Hampshire 10Q 2008 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 27, 2008


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

For the transition period from to

Commission File Number: 000-20201

HAMPSHIRE GROUP, LIMITED

(Exact name of registrant as specified in its charter)


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

114 W. 41st Street, New York, New York		10036
(Address of principal executive offices)		(Zip Code)

(212) 840-5666
(Registrant’s telephone number, including area code)

1924 Pearman Dairy Road, Anderson, South Carolina
(Former address, changed since last report)

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

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


Large accelerated filero		Accelerated filerþ		Non-accelerated filero (Do not check if smaller reporting company)		Smaller reporting companyo

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 October 31, 2008: 5,469,165

HAMPSHIRE GROUP, LIMITED

QUARTERLY REPORT ON FORM 10-Q

For the Quarterly Period Ended September 27, 2008



“SAFE HARBOR” STATEMENT	ii

PART I—FINANCIAL INFORMATION		1

Item 1. Financial Statements		1

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

Item 3. Quantitative and Qualitative Disclosures About Market Risk		25

Item 4. Controls and Procedures		25

PART II—OTHER INFORMATION		26

Item 1. Legal Proceedings		26

Item 1A. Risk Factors		26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		27

Item 6. Exhibits		28

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 Quarterly Report on Form 10-Q (the “Quarterly Report”), 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 for the fiscal year ended December 31, 2007.

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,” “Company,” “we,” and “us” are used to refer to Hampshire Group, Limited and its wholly-owned subsidiaries.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Hampshire Group, Limited and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets


(In thousands, except par value and shares)	September 27, 2008			December 31, 2007
Current assets:
Cash and cash equivalents	$	437		$	48,431
Accounts receivable, net		57,908			26,535
Other receivables		3,024			7,384
Inventories, net		46,690			17,462
Deferred tax assets, net		10,875			9,485
Other current assets		2,589			2,144
Assets of discontinued operations		170			20,408

Total current assets		121,693			131,849
Fixed assets, net		13,600			8,060
Goodwill		8,162			8,162
Deferred tax assets, net		5,151			4,231
Other assets		4,732			4,166

Total assets	$	153,338		$	156,468


Current liabilities:
Current portion of long-term debt	$	29		$	41
Borrowings under credit facility		9,775			—
Accounts payable		26,921			15,062
Accrued expenses and other liabilities		13,762			14,871
Liabilities of discontinued operations		1,486			6,418

Total current liabilities		51,973			36,392

Long-term debt less current portion		11			33
Other long-term liabilities		12,744			13,499

Total liabilities		64,728			49,924


Commitments and contingencies (Note 5)		—			—

Stockholders’ equity:
Preferred stock, $0.10 par value, 1,000,000 shares authorized; none issued		—			—
Series A junior participating preferred stock, $0.10 par value, 10,000 shares and zero shares authorized at September 27, 2008 and December 31, 2007, respectively; none issued		—			—
Common stock, $0.10 par value, 10,000,000 shares authorized; 8,243,784 shares issued at September 27, 2008 and December 31, 2007		824			824
Additional paid-in capital		36,079			35,977
Retained earnings		72,105			78,189
Treasury stock, 2,774,619 and 384,279 shares at cost at September 27, 2008 and December 31, 2007		(20,398	)		(8,446	)

Total stockholders’ equity		88,610			106,544

Total liabilities and stockholders’ equity	$	153,338		$	156,468

See accompanying notes to the financial statements.

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


	Three Months Ended						Nine Months Ended
(In thousands, except per share data)	September 27, 2008			September 29, 2007			September 27, 2008			September 29, 2007
Net sales	$	80,962		$	85,236		$	153,622		$	158,513
Cost of goods sold		63,003			63,565			117,343			118,266

Gross profit		17,959			21,671			36,279			40,247
Selling, general, and administrative expenses		14,545			15,420			43,058			41,384
Special costs		1,360			1,082			2,328			4,929

Income (loss) from operations		2,054			5,169			(9,107	)		(6,066	)

Other income (expense):
Interest income		106			116			872			1,592
Interest expense		(24	)		(80	)		(100	)		(99	)
Other, net		1,666			(213	)		1,659			(33	)

Income (loss) from continuing operations before income taxes		3,802			4,992			(6,676	)		(4,606	)
Provision (benefit) for income taxes		957			1,025			(3,066	)		(4,221	)

Income (loss) from continuing operations		2,845			3,967			(3,610	)		(385	)
Income (loss) from discontinued operations, net of taxes		(133	)		132			(2,474	)		(1,537	)

Net income (loss)	$	2,712		$	4,099		$	(6,084	)	$	(1,922	)


Basic income (loss) per share:
Income (loss) from continuing operations	$	0.44		$	0.50		$	(0.49	)	$	(0.05	)
Income (loss) from discontinued operations, net of taxes		(0.02	)		0.02			(0.33	)		(0.19	)

Net income (loss)	$	0.42		$	0.52		$	(0.82	)	$	(0.24	)


Diluted income (loss) per share:
Income (loss) from continuing operations	$	0.44		$	0.50		$	(0.49	)	$	(0.05	)
Income (loss) from discontinued operations, net of taxes		(0.02	)		0.02			(0.33	)		(0.19	)

Net income (loss)	$	0.42		$	0.52		$	(0.82	)	$	(0.24	)


Weighted average number of shares outstanding:
Basic weighted average number of common shares outstanding		6,441			7,860			7,383			7,860

Diluted weighted average number of common shares outstanding		6,441			7,860			7,383			7,860

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, 2007		8,243,784	$	824	$	35,977	$	78,189			384,279	$	(8,446	)	$	106,544
Net loss		—		—		—		(6,084	)		—		—			(6,084	)
Tax benefits from share-based payment arrangements		—		—		102		—			—		—			102
Treasury share purchases		—		—		—		—			2,390,340		(11,952	)		(11,952	)

Balance at September 27, 2008		8,243,784	$	824	$	36,079	$	72,105			2,774,619	$	(20,398	)	$	88,610

See accompanying notes to the financial statements.

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


	Nine Months Ended
(In thousands)	September 27, 2008			September 29, 2007
Cash flows from operating activities:
Net loss	$	(6,084	)	$	(1,922	)
Less: Loss from discontinued operations, net of taxes		(2,474	)		(1,537	)

Loss from continuing operations		(3,610	)		(385	)
Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities:
Depreciation and amortization		1,352			592
Loss (gain) on sale or disposal of fixed assets		179			(55	)
Deferred income tax benefit		(2,310	)		(614	)
Deferred compensation expense, net		92			—
Excess tax benefits from share-based payment arrangements		(102	)		(230	)
Changes in operating assets and liabilities:
Receivables, net		(27,018	)		(37,836	)
Inventories, net		(29,229	)		(41,978	)
Other assets		(567	)		3,168
Liabilities		12,554			(5,887	)

Net cash provided by (used in) continuing operating activities		(48,659	)		(83,225	)
Net cash provided by (used in) discontinued operations		9,046			(8,725	)

Net cash provided by (used in) operating activities		(39,613	)		(91,950	)
Cash flows from investing activities:
Capital expenditures		(9,475	)		(1,140	)
Proceeds from sales of fixed assets		—			127

Net cash provided by (used in) continuing investing activities		(9,475	)		(1,013	)
Net cash provided by (used in) discontinued operations		3,724			(404	)

Net cash provided by (used in) investing activities		(5,751	)		(1,417	)
Cash flows from financing activities:
Proceeds from credit facility		16,325			28,240
Repayments of credit facility		(6,550	)		(5,260	)
Purchase of treasury stock		(11,952	)		—
Repayment of long-term debt		(34	)		(53	)
Excess tax benefits from share-based payment arrangements		102			230
Capitalized credit facility costs		(521	)		—

Net cash provided by (used in) financing activities		(2,630	)		23,157

Net increase (decrease) in cash and cash equivalents		(47,994	)		(70,210	)
Cash and cash equivalents at beginning of period		48,431			70,210

Cash and cash equivalents at end of period	$	437		$	—

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” or “Hampshire”) 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 audited financial statements included in the Company’s Form 10-K (“Form 10-K”) for the fiscal year ended December 31, 2007.

The information included herein is not necessarily indicative of the annual results that may be expected for the year ending December 31, 2008, 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 highly seasonal, causing significant fluctuations in financial results for interim periods. The Company sells apparel throughout the year but over 70% of its annual sales in recent years have occurred in the third and fourth quarters, primarily due to the large concentration of sweaters in the product mix and seasonality of the apparel industry in general.

Special Costs

In 2006, the Audit Committee (the “Audit Committee”) of the Board of Directors (the “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, financial reporting, and accounting for expense reimbursements, in each case involving certain members of the Company’s former management (“Audit Committee Investigation”).

