our product. We also compete for private label programs with the internal sourcing departments of many of our customers.

RESULTS OF OPERATIONS

At the beginning of the fourth quarter of 2005 the Company acquired the “David Brooks” trademark, inventory, and certain other assets from Kellwood Company, on January 5, 2006, the Company acquired all of the assets and assumed certain liabilities of Shane Hunter, a San Francisco based apparel business, and on May 20, 2006 the Company acquired Marisa Christina, Incorporated, an apparel business located in New Jersey. In the following discussion the activities of these three operations are collectively referred to as the Company’s “acquired business.” The activity of the Company’s business which continued from the previous year is referred to as the Company’s “existing business.”

Three Months Ended September 30, 2006 and October 1, 2005

Net Sales

Net sales decreased 8.9% to $112,622,000 compared with $123,592,000 for the same period last year. Net sales from the Company’s acquired business contributed approximately $15,586,000 to the net sales of the current period. The $26,556,000 decrease in the Company’s existing business from the prior period resulted from a 157,000 dozen decrease in unit volumes and a unit selling price decline of approximately 7.6%. A decline in 2006 shipments to several customers primarily of the private label business for women’s related separates division accounted for the majority of the decrease in existing business net sales in the current quarter compared with the same period in 2005. The women’s related separates division annual net sales in 2006, when reported, will be lower than 2005 due to such decline. Sweater volume was also lower in the current period due to product that shipped early in the fourth quarter as compared with the third quarter of the prior year.

Gross Profit

Gross profit as a percentage of net sales was 26.7% for the quarter ended September 30, 2006 compared with 24.4% for the same period last year. Gross profit from the acquired business contributed approximately $4,110,000 to our gross profit, and as a percentage of net sales was 26.4% in the current period. The existing business gross profit as a percentage of net sales increased to 26.7% as the result of a higher margin product mix in the current quarter as compared with the same period in the prior year.

Selling, General, and Administrative Expenses

Selling, general, and administrative (“SG&A”) expenses were $21,124,000 versus $18,286,000 for the same period last year. The SG&A expenses in the current period for the acquired business were approximately $5,276,000. Excluding expenses related to the acquired business, the $2,438,000 decrease in existing business SG&A expenses was principally in relation to cost cutting in the private label business division in response to the decline in net sales in the current period. The Company expects 2006 existing business SG&A, as compared to 2005, to continue to decline as costs were reduced in response to the anticipated loss of revenues associated with the private label business in the division.

Investigation, Restatement, and Related Expenses

Expenses related to the Audit Committee Investigation were approximately $4,046,000 in the current quarter. Expenses related to the Audit Committee Investigation, consisting primarily of professional fees, are expected to continue to be significant in the fourth quarter of 2006 and into fiscal year 2007.

Income Taxes

The Company recorded an income tax provision of $2,927,000 compared with $5,653,000 for the same period last year. The effective income tax rate was 60.4% compared with 47.4% for the same period last year. The increase in the effective tax rate as compared with the prior period primarily resulted from the impact of non-deductible tax items and income tax reserves associated with the restatement coupled with an expected decline in pre tax income in the current fiscal year.

Nine Months Ended September 30, 2006 and October 1, 2005

Net Sales

Net sales increased 4.2% to $229,551,000 compared with $220,305,000 for the same period last year. Net sales from the Company’s acquired business contributed approximately $52,168,000. The $42,922,000 decrease in the Company’s existing business resulted from a 329,000 dozen decrease in unit volumes and a unit selling price decline of approximately 2.9%. A decline in 2006 shipments to several customers primarily of the private label business for women’s related separates division accounted for the majority of the decrease in existing business net sales in the current period compared with the same period in 2005. The women’s related separates division annual net sales in 2006, when reported, will be lower than 2005 due to such decline. Sweater volume was lower in the current period with a reduction in units shipped offset in part by an increase in average unit selling prices.

Gross Profit

Gross profit as a percentage of net sales was 24.8% for the nine months ended September 30, 2006 compared with 24.1% for the same period last year. Gross profit from the acquired business contributed approximately $12,716,000 to our gross profit, and as a percentage of net sales was 24.4% in the current period. The existing business gross profit as a percentage of net sales increased to 24.9% as the result of a higher margin product mix, particularly in the current quarter, as compared with the same period in the prior year.

