10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2007

OR

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

For the transition period from                      to                     

Commission file number: 001-31309

PHOENIX FOOTWEAR GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware	15-0327010
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
5840 El Camino Real, Suite 106 Carlsbad, California	92008
(Address of principal executive offices)	(Zip Code)

(760) 602-9688

(Registrant’s telephone number, including area code)

[None]

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

Large accelerated filer  ¨                     Accelerated filer  ¨                     Non-accelerated filer  x

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

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

Class	Outstanding at August 10, 2007
Common Stock, $.01 par value per share	8,382,762 shares

PHOENIX FOOTWEAR GROUP, INC.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

	Page
PART I FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements and Notes to Financial Statements	3
Condensed Consolidated Balance Sheets as of June 30, 2007 (unaudited) and December 30, 2006	3
Condensed Consolidated Statements of Operations and Comprehensive (Loss) Earnings for the Three and Six Months Ended June 30, 2007 and July 1, 2006 (unaudited)	4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and July 1, 2006 (unaudited)	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	26
Item 4T. Controls and Procedures	26
PART II OTHER INFORMATION
Item 1A. Risk Factors	26
Item 3. Default upon Senior Securities	27
Item 4. Submission of Matters to a Vote of Security Holders	27
Item 6. Exhibits	27
Signatures	29

2

PART I: FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

PHOENIX FOOTWEAR GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

	June 30, 2007			December 30, 2006
	(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,053		$	845
Accounts receivable (less allowances of $1,802 and $1,923 in 2007 and 2006, respectively)		17,080			17,573
Inventories (less provision of $1,246 and $1,487 in 2007 and 2006, respectively)		24,284			28,057
Other current assets		3,126			2,519
Income tax receivable		2,865			2,503
Deferred income tax asset		1,591			1,494
Current assets of discontinued operations		8,563			7,490
Total current assets		58,562			60,481
PLANT AND EQUIPMENT — Net		3,777			4,084
OTHER ASSETS:
Goodwill		14,466			14,458
Unamortizable intangibles		11,393			11,393
Intangible assets, net		7,963			8,519
Other assets — net		50			50
Long-term assets of discontinued operations		8,359			8,447
Total other assets		42,231			42,867
TOTAL ASSETS	$	104,570		$	107,432
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Notes payable	$	51,166		$	53,966
Accounts payable		6,929			7,278
Accrued expenses		4,521			5,582
Other current liabilities		1,065			1,054
Income taxes payable		215			82
Current liabilities of discontinued operations		3,208			2,048
Total current liabilities		67,104			70,010
OTHER LIABILITIES:
Other long-term liabilities		1,381			1,419
Deferred income tax liability		4,159			4,159
Total other liabilities		5,540			5,578
Total liabilities		72,644			75,588
Commitments and contingencies (Note 8)
STOCKHOLDERS’ EQUITY:
Common stock, $0.01 par value — 50,000,000 shares authorized; 8,383,000 shares issued in 2007 and 2006		84			84
Additional paid-in-capital		46,204			45,921
Accumulated deficit		(11,551	)		(10,884	)
Accumulated other comprehensive gain (loss)		135			(18	)
		34,872			35,103
Less: Treasury stock at cost, 338,000 and 459,000 shares in 2007 and 2006, respectively		(2,946	)		(3,259	)
Total stockholders’ equity		31,926			31,844
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	104,570		$	107,432

The accompanying notes are an integral part of these consolidated financial statements.

3

PHOENIX FOOTWEAR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) EARNINGS

(Unaudited)

(In thousands, except share and per share data)

	Three Months Ended						Six Months Ended
	June 30, 2007			July 1, 2006			June 30, 2007			July 1, 2006
NET SALES	$	25,169		$	28,373		$	57,563		$	57,539
COST OF GOODS SOLD		17,618			18,391			39,898			37,632
GROSS PROFIT		7,551			9,982			17,665			19,907
OPERATING EXPENSES:
Selling, general and administrative expenses		8,880			8,775			18,916			17,511
Other expenses (income) — net		—			829			6			(565	)
Total operating expenses		8,880			9,604			18,922			16,946
OPERATING (LOSS) INCOME		(1,329	)		378			(1,257	)		2,961
INTEREST EXPENSE		602			649			1,220			1,244
(LOSS) EARNINGS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS		(1,931	)		(271	)		(2,477	)		1,717
INCOME TAX (BENEFIT) PROVISION		(1,151	)		(98	)		(1,188	)		104
NET (LOSS) EARNINGS BEFORE DISCONTINUED OPERATIONS		(780	)		(173	)		(1,289	)		1,613
NET (LOSS) EARNINGS FROM DISCONTINUED OPERATIONS, NET OF TAX (Note 3)		(149	)		(169	)		774			1,075
NET (LOSS) EARNINGS	$	(929	)	$	(342	)	$	(515	)	$	2,688
NET (LOSS) EARNINGS PER SHARE (Note 7)
BASIC:
CONTINUING OPERATIONS	$	(.10	)	$	(.02	)	$	(.16	)	$	.20
DISCONTINUED OPERATIONS		(.02	)		(.02	)		.10			.14
NET (LOSS) EARNINGS	$	(.12	)	$	(.04	)	$	(.06	)	$	.34
DILUTED:
CONTINUING OPERATIONS	$	(.10	)	$	(.02	)	$	(.16	)	$	.20
DISCONTINUED OPERATIONS		(.02	)		(.02	)		.10			.13
NET (LOSS) EARNINGS	$	(.12	)	$	(.04	)	$	(.06	)	$	.33
SHARES OUTSTANDING:
Basic		8,044,871			7,911,531			8,016,207			7,893,543
Diluted		8,044,871			7,911,531			8,016,207			8,265,301
NET (LOSS) EARNINGS	$	(929	)	$	(342	)	$	(515	)	$	2,688
Other comprehensive earnings, net of tax:
Foreign currency translation adjustment		138			31			153			2
COMPREHENSIVE (LOSS) EARNINGS	$	(791	)	$	(311	)	$	(362	)	$	2,690

The accompanying notes are an integral part of these consolidated financial statements.

4

PHOENIX FOOTWEAR GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Six Months Ended
	June 30, 2007			July 1, 2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings	$	(515	)		2,688
Adjustments to reconcile net (loss) earnings to net cash used in operating activities:
Depreciation and amortization		1,142			1,169
Provision for losses on accounts receivable		(121	)		(41	)
Allocation of shares in defined contribution plan		267			323
Loss on sale of property and equipment		4			90
Non-cash share-based compensation		62			81
Non-cash debt issuance cost amortization		284			157
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable		614			(2,713	)
Inventories — net		3,773			(3,340	)
Other receivable		(66	)		(41	)
Other current assets		(406	)		(1,097	)
Income taxes receivable		(363	)		—
Other non current assets		—			(28	)
Increase (decrease) in:
Accounts payable		(349	)		393
Accrued expenses		(1,061	)		2,536
Other liabilities		(272	)		(265	)
Income taxes payable		122			(80	)
Net cash provided by (used in) operating activities from continuing operations		3,115			(168	)
Net cash provided by operating activities from discontinued operations		208			77
Net cash provided by (used in) operating activities		3,323			(91	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment		(289	)		(446	)
Proceeds from disposal of property and equipment		6			13
Net cash used in investing activities from continuing operations		(283	)		(433	)
Net cash used in investing activities from discontinued operations		(32	)		(28	)
Net cash used in investing activities		(315	)		(461	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes payable-line of credit		6,350			7,050
Repayments of notes payable and line of credit		(9,150	)		(6,060	)
Issuance of common stock		—			50
Net cash (used in) provided by financing activities from continuing operations		(2,800	)		1,040
NET INCREASE IN CASH		208			488
CASH — Beginning of period		845			564
CASH — End of period	$	1,053		$	1,052
SUPPLEMENTAL CASH FLOW INFORMATION —
Cash paid during the period for:
Interest	$	1,960		$	2,579
Income taxes	$	102		$	1,700
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In 2006, the Company received 196,967 of its Common Stock previously held in escrow in connection with a reduction in the purchase price recorded for its acquisition of Altama in 2004 (see Note 13, Settlement of Claims)	$	—		$	2,500

The accompanying notes are an integral part of these consolidated financial statements.

5

PHOENIX FOOTWEAR GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Description of Business and Summary of Significant Accounting Policies

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Phoenix Footwear Group, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments which are of a normal recurring nature that are necessary for the fair presentation have been included in the accompanying financial statements. These financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission for the fiscal year ended December 30, 2006. Amounts related to disclosures of December 30, 2006 balances within these interim statements were derived from the aforementioned 10-K. The results of operations for the three and six months ended June 30, 2007, or for any other interim period, are not necessarily indicative of the results that may be expected for the full year.

Going Concern

The consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of June 30, 2007, March 31, 2007 and December 30, 2006, the Company was not in compliance with the financial covenants under its credit agreement. The Company received a waiver for financial covenant defaults which existed as of March 31, 2007 and December 30, 2006. The Company has not requested a waiver for the June 30, 2007 default as it is discussing with its bank a replacement facility with improved financing rates and financial covenants to align with its reduced funding needs and increased borrowing capacity. Additionally, the Company expects that it will not meet certain of these financial covenants during the remainder of 2007. There can be no assurance when, or if, a new facility, amendment, or waiver will be provided. In addition, the Company has implemented and is implementing initiatives to reduce working capital requirements for its business, and on July 2, 2007, completed the sale of its wholly-owned subsidiary, Royal Robbins, to Kellwood Company.

If a refinancing cannot be successfully concluded, or if the Company has a future default of the financial covenants, the payment of the bank debt could be demanded immediately by the lender. If such demand were made, the Company currently has insufficient cash to pay its bank debt in full. The expected inability to meet the financial covenants under the bank credit agreement and delay by the U.S. Department of Defense (“DoD”) in announcing awards of the military boot contract to replace the prior contract with the Company’s Altama subsidiary raises substantial doubt about the Company’s ability to continue as a going concern. In July 2007, the Company was notified by the DoD that it was awarded a new contract (see Note 15, Subsequent Event). The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

Liquidity

At the beginning of fiscal 2006, the Company had a $63.0 million credit facility with its lender, Manufacturers and Traders Trust Company, or M&T, which closed in August 2005. This facility included a line of credit with $28 million of availability, a $28 million term loan from prior acquisitions, and a $7 million acquisition bridge loan which was due on December 31, 2005. The credit agreement included financial covenants requiring the Company not to exceed an average borrowed funds to EBITDA ratio, cash flow coverage ratios, a fixed charge coverage ratio, and a current asset to current liabilities ratio.

On March 31, 2006, the Company entered into an amendment to its credit facility to modify the financial covenants pertaining to the average borrowed funds to EBITDA ratio, fixed charge coverage ratio and the current ratio, for the remainder of fiscal 2006. Notwithstanding this amendment, the Company defaulted on the average borrowed funds to EBITDA ratio and fixed charge coverage ratio covenants as of the end of the first three quarters of fiscal 2006. The Company obtained a waiver from its bank for each of these violations and eleven one-month extensions of the bridge loan maturity date.

On November 13, 2006, the Company entered into a First Lien Senior Secured Credit Facility Agreement, or First Lien Agreement, to modify its prior credit facility. The First Lien Agreement reduced the Company’s total availability from $63 million to $62 million. The First Lien Agreement consists of a Revolving Credit Facility, or Revolver, with an aggregate maximum commitment of $28 million (subject to a borrowing base formula), a First Lien Term Loan A or Term A of $24 million, and a $10 million First Lien Term Loan B, or Term B.

As of June 30, 2007, March 31, 2007 and December 30, 2006, the Company was in default with the financial covenants under its credit agreement. The Company received a waiver for financial covenant defaults which existed as of March 31, 2007 and December 30, 2006. The Company has not requested a waiver for the June 30, 2007 default as it is discussing with its bank a replacement facility with improved financing rates and financial covenants to align with its reduced funding needs and increased borrowing capacity. Additionally, the Company expects that it will not meet certain of these financial covenants during the remainder of 2007. There can be no assurance when, or if, a new facility, amendment, or waiver will be provided. The available borrowing capacity under the revolving credit facility, net of outstanding letters of credit of $2.4 million, was approximately $4.1 million at June 30, 2007.

Principles of Consolidation

The consolidated financial statements consist of Phoenix Footwear Group, Inc. and its wholly-owned subsidiaries, Penobscot Shoe Company, H.S. Trask & Co., Altama Delta Corporation, Altama Delta (Puerto Rico) Corporation, Chambers Belt Company, PXG Canada, Inc. and Phoenix Delaware Acquisition Company (“Tommy Bahama Footwear”). Intercompany accounts and transactions have been eliminated in consolidation.

Accounting Period

The Company operates on a fiscal year consisting of a 52- or 53-week period ending the Saturday nearest to December 31st. The second quarters consisted of the 13 weeks ended June 30, 2007 and July 1, 2006.

6

Reclassifications

Certain reclassifications have been made to the three and six months ended 2006 financial statements to conform to the classifications used in 2007.

2. Income Taxes

The Company records a quarterly tax provision based on estimates that consider year-to-date results, forecasted results for the fiscal year and operational factors that affect income taxes. The Company’s effective tax rate may vary from period to period depending on, among other factors, the geographic and business mix of taxable earnings and losses. The Company considers these factors and others, including its history of generating taxable earnings, in assessing its ability to realize deferred tax assets.

The Company realized an effective tax rate of 60% for the second quarter ended June 30, 2007 compared to an effective tax rate of 36% for the second quarter ended July 1, 2006. The increase in the effective tax rate from 2006 is primarily due to a change in the apportionment of state taxes resulting from the movement of certain distribution facilities between states during 2006.

The Company anticipates an actual effective tax rate of approximately 43.1% for fiscal 2007.

On January 1, 2007, the Company adopted FASB Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109.” FIN No. 48 creates a single model to address the accounting for the uncertainty in income tax positions and prescribes a minimum recognition threshold a tax position must meet before recognition in the financial statements.

The evaluation of a tax position in accordance with FIN No. 48 is a two-step process. The first step is a recognition process to determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, it is presumed that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. The second step is a measurement process whereby a tax position that meets the more-likely-than-not recognition threshold is calculated to determine the amount of benefit/expense to recognize in the financial statements. The tax position is measured at the largest amount of benefit/expense that is greater than 50% likely of being realized upon ultimate settlement.

Any tax position recognized would be an adjustment to the effective tax rate. FIN No. 48 allows the Company to prospectively change its accounting policy as to where interest expense and penalties on income tax liabilities are classified. Effective January 1, 2007, the Company changed its accounting policy and began to classify interest expense and penalties on tax liabilities in income tax expense on its Consolidated Statement of Earnings. Prior to January 1, 2007, interest expense and penalties were recognized as a reduction to net interest income and an increase to selling, general and administrative expenses, respectively, in the Company’s Consolidated Statement of Earnings. For federal tax purposes, the Company’s 2003 through 2006 tax years remain open for examination by the tax authorities under the normal three year statute of limitations. Generally, for state tax purposes, the Company’s 2002 through 2006 tax years remain open for examination by the tax authorities under a four year statute of limitations, however, certain states may keep their statute open for six to ten years.

Upon the adoption of FIN No. 48, the Company recognized an adjustment to beginning accumulated deficit of $152,000, an adjustment to goodwill of $8,000, and an adjustment to income tax provision of $3,000, resulting in a net tax liability relating to FIN No. 48 of $163,000. The Company recognizes accrued interest related to unrecognized tax benefits as part of income tax expense. During the quarter ended June 30, 2007 the Company recognized a charge of $6,000 related to interest. The cumulative effect of FIN 48 on the Company’s accumulated deficit is as follows (in thousands):

Accumulated deficit, 12/30/06, as previously reported	$	(10,884	)
Cumulative effect of adoption of FIN 48		(152	)
Net loss, six-months ended June 30, 2007		(515	)
Accumulated deficit, 6/30/07	$	(11,551	)

3. Discontinued Operations

On July 2, 2007, Phoenix Footwear sold all of the outstanding capital stock of its wholly-owned subsidiary, Royal Robbins, to Kellwood Company, a leading marketer of apparel and consumer soft goods headquartered in St. Louis, Missouri and, concurrently, PXG Canada sold certain assets and assigned certain obligations of PXG Canada that related solely to PXG Canada’s business devoted to the purchasing, marketing, distribution and sale of Royal Robbins branded products to Canadian Recreation Products, Inc., a wholly-owned subsidiary of Kellwood (See Note 15, Subsequent Event).

The results of the Royal Robbins business, previously included in the footwear and apparel segment, have been segregated from continuing operations and reported as discontinued operations in the Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2007 and July 1, 2006. In accordance with EITF 87-24, Allocation of Interest to Discontinued Operations (“EITF 87-24”), interest expense incurred on the debt that was required to be repaid as a result of the sale was allocated to discontinued operations for the periods presented and is included in Cost of Sales and Expenses. During the three and six month periods ended June 30, 2007 interest expense allocated to discontinued operations was approximately $932,000 and $1.9 million, respectively. During the three and six month periods ended July 1, 2006 interest expense allocated to discontinued operations was approximately $821,000 and $1.6 million, respectively.