On December 3, 2007, the Company purchased an insurance policy that insures a person who was a director or an officer of the Company for purposes of the Company’s 2005/2006 directors’ and officers’ insurance policy against litigation brought either by any director or officer of the Company who was terminated during 2006 or by the Company directly (“Special D&O Insurance”). The policy provides coverage of $7.5 million, has a term of six years, and cost $4.1 million including taxes and fees. This payment was treated as a prepaid expense and included in “Other current assets” and “Other assets” as the policy covers a six year period. The Company recognized expense related to this policy in the amount of $0.1 million in 2007 and $0.5 million through September 27, 2008. If the Company enters into settlements and releases with all of its former officers who were terminated during 2006, the remaining value of the policy will be expensed at that time. If, however, such settlements and releases are not entered into, the Company anticipates recognizing $0.7 million in annual expense in each year from 2008 through 2012 and $0.6 million in 2013, which is the end of the policy term.

The Company reports certain costs as “Special Costs” including, but not limited to, the costs associated with the Audit Committee Investigation, the assessment and remediation of certain tax exposures, the restatement of the financial statements which resulted from the findings of the Audit Committee Investigation, investigations by the SEC and the U.S. Attorney’s Office, a stockholder derivative suit, Nasdaq Global Market listing related costs, the Special D&O Insurance expense, legal and other expenses related to the now settled arbitration and litigation with Ludwig Kuttner, the Company’s former Chief Executive Officer, former Chairman, and former Director of the Company, legal matters involving former employees Charles Clayton and Roger Clark, and related matters. See Note 5 —Commitments and Contingencies.

During the three months and nine months ended September 27, 2008, the Company incurred $1.4 million and $2.3 million in Special Costs, respectively. During the three months and nine months ended September 29, 2007, the Company incurred $1.1 million and $4.9 million in Special Costs, respectively. Special Costs incurred since inception of the Audit Committee Investigation were approximately $13.8 million through September 27, 2008. The Company expects to incur additional costs in connection with the investigations by the SEC and the U.S. Attorney’s Office, the lawsuit against Messrs. Clayton and Clark, and related matters. The Company cannot predict the total cost but believes that future costs could be material.

Stock Options

The Company did not record any expense related to equity awards, as no stock-based compensation was awarded during the nine months ended September 27, 2008 or for the three years ended December 31, 2007. No stock options or other forms of equity based compensation were exercised or outstanding during the nine months ended September 27, 2008 and September 29, 2007.

Presentation of Prior Years Data

Certain reclassifications have been made in the prior periods to conform to the current period presentation.

Recent Accounting Standards

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standard (“FAS”) No. 157, “Fair Value Measurements” (“FAS 157”), which defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. See Note 9 —Fair Value Measurementsfor further discussion regarding fair value measures.

FASB Staff Position 157-2 (“FSP FAS 157-2”) delayed the effective date of FAS 157 until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company is in the process of determining the impact the adoption of FAS 157 for nonfinancial assets and nonfinancial liabilities will have on its consolidated financial statements.

In October 2008, the FASB issued Staff Position 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP FAS 157-3”), to clarify the application of the provisions of FAS 157 in an inactive market and how an entity would determine fair value in an inactive market. FSP FAS 157-3 was effective upon issuance and applies to the Company’s current financial statements. The application of the provisions of FSP FAS 157-3 did not materially affect the Company’s results of operations or financial condition as of and for the three and nine months ended September 27, 2008.

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (“FAS 159”), which was effective January 1, 2008. FAS 159 permits companies to choose to measure certain financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The Company did not elect to adopt the provisions permitting the measurement of eligible financial assets and liabilities as of January 1, 2008 using the fair value option.

In May 2008, the FASB issued FAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“FAS 162”). This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with GAAP for non-governmental entities. FAS 162 is effective 60 days following approval by the SEC of the Public Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Company is in the process of determining the impact the adoption of FAS 162 will have on its consolidated financial statements.

Note 2 — Inventories

Inventories at September 27, 2008 and December 31, 2007 consisted of the following:


(In thousands)	September 27, 2008			December 31, 2007
Total finished goods at cost	$	48,962		$	19,889
Less: reserves		(2,272	)		(2,427	)

Inventories, net	$	46,690		$	17,462

Note 3 — Revolving Credit Facility

On February 15, 2008, the Company amended and restated its 2003 Revolving Credit Facility by entering into an Amended and Restated Credit Agreement and Guaranty (the “Credit Facility”) with HSBC Bank USA, National Association (“HSBC”), other financial institutions named therein as bank parties (together with HSBC, the “Banks”), and HSBC, as Letter of Credit Issuing Bank and as Agent for the Banks (“Agent”).

The Credit Facility has a term of approximately five years and expires on April 30, 2013. The Credit Facility provides up to $125.0 million for revolving credit loans and trade letters of credit with a $10.0 million sub-limit for standby letters of credit. Provided that the Company satisfies the applicable requirements under the Credit Facility, the Company may (1) on one occasion during the first year, convert up to $25.0 million to a term loan (the “Term Loan”) and (2) increase the amount available under the Credit Facility up to an additional $25.0 million. The Term Loan would be required to be repaid in monthly installments of principal based on a five-year amortization schedule, with the remaining balance being due at the end of the term of the Credit Facility. Revolving credit loans are limited to the lesser of: (a) $125.0 million less the outstanding principal amount of the Term Loan; or (b) the sum of 85% of eligible accounts receivable, 50% of eligible inventory (subject to seasonal limits) of certain of the Company’s subsidiaries and 50% of the undrawn amount of outstanding eligible trade letters of credit issued under the Credit Facility, and cash on deposit in a pledged account, if any, less in each case the outstanding letters of credit and in the case of (b) above, reserves. The Credit Facility contains customary conditions precedent to each borrowing, including absence of defaults, no material adverse change, and accuracy of representation and warranties. The Credit Facility is available to provide working capital and the trade letters of credit that will be used for the purchase and importation of inventory.

The Company, at its discretion, may prepay outstanding principal in whole or part together with accrued interest at any time. The Credit Facility requires the Company to prepay outstanding principal and accrued interest upon certain events, including certain asset sales or receipt of insurance proceeds. The Credit Facility also contains customary provisions that enable the Agent to accelerate payment of outstanding obligations under the Credit Facility upon certain events, including, among others, non-payment of amounts due under the Credit Facility, breach of a covenant, insolvency, bankruptcy, a change of control of the Company, and if certain liens on the collateral securing the obligations under the Credit Facility fail to be perfected.

The obligations under the Credit Facility are secured by (i) a first priority security interest in certain assets of the Company and the subsidiaries of the Company that are party to the Credit Facility, in their capacity as guarantors, (ii) a pledge of all issued and outstanding common stock of each operating domestic subsidiary of the Company, and (iii) an assignment of proceeds of insurance covering collateral.

Interest accrues on outstanding indebtedness under revolving credit loans at an annual rate, at the election of the Company, equal to either: (a) HSBC’s prime rate then in effect minus 1.00% or (b) the Eurodollar Rate plus 1.25%. Interest accrues on the Term Loan at a rate equal to the Eurodollar Rate plus 1.75%. All interest is calculated on the basis of actual number of days outstanding in a year of 360 days. In addition, the Credit Facility requires the Company to pay certain customary fees, costs, and expenses of the Banks and the Agent.

In connection with the Shane Hunter disposition (See Note 7 —Dispositions and Discontinued Operations), as of April 15, 2008, the Company entered into Amendment No. 1 with respect to the Credit Facility (“Amendment No. 1”). Pursuant to Amendment No. 1, the Banks and the Company agreed, in consideration for the payment of the Agent’s legal fees and expenses, to amend certain representations, warranties, and covenants in the Credit Facility such that a sale of assets otherwise permitted under the Credit Facility will not cause a breach of such representations, warranties, or covenants.

In connection with a settlement agreement (See Note 5 —Commitments and Contingencies), the Company concurrently entered into Amendment No. 2 with respect to the Credit Facility (“Amendment No. 2”). Pursuant to Amendment No. 2, the Credit Facility was amended (i) to permit the settlement and the funding of all or a portion of the settlement with the proceeds of a borrowing thereunder, (ii) to reduce the basket for restricted payments permitted to be made by the Company after the consummation of the settlement from $7.5 million per year to $5.0 million per year, and (iii) to reduce the required consolidated tangible net worth of the Company from $85.0 million to $50.0 million.

At September 27, 2008, there were $9.8 million of outstanding borrowings and approximately $39.4 million outstanding under letters of credit. Borrowing availability was approximately $40.5 million at September 27, 2008.