Selling, General, and Administrative Expenses

SG&A expenses were $55,425,000 versus $45,643,000 for the same period last year. The SG&A expenses in the current period for the acquired business were approximately $13,654,000. Excluding expenses related to the acquired business, the existing business $3,872,000 decrease in SG&A expenses was principally in relation to cost cutting in the private label business division in response to the decline in net sales in the current period. The Company expects 2006 existing business SG&A, as compared to 2005, to continue to decline as costs were reduced in response to the anticipated loss of revenues associated with the private label business in the division.

Investigation, Restatement, and Related Expenses

Expenses related to the Audit Committee Investigation were approximately $4,467,000 in the nine months ended September 30, 2006. Expenses related to the Audit Committee Investigation, consisting primarily of professional fees, are expected to continue to be significant in the fourth quarter of 2006 and into fiscal year 2007.

Recovery of Improper Payments

During the second quarter of 2005, the Company discovered that two former employees had been receiving commissions from a former vendor, which were not disclosed to the Company and were received in violation of Company policy. The commissions related to purchases made by the Company during the years 2000 through 2002. The Company had previously terminated its relationship with this vendor in 2002 for unrelated reasons. Management reported the misconduct to the Company’s Audit Committee, who then engaged outside counsel to conduct an independent review of the matter. The Company considered pursuing legal remedies against the former employees but reached a settlement prior to the commencement of proceedings. Pursuant to the settlement, the Company received $6,013,000 net of expenses incurred in connection with the investigation and settlement of the matter. The settlement has been included as “recovery of improper payments” in the consolidated statement of income for the nine months ended October 1, 2005, due to the unusual nature of the item. Included in this settlement is $1,391,000 from one of the former employees related to an employment contract termination recorded in the fourth quarter of 2004.

Income Taxes

Due to the operating loss, the Company recorded an income tax benefit of $1,065,000 compared with an expense of $6,620,000 for the same period last year. The effective income tax rate was 60.4% compared with 46.5% for the same period last year. The increase in the effective tax rate as compared with the prior period primarily resulted from the impact of non-deductible tax items and income tax reserves associated with the restatement coupled with an expected decline in pre tax income in the current fiscal year.

Extraordinary Income

The Company determined an overall asset value for Marisa Christina of $6,634,000, which exceeded the purchase price of $4,834,000 and resulted in extraordinary gain from the acquisition in the amount of $1,800,000. See Note 8 —Acquisitionsto the Consolidated Financial Statements andAcquisitionsabove.

LIQUIDITY AND CAPITAL RESOURCES

The primary liquidity and capital requirements of the Company are to fund working capital for current operations, which consists primarily of funding the seasonal buildup in inventories and accounts receivable. Due to the seasonality of the business, the Company generally reaches its maximum working capital requirement during the third quarter of the year. The primary sources to meet the liquidity and capital requirements include funds generated from operations and borrowings under revolving credit lines.

Net cash provided by investing activities was $6,116,000 for the nine months ended September 30, 2006 as compared with $46,455,000 for the same period last year. The change was primarily the result of $49,440,000 of net short term investment proceeds in the prior period versus $10,054,000 of net short term investment proceeds in the current period.

The Company maintains a Revolving Credit Agreement (“Credit Facility”) with six participating commercial banks, with HSBC Bank USA as agent. The Credit Facility, which matures on December 31, 2007, provides for secured borrowings up to $100,000,000 in revolving line of credit borrowings and letters of credit. Advances under the line of credit are limited to the lesser of: (a) $100,000,000 less outstanding letters of credit; or (b) the sum of 85% of eligible accounts receivable; cash deposited in a pledged account; 50% of eligible inventory (subject to seasonal limits); and 50% of outstanding eligible letters of credit issued pursuant to the Credit Facility, plus seasonal over advances in the periods of highest requirements.