The following table summarizes the results of the Royal Robbins business:

	Three Months Ended						Six Months Ended
	June 30, 2007			July 1, 2006			June 30, 2007		July 1, 2006
	(In thousands)
Net Sales	$	6,371		$	6,498		$	16,051	$	17,674
Cost of Sales and Expenses		6,181			6,762			14,587		15,885
Income (loss) before Income Taxes		190			(264	)		1,464		1,789
Income Tax Expense (Benefit)		339			(95	)		690		714
(Loss) Income from Discontinued Operations	$	(149	)	$	(169	)	$	774	$	1,075

7

Assets and liabilities of Royal Robbins included in the Condensed Consolidated Balance Sheets are summarized as follows:

	June 30, 2007		December 30, 2006
	(In thousands)
Assets
Cash	$	2	$	1
Accounts receivable, net		3,333		3,259
Inventories, net		4,474		4,132
Other current assets		624		98
Deferred income tax asset		130		—
Total Current Assets	$	8,563	$	7,490
Plant and equipment, net		255		287
Goodwill and Intangible Assets		8,104		8,160
Total Long-Term Assets	$	8,359	$	8,447
Liabilities
Accounts Payable		1,941		1,283
Accrued Liabilities		447		765
Income Taxes Payable		820		—
Total Liabilities	$	3,208	$	2,048

4. Inventories

The components of inventories as of June 30, 2007 and December 30, 2006, net of reserves are as follows:

	June 30, 2007		December 30, 2006
	(In thousands)
Raw materials	$	2,933	$	4,015
Work in process		664		1,305
Finished goods		20,687		22,737
	$	24,284	$	28,057

5. Goodwill and Intangible Assets

The changes in the carrying amounts of goodwill and non-amortizable intangible assets during the first two quarters of fiscal 2007 are as follows:

	Goodwill		Non-Amortizable Intangibles
	(In thousands)
Balance at December 30, 2006	$	14,458	$	11,393
Cumulative tax effect of adoption of FIN 48		8		—
Balance at June 30, 2007	$	14,466	$	11,393

The changes to Goodwill during the first two quarters of fiscal 2007 relate to the cumulative tax effect of the adoption of FIN 48 for the Company’s Altama brand. There were no changes in nonamortizable intangible assets during the first half of fiscal 2007.

The changes in the carrying amounts of amortizable intangible assets during the first two quarters of fiscal 2007 are as follows:

	Gross		Amortizable Intangibles Amortization			Net
	(In thousands)
Balance at December 30, 2006	$	10,406	$	(1,887	)	$	8,519
Amortization Expense		—		(556	)		(556	)
Balance at June 30, 2007	$	10,406	$	(2,443	)	$	7,963

8

Changes in amortizable intangibles during the first and second quarters of fiscal 2007 related to the amortization of other intangibles.

Intangible assets consist of the following as of June 30, 2007 and December 30, 2006:

	Useful Life (Years)	June 30, 2007			December 30, 2006
		(In thousands)
Non-amortizing:
Trademarks and tradenames	—	$	5,410		$	5,410
DoD relationship	—		5,983			5,983
Total		$	11,393		$	11,393
Amortizing:
Customer lists	1-20	$	7,605		$	7,605
Covenant not to compete	2-5		2,776			2,776
Other	5		25			25
Less: Accumulated Amortization			(2,443	)		(1,887	)
Total		$	7,963		$	8,519

Amortizable intangible assets with definite lives are amortized using the straight-line method over periods ranging from 1 to 20 years. During the three and six month periods ended June 30, 2007 aggregate amortization expense was approximately $279,000 and $556,000, respectively. During the three and six month periods ended July 1, 2006 aggregate amortization expenses was approximately $295,000 and $594,000, respectively. Amortization expense related to intangible assets at June 30, 2007 for each of the next five fiscal years and beyond is expected to be incurred as follows (in thousands):

Remainder of 2007	$	560
2008		1,131
2009		1,143
2010		864
2011		568
Thereafter		3,697
Total	$	7,963

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” the Company measures its Intangible Assets for impairment at least annually, and more often when events indicate that an impairment may exist. The Company performs a measurement for impairment on its reporting segments in December of each fiscal year with the exception of its accessories segment, which is measured in June of each fiscal year. In performing its impairment test of goodwill and intangible assets for its accessories segment, the Company determined that there was no impairment of goodwill and intangible assets related to its accessories segment at June 30, 2007.

6. Accounting for Stock-Based Compensation

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share Based Payment,” using the modified prospective method. In accordance with SFAS No. 123 (Revised 2004), the Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award for stock option grants. For performance-based stock rights which cliff vest based on specifically defined performance criteria, the cost is recognized at the time those rights cliff vest. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The Company determines the grant-date fair value of employee share options using the Black-Scholes option-pricing model adjusted for the unique characteristics of these options.

The Company from time to time grants Performance Based Stock Rights (“Stock Rights”). The Stock Rights cliff-vest based on the achievement of specific mutually agreed criteria and expires within a three year period if the criteria have not been met. The cost relating to the Stock Rights will be recognized at the time the Stock Rights cliff vest. No compensation cost will be recognized for Stock Rights until employees render the requisite service.

In accordance with the modified prospective method, the Company’s Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123 (Revised 2004). The following table summarizes compensation costs related to the Company’s stock-based compensation plans:

	Three Months Ended				Six Months Ended
	June 30, 2007		July 1, 2006		June 30, 2007		July 1, 2006
			(In thousands)
Selling, general and administrative	$	27	$	35	$	62	$	80
Pre-tax stock-based compensation expense		27		35		62		80
Income tax benefit		2		5		7		13
Total stock-based compensation expense	$	25	$	30	$	55	$	67

The Company did not grant stock option awards or modify any outstanding stock options during the three or six month periods ended June 30, 2007. The Company recognizes stock-based compensation expense using the straight-line attribution method for stock options and is recognized at the time the expense is considered probable. The remaining unrecognized compensation cost related to unvested stock option awards at June 30, 2007 is $83,000 and the estimated weighted-average period of time over which this cost will be recognized is 1 year. This amount does not include the cost of any additional options that may be granted in future periods nor any changes in the Company’s forfeiture rate. In connection with the exercise of stock options, the Company did not realize income tax benefits in the first two quarters of 2007 that have been credited to additional paid-in capital.

The fair value of stock options at date of grant was estimated using the Black-Scholes model. The expected life of employee stock options was determined using historical data of employee exercises and represents the period of time that stock options are expected to be outstanding. The risk free interest rate was based on the U.S. Treasury constant maturity for the expected life of the stock option. Expected volatility was based on the historical volatilities of the Company’s Common Stock. The Black-Scholes model was used with the following assumptions:

	June 30, 2007		July 1, 2006
Expected life (years)	6		6
Risk-free interest rate	4.16	%	4.16	%
Expected volatility	44.26	%	44.26	%
Expected dividend yield	0.0	%	0.0	%

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The following table summarizes the stock option transactions during the first two quarters of fiscal 2007:

	Shares	Weighted average exercise price		Weighted average remaining contractual life (in years)	Aggregate intrinsic value
	(In thousands, expect per share and contractual life data)
Options outstanding December 30, 2006	668	$	7.00
Granted	—		—
Exercised	—		—
Canceled	10		8.10
Options outstanding June 30, 2007	658	$	6.99	5.8	$	20
Options exercisable June 30, 2007	624	$	7.04	5.7	$	20

SFAS No. 123 (Revised 2004) requires the Company to reflect income tax benefits resulting from tax deductions in excess of expense as a financing cash flow in its Consolidated Statement of Cash Flows rather than as an operating cash flow as in prior periods. Cash proceeds, tax benefits and intrinsic value of related total stock options and rights exercised were $0 during the three and six months ended June 30, 2007 and July 1, 2006. Prior to January 1, 2006, the Company accounted for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. During the first and second quarters of fiscal 2007 there were no stock options granted.

The Company’s Board of Directors approved the issuance of 260,000 Performance Stock Rights to Directors and certain officers and executive managers of the Company, subject to the approval of a form of award agreement by its Compensation Committee. The form of the awards agreement was approved by the Compensation Committee during September 2006. The outstanding Stock Rights have an expected weighted average remaining life of approximately 2.4 years. The Stock Rights that could vest upon achievement of the performance targets at June 30, 2007 total 774,000 shares, which includes 420,000 Performance Stock Rights which were granted to the Company’s new CEO during the second quarter of 2007. The Company will recognize compensation expense based on the fair value of the Stock Rights upon cliff-vesting. The Company deems Stock Rights to be equivalent to a stock option for the purpose of calculating dilutive shares.

The following table summarizes Performance Based Stock Rights outstanding as of June 30, 2007:

	Rights	Aggregate Intrinsic Value
	(In thousands)
Stock Rights outstanding December 30, 2006	399
Granted	423
Exercised	—
Cancelled	48
Stock Rights outstanding June 30, 2007	774	$	2,553

7. Per Share Data

Basic net (loss) earnings from continuing operations per share is computed by dividing net (loss) earnings from continuing operations by the weighted average number of common shares outstanding for the period. Diluted net (loss) earnings from continuing operations per share is calculated by dividing net (loss) earnings from continuing operations and the effect of assumed conversions by the weighted average number of common and, when applicable, potential common shares outstanding during the period. A reconciliation of the numerators and denominators of basic and diluted (loss) earnings from continuing operations per share is presented below.

	Three Months Ended						Six Months Ended
	June 30, 2007			July 1, 2006			June 30, 2007			July 1, 2006
	(In thousands, except per share data)
Basic net (loss) earnings from continuing operations per share:
Net (loss) earnings from continuing operations	$	(780	)	$	(173	)	$	(1,289	)	$	1,613
Weighted average common shares outstanding		8,045			7,912			8,016			7,894
Basic net (loss) earnings from continuing operations per share	$	(.10	)	$	(.02	)	$	(.16	)	$	0.20
Diluted net (loss) earnings from continuing operations per share:
Net (loss) earnings from continuing operations	$	(780	)	$	(173	)	$	(1,289	)	$	1,613
Weighted average common shares outstanding		8,045			7,912			8,016			7,894
Effect of stock options outstanding		—			—			—			371
Weighted average common and potential common shares outstanding		8,045			7,912			8,016			8,265
Diluted net (loss) earnings from continuing operations per share	$	(.10	)	$	(.02	)	$	(.16	)	$	0.20

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Options and performance stock rights, to purchase shares of common stock which totaled 750,000 in the first six months of fiscal 2006, were not included in the computation of diluted earnings per share as the effect would be anti-dilutive.

In addition to shares outstanding held by the public, the Company’s defined contribution 401(k) savings plan held approximately 121,000 shares as of June 30, 2007, which were issued during 2001 in connection with the termination of the Company’s defined benefit pension plan. These shares, while eligible to vote, are classified as treasury stock and therefore are not outstanding for the purpose of determining per share earnings until the time that such shares are allocated to employee accounts. This allocation is occurring over a seven-year period which commenced in 2002. During fiscal 2007, approximately 121,000 shares were allocated to the defined contribution 401(k) savings plan.

In addition to the options and rights outstanding under the Plan, the Company granted options to two separate major stockholders in consideration for debt and debt guarantees. Options outstanding and exercisable under these arrangements totaled 398,000 as of June 30, 2007. These options were granted July 17, 1997, September 1, 1999 and on various dates during 2001 and have an exercise price ranging from $1.75 to $2.38 per share and expire at various dates through June 2011.

In conjunction with the Company’s secondary offering completed July 19, 2004, the Company issued 50,000 warrants with an exercise price of $15.00 to the managing underwriters. The warrants contain piggyback registration rights that expire seven years from the closing of the offering. The warrants expire on July 18, 2009. These warrants were excluded from the computation of diluted earnings per share as the effect would be anti-dilutive.

8. Contingent Liabilities and Contractual Obligations

The Company has various license agreements to manufacture and distribute products bearing certain trademarks or patents owned by various entities. In accordance with these agreements, the Company incurred royalty expense of approximately $575,000 and $936,000 for the three and six months ended June 30, 2007, respectively, and incurred royalty expense of approximately $571,000 and $1.1 million for the three and six months ended July 1, 2006, respectively. These amounts are included in the Company's cost of sales. The Company has various agreements in effect at June 30, 2007 which expire on various dates between 2007 and 2012. Future minimum royalty commitments under such license agreements at June 30, 2007 are as follows:

	(In thousands)
2007	$	2,091
2008		2,027
2009		2,037
2010		2,002
2011		2,463
Thereafter		1,152
Total	$	11,772

On October 3, 2006, the Company notified the seller under the purchase agreement for the acquisition of Tommy Bahama Footwear that it is withholding payment of the $500,000 holdback that the Company maintained under the terms of the Agreement. The Company had previously notified the sellers that certain acquired assets did not conform to the representations and warranties contained in the purchase agreement. The sellers have demanded payment of the holdback amount.

On June 15, 2007, Tommy Bahama Group, Inc. filed a claim against The Walking Company in the United States District Court for the Northern District of Georgia, seeking undisclosed damages in excess of $75,000 and to enjoin it from using certain Tommy Bahama trademarks and images in its catalog, website and in store displays. The Company is a licensee of Tommy Bahama marks in connection with its Tommy Bahama Footwear line. The Walking Company claims it had permission from the Company to use the Tommy Bahama marks in this manner as part of the arrangement with the Company for the sale of Tommy Bahama footwear in The Walking Company retail stores and through its catalogs. On July 10, 2007, The Walking Company filed a third party claim against Phoenix Footwear for contribution and indemnification for the claims in Tommy Bahama Group's complaint, as well as an undisclosed amount of damages for breach of contract, fraudulent and negligent misrepresentation in connection with the purported agreement and alleged representations made about use of the Tommy Bahama marks in connection with entering into their sales arrangements, including recovery of its expenses in producing the marketing material. Although the Company believes that it has meritorious defenses and intends to vigorously defend this lawsuit, management cannot predict the outcome of this litigation.

In the normal course of business, the Company is subject to legal proceedings, lawsuits and other claims. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Consequently, the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at June 30, 2007, cannot be ascertained. While these matters could affect the Company’s operating results for any one quarter when resolved in future periods and while there can be no assurance with respect thereto, management believes, with the advice of outside legal counsel, that after final disposition, any monetary liability or financial impact to the Company from these matters would not be material to the Company’s consolidated financial condition, results of operations or cash flows.

9. Debt

On August 4, 2005, the Company and Manufacturers and Traders Trust Company (“M&T”) entered into an Amended and Restated Credit Facility Agreement (the “Amended Credit Agreement”) in connection with its acquisition of Tommy Bahama Footwear. This Amended Credit Agreement replaced the Company’s existing credit agreement with M&T of $52 million and increased its availability to $63 million. M&T acted as lender and administrative agent for additional lenders under the Amended Credit Agreement. The Amended Credit Agreement increased the existing line of credit from $24 million to $28 million and added a $7 million bridge loan used for the acquisition of Tommy Bahama Footwear. The revolving line has an interest rate of LIBOR plus 3.0%, or the prime rate plus 0.375%. The bridge loan had an interest rate of LIBOR plus 3.5% or the prime rate plus 0.75%. The borrowings under the Amended Credit

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Agreement were secured by a blanket security interest in all the assets of the Company and its subsidiaries. The amended credit facility was to expire on June 30, 2010 and all borrowings under that facility were due and payable on that date. The Company’s availability under the revolving credit facility was $28 million (subject to a borrowing base formula). The bridge loan was due December 31, 2005. At December 31, 2005, LIBOR with a 90-day maturity was 4.53% and the prime rate was 7.00%. In addition, the payment or declaration of dividends and distributions was restricted. The Company was permitted to pay dividends on its common stock as long as it was not in default and doing so would not cause a default, and as long as its average borrowed funds to EBITDA ratio, as defined in the amended Credit Agreement, was no greater than 2 to 1. Under the terms of the amended Credit Agreement, the borrowing base for the revolver was based on certain balances of accounts receivable and inventory. The borrowing base formula contained inventory caps, and financial covenants requiring the Company not to exceed certain average borrowed funds to EBITDA ratios and cash flow coverage ratios.

On November 13, 2006, the Company and M&T entered into a First Lien Senior Secured Credit Facility Agreement (The “First Lien Agreement”), to modify the Amended and Restated Credit Facility Agreement dated August 4, 2005. The First Lien Agreement reduces the current availability from $63 million to $62 million. The First Lien Agreement consists of a Revolving Credit Facility (“Revolver”) with an aggregate maximum commitment of $28 million (subject to a borrowing base formula), a First Lien Term Loan A (“Term A”) of $24 million and a $10 million First Lien Term Loan B (“Term B”).

The Revolver and Term A bear an initial interest rate of LIBOR plus a margin of 3.5% and 4.0%, respectively, or at the election of the Company a base rate plus a margin of 0.75%. The base rate is the higher of the prime rate, and the federal funds rate plus one-half percentage point.

The interest rates for these loans adjust quarterly based the Company’s average borrowings to EBITDA, with the LIBOR spreads varying from 1.75% to 3.50% per annum (for the Revolver) and 2.25% to 4.00% per annum (for the Term A Loan), and the alternative base rate margins varying from 0% to 0.75% (for the Revolver) and from 0.25% to 1.25% for the Term A Loan. The Revolver interest is payable monthly and the Term A loan interest and principal is payable quarterly. The Revolver and Term A loan expire on November 13, 2011 and all borrowings are due and payable on that date. The Term B Loan has a fifteen month maturity, requires monthly interest only payments and bears an initial interest rate of LIBOR plus 7.0%. The LIBOR margins increase quarterly from 7.00% to 10.00%.