Note 4 — Income (Loss) Per Share

Set forth in the table below is the reconciliation by year of the numerator (income (loss) from continuing operations) and the denominator (shares) for the computation of basic and diluted earnings from continuing operations per share:


	Numerator			Denominator		Per Share
(In thousands, except per share data)	Income (Loss)			Shares		Amount
Three months ended September 27, 2008:
Basic income from continuing operations	$	2,845			6,441	$	0.44
Effect of dilutive securities:
Stock options		—			—		—

Diluted income from continuing operations	$	2,845			6,441	$	0.44

Three months ended September 29, 2007:
Basic income from continuing operations	$	3,967			7,860	$	0.50
Effect of dilutive securities:
Stock options		—			—		—

Diluted income from continuing operations	$	3,967			7,860	$	0.50

Nine months ended September 27, 2008:
Basic loss from continuing operations	$	(3,610	)		7,383	$	(0.49	)
Effect of dilutive securities:
Stock options		—			—		—

Diluted loss from continuing operations	$	(3,610	)		7,383	$	(0.49	)

Nine months ended September 29, 2007:
Basic loss from continuing operations	$	(385	)		7,860	$	(0.05	)
Effect of dilutive securities:
Stock options		—			—		—

Diluted loss from continuing operations	$	(385	)		7,860	$	(0.05	)

There were no stock options outstanding during the nine month periods ended September 27, 2008 and September 29, 2007.

Note 5 — 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 $7.5 million 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. The reserve balance was $5.1 million at September 27, 2008 for such unresolved matters. The Company has bonus agreements with certain members of current and former management which are contingent upon the release of the aforementioned reserve established for past inventory purchases. If the Company determines that this reserve is no longer needed and is released, the bonus payments could be as much as $0.4 million.

Due to current economic and market conditions, the Company has decided to indefinitely delay the launch of a recently licensed women’s label and is currently reviewing its long-term strategy for this license. In conjunction with this decision, the Company has recorded a $0.3 million charge for minimum commitments under the license through June 2010. If the Company were to terminate the license, it could be liable for up to $1.2 million of commitments.

On August 17, 2006, Mr. Kuttner, filed a Demand for Arbitration with the American Arbitration Association claiming that his 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 $7.5 million.

On March 7, 2008, in connection with the findings of the Audit Committee Investigation, the Company filed a complaint in the Court of Chancery of the State of Delaware for the County of New Castle (the “Court”), against Messrs. Kuttner, Clayton, and Clark. The complaint asserted claims against Messrs. Kuttner, Clayton, and Clark for breach of fiduciary duty, gross mismanagement, corporate waste, unjust enrichment, common law fraud and, as to Mr. Kuttner, common law conversion.

On August 4, 2008, the Company entered into a Stock Purchase and Settlement Agreement and Mutual Releases (the “Settlement Agreement”) with Ludwig Kuttner, his wife, Beatrice Ost-Kuttner, his son, Fabian Kuttner, and a limited liability company controlled by him, K Holdings LLC (together, the “Kuttner Parties”). Under the Agreement, the Company and Ludwig Kuttner resolved any ongoing and potential litigation between them related to the Audit Committee Investigation and the Kuttner Parties sold all of the stock of the Company that they owned to the Company.

Pursuant to the agreement (i) the Company purchased from the Kuttner Parties 2,390,340 shares of common stock of the Company, constituting all of the interests in the Company beneficially owned by the Kuttner Parties, for a price per share of $5.00, (ii) the Company released certain claims it asserted against Ludwig Kuttner related to the Audit Committee Investigation, (iii) Ludwig Kuttner dismissed certain claims he asserted against the Company related to, among other things, employment related matters, (iv) the Company granted a release of any other claims that it may have or could assert against the Kuttner Parties, (v) the Kuttner Parties granted a release of any other claims that they may have or could assert against the Company, and (vi) Ludwig Kuttner made a payment of approximately $1.6 million to the Company. In addition, (i) the Kuttner Parties agreed not to purchase any of the Company’s stock, propose to enter into any business combination with the Company, seek election to the Board or solicit proxies from the Company’s stockholders, in each case, for a period of ten (10) years, (ii) Ludwig Kuttner resigned from the Board, and (iii) the Kuttner Parties agreed not to solicit the Company’s employees and customers for a period of eighteen months. The Kuttner Parties also agreed not to compete with the Company for a period of eighteen months.

The $1.6 million received pursuant to the Settlement Agreement and the reversal of approximately $0.1 million of liabilities related to claims waived pursuant to the Settlement Agreement were recognized in theOther, netcomponent ofOther income (expense)in the three and nine month periods ended September 27, 2008.

On September 10, 2008 and September 19, 2008, Mr. Clayton and Mr. Clark, respectively, filed answers with respect to the claims that the Company filed against them on March 7, 2008, as well as counterclaims against the Company. Mr. Clayton and Mr. Clark denied the Company’s claims against them and asserted claims against the Company for, among other things, certain compensation and benefits related to the termination of their employment with the Company and defamation and other damages allegedly stemming from the Company’s issuance of certain press releases related to the Audit Committee Investigation. The filings did not specify the aggregate amount of damages sought by Messrs. Clayton and Clark. The Company intends to vigorously defend against such claims.

On September 22, 2008, Mr. Clayton filed a complaint against certain of the Company’s directors and officers. Mr. Clayton’s complaint asserted claims against those directors and officers for, among other things, contribution in the event that Mr. Clayton is found liable to the Company for damages in relation to the Company’s complaint against him and defamation and other damages allegedly stemming from the Company’s issuance of certain press releases related to the Audit Committee Investigation. In accordance with Delaware law, the Company’s bylaws and agreements between the directors and officers and the Company, the Company will indemnify the directors and officers if they are held liable to Mr. Clayton for damages and the Company will advance them legal fees incurred in connection with their defense. The Company has been advised that the directors and officers intend to vigorously defend against such claims.

Note 6 — Taxes

The statute of limitations with respect to the Company’s federal income tax returns has lapsed for periods through 2004. The expiration of the 2004 tax year resulted in the recording of approximately $1.0 million of previously unrecognized tax benefits, including interest of $0.4 million, during the quarter ended September 27, 2008. As of September 27, 2008, the Company’s unaudited condensed consolidated balance sheet reflects a liability for unrecognized tax benefits of $7.0 million, including $2.4 million of accrued interest and penalties. The Company anticipates that total unrecognized tax benefits will decrease by approximately $2.2 million, including interest and penalties of approximately $0.7 million, due to the settlement of certain state and local income tax liabilities or the expiration of statutes of limitation within twelve months from September 27, 2008. The Company currently utilizes both U.S. net operating loss carrybacks and carryforwards. Upon examination, one or more of these net operating loss carrybacks or carryforwards may be limited or disallowed. With limited exceptions, the statute of limitations for state income tax returns has expired for tax years 2001 and prior. The Company also files income tax returns in Hong Kong for which tax years 2005 and beyond remain open to examination by the Hong Kong Inland Revenue Department.

In May 2008, the Company received a notice from the City of New York that it intends to audit tax returns filed by the Company for the years 2002 through 2005.

Note 7 — Dispositions and Discontinued Operations

The Company continually reviews its portfolio of labels, business lines, and divisions to evaluate whether they meet profitability and performance requirements and are in line with the Company’s business focus. As a part of this review, the Company has disposed and discontinued operations of certain divisions as outlined below.

In 2007, the Company sold certain assets of its Marisa Christina division and ceased its domestic activities. During 2007, the Company also sold the inventory, trade names, and certain other assets of its David Brooks division and assigned certain obligations of its David Brooks division to the buyer.

On April 15, 2008, the Company sold certain assets of its Shane Hunter division including inventory, trademarks, and other assets to a buyer which includes former members of Shane Hunter’s management. The total purchase price was approximately $3.7 million. In addition, the buyer assumed $0.1 million of liabilities of Shane Hunter. During the nine months ended September 27, 2008, the Company recognized a pre-tax loss on the transaction of $3.7 million due to, among other things, the write off of an intangible, severance, transaction related costs, and the acceleration of certain facility lease expenses.

The Company retained the remaining assets of Shane Hunter including approximately $14.0 million in gross accounts receivable as of April 14, 2008. As of September 27, 2008, the balance of these gross receivables was approximately $0.1 million. The funds from the sale of assets and the liquidation of the remaining assets has been used to provide additional funds for operations and other general corporate purposes.

In connection with the Shane Hunter disposition, as of April 15, 2008, the Company entered into Amendment No. 1 with respect to its Credit Facility (“Amendment No. 1”). Pursuant to Amendment No. 1, the Banks and the Company agreed, in consideration for the payment of the Agent’s legal fees and expenses, to amend certain representations, warranties and covenants in the Credit Facility such that a sale of assets otherwise permitted under the Credit Facility will not cause a breach of such representations, warranties, or covenants.