Advances under the Credit Facility bear interest at either the bank’s prime rate less 0.25% or, at the option of the Company, a fixed rate of the London Interbank Offered Rate or LIBOR plus 1.80%, for a fixed term. The loan is collateralized by the trade accounts receivable, inventory, cash on deposit in a pledged account, if any, and a pledge of the common stock of the subsidiaries. At September 30, 2006, the Company had outstanding borrowings of $10,400,000 and $36,252,000 outstanding under letters of credit and no cash deposited in a pledged account. At September 30, 2006, the Company had availability under the Revolving Credit Facility for borrowing of approximately $53,348,000.

The Credit Facility contains an aggregate limit of $10,000,000 on the repurchase of the Company’s common stock. As of September 30, 2006, the Company had repurchased a net amount of $8,661,000 of its common stock. In addition, on April 26, 2006, the Board of the Company approved the repurchase of up to 1,000,000 shares of the Company’s outstanding stock. Repurchases of shares of the Company’s common stock under this plan were suspended upon the commencement of the Audit Committee Investigation.

Management believes that it will be able to renew the Credit Facility on comparable terms and that the borrowings available to it, under the current and future credit facilities along with cash flow from operations, will provide adequate resources to meet the Company’s capital requirements and operational needs for the foreseeable future.

OFF-BALANCE SHEET ARRANGEMENTS

The Company utilizes letters of credit and is a party to operating leases. It is currently not the Company’s general business practice to have material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance-sheet arrangements for the Company.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to the Company’s significant accounting policies and estimates as set forth in the annual Report on Form 10-K/A Amendment No. 1 for the year ended December 31, 2005.

RECENT ACCOUNTING PRONOUNCEMENTS

In June of 2005, the FASB issued FAS No. 154, “Accounting Changes and Error Corrections – a replacement of Accounting Principles Board Opinion (“APB”) No. 20 and FASB Statement No. 3” (“FAS 154”). This Statement generally requires retrospective application to prior periods’ financial statements of changes in accounting principle. Previously, Opinion No. 20 required that most voluntary changes in accounting principle were recognized by including the cumulative effect of changing to the new accounting principle in net income of the period of the change. FAS 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. This Statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company complied with the provisions of FAS 154 as it relates to the restatement discussed in Note 2 –Restatement of Previously Issued Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company is exposed to market risk in the area of changing interest rates. The Company is also exposed to market risk due to increased costs of its products. During the first nine months of fiscal year 2006, there were no significant changes in the Company’s exposure to market risks. See Item 7A in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2005, which was filed with the Securities and Exchange Commission on May 31, 2007, for a discussion regarding the Company’s exposure to market risks. The impact of a hypothetical 100 basis point increase in interest rates on the Company’s variable rate debt (borrowings under the Credit Facility) would have been minimal in the three months and the nine months ended September 30, 2006 and October 1, 2005 due to the negligible short-term borrowings during such periods

Item 4. Controls and Procedures.

Under the supervision and with the participation the Company’s Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of its disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) that were in place, as of September 30, 2006. Based on the evaluation performed, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, because of the material weaknesses that management identified in our internal controls over financial reporting as of December 31, 2005, which were not remediated as of September 30, 2006, our disclosure controls and procedures were not effective at a reasonable level as of September 30, 2006.

The Public Company Accounting Oversight Board Auditing Standard No. 2 defines a material weakness as a control deficiency, or a combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the Company’s financial statements will not be prevented or detected.

In connection with the evaluation described above, the Company’s present management identified material weaknesses as of December 31, 2005, which were not remediated as of September 30, 2006, in the following areas:

	•		Control Environment

			Certain of the Company’s controls including certain entity level controls within its control environment were not effectively designed or applied to prevent certain members of former management, including Mr. Kuttner and Mr. Clayton, from having the ability, which in certain instances was utilized, to circumvent or override certain controls and affect preparation of accounting entries and certain transactions including expense reimbursements to certain employees. In addition, discussion and thorough legal, accounting, or other professional analysis did not occur in all instances. This material weakness contributed to the restatement of the Company’s financial statements and increased the likelihood of a material misstatement occurring within the Company’s interim and annual financial statements not being prevented or detected.