The borrowings under the First Lien Agreement are secured by a first priority perfected lien and security interest in all the assets of the Company and its subsidiaries. The First Lien Agreement includes a borrowing base formula with inventory caps, and financial covenants requiring the Company to (a) maintain a minimum current ratio, (b) maintain a minimum fixed charge coverage ratio, (c) maintain a minimum trailing twelve month EBITDA and (d) maintain maximum average borrowed funds to EBITDA ratio, measured quarterly. M&T acts as lender and administrative agent for additional lenders in the event a syndicate is formed, under the agreement. In connection with the new credit facility, the Company engaged M&T to syndicate the loan among additional potential lenders. The Company paid M&T a $250,000 fee for its syndication efforts, which is being amortized over the fifteen month maturity of Term Loan B. Under the terms of the engagement, M&T may modify the terms and conditions of the facility in order to successfully execute the syndication. As a result, the Company’s current facility may be refinanced prior to its maturity date although there can be no assurance that it will do so, or that it will be able to do so on terms favorable to the Company.

The Company was in default of four of its financial covenants as of June 30, 2007, March 31, 2007 and December 30, 2006. The Company obtained waivers from its bank with respect to its December 30, 2006 and March 31, 2007 defaults. The Company has not requested a waiver for the June 30, 2007 default as it is discussing with its bank a replacement facility with improved financing rates and financial covenants to align with its reduced funding needs and increased borrowing capacity. Additionally, the Company expects that it will not meet certain of these financial covenants during the remainder of 2007. There can be no assurance when, or if, a new facility, amendment, or waiver will be provided. Therefore, in accordance with EITF 86-30, Classification of Obligations When a Violation Is Waived by the Creditor (“EITF 86-30”), the Company reclassified its long-term debt as current liabilities as of the end of its second quarter ended June 30, 2007.

The available borrowing capacity under the revolving credit facility, net of outstanding letters of credit of $2.4 million, was approximately $4.1 million at June 30, 2007, and net of outstanding letters of credit of $1.9 million, was approximately $4.3 million at December 30, 2006.

Debt as of June 30, 2007 and December 30, 2006 consisted of the following:

	June 30, 2007		December 30, 2006
	(In thousands)
Term A payable to bank in variable quarterly installments through November 13, 2011, interest payable quarterly and bears an initial rate of LIBOR plus 4.0% (effective rate of 9.4% at June 30, 2007) (1)	$	22,400	$	24,000
Term B requires monthly interest only payments and bears an initial interest rate of LIBOR plus 7.0%. The LIBOR margins increase quarterly from 7.00% to 10.0% (effective rate of 13.4% at June 30, 2007)		10,000		10,000
Revolving line of credit to bank; secured by accounts receivable, inventory and equipment; interest payable monthly and bears a rate primarily at LIBOR plus 3.5% (effective rate of 8.9% at June 30, 2007) (1)		18,766		19,966
		51,166		53,966
Less: current portion		51,166		53,966
Non-current portion	$	—	$	—

(1) The Revolver and Term A bear an initial interest rate of LIBOR plus a margin of 3.5% and 4.0%, respectively, or at the election of the Company a base rate plus a margin of 0.75%. The base rate is the higher of the prime rate, and the federal funds rate plus one-half percentage point. The interest rates for these loans adjust quarterly based the Company’s average borrowings to EBITDA, with the LIBOR spreads varying from 1.75% to 3.50% per annum (for the Revolver) and 2.25% to 4.00%. per annum (for the Term A Loan), and the alternative base rate margins varying from 0% to 0.75% (for the Revolver) and from 0.25% to 1.25% for the Term A Loan.

The aggregate principal payments of notes payable are as follows:

One year or less	$	51,166
One to three years		—
Three to five years		—
Total	$	51,166

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10. Other expenses (income) — net

Other expenses (income) — net, totaled $0 and $6,000 in net expense for the three and six months ended June 30, 2007 and consisted primarily of losses on the sale of property and equipment. Other expenses (income) — net totaled $829,000 in net expense for the second quarter of fiscal 2006 which consisted primarily of severance costs associated with the departure of the Company’s CEO. Other expenses (income) — net totaled $565,000 in net income for the first two quarters of fiscal 2006 which primarily consists of a $1.5 million net gain associated with a purchase price reduction related the Company’s Altama acquisition partially offset by severance expense associated with the departure of the Company’s CEO.

11. Operating Segment Information

For the fiscal year ended December 30, 2006, the Company’s operating segments were classified into four segments: footwear and apparel, premium footwear, military boot operations and accessories. Through the acquisition of Chambers Belt in 2005, the Company added the accessories segment. Through the acquisition of Tommy Bahama Footwear, the Company added the premium footwear segment. As the H.S. Trask brand has a similar customer base and retail pricing structure to Tommy Bahama Footwear, the H.S. Trask brand was reclassified into the premium footwear segment and prior year numbers related to H.S. Trask were reclassified to conform to current year presentation.

The footwear and apparel operation designs, develops and markets various moderately-priced branded dress and casual footwear and apparel, outsources entirely the production of its products from foreign manufacturers primarily located in Brazil and Asia and sells its products primarily through department stores, national chain stores, independent specialty retailers, third-party catalog companies and directly to consumers over its Internet web sites. The premium footwear operation designs, develops and markets premium-priced branded dress and casual footwear, outsources entirely the production of its products from foreign manufacturers primarily located in Brazil, Asia and Europe and sells its products primarily through department stores, national chain stores, independent specialty retailers, third-party catalog companies and directly to consumers over its Internet web sites. The military boot operation manufactures one brand of mil-spec combat boots for sale to the DoD which serves all four major branches of the U.S. military, however these boots are used primarily by the U.S. Army and the U.S. Marines. In addition, the military boot operation manufactures or outsources commercial combat boots, infantry combat boots, tactical boots and safety and work boots and sells these products primarily through domestic footwear retailers, footwear and military catalogs and directly to consumers over its own web site. The accessory operation designs, develops and markets branded belts and personal items, manufactures a portion of its product at a facility in California, outsources the production of a portion of its product from foreign manufacturers in Mexico and Asia and sells its products primarily through department stores, national chain stores and independent specialty retailers.

On July 2, 2007, Phoenix Footwear sold all of the outstanding capital stock of its wholly-owned subsidiary, Royal Robbins, to Kellwood, a leading marketer of apparel and consumer soft goods headquartered in St. Louis, Missouri and, concurrently, PXG Canada sold certain assets and assigned certain obligations of PXG Canada that related solely to PXG Canada’s business devoted to the purchasing, marketing, distribution and sale of Royal Robbins branded products to Canadian Recreation, a wholly-owned subsidiary of Kellwood. The results of Royal Robbins, previously included in the footwear and apparel segment, have been segregated from continuing operations and reported as discontinued operations in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations for all periods presented.

Operating profits by business segment exclude allocated corporate interest expense and income taxes. Corporate general and administrative expenses include expenses such as salaries and related expenses for executive management and support departments such as accounting, information technology and human resources which benefit the entire corporation and are not segment specific. The following table summarizes sales to customers by operating segment that are 10% or greater.

	Customer Concentration Summary
	Three Months Ended				Six Months Ended
	June 30, 2007		July 1, 2006		June 30, 2007		July 1, 2006
Premium Footwear:
Tommy Bahama Retail	20	%	16	%	23	%	13	%
Nordstrom	18	%	17	%	11	%	17	%
Military:
Department of Defense	36	%	60	%	51	%	66	%
US Government	*	%	*	%	18	%	*
Accessories:
Wal-Mart	66	%	61	%	66	%	57	%

* Less than 10% for the period presented

No individual off-shore customer, excluding the Company’s Canadian subsidiary, represents more than 10% of net sales for any segment.

	Three Months Ended June 30, 2007			Three Months Ended July 1, 2006			Six Months Ended June 30, 2007			Six Months Ended July 1, 2006
	(In thousands)
Net Revenues
Footwear and Apparel	$	5,552		$	5,237		$	13,493		$	12,839
Premium Footwear		2,897			5,596			6,110			12,290
Military Boots		5,354			6,512			16,420			13,698
Accessories		11,366			11,028			21,540			18,712
	$	25,169		$	28,373		$	57,563		$	57,539
Operating Income (loss)
Footwear and Apparel	$	665		$	1,064		$	2,513		$	2,818
Premium Footwear		(954	)		303			(1,927	)		(157	)
Military Boots		137			377			1,039			1,474
Accessories		1,072			1,244			2,078			1,637
Reconciling Items(1)		(2,249	)		(2,610	)		(4,960	)		(2,811	)
	$	(1,329	)	$	378		$	(1,257	)	$	2,961

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Depreciation and Amortization
Footwear and Apparel	$	10	$	13	$	19	$	69
Premium Footwear		29		55		57		114
Military Boots		198		194		394		379
Accessories		258		252		512		502
Reconciling Items(2)		81		53		160		105
	$	576	$	567	$	1,142	$	1,169
Capital Expenditures
Footwear and Apparel	$	4	$	—	$	5	$	42
Premium Footwear		—		2		—		7
Military Boots		32		64		77		173
Accessories		29		44		100		71
Reconciling Items(2)		10		81		107		153
	$	75	$	191	$	289	$	446

	As of June 30, 2007		As of December 30, 2006
	(In thousands)
Identifiable Assets
Footwear and Apparel	$	11,743	$	12,582
Premium Footwear		6,157		7,320
Military Boots		9,189		14,439
Accessories		25,250		23,792
Discontinued Operations		9,438		8,453
Goodwill
Footwear and Apparel		1,949		1,949
Premium Footwear		162		162
Military Boots		6,663		6,655
Accessories		5,692		5,692
Discontinued Operations		4,894		4,894
Non-amortizable intangibles
Footwear and Apparel		—		—
Premium Footwear		590		590
Military Boots		8,133		8,133
Accessories		2,670		2,670
Discontinued Operations		2,590		2,590
Reconciling Items(3)		9,450		7,511
	$	104,570	$	107,432

(1) Represents corporate general and administrative expenses and other income (expense) not utilized by management in determining segment profitability. Corporate general and administrative expenses include expenses such as salaries and related expenses for executive management and support departments such as accounting, information technology and human resources which benefit the entire corporation and are not segment specific. The increase in corporate expenses during fiscal 2007 is due to the $1.5 million net gain related to the Altama purchase price reduction settlement recognized during the first quarter of fiscal 2006, in addition to increased spending on legal, tax and auditing fees and initiatives addressing Sarbanes Oxley compliance and FIN 48 implementation during fiscal 2007.

(2) Represents capital expenditures and depreciation of the Company’s corporate office not utilized by management in determining segment performance.

(3) Identifiable assets are comprised of net receivables, net inventory, certain property, plant and equipment. Reconciling items represent unallocated corporate assets not segregated between the four segments and includes amortizable intangibles and other assets.

12. Related Parties

The Company provides raw materials, components and equipment utilized in manufacturing its product, to Maquiladora Chambers de Mexico, S.A., a manufacturing company located in Sonora, Mexico. Maquiladora Chambers de Mexico, S.A. provides production related services to convert these raw materials into finished goods for the Company. The Managers of the Company’s Chambers Belt and Tommy Bahama Footwear brands, who are former principals of Chambers Belt prior to the Company’s 2005 acquisition of the brand, each own an equity interest in Maquiladora Chambers de Mexico, S.A. As

14

of June 30, 2007 and December 30, 2006, there was $0 due to or from the Company from Maquiladora Chambers de Mexico, S.A. For the three and six months ended June 30, 2007, the Company purchased a total of $594,000 and $1.1 million, respectively, and for the three and six months ended July 1, 2006, the Company purchased a total of $462,000 and $843,000, respectively, in production related services from Maquiladora Chambers de Mexico, S.A.

13. Settlement of Claims

On January 8, 2006, the Company entered into an agreement with the seller of Altama which modified the terms of the Stock Purchase Agreement dated June 15, 2004 among them pursuant to which the Company acquired Altama. As a result of the agreement, the total price paid by the Company for Altama was reduced by approximately $1.6 million in cash previously due the seller and held by the Company, 196,967 in the Company shares held in an escrow valued at the original purchase price of $2.5 million and the termination of all future obligations under the stock purchase agreement, including a contingent earn-out covenant, and consulting and non-competition agreements which totaled approximately $1.6 million. As a result of this transaction the Company recorded a reduction in goodwill of $2.5 million related to the return of 196,967 of the Company’s shares, a corresponding increase in treasury stock of $2.5 million, a reduction in intangible assets of approximately $1.7 million and an after-tax gain of approximately $1.5 million for fiscal 2006.

On October 20, 2006, the Company entered into a settlement agreement with a sourcing agent for the Tommy Bahama Footwear brand regarding a claim for past due commissions. The Company made a payment of approximately $100,000 plus interest in settlement on February 15, 2007. The amount was included in accrued liabilities as of December 30, 2006.

14. Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS No. 157). SFAS No. 157 establishes a common definition for fair value to be applied to US GAAP guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. This new standard provides guidance for using fair value to measure assets and liabilities. The FASB believes the standard also responds to investors’ requests for expanded information about the extent to which company’s measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances.

In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Liabilities – Including an Amendment to FASB Statement No. 115” (SFAS No. 159). SFAS No. 159 improves financial reporting by giving entities the opportunity to mitigate earnings volatility by electing to measure related financial assets and liabilities at fair value rather than using different measurement attributes. Unrealized gains and losses on items for which the fair value option has been elected should be reported in earnings. Upon initial adoption, differences between the fair value and carrying amount should be included as a cumulative-effect adjustment to beginning retained earnings.

SFAS Nos. 157 and 159 are effective as of the beginning of the first fiscal year that begins after November 15, 2007. Earlier application is permitted as of the beginning of the fiscal year that begins on or before November 15, 2007. The Company will not early adopt SFAS Nos. 157 and 159 and is currently assessing the impact of implementing SFAS Nos. 157 and 159 on its financial position and results of operations.

15. Subsequent Event

On July 9, 2007, the Defense Supply Center Philadelphia (the “DSCP”) of the United States Department of Defense awarded Altama a contract to furnish hot weather infantry combat boots. The contract contains an initial one year term with four one year extension options available to the DSCP. The contract is a fixed price with economic price adjustment, indefinite delivery, and indefinite quantity contract. The contract provides for a minimum of approximately 83,000 pairs, for a fixed price of approximately $5.0 million, and a maximum of approximately 337,000 pairs, for a fixed price of approximately $20.4 million, in contract year one. It also provides for a minimum of approximately 61,000 pairs and a maximum of approximately 308,000 pairs in each of the next four contract option years. As a result, there can be no assurance of the ultimate number of combat boots that the DSCP will purchase under the contract.

On July 2, 2007, Phoenix Footwear sold all of the outstanding capital stock of its wholly-owned subsidiary, Royal Robbins, to Kellwood, a leading marketer of apparel and consumer soft goods headquartered in St. Louis, Missouri and, concurrently, PXG Canada sold certain assets and assigned certain obligations of PXG Canada that related solely to PXG Canada’s business devoted to the purchasing, marketing, distribution and sale of Royal Robbins branded products to Canadian Recreation.

At closing, the aggregate cash consideration of $38 million anticipated to be paid under the stock purchase agreement and the asset purchase agreement was reduced by $132,529, resulting from the preliminary closing date working capital being less than $6.5 million pursuant to the working capital collar formula. The final closing date working capital adjustment remains subject to post-closing review by Kellwood and Phoenix Footwear. As a result, the closing date working capital adjustment may be further adjusted up or down. The purchase price was determined through arms-length negotiations between the parties. In addition to the aggregate cash consideration, Canadian Recreation assumed certain accounts payable owed by PXG Canada to Phoenix Footwear in an amount not to exceed $750,000. The accounts payable are required to be paid by Canadian Recreation within 45 days of the closing. Phoenix Footwear preliminarily estimates it will record a gain of approximately $22.9 million as a result of this sale.

As part of the transactions, Phoenix Footwear caused a $3 million standby letter of credit to be issued by Phoenix Footwear’s lender for Kellwood’s benefit to partially fund indemnification payments. Phoenix Footwear will maintain the $3 million standby letter of credit for eighteen months following the closing, subject to reduction on the first anniversary of the closing to an amount equal to the greater of $1.5 million or the amount of all unresolved indemnification claims of Kellwood, if any, made under the stock purchase agreement.

Also as part of the transactions, on July 2, 2007, Phoenix Footwear and M&T entered into a termination agreement (the “Termination Agreement”), with respect to the termination of certain agreements executed by Royal Robbins and PXG Canada in connection with Phoenix Footwear’s Amended and Restated Credit Facility Agreement. Approximately $35.2 million of the net proceeds from the aforementioned sale transactions were used by Phoenix Footwear to pay down the outstanding indebtedness owed by Phoenix Footwear to M&T under the Credit Agreement. The Termination Agreement terminated all security agreements, guaranties, financing statements and other collateral arrangements that created or granted or lien, security interest or other encumbrance on the assets or capital stock of Royal Robbins and terminated all security agreements, financing statements or other collateral documents that created or granted a lien, security interest or other encumbrance on the assets of PXG Canada sold to Canadian Recreation under the asset purchase agreement.