In accordance with the provisions of FAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” these unaudited condensed consolidated financial statements reflect the results of operations and financial position of the Marisa Christina, David Brooks, and Shane Hunter divisions separately as discontinued operations.

The assets and liabilities of the discontinued operations are presented in the consolidated balance sheets under the captions “Assets of discontinued operations” and “Liabilities of discontinued operations.” The underlying assets and liabilities of the discontinued operations are as follows:


(In thousands)	September 27, 2008		December 31, 2007
Accounts receivable, net	$	—	$	13,504
Other receivables		43		264
Inventories, net		—		4,664
Other current assets		23		377
Fixed assets, net		—		284
Intangible assets, net		—		1,270
Other assets		104		45

Assets of discontinued operations	$	170	$	20,408


Accounts payable	$	996	$	3,166
Accrued expenses and other liabilities		214		3,198
Other long-term liabilities		276		54

Liabilities of discontinued operations	$	1,486	$	6,418

The operating results for the discontinued operations for the three and nine months ended September 27, 2008 and September 29, 2007 were as follows:


	Three Months Ended					Nine Months Ended
(In thousands)	September 27, 2008			September 29, 2007		September 27, 2008			September 29, 2007
Net sales	$	—		$	18,348	$	16,607		$	45,307

Gross profit (loss)	$	—		$	4,619	$	4,077		$	11,074

Income (loss) on discontinued operations before income taxes	$	(105	)	$	239	$	(417	)	$	(2,730	)
Loss on sale of business		(28	)		—		(3,680	)		—
Provision (benefit) for income taxes		—			107		(1,623	)		(1,193	)

Income (loss) from discontinued operations, net of taxes	$	(133	)	$	132	$	(2,474	)	$	(1,537	)

Note 8 — Restructuring and Cost Reduction Plan

As previously disclosed, in May 2008 the Company initiated a restructuring and cost reduction plan (the “Plan”) that involves the reduction of its workforce and includes the consolidation and relocation of some of its operations, including the closing of its Hauppauge, NY office. In addition to the reduction in workforce, the Plan will eliminate certain non-payroll expenses. Key objectives of the Plan include the consolidation of the Company’s women’s divisions into one New York office, expanding the capabilities of the Company’s Hong Kong based subsidiary, and the consolidation of certain back office functions into the Company’s South Carolina office. The Company estimates it will incur one-time costs of approximately $0.7 million, consisting mostly of termination benefits.

The following summarizes the restructuring costs recognized through September 27, 2008 associated with the Plan:


	Three Months Ended		Nine Months Ended
(In thousands)	September 27, 2008		September 27, 2008
Personnel reductions	$	50	$	482
Other costs		46		55

Total	$	96	$	537

A reconciliation of the beginning and ending liability balances for restructuring costs included in the liabilities section of the unaudited condensed consolidated balance sheet is shown below:


	Three Months Ended September 27, 2008
	Personnel			Other
(In thousands)	Reductions			Costs			Total
Beginning of period	$	134		$	—		$	134
Costs charged to expense		50			46			96
Costs paid or settled		(100	)		(21	)		(121	)

End of period	$	84		$	25		$	109


	Nine Months Ended September 27, 2008
	Personnel			Other
(In thousands)	Reductions			Costs			Total
Beginning of period	$	—		$	—		$	—
Costs charged to expense		482			55			537
Costs paid or settled		(398	)		(30	)		(428	)

End of period	$	84		$	25		$	109

Personnel reductions and other costs are charged to “Selling, general, and administrative expenses” on these unaudited condensed consolidated statements of operations for the three and nine months ended September 27, 2008. The Company currently estimates that the total one-time costs associated with the Plan are $0.7 million with $0.2 million remaining to be expensed during the remainder of 2008. The Company anticipates total personnel reductions during 2008 of approximately 41 employees primarily located in the New York metropolitan region and South Carolina.

Note 9 — Fair Value Measurements

In September 2006, the FASB issued FAS 157, which defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.

FAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FAS 157 also established a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1— Quoted prices in active markets for identical assets or liabilities.

Level 2— Fair values utilize inputs other than quoted prices that are observable for the asset or liability, and may include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability.

Level 3— Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table presents information about the Company’s assets measured at fair value on a recurring basis at September 27, 2008, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

Fair Value Measurements at Reporting Date Using

Quoted Prices in

Significant Other

Significant

Active Markets

Observable

Unobservable

(In thousands)

for Identical Assets

Inputs

September 27,

Description

(Level 1)

(Level 2)

(Level 3)

2008

Cash and cash equivalents

437

—

437

Note 10 — Stockholder Rights Plan

On August 13, 2008, the Board adopted a Stockholder Rights Plan (the “Rights Plan”) in which preferred share purchase rights (a “Right”) were distributed as a dividend at the rate of one Right for each outstanding share of common stock as of the close of business on August 25, 2008. There were 5,469,165 outstanding shares of common stock on August 25, 2008.

The Rights are intended to enable all of the Company’s stockholders to realize the long-term value of their investment in the Company. The Rights will not prevent a takeover, but should encourage anyone seeking to acquire the Company to negotiate with the Board prior to attempting a takeover. The Rights will expire on August 23, 2013.

Each Right will entitle stockholders, in certain circumstances, to buy one one-thousandth of a newly issued share of Series A Junior Participating Preferred Stock of the Company at an exercise price of $33.00. The Rights will be exercisable and transferable apart from the common stock only if a person or group acquires beneficial ownership of 15% or more of the common stock (such person or group, an “Acquiring Person”) (except, subject to certain limitations, for stockholders were who, together with their affiliates and associates, owned as of August 13, 2008 in excess of 15% of the common stock) or commences a tender or exchange offer upon consummation of which a person or group would own 15% or more of the outstanding common stock.

If any person becomes an Acquiring Person other than pursuant to an offer for all shares which is determined by the Board to be fair to and otherwise in the best interests of the Company and its stockholders, then each Right not owned by an Acquiring Person or certain related parties will entitle its holder to purchase, at the Right’s then-current exercise price, shares of common stock (or, in certain circumstances as determined by the Board, cash, other property or other securities) having a value of twice the Right’s exercise price. In addition, if, after any person has become an Acquiring Person, the Company is involved in a merger or other business combination transaction with another person in which its common stock is changed or converted, or sells 50% or more of its assets or earning power to another person, each Right will entitle its holder to purchase, at the Right’s then-current exercise price, shares of common stock of such other person having a value of twice the Right’s exercise price.

The Company will generally be entitled to redeem the Rights at $0.01 per Right at any time until a person or group has become an Acquiring Person.

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 Annual Report for the fiscal year ended December 31, 2007 under Item 1A —Risk Factorsand in Part II, Item 1A —Risk Factorsin this Form 10-Q, 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 of or inability to renew certain licenses;

•

Change in consumer preferences and fashion trends, which could negatively affect acceptance of our products by retailers 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, our suppliers, 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 any business 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;

•

Future defaults under our credit facility;

•

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

•

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

•

Potential future restatements of our prior financial statements.

•

Our stockholders’ rights plan potentially adversely affects existing stockholders.

•

Risks related to the current global credit crisis.

OVERVIEW

Hampshire Group, Limited is a provider of women’s and men’s sweaters, wovens and knits, and a designer and marketer of branded apparel in the United States. As a holding company, we operate through our wholly-owned subsidiaries: Hampshire Designers, Inc. and Item-Eyes, Inc. The Company was established in 1977 and is incorporated in the state of Delaware.

Hampshire Designers, Inc. is comprised of both our women’s knitwear division, known as Hampshire Designers, and our men’s division, known as Hampshire Brands, which together represent what we believe is one of the leading designers and marketers of sweaters in North America. In addition, we believe Item-Eyes, Inc. is a leading designer and marketer of related sportswear for women. We continually review our portfolio of labels, business lines, and divisions to evaluate whether they meet profitability and performance requirements and are in line with our business focus.

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 merchant retailers, and specialty stores. All of our divisions source their product with quality manufacturers. Keynote Services, Limited, our Hong Kong based subsidiary, assists with our sourcing needs and provides quality control.

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 divisions source the manufacture of their product with factories primarily located in Southeast Asia. Our products are subject to increasing prices, which we try to offset 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.

With our dependence on international sources, the failure of any of these manufacturers to ship our product in a timely manner, failure of the factories to meet required quality standards, or delays in receipt, including clearing U.S. Customs, could cause us to miss delivery dates to customers. The failure to make timely deliveries of quality product could result in customers either canceling their orders or demanding reduced prices for late delivery. Currency fluctuations can also expose us to higher costs.