	•		Controls Over the Financial Statement Preparation and Disclosure Process

			The Company’s design and operation of controls with respect to the process of preparing and reviewing the annual and interim financial statements are ineffective. Deficiencies identified include the lack of appropriate review of the footnotes, reconciliations, and supporting schedules. The Company also lacked adequate controls related to complying with disclosure requirements such as the use of disclosure checklists, lacked adequate controls over spreadsheets used in the financial close and reporting process, and lacked an independent review of journal entries. This material weakness contributed to the restatement of the Company’s provision for income taxes, accrued expenses and other liabilities, as well as expense reimbursements to certain employees.

	•		Controls Over the Provision for Income Taxes

			The Company failed to maintain effective controls to provide reasonable assurance that the provision for income taxes was appropriately determined, including adequate reserves for certain tax liabilities. The Company had potential tax liabilities for deductions related to highly-compensated executive officers of a publicly-held company related to Internal Revenue Code Section 162(m) for incentive compensation, deductions for non-accountable plan expense reimbursements under IRS regulations, certain executive deferred compensation plans that may not have conformed to federal regulations due to actions by Mr. Kuttner and Mr. Clayton, and certain other tax matters, including state and local income tax nexus issues.

	•		Controls Over Accrued Expenses and Other Liabilities

			The Company failed to maintain effective internal controls related to the review of accrued liabilities. Accordingly, accruals related to employee bonuses, certain employee benefit plans, and receipt of vendor products were recorded in periods prior or subsequent to the period in which the liability was incurred. In addition, the Company had unrecorded payroll tax liabilities related to, among other things, certain employee deferred compensation plans.

Changes in Internal Control Over Financial Reporting

There were significant changes in the Company’s internal control over financial reporting during the three months ended September 30, 2006 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting as outlined in “Remediation of Material Weaknesses in Internal Controls Over Financial Reporting.”

Remediation of Material Weaknesses in Internal Controls Over Financial Reporting

During the quarter ended September 30, 2006, the Company was actively engaged in implementation and remediation efforts to address the material weaknesses in the Company’s internal controls over financial reporting. These remediation efforts, outlined below, were specifically designed to address the material weaknesses identified by the Company’s management:

•

With respect to the control environment material weakness, the Company terminated the employment of two members of former management who were responsible for the preparation of financial statements.

Subsequent to September 30, 2006, the Company has been actively engaged in implementation and remediation efforts to address the material weaknesses in the Company’s internal controls over financial reporting as of September 30, 2006. These remediation efforts, outlined below, are specifically designed to address the material weaknesses identified by the Company’s management:

•

Implemented enhanced procedures and controls around the financial statement preparation and disclosure process as well as the financial review process at the corporate level. These enhancements include but are not limited to dedicating personnel with technical knowledge of SEC reporting to the financial statement preparation process; providing such personnel access to applicable training; obtaining database software to assist in the research of complex accounting and disclosure matters; and formalization of the procedures for tracking disclosure matters.

•

Implemented extensive procedures and controls around the income tax provision process. These enhancements include but are not limited to dedicating personnel to the tax provision process with technical knowledge of the Company’s tax filings and FAS 109 – Accounting for Income Taxes; providing such personnel access to applicable training; obtaining database software to assist in the research of complex tax matters; and formalization of the procedures for preparation of the tax provision.

•

Implemented enhanced procedures and controls around acquisition accounting, accrued liabilities, management for and accounting of benefit plans, and management expense reports.

In addition, the more enhanced reconciliation procedures and detailed reviews implemented to address these issues subsequent to September 30, 2006 will continue to be performed in the future to ensure these matters are remediated. The Company has not yet completed its evaluation of internal controls as to their effectiveness for the year ended December 31, 2006.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

For a description of litigation and certain related matters, please see Note 9 of PART I. FINANCIAL INFORMATION, Item 1, entitledSubsequent Events, and Part I, Item 2 entitledLegal and Compliance MattersunderRestatements and Related Matters.

Item 1A. Risk Factors.

There have been no material changes to the Company’s risk factors as set forth in the Annual Report on Form 10-K/A Amendment No. 1 for the year ended December 31, 2005.