15

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

The following discussion should be read in conjunction with the interim unaudited condensed consolidated financial statements contained in this report, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, the historical consolidated financial statements and the related notes and the other financial information included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) for the fiscal year ended December 30, 2006. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of any number of factors, including those set forth under “Cautionary Statement Concerning Forward-Looking Statements” and “Risk Factors” below.

References to our “fiscal 2005” refer to our fiscal year ended December 31, 2005, references to our “fiscal 2006” refer to our fiscal year ended December 30, 2006, and references to our “fiscal 2007” refer to our fiscal year ending December 29, 2007.

Overview

We design, develop and market a diversified selection of men’s and women’s footwear, belts, and outdoor apparel. In addition, we design and manufacture military combat and uniform boots. Our brands include the Tommy Bahama^®, Trotters^®, SoftWalk^®, H.S. Trask^® footwear, Altama^® boots and Chambers Belts^®. Through a series of acquisitions, we have built this portfolio of brands that we believe provide us with organic growth potential. We may continue to build our portfolio of brands through acquisitions of footwear, apparel or related products; however, we have no present plans to do so. Rather, our current focus is on building value within these existing brands through investments in key personnel, product development and operating process improvements and expanding the distribution of our products.

Our operations are comprised of four reportable segments: footwear and apparel, premium footwear, military boot business and accessories. We identify operating segments based on, among other things, the way our management organizes the components of our business for purposes of allocating resources and assessing performance. Segment revenues are generated from the sale of footwear, apparel and accessories through wholesale channels, military channels including the U.S. government, direct to consumer catalogs and website sales. See “Segment Information” in the Notes to Consolidated Financial Statements.

Our portfolio consists largely of small specialty brands, most of which serve a product need or provide an operational benefit to their customers beyond the price and aesthetics of their respective products. For instance, Trotters is one of the last brands providing retailers an “in stock, full size and widths” resource. Nonetheless, we believe these brands can generate considerable growth and enjoy attractive operating margins in part, because we can provide them with shared infrastructure and access to resources they otherwise would not enjoy as a stand alone enterprise. These resources include: access to working capital; sourcing capabilities and relationships; distribution, financing and information technology platforms; and most notably, human capital. By combining these brand attributes with operational leverage we believe we can create shareholder value even though they may not enjoy the national awareness of some other larger or better known brands.

We are continuing to integrate the brands we have acquired and are focused on improving our operational efficiencies. In this regard, we have undertaken initiatives to attract the human resources necessary to succeed, strengthen our balance sheet, improve our operating margins and invest in organic growth projects.

Expanding our Industry Expertise. As we have grown, so too has our need for individuals well versed in the operating disciplines of the footwear, apparel and accessories business. Over the course of fiscal 2006 a significant number of individuals have been added to the staff to advance our design, sourcing and sales capabilities. In addition, on April 17, 2007, the Company appointed Cathy B. Taylor as Chief Executive Officer, effective April 23, 2007. Ms. Taylor has over 25 years of executive and consulting experience in the retail footwear industry, of which 20 was with Cole Haan/Nike, Inc. She has served as a consultant to the Company since August 2006, in connection with its Tommy Bahama and H.S. Trask product lines, through the firm she founded in 2005, CBT Brand Consulting. From 2004 to 2005, she was a managing director of Herbert Mines Associates, an executive search firm, where she focused on the luxury products market. From 2001 to 2003, Ms. Taylor served as President & CEO of Wenger North America, the maker of the ‘Genuine Swiss Army Knife,’ where she led the company, upon recruitment by its Board of Directors, following its LBO. From 1999 to 2000, she served as CEO of Vivre, Inc., a luxury catalog and internet retailer. Prior to that, while with Cole Haan, and Nike, Inc., following its acquisition of Cole Haan, she held a series of positions including Vice President of Retail, Executive Vice President, and President & Chief Executive Officer of Cole Haan (a division of Nike, Inc.). In these roles she developed and implemented global branding, marketing, sourcing and sales strategies. The Company and Ms. Taylor have entered into an employment agreement, effective April 23, 2007, in connection with her appointment as Chief Executive Officer. The term of employment is five years which, if not earlier terminated, will renew in successive one-year increments.

Balance Sheet Strengthening. During fiscal 2006 and continuing into fiscal 2007 we have taken a number of steps to reduce the working capital required to run our business. First among these is the reduction of inventory used in running our brands. We have sold off considerable amounts of excess inventory and are installing inventory management practices to reduce standard inventory levels which we believe will help substantially reduce the units and value of inventory necessary to operate our brands. In addition, we are converting to a centralized credit platform which we believe will significantly improve our receivable turns, further reducing our average working capital needs. Lastly, on July 2, 2007, we sold our Royal Robbins subsidiary, and related brand assets from our PXG Canada subsidiary, to Kellwood Company, a leading marketer of apparel and consumer soft goods headquartered in St. Louis, Missouri. Thus far we have used a portion of the net proceeds from the sale to pay down $35.2 million of our bank debt and preliminarily estimate that we will record a gain of approximately $22.9 million as a result of this sale. We plan to utilize the remaining net proceeds to further pursue our growth strategy of strengthening our remaining brands. As a result of the sale, we have reported the results of our Royal Robbins business as discontinued operations for all current and prior periods presented, pursuant to SFAS No. 144 “Accounting for the Disposal of Long-Lived Assets”.

Operating Margin Improvements. We have several initiatives which in the near term have suppressed margins, but which we believe will lead to improvement in our operating margins over the course of fiscal 2007. Our emphasis on inventory reduction, particularly closeout and slower moving goods, yielded gross margins which were below the normalized rates for several of our brands in fiscal 2005 and fiscal 2006. We were particularly aggressive in the last part of fiscal 2006 and first part of fiscal 2007 and as a result have inventory levels which we expect should generate considerably better gross margins. We are also in the process of making substantial changes to our footwear sourcing network which we expect will further improve gross margins and pricing flexibility in the later part of fiscal 2007 and beyond. This past year we closed a significant number of third party sourcing relationships, as well as opened up a second foreign sourcing office. We currently have duplicative costs within our sourcing operations as we complete this migration, but expect to see both the elimination of these additional costs and product from the new sources enter our supply system over the course of fiscal 2007. Lastly, we are undertaking the consolidation of our distribution facilities into a single, unified and state of the art warehousing chain. Concurrent with our realigned sourcing operations we expect this to yield more efficient and timely fulfillment of our customer requirements.

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Organic Growth Initiatives. We have a number of avenues for organic growth in which we have invested during the last several quarters. Most notably, we built an organization to support the relaunch of Tommy Bahama Footwear and accessories. These investments included product design, sales, marketing and planning resources. While a cost to us in fiscal 2006 and early fiscal 2007, we believe the opportunity to profitably grow our Tommy Bahama Footwear business unit more than warranted these investments.

In addition to Tommy Bahama we are in the process of reinvesting in our Trask brand. During the last year we underwent a marketing study to assess what, if any, strategic opportunities existed within the men’s marketplace that Trask was capable of exploiting. The results of this study concluded that Trask was well positioned to expand its market share conditioned upon a successful updating and redesign of its line. Accordingly, late in fiscal 2006 and continuing into the current year we are developing the products while refocusing our efforts within the brand.

Results of Operations

The following table sets forth selected consolidated operating results for each of the quarterly periods indicated, presented in dollars and as a percentage of net sales.

Fiscal Quarter Ended June 30, 2007 Compared to Fiscal Quarter Ended July 1, 2006.

	Fiscal Quarter Ended
	June 30, 2007					July 1, 2006					Increase (Decrease)
						(In thousands)
Net sales	$	25,169		100	%	$	28,373		100	%	$	(3,204	)	(11	)%
Cost of goods sold		17,618		70	%		18,391		65	%		(773	)	(4	)%
Gross profit		7,551		30	%		9,982		35	%		(2,431	)	(24	)%
Operating expenses:
Selling, general and administrative expense		8,880		35	%		8,775		31	%		105		1	%
Other expense (income) — net		—		—	%		829		3	%		(829	)	(100	)%
Total operating expenses		8,880		35	%		9,604		34	%		(724	)	(8	)%
Operating (loss) income		(1,329	)	(5	)%		378		1	%		(1,707	)	(*	)%
Interest expense		602		(3	)%		649		2	%		(47	)	(7	)%
Loss before income taxes and discontinued operations		(1,931	)	(8	)%		(271	)	(1	)%		(1,660	)	*	%
Income tax (benefit) provision		(1,151	)	(5	)%		(98	)	(*	)%		(1,053	)	*	%
Net loss before discontinued operations		(780	)	(3	)%		(173	)	(1	)%		(607	)	*	%
(Loss) income from discontinued operations		(149	)	(1	)%		(169	)	(*	)%		20		(12	)%
Net loss	$	(929	)	(4	)%	$	(342	)	(1	)%	$	(587	)	*	%

* Greater than 100%

Consolidated Net Sales from Continuing Operations

Consolidated net sales from continuing operations for the second quarter of fiscal 2007 were $25.2 million compared to $28.4 million for the second quarter of fiscal 2006, representing a $3.2 million, or 11%, decrease. The decrease in sales from continuing operations during the second quarter of 2007 is attributable to a decrease of $2.7 million in sales in our premium footwear segment and a decrease of $1.2 million in sales in our military boot segment, offset slightly by an increase in sales in our footwear and apparel and accessories segments. In our military boot segment, sales to the DoD decreased $2.4 million in the second quarter of 2007 compared to the second quarter of 2006. In our premium footwear segment, the decrease is primarily attributable to a decrease in sales for our Tommy Bahama footwear brand which was a result of the repositioning of the brand and the development of new styles.

Consolidated Gross Profit from Continuing Operations

Consolidated gross profit from continuing operations for the second quarter of fiscal 2007 decreased 24% to $7.6 million compared to $10.0 million for the comparable prior year period. Gross profit as a percentage of net sales from continuing operations decreased to 30% compared to 35% in the comparative prior year period. The decrease in gross profit and gross profit as a percentage of sales is primarily attributable to increased sales discounts and allowances related to our premium footwear segment, higher manufacturing costs associated with lower production volumes at our military segment and additional sourcing and logistics costs incurred in connection with our product sourcing transition during the period from Brazil to China.

Consolidated Operating Expenses from Continuing Operations

Consolidated selling, general and administrative, or SG&A, expenses from continuing operations were $8.9 million, or 35% of net sales, for the second quarter of fiscal 2007 compared to $8.8 million or 31% of net sales for the second quarter of fiscal 2006. The increase in SG&A expenses from continuing operations in the second quarter of fiscal 2007 is primarily attributable to increased spending on design costs, offset by decreased spending on advertising and marketing programs, decreased headcount, in addition to efficiencies recognized in our warehousing and shipping departments.

On January 1, 2006, we adopted SFAS No. 123 (Revised 2004), “Share Based Payment,” using the modified prospective method. In accordance with SFAS No. 123 (Revised 2004), we measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award for stock option grants. For performance-based stock rights which cliff vest based on specifically defined performance criteria, the cost is recognized at the time those rights are expected to cliff vest. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. We determine the grant-date fair value of employee share options using the Black-Scholes option-pricing model adjusted for the unique characteristics of these options. For the second quarter of fiscal 2007 and 2006, we recognized $27,000 and $35,000, respectively, in compensation costs for the vesting of stock options. In accordance with the modified prospective method, our Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123 (Revised 2004).

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Consolidated Other Expenses (Income) — Net, from Continuing Operations

Consolidated “Other expenses (income) — net” from continuing operations totaled $829,000 in other expense for the second of quarter fiscal 2006 which consisted primarily of severance costs associated with the departure of the Company’s CEO.

Consolidated Interest Expense from Continuing Operations

Consolidated interest expense from continuing operations for the second quarter of fiscal 2007 was $602,000, compared to $649,000 for the second quarter of fiscal 2006. The consistency of interest expense between the two periods is a result of increased interest rates during fiscal 2007, offset by a lower debt balance at the end of the current period, compared to the prior year.

Consolidated Income Tax Provision from Continuing Operations

The Company records a quarterly tax provision based on estimates that consider year-to-date results, forecasted results for the fiscal year and operational factors that affect income taxes. Our effective tax rate may vary from period to period depending on, among other factors, the geographic and business mix of taxable earnings and losses. We consider these factors and others, including our history of generating taxable earnings, in assessing our ability to realize deferred tax assets.

The Company realized an effective tax rate of 60% for the second quarter ended June 30, 2007, compared to an effective tax rate of 36% for the second quarter ended July 1, 2006. The increase in the effective tax rate is primarily due to a change in the apportionment of state income taxes.

Consolidated Net Loss from Continuing Operations

Our net loss from continuing operations for the second quarter of fiscal 2007 was $780,000, compared to net loss from continuing operations of $173,000 for the second quarter of fiscal 2006. Our net loss per diluted share from continuing operations was $0.10 for the second quarter of fiscal 2007, compared to net loss per diluted share from continuing operations of $0.02 for the comparable period of fiscal 2006. The increase in our net loss from continuing operations is attributable to lower overall gross margins realized in our premium footwear, military boot and accessories segments during the second quarter of 2007.

Net Loss from Discontinued Operations

Pursuant to our Board of Directors’ approval of the plan to sell our wholly-owned subsidiary, Royal Robbins, and related Canadian operations, to Kellwood, all operating results related to Royal Robbins have been reclassified and included in discontinued operations. For the three months ended June 30, 2007, and July 1, 2006, net loss from discontinued operations was $149,000 and $169,000, respectively.

Footwear and Apparel Business

Net Sales

Net sales for the second quarter of fiscal 2007 were $5.6 million, compared to $5.2 million for the second quarter of fiscal 2006, representing a 6% increase. Net sales for our Trotters brand increased $444,000, or 15%, and was partially offset by a decrease of approximately $154,000, or 7%, in our SoftWalk brand for the comparative period. During the first quarter of fiscal 2007 we made our first shipments of footwear under a previously signed license with American Red Cross. These shipments resulted in net sales of $37,000 during the second quarter of 2007. The increase in sales for our Trotters brand was primarily attributable to increased international sales, offset by increased sales at close-out prices during the current fiscal quarter for our SoftWalk brand, which translated to lower overall sales for the brand.

Gross Profit

Gross profit for the second quarter of fiscal 2007 was $2.4 million, compared to $2.5 million for the prior fiscal year period. Gross margin in this segment as a percentage of net sales decreased to 44% compared to 48% in the prior comparative fiscal quarter. The decrease in gross profit dollars primarily relates to an increase in close-out sales in our SoftWalk and Trotters brands. The decrease in gross profit as a percentage of sales is primarily a result of a change in product sales mix within this segment.

Operating Expenses

SG&A expenses were $1.7 million or 31% of net sales in this segment for the second quarter of fiscal 2007, compared to $1.4 million or 27% of net sales for the comparable period of fiscal 2006. The increase in SG&A expenses in the second quarter of fiscal 2007 can be attributed to the bankruptcy of a large customer during the current quarter, resulting in bad debt expense of approximately $130,000. Increases in spending during the current year second quarter on marketing and promotional programs also contributed to the increase in SG&A expenses.

Premium Footwear Business

Net Sales

Net sales for the second quarter of fiscal 2007 were $2.9 million, compared to $5.6 million for the second quarter of fiscal 2006, representing a $2.7 million decrease. This decrease is primarily attributable to a decrease in sales for our Tommy Bahama footwear brand during the second quarter of 2007, compared to the second quarter of 2006 which was a result of the repositioning of the brand and the development of new styles. The new Tommy Bahama styles began shipping in January 2007 and we expect shipments will continue to increase throughout 2007 as more styles become available. In addition, the Tommy Bahama accessories line is included in our accessories segment during fiscal 2007, while prior to May 2006, it was included in the premium footwear segment. Total net sales for the Tommy Bahama accessories line included in this segment during the second quarter of fiscal 2006 was approximately $161,000.

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Gross Profit

Gross profit for the second quarter of fiscal 2007 decreased to $861,000, compared to $2.1 million for the comparable prior fiscal year while gross profit as a percentage of net sales decreased from 38% to 30% for the same comparable period. The decrease in gross profit margin as a percentage of sales resulted from a decrease in direct to consumer sales, which generate a higher gross profit, for our H.S. Trask brand during the quarter, in addition to an increase in product sales at close-out prices.

Operating Expenses

SG&A expenses were $1.8 million or 63% of net sales in this segment for the second quarter of fiscal 2007, compared to $1.8 million or 33% of net sales for the comparable period of fiscal 2006. The increase in SG&A expenses as a percentage of sales is a result of our continued investment in the product design and development of our Tommy Bahama Footwear and H.S. Trask brands.

Military Boot Business

Net Sales

Net sales for the second quarter of fiscal 2007 were $5.4 million for the Military Boot segment, a decrease of 18%, compared to $6.5 million of net sales for the prior year comparable quarter. Sales to the DoD were $1.5 million or 28% of total net sales for our military boot business and sales to commercial customers were $3.9 million or 72% of total net sales for our military boot business. The decrease in sales in this segment is a result of decreased DoD sales of approximately $2.4 million during the current year quarter. Our latest DoD contract expired September 30, 2006 and the final deliveries under this contract were shipped during May 2007. In July 2007, we were notified by the DoD that we were awarded a new contract. The contract contains an initial one year term with four one year extension options available to the DSCP. The contract is a fixed price with economic price adjustment, indefinite delivery, and indefinite quantity contract. The contract provides for a minimum of approximately 83,000 pairs, for a fixed price of approximately $5.0 million, and a maximum of approximately 337,000 pairs, for a fixed price of approximately $20.4 million, in contract year one. It also provides for a minimum of approximately 61,000 pairs and a maximum of approximately 308,000 pairs in each of the next four contract option years. As a result, there can be no assurance of the ultimate number of combat boots that the DSCP will purchase under the contract. This award was made at lower per boot prices than Altama’s prior award. As a result, we expect to generate lower margins than under the prior award, the impact of which we expect to be lessened if higher volumes are ordered under the contract. We expect to begin delivering product under the new contract in September 2007. The decrease in DoD sales during the current quarter was partially offset by an increase in commercial sales of $1.3 million.