The apparel market is highly competitive. Competition is primarily based on product design, price, quality, and service. We face competition from apparel designers, manufacturers, importers, licensors, and our own customers’ private label programs, many of which are larger and have greater financial and marketing resources than we have available to us.

Legal and Compliance Matters

On August 17, 2006, Mr. Ludwig Kuttner, the Company’s former Chief Executive Officer, former Chairman, and former Director, filed a Demand for Arbitration with the American Arbitration Association claiming that his 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 $7.5 million. On March 7, 2008, in connection with the findings of the Audit Committee Investigation, we filed a complaint in the Court of Chancery of the State of Delaware for the County of New Castle (the “Court”), against Messrs. Kuttner, former employee Charles Clayton, and former employee Roger Clark. The complaint asserted claims against Messrs. Kuttner, Clayton, and Clark for breach of fiduciary duty, gross mismanagement, corporate waste, unjust enrichment, common law fraud and, as to Mr. Kuttner, common law conversion.

On August 4, 2008, we entered into a Stock Purchase and Settlement Agreement and Mutual Releases (the “Settlement Agreement”) with Ludwig Kuttner, his wife, Beatrice Ost-Kuttner, his son, Fabian Kuttner, and a limited liability company controlled by him, K Holdings LLC (together, the “Kuttner Parties”). Under the Agreement, we resolved any ongoing and potential litigation between us and Ludwig Kuttner related to the Audit Committee Investigation, and the Kuttner Parties sold all of the stock of the Company that they owned to the Company.

Pursuant to the agreement (i) we purchased from the Kuttner Parties 2,390,340 shares of our common stock, constituting all of the interests in us beneficially owned by the Kuttner Parties, for a price per share of $5.00, (ii) we released certain claims we asserted against Ludwig Kuttner related to the Audit Committee Investigation, (iii) Ludwig Kuttner dismissed certain claims he asserted against us related to, among other things, employment related matters, (iv) we granted a release of any other claims that we may have or could assert against the Kuttner Parties, (v) the Kuttner Parties granted a release of any other claims that they may have or could assert against the us, and (vi) Ludwig Kuttner made a payment to us of approximately $1.6 million. In addition, (i) the Kuttner Parties agreed not to purchase any of our stock, propose to enter into any business combination with us, seek election to the Board or solicit proxies from our stockholders, in each case, for a period of ten (10) years, (ii) Ludwig Kuttner resigned from the Board, and (iii) the Kuttner Parties agreed not to solicit our employees and customers for a period of eighteen months. The Kuttner Parties also agreed not to compete with us for a period of eighteen months.

On September 10, 2008 and September 19, 2008, Mr. Clayton and Mr. Clark, respectively, filed answers with respect to the claims that we filed against them on March 7, 2008, as well as counterclaims against the Company. Mr. Clayton and Mr. Clark denied our claims against them and asserted claims against the Company for, among other things, certain compensation and benefits related to the termination of their employment and defamation and other damages allegedly stemming from our issuance of certain press releases related to the Audit Committee Investigation. The filings did not specify the aggregate amount of damages sought by Messrs. Clayton and Clark. We intend to vigorously defend against such claims.

On September 22, 2008, Mr. Clayton filed a complaint against certain of our directors and officers. Mr. Clayton’s complaint asserted claims against those directors and officers for, among other things, contribution in the event that Mr. Clayton is found liable to the Company for damages in relation to our complaint against him and defamation and other damages allegedly stemming from our issuance of certain press releases related to the Audit Committee Investigation. In accordance with Delaware law, our bylaws and agreements between the directors and officers and us, we will indemnify the officers and directors if they are held liable to Mr. Clayton for damages and we will advance them legal fees incurred in connection with their defense. We have been advised that the directors and officers intend to vigorously defend against such claims.

In May 2008, we received a notice from the City of New York that it intends to audit tax returns filed by us for the years 2002 through 2005.

Stockholder Rights Plan

On August 13, 2008, the Board adopted a Stockholder Rights Plan (the “Rights Plan”) in which preferred share purchase rights (a “Right”) were distributed as a dividend at the rate of one Right for each outstanding share of common stock as of the close of business on August 25, 2008. We had 5,469,165 outstanding shares of common stock on August 25, 2008.

The Rights are intended to enable all of our stockholders to realize the long-term value of their investment. The Rights will not prevent a takeover, but should encourage anyone seeking to acquire us to negotiate with the Board prior to attempting a takeover. The Rights will expire on August 23, 2013.

Each Right will entitle our stockholders, in certain circumstances, to buy one one-thousandth of a newly issued share of Series A Junior Participating Preferred Stock an exercise price of $33.00. The Rights will be exercisable and transferable apart from our common stock only if a person or group acquires beneficial ownership of 15% or more of our common stock (such person or group, an “Acquiring Person”) (except, subject to certain limitations, for stockholders who, together with their affiliates and associates, owned as of August 13, 2008 in excess of 15% of the common stock) or commences a tender or exchange offer upon consummation of which a person or group would own 15% or more of our outstanding common stock.

If any person becomes an Acquiring Person other than pursuant to an offer for all shares which is determined by the Board to be fair to and otherwise in the best interests of the Company and our stockholders, then each Right not owned by an Acquiring Person or certain related parties will entitle its holder to purchase, at the Right’s then-current exercise price, shares of common stock (or, in certain circumstances as determined by the Board, cash, other property or other securities) having a value of twice the Right’s exercise price. In addition, if, after any person has become an Acquiring Person, we are involved in a merger or other business combination transaction with another person in which our common stock is changed or converted, or sells 50% or more of its assets or earning power to another person, each Right will entitle its holder to purchase, at the Right’s then-current exercise price, shares of our common stock of such other person having a value of twice the Right’s exercise price.

We are generally entitled to redeem the Rights at $0.01 per Right at any time until a person or group has become an Acquiring Person.

Amended By Laws

We also announced during the third quarter that our Board adopted amendments to our Bylaws implementing notice procedures for stockholder proposals and for nominations for the election of directors to be considered at annual or special meetings. The amended and new provisions contained in the Amended and Restated Bylaws provide, among other things, that:

	(i)		In order for a stockholder to make a proposal or nomination at a meeting of the stockholders, the stockholder must provide notice to us not less than ninety (90) days nor more than one hundred twenty (120) days prior to the first anniversary of the preceding year’s annual meeting of stockholders, subject to certain exceptions in the event that the date of the meeting is changed by more than thirty (30) days from such anniversary date, no annual meeting was held the prior year, or there is a special meeting of the stockholders.

	(ii)		Any stockholder seeking to have the stockholders take corporate action by written consent must request that the Board fix a record date, in which case the Board must adopt a resolution fixing the record date within ten (10) days after the date on which such a request is received.

Special Costs

On December 3, 2007, we purchased an insurance policy that insures a person who was a director or an officer of the Company for purposes of the Company’s 2005/2006 directors’ and officers’ insurance policy against litigation brought either by any director or officer of the Company who was terminated during 2006 or by the Company directly (“Special D&O Insurance”). The policy provides coverage of $7.5 million, has a term of six years, and cost $4.1 million including taxes and fees. This payment was treated as a prepaid expense and included in other current and long-term assets as the payment covers a six year policy period. We recognized expense related to this policy in the amount of $0.1 million in 2007 and $0.5 million in 2008. If we enter into settlements and releases with all of our former officers who were terminated during 2006, the remaining value of the policy will be expensed at that time. If, however, such settlements and releases are not entered into, we anticipate recognizing $0.7 million in annual expense in each year from 2008 through 2012 and $0.6 million in 2013, which is the end of the policy term.

We report certain costs as “Special Costs” including, but not limited to, the costs associated with the Audit Committee Investigation, the assessment and remediation of certain tax exposures, the restatement of the financial statements which resulted from the findings of the Audit Committee Investigation, investigations by the SEC and the U.S. Attorney’s Office, a stockholder derivative suit, Nasdaq Global Market listing related costs, the Special D&O Insurance expense, legal and other expenses related to the now settled arbitration and litigation with Ludwig Kuttner, legal matters involving Charles Clayton and Roger Clark, and related matters. SeeLegal and Compliance Matters.

During the three months and nine months ended September 27, 2008, we incurred $1.4 million and $2.3 million in Special Costs, respectively. During the three months and nine months ended September 29, 2007, we incurred $1.1 million and $4.9 million in Special Costs, respectively. Special Costs incurred since inception of the Audit Committee Investigation were approximately $13.8 million through September 27, 2008. We expect to incur additional costs in connection with the investigations by the SEC and the U.S. Attorney’s Office, the lawsuit against Messrs. Clayton and Clark, and related matters. We cannot predict the total cost but believe that future costs could be material.