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

ISSUER PURCHASES OF EQUITY SECURITIES
COMMON STOCK, $0.10 PAR VALUE

Total Number of

Maximum Number

Total

Shares Purchased

of Shares that May

Number of

Average

as Part of Publicly

Yet be Purchased

Shares

Price Paid

Announced Plans

Under Such Plans or

Period

Purchased

per Share

or Programs

Programs

July 3 – July 28, 2006

—

July 31 – Sept. 1, 2006

—

Sept. 4 – Sept. 30, 2006

—

Total

—

44,621

Note: Repurchases are made under a plan announced on May 9, 2005 for the repurchase of up to 400,000 shares of common stock. On April 26, 2006, the Board approved the repurchase of 1,000,000 additional shares of common stock of the Company. The plan does not have an expiration date. The Company suspended purchases under this plan upon the commencement of the Audit Committee Investigation.

Item 3. Defaults Upon Senior Securities.

During the 2006 quarter covered by this report, there were no defaults upon the Company’s senior securities. For a discussion of certain waivers and amendments to the credit facility subsequent to September 30, 2006, see Note 9 of Part I, Item 1, entitledSubsequent Events, and Part I, Item II, entitledRevolving Credit Facility ExtensionunderRestatements and Related Matters.

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

Not applicable.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits.

(a)

The following exhibits are filed as part of this Report:

10.1 Amendment No. 3 and Waiver, dated as of August 8, 2006, to that certain Credit Agreement and Guaranty, dated as of August 15, 2003 and amended December 29, 2004 and November 10, 2005, by and among the Company, the Guarantors party thereto, HSBC Bank USA, National Association, as Agent for the Banks, and the Banks named therein (incorporated by reference to Exhibit 10.1 to the Company’s Current Report (File No. 000-20201) on Form 8-K filed on August 9, 2006).

10.2 Indemnification Agreement, dated as of August 21, 2006, by and between Jonathan Norwood and Hampshire Group, Limited (incorporated by reference to Exhibit 10.1 to the Company’s Current Report (File No. 000-20201) on Form 8-K filed on August 24, 2006).

10.3 Letter Agreement, dated August 21, 2006, by and between Jonathan Norwood and Hampshire Group, Limited (incorporated by reference to Exhibit 10.2 to the Company’s Current Report (File No. 000-20201) on Form 8-K filed on August 24, 2006).

10.4 Indemnification Agreement, dated as of September 11, 2006, by and between Michael Culang and Hampshire Group, Limited (incorporated by reference to Exhibit 10.1 to the Company’s Current Report (File No. 000-20201) on Form 8-K filed on September 12, 2006).

10.5 Indemnification Agreement, dated as of September 11, 2006, by and between Heath L. Golden and Hampshire Group, Limited (incorporated by reference to Exhibit 10.2 to the Company’s Current Report (File No. 000-20201) on Form 8-K filed on September 12, 2006).

10.6 Indemnification Agreement, dated as of September 11, 2006, by and between Maura McNerney and Hampshire Group, Limited (incorporated by reference to Exhibit 10.3 to the Company’s Current Report (File No. 000-20201) on Form 8-K filed on September 12, 2006).

10.7 Employment Agreement, dated as of September 14, 2006, by and between Hampshire Group, Limited and Jeffrey Meier (incorporated by reference to Exhibit 10.1 to the Company’s Current Report (File No. 000-20201) on Form 8-K filed on September 19, 2006).

31.1 Certification of Interim Chief Executive Officer pursuant to Item 601(b) (31) of Regulation S-K as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002

31.2 Certification of Chief Financial Officer pursuant to Item 601(b) (31) of Regulation S-K as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002

32.1 Certification of Interim Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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.


	Hampshire Group, Limited

Date: August 9, 2007	By:	/s/ Michael S. Culang Michael S. Culang
		Interim Chief Executive Officer and President

		/s/ Jonathan W. Norwood Jonathan W. Norwood
		Vice President and Chief Financial Officer (principal financial and accounting officer)

INDEX TO EXHIBITS


EXHIBIT
NUMBER		DESCRIPTION

31.1		Certification of Interim Chief Executive Officer pursuant to Item 601(b) (31) of Regulation S-K as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Item 601(b) (31) of Regulation S-K as adopted pursuant to Section 302 of the Sarbanes- Oxley Act of 2002

32.1		Certification of Interim Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Hampshire Inactive 10-Q2006 Q3 Quarterly report

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