Gross Profit

Gross profit for the second quarter of fiscal 2007 was $882,000 or 16% of net sales for this segment, compared to gross profit of $1.3 million or 20% of net sales for the second quarter of fiscal 2006. The decrease in gross profit dollars and as a percentage of sales was primarily attributable to an increase in sales to non-DoD U.S. government agencies which generate lower gross margins than sales to our other commercial customers, in addition to lower production volumes during the current quarter as a result of the final shipments being made under our prior DoD contract.

Operating Expenses

Direct SG&A expenses were $745,000 or 14% of net sales for this segment for the second quarter of fiscal 2007, compared to $914,000 or 14% of net sales for the second quarter of fiscal 2006. This decrease in direct SG&A expenses in fiscal 2007, compared to the prior year period, is attributable to decreased levels of selling and advertising expenditures during the current year period.

Accessories Business

Net Sales

Net sales for the second quarter of fiscal 2007 were $11.4 million, compared to $11.0 million for the second quarter of fiscal 2006. The increase is primarily related to our Tommy Bahama accessories line which is included in our accessories segment during 2007, while prior to May 2006, it was included in the premium footwear segment. Net sales related to Tommy Bahama accessories during the second quarter of 2007 were $653,000.

Gross Profit

Gross profit for the second quarter of fiscal 2007 was $3.4 million, or 30% of net sales, compared to gross profit for the second quarter of fiscal 2006 of $4.0 million, or 37% of net sales. The decrease in gross profit as a percentage of sales during 2007 is a result of an increase in sales to mass merchant customers, which includes Wal-Mart, which generate lower gross margin sales than Chambers’ other wholesale customers.

Operating Expenses

Operating expenses for the second quarter of fiscal 2007 totaled $2.3 million compared to $2.8 million for the second quarter of fiscal 2006. The decrease in operating expenses is due to lower headcount and decreased expenses associated with brand selling expenses for this segment.

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Fiscal Six Month Period Ended June 30, 2007 Compared to Fiscal Six Month Period Ended July 1, 2006.

The following table sets forth selected consolidated operating results for each of the six month periods indicated, presented in dollars and as a percentage of net sales.

	Fiscal Six Months Ended
	June 30, 2007					July 1, 2006					Increase (Decrease)
						(In thousands)
Net sales	$	57,563		100	%	$	57,539		100	%	$	24		—	%
Cost of goods sold		39,898		69	%		37,632		65	%		2,266		6	%
Gross profit		17,665		31	%		19,907		35	%		(2,242	)	(11	)%
Operating expenses:
Selling, general and administrative expense		18,916		33	%		17,511		31	%		1,405		8	%
Other expense (income) — net		6		—	%		(565	)	(1	)%		571		(	*)%
Total operating expenses		18,922		33	%		16,946		30	%		1,976		12	%
Operating (loss) income		(1,257	)	(2	)%		2,961		5	%		(4,218	)	(	*)%
Interest expense		1,220		2	%		1,244		2	%		(24	)	(2	)%
(Loss) earnings before income taxes and discontinued operations		(2,477	)	(4	)%		1,717		3	%		(4,194	)	(	*)%
Income tax (benefit) provision		(1,188	)	(2	)%		104		—	%		(1,292	)	(	*)%
(Loss) earnings before discontinued operations		(1,289	)	(2	)%		1,613		3	%		(2,902	)	(	*)%
Income from discontinued operations		774		1	%		1,075		2	%		(301	)	(28	)%
Net (loss) earnings	$	(515	)	(1	)%	$	2,688		5	%	$	(3,203	)	(	*)%

* Greater than 100%

Consolidated Net Sales from Continuing Operations

Consolidated net sales from continuing operations for the first six months of fiscal 2007 were $57.6 million, compared to $57.5 million for the first six months of fiscal 2006. The overall consistency in sales during the first six months of 2007 is attributable to a decrease of $6.2 million in sales in our premium footwear segment, offset by an increase in sales in our footwear and apparel segment of $667,000, an increase in net sales in our military boot segment of $2.7 million, and an increase in net sales in our accessories segment of $2.8 million. In our premium footwear segment, a decrease in sales for our Tommy Bahama footwear brand during the first six months of 2007, compared to the first six months of 2006, was a result of the repositioning of the brand and the development of new styles. In addition, a decrease in sales for our H.S. Trask brand resulted from an initiative begun in the fourth quarter of 2006 which included updating and redesigning the product line. These updated products are currently being developed and we expect to see an increase in sales for these brands later in 2007 as the new styles become available for shipment to our customers.

Consolidated Gross Profit from Continuing Operations

Consolidated gross profit from continuing operations for the first six months of fiscal 2007 decreased 11% to $17.7 million, compared to $19.9 million for the comparable prior year period. Gross profit as a percentage of net sales decreased to 31% compared to 35% in the comparative prior year period. The decrease in gross profit and gross profit as a percentage of sales is primarily attributable to a larger increase in sales associated with our military boot and accessories segments which generate lower gross margins than our footwear and apparel and premium footwear segments, in addition to an increased percentage of product being sold at close-out prices in our footwear and apparel and premium footwear segments.

Consolidated Operating Expenses from Continuing Operations

Consolidated SG&A expenses from continuing operations were $18.9 million, or 33% of net sales, for the first six months of fiscal 2007, compared to $17.5 million or 31% of net sales for the first six months of fiscal 2006. The increase in SG&A expenses in fiscal 2007 is primarily attributable to increased spending on legal, tax and auditing fees and initiatives addressing Sarbanes Oxley compliance and FIN 48 implementation, offset by decreased spending on advertising and marketing programs and decreased headcount at the consolidated level, in addition to efficiencies recognized in our warehousing and shipping departments.

On January 1, 2006, we adopted SFAS No. 123 (Revised 2004), “Share Based Payment,” using the modified prospective method. In accordance with SFAS No. 123 (Revised 2004), we measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which an employee is required to provide service in exchange for the award for stock option grants. For performance-based stock rights which cliff vest based on specifically defined performance criteria, the cost is recognized at the time those rights are expected to cliff vest. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. We determine the grant-date fair value of employee share options using the Black-Scholes option-pricing model adjusted for the unique characteristics of these options. For the first six months of fiscal 2007 and 2006, we recognized $62,000 and $80,000, respectively, in compensation costs for the vesting of stock options. In accordance with the modified prospective method, our Consolidated Financial Statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123 (Revised 2004).

Consolidated Other Expenses (Income) — Net, from Continuing Operations

Consolidated “Other expenses (income) — net” from continuing operations totaled $6,000 in other expense for the first six months of fiscal 2007 which consisted primarily of losses on the sale of property and equipment. Consolidated “Other income (expense) — net” totaled $565,000 in other income for the six month period of fiscal 2006 which primarily consists of a $1.5 million net gain associated with a purchase price reduction related to our Altama acquisition partially offset by $829,000 in severance costs. On January 8, 2006 we entered into an agreement with the seller of the Altama Delta Corporation which modified the terms of the Stock Purchase Agreement dated June 15, 2004 among them pursuant to which we acquired Altama. As a result of the agreement, the total price paid by us for Altama was reduced by approximately $1.5 million in cash, 196,967 in Phoenix Footwear shares valued at the original purchase price of $2.5 million and the termination of all future obligations under the stock purchase agreement, including a contingent earn-out covenant, and consulting and non-competition agreements which totaled $1.6 million. As a result of this transaction we recorded a net gain of $1.5 million in the six month period of fiscal 2006.

Consolidated Interest Expense from Continuing Operations

Consolidated interest expense from continuing operations for the first six months of fiscal 2007 and fiscal 2006 was $1.2 million. The consistency of interest expense between the two periods is a result of increased interest rates during fiscal 2007, offset by a lower debt balance at the end of the current period, compared to the prior year.

Consolidated Income Tax Provision from Continuing Operations

The Company records a quarterly tax provision based on estimates that consider year-to-date results, forecasted results for the fiscal year and operational factors that affect income taxes. Our effective tax rate may vary from period to period depending on, among other factors, the geographic and business mix of taxable earnings and losses. We consider these factors and others, including our history of generating taxable earnings, in assessing our ability to realize deferred tax assets.

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The Company realized an effective tax rate of 48% for the six month period ended June 30, 2007 compared to an effective tax rate of 8% for the six month period ended July 1, 2006. The increase in the effective tax rate is primarily due to a non-recurring, non-taxable net gain recorded in the first six months ended July 1, 2006 related to the Altama purchase price reduction transaction, in addition to a change in the apportionment of state income taxes.

The Company anticipates an actual effective tax rate of approximately 43.1% for fiscal 2007.

Consolidated Net Loss (Earnings) from Continuing Operations

Our net loss from continuing operations for the first six months of fiscal 2007 was $1.3 million, compared to net earnings from continuing operations of $1.6 million for the first six months of fiscal 2006. Our net loss per diluted share from continuing operations was $0.16 for the first six months of fiscal 2007, compared to net earnings from continuing operations of $0.20 per diluted share for the comparable period of fiscal 2006. The decrease in net earnings is attributable to lower overall sales and gross margins realized in our premium footwear segment and lower gross margins realized in our military boot and accessories segments during the first six months of 2007, in addition to the $1.5 million net gain we recorded in the first six months of fiscal 2006 associated with the Altama purchase price reduction transaction.

Net Earnings from Discontinued Operations

Pursuant to our Board of Directors’ approval of the plan to sell our wholly-owned subsidiary, Royal Robbins and related Canadian operations, to Kellwood, all operating results related to Royal Robbins have been reclassified and included in discontinued operations. For the six months ended June 30, 2007 and July 1, 2006, net earnings from discontinued operations was $774,000 and $1.1 million, respectively.

Footwear and Apparel Business

Net Sales

Net sales for the first six months of fiscal 2007 were $13.5 million compared to $12.8 million for the first six months of fiscal 2006, representing a 5% increase. Net sales for our Trotters brand increased $884,000, or 12%, and were partially offset by a decrease of approximately $393,000, or 7%, in our SoftWalk brand for the comparative period. During the first six months of fiscal 2007 we made our first shipments of footwear under a previously signed license with American Red Cross. These shipments resulted in net sales of $173,000 during the six month period. The increase in sales for our Trotters brand was primarily attributable to increased international sales, offset by increased sales at close-out prices during the current six month period for our SoftWalk brand which translated to lower overall sales dollars for the brand.

Gross Profit

Gross profit for the first six months of fiscal 2007 increased 3% to $6.1 million, compared to $5.9 million for the comparable prior fiscal year. Gross margin in this segment as a percentage of net sales decreased to 45% compared to 46% in the prior comparative fiscal six month period. The slight increase in gross profit dollars primarily relates to increased sales in our Trotters brand, partially offset by a decrease in sales in our SoftWalk brand. The decrease in gross profit as a percentage of sales is primarily a result of a change in product sales mix within this segment which included a larger percentage of product being sold at close-out prices compared to the prior year period.

Operating Expenses

SG&A expenses were $3.6 million, or 26% of net sales in this segment for the first six months of fiscal 2007, compared to $3.1 million or 24% of net sales for the comparable period of fiscal 2006. The increase in SG&A expenses in the first six months of fiscal 2007 can be attributed to the bankruptcy of a large customer during the current period, resulting in bad debt expense of approximately $130,000. Increases in spending during the current year six month period on marketing and promotional programs also contributed to the increase in SG&A expenses.

Premium Footwear Business

Net Sales

Net sales for the first six months of fiscal 2007 were $6.1 million compared to $12.3 million for the first six months of fiscal 2006, representing a $6.2 million decrease. This decrease is primarily attributable to a decrease in sales for our Tommy Bahama footwear brand during the first six months of 2007 compared to the first six months of 2006, which was a result of the repositioning of the brand and the development of new styles. The new Tommy Bahama, styles began shipping in January 2007 and we expect shipments will continue to increase throughout 2007 as more styles become available. Sales also decreased in the H.S. Trask brand which resulted from an initiative begun in the fourth quarter of 2006 which included updating and redesigning the product line. These updated products are currently being developed and we expect to see an increase in sales for these brands later in 2007 as the new styles become available for shipment to our customers. In addition, the Tommy Bahama accessories line is included in our accessories segment during fiscal 2007, while prior to May 2006 it was included in the premium footwear segment and included net sales totaling $765,000 during the first six months of 2006 which were included in this segment.

Gross Profit

Gross profit for the first six months of fiscal 2007 decreased to $2.1 million, compared to $3.9 million for the comparable prior fiscal year while gross profit as a percentage of net sales increased from 32% to 35% for the same comparable period. The increase in gross profit margin as a percentage of sales resulted from a lower level of close-out sales in the first quarter, compared to the prior year period which included our transition out of the old Tommy Bahama line and lower margin sales in our Lady Trask and discontinued Colter Creek brand, offset by a decrease in gross profit margin as a percentage of sales during the second quarter of the current year resulting from a decrease in direct to consumer sales, which generate a higher gross profit, for our H.S. Trask brand during the current period, in addition to an increase in product sales at close-out prices during the second quarter of the current year.

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Operating Expenses

SG&A expenses were $4.1 million or 66% of net sales in this segment for the first six months of fiscal 2007, compared to $4.0 million or 33% of net sales for the comparable period of fiscal 2006. The increase in SG&A expenses as a percentage of sales is a result of our continued investment in the product design and development of our Tommy Bahama Footwear and H.S. Trask brands.

Military Boot Business

Net Sales

Net sales for the first six months of fiscal 2007 were $16.4 million for the Military Boot segment an increase of 20%, compared to $13.7 million of net sales for the prior year six month period. Sales to the DoD were $7.4 million or 45% of total net sales for our military boot business and sales to commercial customers were $9.0 million or 55% of total net sales for our military boot business. The overall increase in sales is a result of increased commercial sales of approximately $4.3 million. DoD sales decreased approximately $1.6 million during the current year six month period. Our latest DoD contract expired September 30, 2006 and the final deliveries under this contract were shipped during May 2007. In July 2007, we were notified by the DoD that we were awarded a new contract. We expect to begin delivering product under the new contract in September 2007.

Gross Profit

Gross profit for the first six months of fiscal 2007 was $2.7 million or 16% of net sales for this segment, compared to gross profit of $3.3 million or 24% for the first six months of fiscal 2006. The decrease in gross profit dollars and as a percentage of sales was primarily attributable to an increase in sales to non-DoD U.S. government agencies which generate lower gross margins than sales to our other commercial customers.

Operating Expenses

Direct SG&A expenses were $1.6 million or 10% of net sales for this segment for the first six months of fiscal 2007, compared to $1.8 million or 13% of net sales for the first six months of fiscal 2006. This decrease in direct SG&A expenses in fiscal 2007, compared to the prior year period, is attributable to relocation expenses associated with a change in third party distribution services and the relocation of the brand’s sales office which both occurred during fiscal 2006.

Accessories Business

Net Sales

Net sales for the first six months of fiscal 2007 were $21.5 million compared to $18.7 million for the first six months of fiscal 2006. The increase is primarily due to increased sales of approximately $3.4 million to Wal-Mart during the current year. An additional increase is related to our Tommy Bahama accessories line which is included in our accessories segment during 2007, while prior to May 2006, it was included in the premium footwear segment. Net sales related to the Tommy Bahama accessories line during the first six months of 2007 was $971,000.

Gross Profit

Gross profit for the first six months of fiscal 2007 was $6.8 million, or 31% of net sales, compared to gross profit for the first six months of fiscal 2006 of $6.8 million, or 36% of net sales. The decrease in gross profit as a percentage of sales during 2007 is a result of an increase in sales to mass merchant customers, which includes Wal-Mart, which generate lower gross margin sales than Chambers’ other wholesale customers.

Operating Expenses

Operating expenses for the first six months of fiscal 2007 totaled $4.7 million compared to $5.1 million for the first six months of fiscal 2006. The decrease in operating expenses is due to lower headcount and decreased expenses associated with brand selling expenses for this segment.

Seasonal and Quarterly Fluctuations

The following sets forth our consolidated net sales and operating income (loss) from continuing operations summary operating results for the quarterly periods indicated (in thousands).

	Fiscal 2007
	First Quarter		Second Quarter			Third Quarter		Fourth Quarter
Net sales from continuing operations	$	32,394	$	25,169		$	—	$	—
Operating income (loss) from continuing operations	$	72	$	(1,329	)	$	—	$	—
	Fiscal 2006
	First Quarter		Second Quarter			Third Quarter		Fourth Quarter
Net sales from continuing operations	$	29,166	$	28,373		$	27,337	$	24,560
Operating income (loss) from continuing operations	$	2,583	$	378		$	34	$	(27,901	)

Our quarterly consolidated results of continuing operations have fluctuated, and we expect will continue to fluctuate in the future, as a result of seasonal variances. Notwithstanding the effects of our acquisition activity, net sales and income from continuing operations in our first and third quarters historically have been stronger than in our second and fourth quarters.