Amended and Restated Revolving Credit Facility

On February 15, 2008, we amended and restated our 2003 Revolving Credit Facility by entering into an Amended and Restated Credit Agreement and Guaranty (the “Credit Facility”) with HSBC Bank USA, National Association (“HSBC”), other financial institutions named therein as bank parties (together with HSBC, the “Banks”), and HSBC, as Letter of Credit Issuing Bank and as Agent for the Banks (“Agent”).

The Credit Facility has a term of approximately five years and expires on April 30, 2013. The Credit Facility provides up to $125.0 million for revolving credit loans and trade letters of credit with a $10.0 million sub-limit for standby letters of credit. Provided that we satisfy the applicable requirements under the Credit Facility, we may (1) on one occasion during the first year, convert up to $25.0 million to a term loan (the “Term Loan”) and (2) increase the amount available under the Credit Facility up to an additional $25.0 million. The Term Loan would be required to be repaid in monthly installments of principal based on a five-year amortization schedule, with the remaining balance being due at the end of the term of the Credit Facility. Revolving credit loans are limited to the lesser of: (a) $125.0 million less the outstanding principal amount of the Term Loan; or (b) the sum of 85% of eligible accounts receivable, 50% of eligible inventory (subject to seasonal limits) of certain of our subsidiaries and 50% of the undrawn amount of outstanding eligible trade letters of credit issued under the Credit Facility, and cash on deposit in a pledged account, if any, less in each case the outstanding letters of credit and in the case of (b) above, reserves. The Credit Facility contains customary conditions precedent to each borrowing, including absence of defaults, no material adverse change, and accuracy of representation and warranties. The Credit Facility is available to provide working capital and the trade letters of credit that will be used for the purchase and importation of inventory.

We, at our discretion, may prepay outstanding principal in whole or in part together with accrued interest at any time. The Credit Facility requires us to prepay outstanding principal and accrued interest upon certain events, including certain asset sales or receipt of insurance proceeds. The Credit Facility also contains customary provisions that enable the Agent to accelerate payment of outstanding obligations under the Credit Facility upon certain events, including, among others, non-payment of amounts due under the Credit Facility, breach of a covenant, insolvency, bankruptcy, a change of control of the Company, and if certain liens on the collateral securing the obligations under the Credit Facility fail to be perfected.

The obligations under the Credit Facility are secured by (i) a first priority security interest in certain of our assets and our subsidiaries that are party to the Credit Facility, in their capacity as guarantors, (ii) a pledge of all issued and outstanding common stock of each of our operating domestic subsidiaries, and (iii) an assignment of proceeds of insurance covering collateral.

Interest accrues on outstanding indebtedness under revolving credit loans at an annual rate equal to either: (a) HSBC’s prime rate then in effect minus 1.00% or (b) the Eurodollar Rate plus 1.25%. Interest accrues on the Term Loan at a rate equal to the Eurodollar Rate plus 1.75%. All interest is calculated on the basis of actual number of days outstanding in a year of 360 days. In addition, the Credit Facility requires us to pay certain customary fees, costs, and expenses of the Banks and the Agent.

In connection with the Shane Hunter disposition (SeeDispositions, Discontinued Operations, and Related Matters), as of April 15, 2008, we entered into Amendment No. 1 with respect to the Credit Facility (“Amendment No. 1”). Pursuant to Amendment No. 1, the Banks and the Company agreed, in consideration for the payment of the Agent’s legal fees and expenses, to amend certain representations, warranties and covenants in the Credit Facility such that a sale of assets otherwise permitted under the Credit Facility will not cause a breach of such representations, warranties or covenants.

In connection with the Settlement Agreement, we concurrently entered into Amendment No. 2 to the Credit Facility (“Amendment No. 2”). Pursuant to Amendment No. 2, the Banks agreed to amend the Credit Agreement (i) to permit the Settlement and the funding of all or a portion of the Settlement with the proceeds of a borrowing thereunder, (ii) to reduce the basket for restricted payments permitted to be made by us after the consummation of the Settlement from $7.5 million per year to $5.0 million per year, and (iii) to reduce our required consolidated tangible net worth from $85.0 million to $50.0 million.

Dispositions, Discontinued Operations, and Related Matters

We continually review our portfolio of labels, business lines, and divisions to evaluate whether they meet profitability and performance requirements and are in line with our business focus. As a part of this review, we disposed and discontinued operations of certain divisions as outlined below.

In 2007, we sold certain assets of our Marisa Christina division and ceased its domestic activities. During 2007, we also sold the inventory, trade names, and certain other assets of our David Brooks division and assigned certain obligations of our David Brooks division to the buyer.

On April 15, 2008, we sold certain assets of our Shane Hunter division including inventory, trademarks, and other assets to a buyer which includes former members of Shane Hunter’s management. The total purchase price was approximately $3.7 million. In addition, the buyer assumed $0.1 million of liabilities of Shane Hunter. During the nine months ended September 27, 2008, we recognized a pre-tax loss on the transaction of $3.7 million due to, among other things, the write off of an intangible, severance, transaction related costs, and the acceleration of certain facility lease expenses.

We retained the remaining assets of Shane Hunter, including approximately $14.0 million in gross accounts receivable as of April 14, 2008. The balance of these gross receivables as of September 27, 2008 was approximately $0.1 million. The funds from the sale of assets and the liquidation of the remaining assets will be used to provide additional funds for Hampshire’s operations and other general corporate purposes.

In accordance with the provisions of Financial Accounting Standards Board (“FASB”) Financial Accounting Standard (“FAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the accompanying condensed consolidated financial statements reflect the results of operations and financial position of the Marisa Christina, David Brooks, and Shane Hunter divisions separately as discontinued operations.


(In thousands)	September 27, 2008		December 31, 2007
Accounts receivable, net	$	—	$	13,504
Other receivables		43		264
Inventories, net		—		4,664
Other current assets		23		377
Fixed assets, net		—		284
Intangible assets, net		—		1,270
Other assets		104		45

Assets of discontinued operations	$	170	$	20,408


Accounts payable	$	996	$	3,166
Accrued expenses and other liabilities		214		3,198
Other long-term liabilities		276		54

Liabilities of discontinued operations	$	1,486	$	6,418

The operating results for the discontinued operations for the three and nine months ended September 27, 2008 and September 29, 2007 were as follows:


	Three Months Ended					Nine Months Ended
	September 27,			September 29,		September 27,			September 29,
(In thousands)	2008			2007		2008			2007
Net sales	$	—		$	18,348	$	16,607		$	45,307

Gross profit (loss)	$	—		$	4,619	$	4,077		$	11,074

Income (loss) on discontinued operations before income taxes	$	(105	)	$	239	$	(417	)	$	(2,730	)
Loss on sale of business		(28	)		—		(3,680	)		—
Provision (benefit) for income taxes		—			107		(1,623	)		(1,193	)

Income (loss) from discontinued operations, net of taxes	$	(133	)	$	132	$	(2,474	)	$	(1,537	)

Restructuring and Cost Reduction Plan

Due to the continued weak retail environment, we initiated an evaluation of our selling, general, and administrative expenses during the second quarter of 2008. The result of this evaluation was the initiation in May 2008 of a restructuring and cost reduction plan, which we refer to as the restructuring plan, that involves a reduction of our workforce and includes the consolidation and relocation of some of our operations, including the closing of our Hauppauge, NY office. In addition to the reduction in workforce, the restructuring plan will eliminate certain non-payroll expenses. Key objectives of the restructuring plan include the centralization of our women’s divisions into one New York office, expanding the capabilities of our Hong Kong based subsidiary, and the consolidation of certain back office functions into our South Carolina office.

The restructuring plan’s cost saving impact on an annualized basis is estimated to be approximately $3.1 million with one-time costs of approximately $0.7 million, consisting mostly of termination benefits. As of September 27, 2008, the implementation of the restructuring plan was substantially complete. The following summarizes the restructuring costs associated with the restructuring plan:


	Three Months Ended		Nine Months Ended
(In thousands)	September 27, 2008		September 27, 2008
Personnel reductions	$	50	$	482
Other costs		46		55

Total	$	96	$	537

A reconciliation of the beginning and ending liability balances for restructuring costs included in the liabilities section of the unaudited condensed consolidated balance sheet is shown below:


	Three Months Ended September 27, 2008
	Personnel			Other
(In thousands)	Reductions			Costs			Total
Beginning of period	$	134		$	—		$	134
Costs charged to expense		50			46			96
Costs paid or settled		(100	)		(21	)		(121	)

End of period	$	84		$	25		$	109


	Nine Months Ended September 27, 2008
	Personnel			Other
(In thousands)	Reductions			Costs			Total
Beginning of period	$	—		$	—		$	—
Costs charged to expense		482			55			537
Costs paid or settled		(398	)		(30	)		(428	)

End of period	$	84		$	25		$	109

Personnel reductions and other costs are charged to “Selling, general, and administrative expenses” on the accompanying unaudited condensed consolidated statements of operations. We currently estimate that the total one-time costs associated with the Plan are $0.7 million with the remaining $0.2 million to be expensed during the remainder of 2008. We anticipate total personnel reductions during 2008 of approximately 41 employees primarily located in the New York metropolitan region and South Carolina.