Liquidity and Capital Resources

Our primary liquidity requirements include debt service, capital expenditures, working capital needs and financing for acquisitions. We have historically met these liquidity needs with cash flows from operations, borrowings under our term loans and revolving credit facility and issuances of shares of our common stock.

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The consolidated financial statements have been prepared assuming that we will continue as a going concern. As of June 30, 2007, March 31, 2007 and December 30, 2006, we were in default with the financial covenants under our credit agreement. On May 14, 2007 and March 30, 2007, we received waivers of the financial covenant defaults with respect to our December 30, 2006 and March 31, 2007 defaults. We have not requested a waiver for the June 30, 2007 default as we are discussing with our bank a replacement facility with improved financing rates and financial covenants to align with our reduced funding needs and increased borrowing capacity. Additionally, we expect that we will not meet certain of these financial covenants during the remainder of 2007. There can be no assurance when, or if, a new facility, amendment, or waiver will be provided.

If we are not successful in obtaining a replacement facility or amendment or waiver, or if we have a future default of the financial covenants, the payment of the bank debt could be demanded immediately by the lender. If such a demand were made, we currently have insufficient funds to pay our debt in full. This raises substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.

Based upon current and anticipated levels of operations and provided that there is no intervening acceleration of our bank indebtedness, we believe we have sufficient liquidity from our cash flow from operations, and availability under our revolving credit facility, to meet our debt service requirements and other projected cash needs for the next twelve months.

Bank Credit Agreement

At the beginning of fiscal 2006, we had a $63.0 million credit facility with our lender Manufacturers and Traders Trust Company, or M&T, which closed in August 2005. This facility included a line of credit with $28 million of availability, a $28 million term loan from prior acquisitions, and a $7 million acquisition bridge loan which was due on December 31, 2005. The credit agreement included financial covenants requiring us not to exceed an average borrowed funds to EBITDA ratio, cash flow coverage ratios, a fixed charge coverage ratio, and a current asset to current liabilities ratio.

On March 31, 2006, we entered into an amendment to our credit facility to modify the financial covenants pertaining to the average borrowed funds to EBITDA ratio, fixed charge coverage ratio and the current ratio, for the remainder of fiscal 2006. Notwithstanding this amendment, we defaulted in the average borrowed funds to EBITDA ratio and fixed charges coverage ratio covenants as of the end of the first three quarters of fiscal 2006. We obtained a waiver from our bank for each of these violations and eleven one-month extensions of the bridge loan maturity date.

On November 13, 2006, we entered into a First Lien Senior Secured Credit Facility Agreement, or First Lien Agreement, to modify our prior credit facility. The First Lien Agreement reduced our total availability from $63 million to $62 million. The First Lien Agreement consists of a Revolving Credit Facility, or Revolver, with an aggregate maximum commitment of $28 million (subject to a borrowing base formula), a First Lien Term Loan A or Term A of $24 million, and a $10 million First Lien Term Loan B, or Term B.

The Revolver and Term A bear an initial interest rate of LIBOR plus a margin of 3.5% and 4.0%, respectively, or at our election a base rate plus a margin of 0.75%. The base rate is the higher of the prime rate and the federal funds rate plus one-half percentage point.

The interest rates for these loans adjust quarterly based on average borrowings to EBITDA, with the LIBOR spreads varying from 1.75% to 3.50% per annum (for the Revolver) and 2.25% to 4.00% per annum (for the Term A Loan), and the alternative base rate margins varying from 0% to 0.75% (for the Revolver) and from 0.25% to 1.25% for the Term A Loan. The Revolver interest is payable monthly and the Term A loan interest and principal is payable quarterly. The Revolver and Term A loan expire on November 13, 2011 and all borrowings are due and payable on that date. The Term B Loan has a fifteen month maturity, requires monthly interest only payments and bears an initial interest rate of LIBOR plus 7.0%. The LIBOR margins increase quarterly from 7.00% to 10.00%.

The borrowings under the First Lien Agreement are secured by a first priority perfected lien and security interest in all of our assets and those of our subsidiaries. The First Lien Agreement includes a borrowing base formula with inventory caps and financial covenants requiring us to (a) maintain a minimum current ratio, (b) maintain a minimum fixed charge coverage ratio, (c) maintain a minimum trailing twelve month EBITDA, (d) maintain a maximum average borrowed funds to EBITDA ratio, measured quarterly and (e) a minimum EBITDA requirement. M&T acts as lender and administrative agent for additional lenders under the agreement. In connection with the new credit facility, we engaged M&T to syndicate the loan among additional potential lenders. We paid M&T a $250,000 fee for its syndication efforts. Under the terms of the engagement, M&T may modify the terms and conditions of the facility in order to successfully execute the syndication. As a result, our current facility may be refinanced prior to its maturity date although there can be no assurance that we will do so, or that we will be able to do so on favorable terms.

At June 30, 2007, our outstanding credit facility balance was $51.2 million consisting of the revolving credit facility and our term loans of $18.8 million and $32.4 million, respectively. At December 30, 2006 our outstanding credit facility balance was $54.0 million consisting of the revolving credit facility and our term loans of $20.0 million and $34.0 million, respectively. Our available borrowing capacity under the revolving credit facility, net of outstanding letters of credit of $1.9 million, was approximately $4.3 million at December 30, 2006, and net of outstanding letters of credit of $2.4 million was approximately $4.1 million at June 30, 2007. On July 2, 2007, we paid down $35.2 million of the term loans and revolving credit facility from the proceeds of the sale of our Royal Robbins subsidiary. As a result, as of July 28, 2007, our outstanding credit facility balance was $14.1 million.

Working Capital

We have implemented and are implementing initiatives to reduce the working capital required for our business including reducing inventory and installing a new credit platform. As discussed above, we are in default of our financial covenants as of June 30, 2007. Accordingly, we have classified our long-term debt as current liabilities as of the end of the second quarter of fiscal 2007 and as of the end of fiscal 2006 in accordance with EITF 86-30, Classification of Obligations When a Violation Is Waived by the Creditor.

Working capital at the end of the second quarter of fiscal 2007 was a net deficit of approximately $8.5 million, compared to a net deficit of approximately $9.5 million at the end of fiscal 2006. During fiscal 2006 and continuing into fiscal 2007, we have taken a number of steps to reduce the working capital required to run our business. This includes the reduction of inventory used in running our brands and converting to a centralized credit platform which we believe will significantly improve our receivable turns, further reducing our average working capital needs.

Our working capital varies from time to time as a result of the seasonal requirements of our brands, which have historically been heightened during the first and third quarters, the timing of factory shipments, the need to increase inventories and support an in-stock position in anticipation of customers’ orders, and the timing of accounts receivable collections. Our current ratio, the relationship of current assets to current liabilities (adjusted to exclude the

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reclassification of long term debt), was 2.0 at June 30, 2007, compared to 3.1 at December 30, 2006. Current assets at the end of the second quarter of fiscal 2007 decreased $1.9 million from fiscal 2006. Accounts receivable days sales outstanding decreased from 80 days as of the end of fiscal 2006 to 75 days at the end of the second quarter of fiscal 2007, reflective of increased collection efforts.

Changes in Cash Flow

The following table sets forth our change in cash flow:

	Six Months ended
	June 30, 2007			July 1, 2006
	(In thousands)
Cash provided by (used in) Operating Activities	$	3,323		$	(91	)
Cash used in Investing Activities	$	(315	)	$	(461	)
Cash (used in) provided by Financing Activities	$	(2,800	)	$	1,040
Net increase in Cash	$	208		$	488

Cash Flows Provided by (Used in) Operations. During the first six months of fiscal 2007 our net cash provided by operating activities was $3.3 million compared to $91,000 net cash used in operating activities during the comparable period of fiscal 2006. The increase in operating cash inflows from the prior year is due primarily to a net decrease in accounts receivable and inventory and the collection of income taxes receivable, offset by a decrease in accrued expenses and a decline in net earnings during the current period.

Investing Activities. In the first six months of fiscal 2007, our cash used in investing activities totaled $315,000 compared to cash used totaling $461,000 in the comparable period of fiscal 2006. During the first six months of fiscal 2007 and fiscal 2006 cash used in investing activities was primarily due to improvements at our manufacturing facilities, further enhancement of our e-commerce platform and expenditures incurred in the continued integration of our operations across all brands.

For the remainder of fiscal 2007, we anticipate capital expenditures of approximately $539,000, which will consist generally of new computer hardware and software, further development of an e-commerce platform for our brands and investment in new machinery and equipment for our manufacturing facilities to improve operating efficiencies. The actual amount of capital expenditures for fiscal 2007 may differ from this estimate, largely depending on acquisitions we may complete or unforeseen needs to replace existing assets.

Financing Activities. For the first six months of fiscal 2007, our net cash used in financing activities was $2.8 million compared to cash provided by financing activities of $1.0 million for the comparable period of fiscal 2006. The cash used in the current period was primarily related to payments made on our notes payable during the six month period, compared to cash provided by financing activities during 2006 which was primarily due to the proceeds from borrowings made on our revolving line of credit, partially offset by notes payable payments made during the period. In 2007, this cash was primarily generated through the reductions of inventory and through the collection of accounts receivable balances. In 2006, this cash was primarily used to purchase inventory to support our sales for the first six months of the fiscal year.

Our ability to generate sufficient cash to fund our operations depends generally on the results of our operations and the availability of financing. Assuming there is no intervening acceleration of our bank indebtedness, our management believes that cash flows from operations in conjunction with the available borrowing capacity under our amended credit facility will be sufficient for the next twelve months to fund operations, meet debt service and contingent earn-out payment requirements and fund capital expenditures other than future acquisitions.

Inflation

We believe that the relatively moderate rates of inflation in recent years have not had a significant impact on our net sales or profitability.

Contractual Obligations

In the Annual Report on Form 10-K for the year ended December 30, 2006 under the heading “Contractual Obligations,” we outlined certain of our contractual obligations as described therein. For the three and six months ended June 30, 2007, there have been no material changes in the contractual obligations specified except for the additional borrowings under our amended credit facility as described above.

During the second quarter of fiscal 2007, we entered into an employment agreement with Cathy B. Taylor, our new Chief Executive Officer, effective April 23, 2007. The agreement is for a term of five years which, if not earlier terminated, will renew in successive one-year increments and provides, among other things,

• an annual base salary of $550,000, with increases subject to Board of Directors performance and salary review;

• an annual bonus of up to 120% of annual salary, based on brand financial performance targets;

• moving and temporary livings expenses, as specified in the agreement, and reimbursement, vacations and medical insurance and other benefits, commensurate with other senior-level executives; and

• an award of performance-based deferred stock awards covering up to 420,000 shares of common stock.

Ms. Taylor’s employment under the agreement is terminable for any reason by the Company, with or without cause, at any time. Upon termination without cause or at any time by Ms. Taylor for good reason, Ms. Taylor is entitled severance of continued annual salary payments for 18 months for termination prior to April 15, 2008, and 12 months for termination thereafter. She is also entitled to a pro rated portion of any bonus earned, if terminated during the last four months of a fiscal year. Additionally, if the termination is by her with good reason, or by the Company without cause, following a change of control, as defined in the agreement, all unvested performance-based deferred stock awards not previously forfeited, vest. Lastly, she is entitled to severance of six months of continued salary payments it either party fails to renew the agreement following the initial five year term, or the successive one year terms thereafter.

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In connection with its acquisition of Chambers Belt, the Company agreed to pay the former owners as part of the purchase price potential earn-out cash payments equal to 50% of the net contribution of Chambers Belt division for the 12-month periods ending June 28, 2007 and 2006, respectively, as long as minimum thresholds are achieved by the acquired business during these periods. The net contribution is defined as the operating earnings of the Chambers division determined in accordance with GAAP, with allocation of expenses for services, facilities, equipment and products shared with its other brands. For the periods ending June 28, 2007 and June 28, 2006, Chambers Belt did not meet the minimum threshold necessary for the Company to make a cash payout pursuant to the agreement.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements other than operating leases. See “Contractual Obligations” above. We do not believe that these operating leases are material to our current or future financial condition, results of operations, liquidity, capital resources or capital expenditures.

Critical Accounting Policies

As of June 30, 2007, the Company’s consolidated critical accounting policies and estimates have not changed materially from those set forth in the Annual Report on Form 10-K for the year ended December 30, 2006, except for the following:

On January 1, 2007, the Company adopted FASB Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109.” FIN No. 48 creates a single model to address the accounting for the uncertainty in income tax positions and prescribes a minimum recognition threshold a tax position must meet before recognition in the financial statements.

The evaluation of a tax position in accordance with FIN No. 48 is a two-step process. The first step is a recognition process to determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, it is presumed that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. The second step is a measurement process whereby a tax position that meets the more-likely-than-not recognition threshold is calculated to determine the amount of benefit/expense to recognize in the financial statements. The tax position is measured at the largest amount of benefit/expense that is greater than 50% likely of being realized upon ultimate settlement.

Any tax position recognized would be an adjustment to the effective tax rate. FIN No. 48 allows the Company to prospectively change its accounting policy as to where interest expense and penalties on income tax liabilities are classified. Effective January 1, 2007, the Company changed its accounting policy and began to classify interest expense and penalties on tax liabilities in income tax expense on its Consolidated Statement of Earnings. Prior to January 1, 2007, interest expense and penalties were recognized as a reduction to net interest income and an increase to selling, general and administrative expenses, respectively, in the Company’s Consolidated Statement of Earnings. For federal tax purposes, the Company’s 2003 through 2006 tax years remain open for examination by the tax authorities under the normal three year statute of limitations. Generally, for state tax purposes, the Company’s 2002 through 2006 tax years remain open for examination by the tax authorities under a four year statute of limitations, however, certain states may keep their statute open for six to ten years.

Upon the adoption of FIN No. 48, the Company recognized an adjustment to beginning accumulated deficit of $152,000, an adjustment to goodwill of $8,000, and an adjustment to income tax provision of $3,000, resulting in a net tax liability relating to FIN No. 48 of $163,000. The Company recognizes accrued interest related to unrecognized tax benefits as part of income tax expense. During the quarter ended June 30, 2007 the Company recognized a charge of $6,000 related to interest. The cumulative effect of FIN 48 on the Company’s accumulated deficit is as follows (in thousands):

Accumulated deficit, 12/30/06, as previously reported	$	(10,884	)
Cumulative effect of adoption of FIN 48		(152	)
Net loss, six-months ended June 30, 2007		(515	)
Accumulated deficit, 6/30/07	$	(11,551	)

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and the Securities and Exchange Commission filings that are incorporated by reference into this report contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We intend that these forward-looking statements be subject to the safe harbors created by those sections.

These forward-looking statements include, but are not limited to, statements relating to our anticipated financial performance, business prospects, new developments, new merchandising strategies and similar matters, and/or statements preceded by, followed by or that include the words “believes,” “could,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “projects,” “seeks,” or similar expressions. We have based these forward-looking statements on our current expectations and projections about future events, based on the information currently available to us. These forward-looking statements are subject to risks, uncertainties and assumptions, including those described under the heading “Risk Factors,” below and in our Annual Report on Form 10-K for the fiscal year ended December 30, 2006, that may affect the operations, performance, development and results of our business. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date stated, or if no date is stated, as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or any other reason except as required under applicable law. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Quarterly Report on Form 10-Q may not occur.

Investors should also be aware that while we do, from time to time, communicate with securities analysts, it is against our policy to disclose to them any material non-public information or other confidential commercial information. Accordingly, investors should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report.

Furthermore, we have a policy against publishing financial forecasts or projections issued by others or confirming financial forecasts, or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Fluctuations

As a majority of our purchasing commitments are denominated in U.S. dollars and all of our sales are denominated in U.S. dollars, we were not significantly exposed to fluctuations in foreign currency rates during the second quarter of fiscal 2007. In January of 2006, we established an operating presence in Canada and began selling our product into the Canadian market. As the volume of transactions in a foreign currency was relatively low in the second quarter of fiscal 2007, we do not expect to experience significant exposure to foreign currency risk in fiscal 2007.

In the normal course of business, we are exposed to foreign currency exchange rate risks that could impact our results of operations. We do not use derivative financial instruments to hedge this exposure nor does it enter into any trading or speculative positions with regard to foreign currency related derivative instruments.

We are exposed to foreign currency exchange rate risk inherent primarily in its sales commitments, anticipated sales and assets and liabilities denominated in currencies other than the U.S. dollar. The Company transacts business in two foreign currencies worldwide consisting of the Canadian Dollar and the Euro. For most foreign currency transactions, the Company is a net receiver of foreign currencies and, therefore, benefits from a weaker U.S. dollar and is adversely affected by a stronger U.S. dollar relative to those foreign currencies in which the Company transacts significant amounts of business.

Interest Rate Fluctuations

We are exposed to interest rate changes primarily as a result of our revolver and long-term debt under our credit facility, which we use to maintain liquidity and to fund capital expenditures and expansion. Our market risk exposure with respect to this debt is to changes in the “prime rate” in the U.S. and changes in LIBOR. Our revolver and our term loans provide for interest on outstanding borrowings at rates tied to the prime rate or, at our election, tied to LIBOR. At June 30, 2007 and December 30, 2006, we had $51.2 million and $54.0 million, respectively, in outstanding borrowings under our credit facility. Note 9 to the Company’s Condensed Consolidated Financial Statements outlines the principal amounts, if any, and other terms required to evaluate the expected cash flows and sensitivity to interest rate changes.

Item 4T. Controls and Procedures

The Company’s Chief Executive Officer (“CEO”) and its Chief Financial Officer (“CFO”) have concluded, based on their evaluation as of the end of the period covered by this report, that the Company’s disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective to provide reasonable assurance that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to the Company’s management, including its CEO and its CFO, as appropriate to allow timely decisions regarding required disclosure.

There can be no assurance, however, that our disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to disclose material information otherwise required to be set forth in our periodic reports. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable, not absolute, assurance of achieving their control objectives.

Changes in Internal Control Over Financial Reporting

An evaluation was performed under the supervision of the Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of whether any change in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) occurred during the three months ended June 30, 2007. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that no significant changes in the Company’s internal controls over financial reporting occurred during the three months ended June 30, 2007 that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II — Other Information

Item 1A. Risk Factors

The Company has included in Part I, Item 1A of its Annual Report on Form 10-K for the year ended December 30, 2006 a description of certain risks and uncertainties that could affect the Company’s business, future performance or financial condition (the “Risk Factors”). As of June 30, 2007, the Company’s risk factors have not materially changed from those disclosed in the Company’s in the Annual Report on Form 10-K for the year ended December 30, 2006, except as follows:

Defaults under our secured credit arrangement could result in expensive refinancing, dilutive stock issuances, or an acceleration of bank debt and foreclosure on our assets by our bank

We have a $62.0 million credit facility with our bank, under which we had $14.1 million outstanding as of July 28, 2007. In the future, we may incur additional indebtedness in connection with acquisitions or for other purposes. All of our assets are pledged as collateral to secure our bank debt. Our credit facility includes a number of covenants, including financial covenants.

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Under the prior credit facility, we were in default of some of our financial covenants as of the end of the first three quarters of fiscal 2006 but obtained waivers from our bank related to these violations. We modified these financial covenants in November 2006 when entering into our current facility. We were in default of four financial covenants under our current credit facility at December 30, 2006, March 31, 2007 and June 30, 2007. We received waivers from our bank with respect to our December 30, 2006 and March 31, 2007 defaults. We have not requested a waiver for the June 30, 2007 default as we are discussing with our bank a replacement facility with improved financing rates and financial covenants to align with our reduced funding needs and increased borrowing capacity. Additionally, we expect that we will not meet certain of these financial covenants during the remainder of 2007. There can be no assurance when, or if, a new facility, amendment, or waiver will be provided.

If we fail to obtain a replacement facility or a waiver and amendment or if we experience future defaults under our credit agreement which we are unable to cure and we cannot obtain appropriate waivers, our bank could increase our interest rates, charge us additional fees, impose significant restrictions and requirements on our operations or declare our debt to be immediately due and payable. In such event, we would need to repay the debt or the bank could foreclose on our assets. To repay the debt we would need to either obtain a new credit facility or issue equity securities. A new credit facility following an acceleration would likely have higher interest rates and impose significant additional restrictions and requirements on us. New securities issuances would dilute your stock ownership. There is no assurance that we would be able to obtain replacement financing or issue sufficient equity securities to refinance our current bank debt.

Item 3. Default Upon Senior Securities

We were not in compliance with the average borrowed funds to EBITDA ratio and cash flow coverage ratio covenants at June 30, 2007 and March 31, 2007 under our amended and restated credit facility agreement with M&T Bank. On May 14, 2007, we obtained a waiver from our lender with respect to the March 31, 2007 default. We have not requested a waiver for the June 30, 2007 default as we are discussing with our bank a replacement facility with improved financing rates and financial covenants to align with our reduced funding needs and increased borrowing capacity. Additionally, we expect that we will not meet certain of these financial covenants during the remainder of 2007. There can be no assurance when, or if, a new facility, amendment, or waiver will be provided. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

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

(a) We held our Annual Meeting of Stockholders on May 31, 2007.

(b) At the meeting, the following nominees were elected as directors to hold office until the Annual Meeting of Stockholders to be held in 2008, and until his or her successor is elected and shall qualify:

Nominee	Votes For	Votes Withheld
Steven M. DePerrior	6,452,705	1,239,839
Robert A. Gunst	6,464,537	1,228,007
Gregory M. Harden	6,464,337	1,228,207
John C. Kratzer	6,464,537	1,228,007
Wilhelm Pfander	6,464,637	1,227,907
Frederick R. Port	6,464,737	1,227,807
James R. Riedman	6,438,762	1,253,782
John M. Robbins	6,464,537	1,228,007
Cathy B. Taylor	7,404,066	288,478

Item 6. Exhibits

2.1	Stock Purchase Agreement by and among Phoenix Footwear Group, Inc. and Kellwood Company dated June 18, 2007 (Exhibits and schedules have been omitted pursuant to Item 601(b) (2) of Regulation S-K, but a copy will be furnished supplementally to the Securities and Exchange Commission upon request)
2.2	Asset Purchase Agreement dated June 18, 2007 by and between PXG Canada, Inc. and Canadian Recreation Products, Inc. (Exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K, but a copy will be furnished supplementally to the Securities and Exchange Commission upon request)

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10.1	Employment Agreement dated April 23, 2007, between Phoenix Footwear Group, Inc. and Cathy Taylor (incorporated by reference to Exhibit 10.1 of Form 8-K dated April 23, 2007 (SEC file No. 001-31309))* **
10.2	Standby Letter of Credit issued July 2, 2007 between Manufacturers & Traders Trust Company and Phoenix Footwear Group, Inc., with Kellwood Company as a beneficiary.
10.3	Termination Agreement, dated July 3, 2007, by and among Manufacturers and Traders Trust Company and Phoenix Footwear Group, Inc.
31.1	Certification of Cathy B. Taylor pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Kenneth E. Wolf pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Management contract or compensatory plan or arrangement.

** Certain confidential information contained in the document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended, or Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.

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SIGNATURES

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

	PHOENIX FOOTWEAR GROUP, INC.
Date: August 14, 2007	/s/ Cathy B. Taylor
	Cathy B. Taylor
	President and Chief Executive Officer
Date: August 14, 2007	/s/ Kenneth E. Wolf
	Kenneth E. Wolf
	Chief Financial Officer

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EXHIBIT INDEX

2.1	Stock Purchase Agreement by and among Phoenix Footwear Group, Inc. and Kellwood Company dated June 18, 2007 (Exhibits and schedules have been omitted pursuant to Item 601(b) (2) of Regulation S-K, but a copy will be furnished supplementally to the Securities and Exchange Commission upon request)
2.2	Asset Purchase Agreement dated June 18, 2007 by and between PXG Canada, Inc. and Canadian Recreation Products, Inc. (Exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K, but a copy will be furnished supplementally to the Securities and Exchange Commission upon request)
10.1	Employment Agreement dated April 23, 2007, between Phoenix Footwear Group, Inc. and Cathy Taylor (incorporated by reference to Exhibit 10.1 of Form 8-K dated April 23, 2007 (SEC file No. 001-31309))* **
10.2	Standby Letter of Credit issued July 2, 2007 between Manufacturers & Traders Trust Company and Phoenix Footwear Group, Inc., with Kellwood Company as a beneficiary.
10.3	Termination Agreement, dated July 3, 2007, by and among Manufacturers and Traders Trust Company and Phoenix Footwear Group, Inc.
31.1	Certification of Cathy B. Taylor pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Kenneth E. Wolf pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Management contract or compensatory plan or arrangement.

** Certain confidential information contained in the document has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 406 of the Securities Act of 1933, as amended, or Rule 24b-2 promulgated under the Securities and Exchange Act of 1934, as amended.

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EX-2.1

Exhibit 2.1

STOCK PURCHASE AGREEMENT

This Stock Purchase Agreement is entered into this 18^th day of June, 2007, by and between Phoenix Footwear Group, Inc., a Delaware corporation (“Seller”) and Kellwood Company, a Delaware corporation (the “Buyer”). Seller and Buyer are sometimes referred to herein as a “Party” and collectively as the “Parties.”

RECITALS:

WHEREAS, Seller owns all of the outstanding capital stock of Royal Robbins, Inc. (“Royal Robbins”), which is engaged in the business of designing, sourcing, purchasing marketing, distributing and selling Royal Robbins branded specialty outdoor apparel for men and women (“Royal Robbins Products”);

WHEREAS, Seller owns all of the outstanding capital stock of PXG Canada Inc., a corporation organized under the laws of the Province of Ontario, Canada (“PXG Canada” together with Royal Robbins, the “Companies”), which markets, distributes and sells in Canada footwear and apparel products, including Royal Robbins Products; and

WHEREAS, Buyer desires to purchase from Seller, and Seller desires to sell to Buyer on the terms and conditions herein, all of the outstanding capital stock of Royal Robbins and concurrently therewith to consummate the asset purchase transaction contemplated by the Agreement Regarding Assignment of Business Assets and Assumption of Obligations dated June 18, 2007 (the “PXG Canada Transfer Agreement”) between Canadian Recreation Products, Inc., which is a wholly-owned subsidiary of Buyer formed under the laws of Quebec, Canada (“Buyer Canadian Sub”), and PXG Canada (a true copy of which is annexed hereto as Exhibit A) pursuant to which Buyer Canadian Sub will acquire certain assets, and assume certain obligations, of PXG Canada, in each case which relates solely to its marketing, sale and distribution of Royal Robbins Products, all as more specifically provided therein;

PROVISIONS:

NOW, THEREFORE, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties and covenants herein contained, the Parties agree as follows.

1. Definitions.

“Acquisition Proposal” has the meaning set forth in Section 5(f).

“Adverse Consequences” means all actions, suits, proceedings, hearings, charges, complaints, injunctions, judgments, orders, decrees, rulings, out of pocket costs, actual losses and damages, Taxes, fines, liens, liabilities, obligations, deficiencies, claims, demands, and expenses, including interest, penalties, reasonable attorneys’ fees and amounts paid in settlement of any of the foregoing in accordance with the terms herein.

“Affiliate” of a Person means any other Person which directly or indirectly controls, is controlled by, or is under common control with, such Person. The term “control” including, with correlative means, the terms “controlled by” and “under common control with”, as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise.

“Agreement” means this Stock Purchase Agreement, including the exhibits and schedules hereto, as it may be amended or modified from time to time as permitted herein.

“Benefit Arrangement” means any plan, agreement, arrangement or practice providing for insurance coverage (including any self-insured plan, agreement, arrangement or practice), supplemental unemployment benefits, deferred compensation, bonuses, stock options, stock purchases, “parachute payments” (within the meaning of Code §280G), or other form of incentive or post-employment compensation or benefits, which (a) is not a Employee Benefit Plan, and (b) covers or may provide benefits to any employee or prior employee.

“Business Day” means any day except a Saturday, Sunday or other day on which commercial banks are authorized by law to close in the State of California.

“Buyer” has the meaning set forth in the preface above.

“Buyer Canadian Sub” has the meaning set forth in the recitals to this Agreement.

“Buyer Indemnitees” has the meaning set forth in Section 8(b)(i).

“CERCLA” has the meaning set forth in Section 3(z)(iii).

“Claim” has the meaning set forth in Section 8(d).

“Claim Notice” has the meaning set forth in Section 8(d).

“Closing” has the meaning set forth in Section 2(e).

“Closing Date” has the meaning set forth in Section 2(e).

“Closing Date Working Capital” means the combined current assets less the combined current liabilities of both (a) Royal Robbins and (b) PXG Canada to the extent being transferred under the PXG Canada Transfer Agreement, in all cases as described and determined in accordance with the guidelines set forth on Exhibit B annexed hereto.

“Closing Date Working Capital Deficit” means the amount, if any, by which the Closing Date Working Capital reflected on the Estimated Closing Date Working Capital Schedule is less than Six Million Five Hundred Thousand Dollars ($6,500,000).

“Closing Date Working Capital Surplus” means the amount, if any, by which the Closing Date Working Capital reflected on the Estimated Closing Date Working Capital Schedule is more than Eight Million Five Hundred Thousand Dollars ($8,500,000).

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“Code” means the Internal Revenue Code of 1986, as amended.

“Companies” has the meaning given thereto in the recitals to this Agreement.

“Confidential Information” means any information concerning the Royal Robbins Business that is not already generally available to the public.

“Confidentiality Agreement” has the meaning set forth in Section 5(g).

“Controlling Party” has the meaning set forth in Section 9(f).

“Disclosure Schedules” means the Disclosure Schedules delivered herewith by Seller to Buyer which contains exceptions to the representations and warranties of Seller herein The Disclosure Schedules are arranged in sections corresponding to the lettered and numbered Sections contained in this Agreement. The exceptions set forth in one section of Disclosure Schedules need not be set forth in any other section thereof so long as its relevance to the latter section is reasonably apparent from the description contained within the Disclosure Schedules.

“Due Date” has the meaning set forth in Section 9(b)(ii).

“Employee Benefit Plan” means any (a) Employee Pension Benefit Plan or (b) Employee Welfare Benefit Plan.

“Employee Pension Benefit Plan” has the meaning set forth in ERISA §3(2).

“Employee Welfare Benefit Plan” has the meaning set forth in ERISA §3(1).

“Environmental, Health, and Safety Requirements” means all federal, state, local, and foreign statutes, regulations, ordinances, and other provisions having the force or effect of law, all judicial and administrative orders and determinations, all contractual obligations, and all common law concerning public health and safety, worker health and safety, and pollution or protection of the environment, including, without limitation, all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control, or cleanup of any hazardous materials, substances, or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise, or radiation, each as amended.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“ERISA Affiliate” means, with respect to any Person, any other Person that is a member of a “controlled group of corporations” trade or business under Code §414(b) or (c), or is a member of the same “affiliated service group” with such Person (under Code §§414(b), 414(m), 414(o)) or any other entity aggregated with such Person under Code §414(a)).

“Estimated Closing Date Working Capital Schedule” means the draft schedule of the Closing Date Working Capital, which shall include Seller’s good faith estimate of each of the Closing Date Working Capital and any Closing Date Working Capital Surplus or Closing Date Working Capital Deficit.

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“Fiduciary” has the meaning set forth in ERISA §3(21).

“Final Closing Date Working Capital Schedule” means the schedule of the Closing Date Working Capital, which shall be prepared by Seller and be in the same format as the Estimated Closing Date Working Capital Schedule and include a calculation of the Closing Date Working Capital, as finally determined pursuant to Section 2(g), and the Closing Date Working Capital Deficit, if any, or Closing Date Working Capital Surplus, if any.

“Governmental Authority” means the United States of America, any state, any foreign governments and any political subdivision or regional division of the foregoing, and any agency, department, court, regulatory body, commission, board, bureau or instrumentality of any of them.

“Indemnification L/C” has the meaning set forth in Section 2(f).

“Indemnified Party” has the meaning set forth in Section 8(d).

“Indemnifying Party” has the meaning set forth in Section 8(d).

“Intellectual Property” means (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, United States, foreign and international patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions and reexaminations thereof, (b) all trademarks, service marks, trade dress, logos, trade names, corporate names and slogans embodying business and product goodwill or indications of origin, together with all translations, adaptations, derivations and combinations thereof and including all goodwill associated therewith, and all United States, foreign and international applications, registrations and renewals in connection therewith, (c) all copyrightable works, all copyrights, and all United States, foreign and international applications, registrations and renewals in connection therewith, (d) all trade secrets, including confidential and other non-public information, customer and supplier, manufacturing and foreign agent lists, pricing, cost, product and design information and business and marketing plans and proposals, and (e) all web sites, domain names, e-mail addresses used exclusively in the conduct of the Royal Robbins Business.

“Knowledge” means the actual knowledge after reasonable due inquiry of any fact or circumstance or other matter by James Riedman, Kenneth Wolf, Robert Orlando, Loren White or Cathy Taylor.

“Leases” has the meaning set forth in Section 3(l).

“Legal Requirements” means any federal, state, local, municipal, foreign, provincial, international, multinational or other constitution, law, ordinance, principle of common law, code, rule, regulation, statute or treaty.

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“Liability” means any liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated and whether due or to become due), including any liability for Taxes.

“Material Adverse Effect” means (a) the occurrence, incident, action, failure to act, event, change or effect that is, or would reasonably be expected to be, materially adverse to the condition (financial or otherwise), properties, assets, liabilities, business or results of operations of the Royal Robbins Business except changes solely to the extent resulting from (i) changes in general economic conditions, financial markets or the industry in which the entity operates, (ii) the announcement or other disclosure of this Agreement or consummation of the transactions contemplated by this Agreement, or (b) any other event, change or effect that would adversely affect the ability of Seller to consummate timely the transactions contemplated hereby.

“Multiemployer Plan” has the meaning set forth in ERISA §3(37).

“Ordinary Course of Business” means the ordinary course of business of the Royal Robbins Business consistent with its past custom and practice.

“Party” or “Parties” has the meaning set forth in the preface above.

“PBGC” means the Pension Benefit Guaranty Corporation.