RESULTS OF CONTINUING OPERATIONS

Quarterly Comparison — Three Months Ended September 27, 2008 and September 29, 2007

Net Sales

Net sales decreased 5.0% to $81.0 million for the three months ended September 27, 2008 compared with $85.2 million for the same period last year. The $4.2 million decrease was the result of a decline in volume partially offset by higher average selling prices as outlined in the table below:


	Quarterly Rate/Volume
				Percentage
(Dollars in thousands)	Dollars			of 2007
Net sales quarter ended September 29, 2007	$	85,236			100.0	%
Volume		(10,594	)		(12.4	%)
Average selling prices		6,320			7.4	%

Net sales quarter ended September 27, 2008	$	80,962			95.0	%

Our average selling prices increased as we were able to pass along some of the higher product costs we incurred in the current period. We believe that the decrease in the volume of our 2008 third quarter net sales is reflective of the severity of the current weak retail market, including its impact on the economic well being of our customers. If these retail conditions persist, which we believe appears likely for the balance of the year, our net sales and operating results will be adversely affected in 2008.

Gross Profit

Gross profit for the three months ended September 27, 2008 was $18.0 million compared with $21.7 million for the same period last year, which reflected a decrease in net sales and gross profit percentage of 22.2% of net sales for the three months ended September 27, 2008 compared with 25.4% of net sales for the same period last year. The decrease in the gross profit percentage was primarily due to increases in our cost of goods sold that we were unable to fully pass through to our customers, particularly in men’s apparel sold by Hampshire Brands.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses for the three months ended September 27, 2008 were $14.5 million compared with $15.4 million for the same period last year. The decrease in 2008 as compared to 2007 was primarily due to the combined effect of lower compensation expenses as discussed in theRestructuring and Cost Reduction Plan,a reduction in estimated 2008 incentive compensation, and a decline in shipping costs due to lower volumes in the current period.

Special Costs

During the three months ended September 27, 2008, Special Costs were $1.4 million as compared to $1.1 million for the same period last year. The increase in the current period was principally for legal fees related to the Settlement Agreement with the Kuttner Parties. (SeeLegal and Compliance Matters) We expect to incur additional costs in connection with the investigations by the SEC and the U.S. Attorney’s Office, legal matters involving Messrs. Clayton and Clark, and related matters. We cannot predict the total cost but believe that future costs could be material.

Other Income (Expense)

The “Other, net” component of Other income (expense) increase in three months ended September 27, 2008 reflects the $1.6 million received pursuant to the Settlement Agreement (SeeLegal and Compliance Matters) and the reversal of approximately $0.1 million liabilities related to claims waived pursuant to the Settlement Agreement.

Income Taxes

Our estimated annual income tax rate for 2008 is 39.6%, and our estimated annual rate in 2007 was 43.7%. The decrease in our 2008 estimated tax rate as compared with the prior year primarily resulted from the combined effect of a decrease in non-deductible tax items and decline in state and local apportionment factors.

Our effective income tax rate (the income tax benefit or provision divided by the pre tax income or loss) was 25.2% for the three months ended September 27, 2008 compared with 20.5% for the same period last year. The increase in our 2008 effective tax rate as compared to the prior year was the result of adjustments resulting from reconciliation of the 2007 tax return filed in the quarter ended September 27, 2008.

Year-to-Date Comparison — Nine Months Ended September 27, 2008 and September 29, 2007

Net Sales

Net sales decreased 3.1% to $153.6 million for the nine months ended September 27, 2008 compared with $158.5 million for the same period last year. The $4.9 million decrease was the result of a decline in volume mainly due to weak retail conditions partially offset by higher average selling prices as outlined in the table below:


	Year To Date Rate/Volume
				Percentage
(Dollars in thousands)	Dollars			of 2007
Net sales nine months ended September 29, 2007	$	158,513			100.0	%
Volume		(12,095	)		(7.6	%)
Average selling prices		7,204			4.5	%

Net sales nine months ended September 27, 2008	$	153,622			96.9	%

Our average selling prices increased as we were able to pass along some of the higher product costs we incurred in the current period. We believe that the decline in our year to date 2008 net sales is reflective of the severity of the current weak retail market, including its impact on the economic well being of our customers. If these retail conditions persist, which we believe appears likely for the balance of the year, our net sales and operating results will be adversely affected in 2008.

Gross Profit

Gross profit for the nine months ended September 27, 2008 was $36.3 million compared with $40.2 million for the same period last year reflected a decrease in net sales and gross profit percentage of 23.6% of net sales for the nine months ended September 27, 2008 compared with 25.4% of net sales for the same period last year. The decrease in the gross profit percentage was primarily due to increases in our cost of goods sold that we were unable to fully pass through to our customers, particularly in men’s apparel sold by Hampshire Brands.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses for the nine months ended September 27, 2008 were $43.1 million compared with $41.4 million for the same period last year. The increase in 2008 as compared to 2007 was primarily due to the combined effect of trade receivables allowances for customers who have filed for bankruptcy protection, expenses related to the restructuring plan and increases in rent and depreciation, primarily related to facilities in New York, New York as we consolidated operations formerly dispersed over a number of locations during February 2008. These increases were partially offset by lower compensation costs.

Special Costs

During the nine months ended September 27, 2008, we incurred $2.3 million in Special Costs as compared to $4.9 million during the nine months ended September 29, 2007. Professional fees, principally legal and accounting, were higher in 2007 primarily due to the completion of the Audit Committee Investigation in the second quarter of 2007, determining the necessary adjustments and restating our Annual Report on Form 10-K for the year ended December 31, 2005, and for related matters. We expect to incur additional costs in connection with the investigations by the SEC and the U.S. Attorney’s Office, legal matters involving Messrs. Clayton and Clark, and related matters. We cannot predict the total cost but believe that future costs could be material.

Other Income (Expense)

The “Other, net” component of Other income (expense) increase in the nine months ended September 27, 2008 reflects the $1.6 million received pursuant to the Settlement Agreement (SeeLegal and Compliance Matters) and the reversal of approximately $0.1 million liabilities related to claims waived pursuant to the Settlement Agreement.

Income Taxes

Our effective income tax rate for the nine months ended September 27, 2008 was 45.9% compared with 91.6% for the same period last year. The decline in our 2008 effective tax rate as compared to the prior year was the result of the effects of tax exposure lapses and interest and penalty accruals on remaining tax exposures recognized in each year to date period.

LIQUIDITY AND CAPITAL RESOURCES

Our primary liquidity and capital requirements 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 our business, we generally reach our maximum working capital requirement during the third quarter of the year. Our liquidity and capital requirements are primarily met from funds generated from operations and borrowings under our Credit Facility.

Net cash used by continuing operating activities was $48.7 million for the nine months ended September 27, 2008 as compared with $83.2 million for the same period last year. This significant improvement in our cash flow was the result of prompt collections of accounts receivable, including $4.3 million from the landlord of our new office in New York for construction allowances, a reduction in inventory, and an increase in trade payables in the current period partially offset by an increase in deferred tax assets and the loss from continuing operations in the current period.

We sold certain assets of our Shane Hunter subsidiary during April 2008 and retained approximately $14.0 million in gross accounts receivable. As of September 27, 2008, approximately $0.1 million of those gross receivables remained uncollected. These collections represent the primary component of the $9.0 million of net cash contributed by discontinued operations during 2008.

Net cash used in continuing investing activities was $9.5 million for the nine months ended September 27, 2008 as compared with $1.0 million for the same period last year. The increase in the use of cash in the current period was primarily the result of an increase in capital expenditures, most of which are related to our new office in New York and were substantially completed in the second quarter of 2008.

Proceeds of $3.7 million from the disposition of certain assets of our Shane Hunter division during April 2008 represent the primary component of cash flows provided by investing activities contributed by discontinued operations during 2008.

We maintain a Credit Facility with six participating commercial banks. The Credit Facility expires on April 30, 2013. The Credit Facility provides up to $125.0 million for revolving credit loans and trade letters of credit with a $10.0 million sub-limit for standby letters of credit. SeeAmended and Restated Revolving Credit Facility.

At September 27, 2008, there were $9.8 million of outstanding borrowings and approximately $39.4 million was outstanding under letters of credit. Borrowing availability was approximately $40.5 million at September 27, 2008. As discussed inAmended and Restated Revolving Credit Facility, we currently have the ability, at our option, to convert up to $25.0 million of the $125.0 million Credit Facility to a term loan.

As discussed inLegal and Compliance Matters, we entered into a settlement with the Kuttner parties and purchased their stock on August 4, 2008. The net cash used for this transaction was approximately $10.4 million.

We believe that the borrowings available to us under the Credit Facility along with cash flow from operations will provide adequate resources to meet our capital requirements and operational needs for the foreseeable future.

OFF-BALANCE SHEET ARRANGEMENTS

We utilize letters of credit and are party to operating leases. It is currently not our 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to our critical accounting policies and estimates as set forth in the Annual Report for the year ended December 31, 2007.

RECENT ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (“FAS 157”), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles in the United States and expands disclosures about fair value measurements. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years.

FASB Staff Position 157-2 (“FSP FAS 157-2”) delayed the effective date of FAS 157 until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We adopted FAS 157 on January 1, 2008, and utilized the one year deferral for nonfinancial assets and nonfinancial liabilities that was granted by FSP FAS 157-2. The adoption of FAS 157 did not have a material impact on our consolidated financial statements.

FAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1— Quoted prices in active markets for identical assets or liabilities.

Level 3— Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table presents information about our assets measured at fair value on a recurring basis at September 27, 2008, and indicates the fair value hierarchy of the valuation techniques utilized by us to determine such fair value:

Fair Value Measurements at Reporting Date Using

Quoted Prices in

Significant Other

Significant

Active Markets

Observable

Unobservable

(In thousands)

for Identical Assets

Inputs

September 27,

Description

(Level 1)

(Level 2)

(Level 3)

2008

Cash and cash equivalents

437

—

437

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (“FAS 159”), which was effective January 1, 2008. FAS 159 permits companies to choose to measure certain financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. We did not elect to adopt the provisions permitting the measurement of eligible financial assets and liabilities as of January 1, 2008 using the fair value option.

In May 2008, the FASB issued FAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“FAS 162”). This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles for non-governmental entities. FAS 162 is effective 60 days following approval by the SEC of the Public Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We are in the process of determining the impact the adoption of FAS 162 will have on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk in the area of changing interest rates. During the first nine months of fiscal year 2008, there were no significant changes in our exposure to market risks. See Item 7A in our Annual Report for the year ended December 31, 2007, which was filed with the SEC on March 7, 2008, for a discussion regarding our exposure to market risks. The impact of a hypothetical 100 basis point increase in interest rates on our variable rate debt (borrowings under the Credit Facility) would have had no material effect in the nine months ended September 27, 2008 due to the fact that there were minimal short-term borrowings during such periods.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

Under the supervision and with the participation of 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 Exchange Act that were in place, as of September 27, 2008. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that its disclosure controls and procedures were effective as of September 27, 2008.

Changes in Internal Control Over Financial Reporting

During the three months ended September 27, 2008, as a result of the Restructuring and Cost Reduction Plan, we consolidated accounting functions of Item-Eyes into our South Carolina office. The consolidation of accounting functions did not materially affect, or is reasonably unlikely to materially affect, the Company’s internal control over financial reporting as the internal controls for the accounting functions of Item-Eyes were converted to the internal controls of our other divisions, and its proximity allows those controls to be more readily monitored.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

For a description of litigation and certain related matters, please see Note 5 of Part I, Item 1, entitledCommitments and Contingencies, and Part I, Item 2 entitledLegal and Compliance Matters.

In addition, the Company is from time to time involved in other litigation incidental to the conduct of its business, none of which is expected to be material to its business, financial condition, or operations.

Item 1A. Risk Factors.

A description of the risk factors associated with our business is contained in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2007. These cautionary statements are to be used as a reference in connection with any forward-looking statements. The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the Securities and Exchange Commission. The following risk factors are the only material changes to the risk factors included in our most recent Form 10-K.

Eliminated was the “Ludwig Kuttner’s ownership interest in the Company and our dispute with and lawsuit against Mr. Kuttner could adversely affect our business or influence the outcome of key transactions presented to stockholders for their approval” risk factor as we entered into the Settlement Agreement with the Kuttner parties on August 4, 2008. SeeLegal and Compliance Matters for additional discussion of this matter.

The following describes a new risk factor related to our stockholders’ rights plan:

Our stockholders’ rights plan may adversely affect existing stockholders.

On August 13, 2008, we adopted a stockholder rights plan that may have the effect of deterring, delaying, or preventing a change in control. Under the rights plan, we issued a dividend for one preferred share purchase right for each share of our common stock held by stockholders of record on August 25, 2008. Each right entitles stockholders to purchase one one-thousandth of a share of our newly created Series A Junior Participating Preferred Stock at a price of $33 per one one-thousandth of a share. The rights expire on August 23, 2013 unless the rights are earlier redeemed or exchanged by us.

In general, subject to certain limited exceptions, the preferred stock purchase rights become exercisable when a person or group acquires 15% or more of our common stock or a tender offer or exchange offer for 15% or more of our common stock is announced or commenced. After any such event, each right will entitle its holder to purchase, at the right’s then-current exercise price, a number of shares of our common stock having a market value of twice the exercise price. The rights will cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our Board of Directors.

We face risks related to the current global credit crisis.

Current uncertainty in global economic conditions, including the recent disruption in credit markets, pose a risk to the overall economy that could impact consumer and customer demand for our products, as well as our ability to manage normal commercial relationships with our customers, suppliers, and creditors, including our lenders. If the current situation continues or worsens significantly, our business could be negatively impacted, including such areas as reduced demand for our products from a slow-down in the general economy, or supplier or customer disruptions resulting from tighter credit markets, which could reduce our revenues or our ability to collect our accounts receivable and have a material adverse effect on our financial condition and results of operations.

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

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

Maximum

Total Number of

Number of Shares

Total

Shares Purchased

that May Yet be

Number of

Average

as Part of Publicly

Purchased Under

Shares

Price Paid

Announced Plans

Such Plans or

Period

Purchased

per Share

or Programs

Programs

June 29 — August 2, 2008

—

August 3 — August 30, 2008

2,390,340

5.00

—

August 31 — September 27, 2008

—

Total

2,390,340

5.00

—

1,036,490

The Company purchased 2,390,340 shares of our common stock, constituting all of the interests in the Company beneficially owned by the Kuttner Parties, for a price-per-share of $5.00. SeeLegal and Compliance Mattersfor additional discussion of this matter.

Under Board approved plans announced on March 17, 2005 and April 26, 2006, the Company may purchase up to 400,000 and 1,000,000 shares, respectively, of our common stock. The plans do not have an expiration date. The maximum number of shares that may yet be purchased under such plans was 1,036,490 at September 27, 2008. The Company suspended purchases under the plans upon the commencement of the Audit Committee Investigation.

Item 6. Exhibits.

(a) The following exhibits are filed as part of this Report:


3.1			Certificate of Designation of Series A Junior Participating Preferred Stock, as filed with the Secretary of State of Delaware on August 13, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report(File No. 000-20201) on Form 8-K filed on August 15, 2008).

3.2			Amended and Restated Bylaws of Hampshire Group, Limited (incorporated by reference to Exhibit 3.2 to the Company’s Current Report (File No. 000-20201) on Form 8-K filed on August 15, 2008).

4.1			Rights Agreement, dated as of August 13, 2008, between Hampshire Group, Limited and Mellon Investor Services LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 to the Company’s Current Report (File No. 000-20201) on Form 8-K filed on August 15, 2008).

10.1			Employment Agreement by and between Hampshire Group, Limited and Michael S. Culang, dated July 30, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report (File No. 000-20201) on Form 8-K filed on August 4, 2008).

10.2			Stock Purchase and Settlement Agreement and Mutual Releases, dated as of August 4, 2008, by and among Ludwig Kuttner, Beatrice Ost-Kuttner, Fabian Kuttner, K Holdings LLC 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 5, 2008).

10.3			Amendment No. 2 to Amended and Restated Credit Agreement and Guaranty, dated as of August 4, 2008, by and among Hampshire Group, Limited, Hampshire Designers, Inc., Item-Eyes, Inc., Shane Hunter, Inc. SB Corporation, the Banks party thereto and HSBC Bank USA, National Association, as Agent for the Banks (incorporated by reference to Exhibit 10.2 to the Company’s Current Report (File No. 000-20201) on Form 8-K filed on August 5, 2008).

31.1			Certification of 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 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: November 3, 2008	By:	/s/ Michael S. Culang
		Michael S. Culang
		Chief Executive Officer and President (Principal Executive Officer)

		/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 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 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. junior Avg

Hampshire Inactive 10-Q2008 Q3 Quarterly report

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