“Permitted Encumbrance” means (a) statutory liens for Taxes to the extent that the payment thereof is not in arrears or otherwise due, (b) encumbrances in the nature of zoning restrictions, easements, rights or restrictions of record on the use of real property if the same do not materially impair the use of such property in the Royal Robbins Business, (c) liens to secure landlords, lessors or renters under leases or rental agreements confined to the premises rented, to the extent that the payment thereof is not in arrears, (d) deposits or pledges made in connection with, or to secure payment of, worker’s compensation, unemployment insurance, old age pension programs mandated under applicable Legal Requirements or other social security regulations, and (e) liens in favor of carriers, warehousemen, mechanics and materialmen, liens to secure claims for labor, materials or supplies and other similar liens to the extent that the payment thereof is not in arrears.

“Person” means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or a governmental entity (or any department, agency or political subdivision thereof).

“Pre-Closing Period” has the meaning set forth in Section 9(b)(i).

“Pre-Closing Portion” means, with respect to any Straddle Period, the portion of such Straddle Period that begins on the first day of such Straddle Period and ends on, and includes, the Closing Date.

“Pre-Closing Tax Returns” has the meaning set forth in Section 9(b)(i).

“Prohibited Transaction” has the meaning set forth in ERISA §406 and Code §4975.

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“Proposed Final Closing Date Working Capital Schedule” has the meaning set forth in Section 2(g).

“Purchase Price” has the meaning set forth in Section 2(a).

“PXG Canada” has the meaning set forth in the recitals to this Agreement.

“PXG Canada Transfer Agreement” has the meaning set forth the recitals to this Agreement.

“PXG Canada Transfer Transaction” means the transaction contemplated by the PXG Canada Transfer Agreement.

“Reportable Event” has the meaning set forth in ERISA §4043.

“Royal Robbins” has the meaning set forth in the recitals to this Agreement.

“Royal Robbins Business” means the business conducted by Royal Robbins and the Royal Robbins Canadian Business.

“Royal Robbins Canadian Business” means the the portion of PXG Canada’s business which solely involves the purchase, marketing and sale of Royal Robbins Products in Canada.

“Royal Robbins Products” has the meaning set forth in the recitals to this Agreement.

“Schedule of Assets and Liabilities” has the meaning set forth in Section 3(g).

“Schedule of Profits and Losses” has the meaning set forth in Section 3(g).

“SEC” means the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act.

“Security Interest” means any mortgage, pledge, security interest, lien, encumbrance, adverse claim, levy, charge or other encumbrance of any kind or any conditional sales contracts, title retention contract or other contract to give or refrain from giving any of the foregoing.

“Seller” has the meaning set forth in the preface above.

“Shares” means all the outstanding shares of each class of the capital stock of Royal Robbins.

“Straddle Period” has the meaning set forth in Section 9(b)(ii).

“Straddle Tax Returns” has the meaning set forth in Section 9(b)(ii).

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“Supplier Existing L/Cs” means those letters of credit issued by Seller’s lender for the account of Seller, Royal Robbins and/or PXG Canada and the benefit of their suppliers for the payment due for Royal Robbins Products which have been ordered and not drawn upon as of the Closing.

“Supplier L/Cs Reimbursement Obligations” means the obligation of Seller, Royal Robbins and/or PXG Canada to reimburse its lender for all Liabilities associated with or resulting from the Supplier Existing L/Cs.

“SWDA” has the meaning set forth in Section 3(z)(iii).

“Tax” or “Taxes” means all taxes (whether federal, state, local or foreign) based upon or measured by income and any other tax whatsoever, including gross receipts, profits, sales, use, occupation, value added, ad valorem, transfer, franchise, withholding, payroll, employment, excise or property taxes, and includes any interest, penalty, or addition thereto, whether disputed or not.

“Taxing Authority” means any Governmental Authority having or purporting to exercise jurisdiction with respect to the collection or imposition of any Tax.

“Tax Benefit” means the tax effect of any item of loss, deduction or credit or any other item which decreases Taxes paid or payable or increases tax basis including any interest with respect thereto or interest that would have been payable but for such item.

“Tax Laws” means the Code, federal, state, county, local or foreign laws relating to Taxes and any regulations or official administrative pronouncements released thereunder.

“Tax Refund” means any refund, rebate, abatement, reduction or other recovery (whether directly or indirectly through a right of setoff or credit) of Taxes (including payments of estimated Taxes) of Royal Robbins and any interest received thereon with respect to any Pre-Closing Periods and the Pre-Closing Portion of any Straddle Period.

“Tax Return” means any return, declaration, report, form, claim for refund or other information return or statement relating to any Tax, including any schedule or attachment thereto, and including any amendment or supplement of any of the foregoing filed or required to be filed with any Taxing Authority in connection with the determination, assessment or collection of any Tax or the administration of any laws, regulations or administrative requirements relating to any Tax.

“Third Party Claim” has the meaning set forth in Section 8(e).

“Treasury Regulations” means the regulations promulgated or proposed by the United States Treasury Department under the Code.

“U.S. GAAP” means United States generally accepted accounting principles as in effect from time to time.

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2. Purchase and Sale of the Shares; Consummation of PXG Canada Transfer Transaction.

(a) Basic Transaction and Purchase Price. On and subject to the terms and conditions of this Agreement, Buyer agrees to purchase from Seller, and Seller agrees to sell to Buyer, all of the Shares, in each case free and clear of any Security Interest, except for any Security Interest created by or through Buyer, in consideration for a purchase price of (i) Thirty Eight Million Dollars ($38,000,000), (ii) plus the amount of the Closing Date Working Capital Surplus, if any, (iii) less the amount of the purchase price paid by the Buyer Canadian Subsidiary to PXG Canada pursuant to the PXG Canada Transfer Agreement on the Closing Date and (iv) less the Closing Date Working Capital Deficit, if any (collectively, the “Purchase Price”).

(b) Payment of the Purchase Price. Buyer shall deliver to Seller at the Closing a wire transfer of immediately available funds in the amount of the Purchase Price to an account designated by Seller to Buyer.

(c) Inter-Company Transactions Between Seller and Royal Robbins. Immediately preceding the Closing Date, all inter-company receivables or payables and loans then existing between Seller, on the one hand, and Royal Robbins, on the other hand, shall be settled and Royal Robbins will dividend to Seller any remaining cash or cash equivalent of Royal Robbins.

(d) PXG Canada Transfer Transaction. Concurrently with the Closing, Royal Robbins shall cause PXG Canada and Buyer will cause Buyer Canadian Sub to consummate the PXG Canada Transfer Transactions.

(e) The Closing. The closing of the sale of Royal Robbins Shares to Buyer and the other transactions contemplated hereby (the “Closing”) shall take place at the offices of Seller (or at such other locations as the Parties may agree), commencing at 10:00 a.m. local time on July 2, 2007 or such later date as soon as practicable following the satisfaction or waiver of all conditions to the obligations of the Parties to consummate the transactions contemplated hereby (other than conditions with respect to actions the respective Parties will take at the Closing itself) (the “Closing Date”).

(f) Indemnification L/C. At the Closing, the Seller shall cause a standby letter of credit, substantially in the form of Exhibit C annexed hereto, (the “Indemnification L/C”) to be issued by Seller’s lender for Seller’s account and Buyer’s benefit to fund indemnification payments, if any, due to Buyer pursuant to Section 8 of this Agreement. Additionally, the Parties and Seller’s lender shall enter into an Escrow Agreement substantially in the form of Exhibit D annexed hereto.

(g) Closing Date Working Capital Requirements.

(i) On or prior to the fifth (5^th ) day prior to the scheduled Closing Date, Seller will prepare and provide to Buyer an Estimated Closing Date Working Capital Schedule.

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(ii) Within thirty-five (35) days after the Closing Date, Seller shall provide Buyer with a proposed Final Closing Date Working Capital Schedule setting forth the Closing Date Working Capital, the Closing Date Working Capital Surplus or Closing Date Working Capital Deficit, as applicable (the “Proposed Closing Date Working Capital Statement”).

(iii) Within thirty-five (35) days after receipt of the Proposed Final Closing Date Working Capital Schedule, Buyer shall notify Seller in writing of any dispute it has with any aspect of Seller’s Proposed Final Closing Date Working Capital Schedule and shall include in such notice the details of the basis therefor. If Buyer does not notify Seller of a dispute in accordance with the foregoing within such thirty-five (35) day period, then Seller’s Proposed Final Closing Date Working Capital Schedule shall be deemed to be the Final Closing Date Working Capital Schedule.

(iv) If Buyer does notify Seller of such dispute with Seller’s Proposed Final Closing Date Working Capital Schedule in accordance with the foregoing within such thirty-five (35) day period, then the Final Closing Date Working Capital Schedule shall be determined as follows:

(A) Buyer and Seller shall attempt to resolve any such dispute as promptly as possible, but in any event within fifteen (15) days after Buyer notifies Seller in writing thereof.

(B) In the event Buyer and Seller are unable to resolve any such dispute within fifteen (15) days (or such longer period as Buyer and Seller shall mutually agree in writing) of Buyer’s written notice of such dispute, then such dispute and each Party’s work papers related thereto shall be submitted to, and all issues having a bearing on such dispute shall be resolved by, (A) by an independent accounting firm appointed by Seller and Buyer, in writing, or (B) in the event such accounting firm is unable or unwilling to take such assignment within fifteen (15) Business Days of being requested by any Party, then by an independent accounting firm selected by the American Arbitration Association in accordance with the Commercial Arbitration Rules to be conducted in San Diego, California (such identified accounting firm selected being referred to as the “Arbitrator”). The Arbitrator shall determine the dispute in accordance with the terms of this Agreement and only with respect to any differences so submitted. Seller and Buyer shall direct the Arbitrator to use its best efforts to render its determination within thirty (30) days after such submission. The Arbitrator’s determination shall be final and binding on the Parties for purposes of determining the Final Closing Date Working Capital Schedule, the Closing Date Working Capital and Closing Date Working Capital Surplus and Closing Date Working Capital Deficit. The fees, costs and expenses of the Arbitrator shall be paid one-half by Seller and one-half by Buyer. Buyer and Seller shall make readily available to the Arbitrator all relevant books and records and any work papers (including those of the Parties’ respective accountants) reasonably requested by the Arbitrator.

(C) The Final Closing Date Working Capital Schedule, as determined pursuant to this Section 2(g), shall be conclusive, final and binding on the Parties.

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(D) If there is any difference in the Closing Date Working Capital set forth in the Estimated Closing Date Working Capital Schedule and the Final Closing Date Working Capital Schedule, then (i) a payment shall be due from Seller to Buyer to the extent that the Closing Date Working Capital set forth in the Final Closing Date Working Capital Schedule would have resulted in a Closing Date Working Capital Deficit if no Closing Date Working Capital Deficit occurred based on the Estimated Closing Working Capital or be in excess of the Closing Date Working Capital Deficit if one was set forth in the Estimated Closing Working Capital Schedule; and (ii) a payment shall be due from Buyer to Seller to the extent that the Closing Date Working Capital set forth in the Final Closing Date Working Capital Schedule would have resulted in a Closing Date Working Capital Surplus if no Closing Date Working Capital Surplus was set forth in the Estimated Closing Working Capital Schedule or be in excess of the Closing Date Working Capital Surplus if one was set forth in the Estimated Closing Working Capital Schedule. The payment, if any, due under this Section 2(g)(iv)(D) shall be paid by the Party required to make it within ten (10) days of the Final Closing Working Capital Schedule becoming conclusive, final and binding on the Parties hereto. Any such payment shall be made in immediately available funds.

(h) Deliveries at the Closing. At the Closing:

(i) Seller will deliver to Buyer the following:

(A) Stock certificates representing all of the Shares, endorsed in blank or accompanied by duly executed assignment documents;

(B) A copy of the articles or certificates of incorporation, as amended (or comparable organizational documents), of Seller, Royal Robbins and PXG Canada, certified by the Secretary of State (or comparable Governmental Authority) of the jurisdiction in which each such entity is incorporated or organized, as of a date reasonably close to the Closing Date, accompanied by a certificate of the Secretary or Assistant Secretary of each such entity, dated the Closing Date, stating that no amendments have been made to such articles or certificate of incorporation (or comparable organizational documents) since such date;

(C) A copy of the bylaws, as amended (or comparable organizational documents), of Seller and Royal Robbins, accompanied by a certificate of the Secretary or Assistant Secretary of each such entity, dated the Closing Date, stating that such bylaws are currently in effect;

(D) Certificates of good standing or existence for Seller and Royal Robbins from the Secretary of State (or comparable Governmental Authority) of the jurisdiction in which such entity is incorporated or organized, as of a date reasonably close to the Closing Date, accompanied by a bring down certificate from such Secretary of State dated as of the Closing Date;

(E) A copy of the resolutions adopted by Seller’s Board of Directors authorizing Seller’s execution and delivery of this Agreement and the transactions contemplated hereby;

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(F) A copy of all of the third party consents referred to in Sections 7(a)(v) and 7(b)(v) which have been obtained by Seller prior to Closing;

(G) A written release executed by Seller’s lender releasing any and all Security Interests and guaranties that it or its Affiliates may have with respect to Royal Robbins or any of the assets it will own on the Closing Date together with a UCC-3 release and all other instruments necessary to record the release of such Security Interests, in each case in form suitable for filing with all appropriate Governmental Authorities;

(H) Written resignations, effective as of the Closing (or evidence of the prior resignation or removal), from all directors and officers of Royal Robbins, from all of their respective positions as directors and/or officers of Royal Robbins;

(I) Royal Robbins’s minute books, stock transfer records, stock certificates, corporate seal and other materials related to its corporate administration;

(J) The Indemnification L/C;

(K) The Escrow Agreement duly executed by it; and

(L) Such other instruments as may be necessary or appropriate to carry out the transactions conducted by this Agreement and to comply with the terms hereof;

At Closing, Seller shall take all steps necessary to place Buyer in actual possession and operating control of the Royal Robbins Business.

(ii) Buyer will deliver to Seller the following:

(A) The Purchase Price in the manner specified in Section 2(b) above;

(B) A copy of the articles or certificates of incorporation, as amended (or comparable organizational documents), of Buyer and the Buyer Canadian Sub, certified by the Secretary of State (or comparable Governmental Authority) of the jurisdiction in which each such entity is incorporated or organized, as of a date reasonably close to the Closing Date, accompanied by a certificate of the Secretary or Assistant Secretary of each such entity, dated the Closing Date, stating that no amendments have been made to such articles or certificate of incorporation (or comparable organizational documents) since such date;

(C) A copy of the bylaws, as amended (or comparable organizational documents), of Buyer, accompanied by a certificate of the Secretary or Assistant Secretary of each such entity, dated the Closing Date, stating that such bylaws are currently in effect;

(D) Certificates of good standing or existence for Buyer and the Canadian Sub from the Secretary of State (or comparable Governmental Authority) of the jurisdiction in which such entity is incorporated or organized, as of a date reasonably close to the Closing Date, accompanied by a bring down certificate from such Secretary of State (or comparable Governmental Authority) dated as of the Closing Date;

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(E) A copy of the resolutions adopted by the Board of Directors or similar governing body of Buyer and of the Buyer Canadian Sub authorizing the execution and delivery of this Agreement and the transactions contemplated hereby by each such entity;

(F) The Escrow Agreement duly executed by it; and

(G) At the Closing, Buyer will agree to be fully responsible for all Supplier L/C Reimbursement Obligations and shall execute such contracts, instruments and documents as Seller’s lender may require to evidence such undertaking and shall secure these reimbursement obligations and other Liabilities with a standby letter of credit in the amount thereof which it shall provide to Seller’s lender and grant a perfected security interest therein to Seller’s lender and otherwise take such further actions as may be required by Seller’s lender with respect to the foregoing. The Buyer shall obtain and deliver to Seller written terminations and releases of all Supplier L/C Reimbursement Obligations that Seller, Royal Robbins, PXG Canada or any other subsidiary of Seller may have with respect to the outstanding Supplier Existing L/Cs, all to be in form and substance satisfactory to Seller.

3. Seller’s Representations and Warranties. Except as set forth in the Disclosure Schedules, the Seller represents and warrants to Buyer as of the date hereof as follows, provided, however, that the representations and warranties with respect to PXG Canada are limited to those aspects of the Royal Robbins Business in which it is engaged and to the assets to be transferred and Liabilities to be assumed by Royal Robbins as of the Closing pursuant to the PXG Canada Transfer Agreement Transaction:

(a) Organization and Authority.

(i) Seller is a corporation duly organized, validly existing and in good standing as corporation under the laws of the State of Delaware. Seller has the full power and authority to execute this Agreement and perform all of Seller’s obligations contemplated hereby. Without limiting the generality of the foregoing, the board of directors of the Seller has duly authorized the execution and delivery of this Agreement and the performance of its obligations contemplated hereunder.

(ii) Royal Robbins is a corporation duly organized, validly existing and in good standing as a corporation under the laws of the State of California. Royal Robbins is duly authorized to conduct business and is in good standing under the laws of those jurisdictions listed in Section 3(a)(ii) of the Disclosure Schedules and there are no other jurisdictions in which the failure to be so qualified would have a Material Adverse Effect. Royal Robbins has full corporate power and authority and all material licenses, permits and authorizations necessary to carry on the business in which it is engaged and to own and use the properties owned and used by it. Seller has delivered to Buyer correct and complete copies of the charter and bylaws of Royal Robbins (as amended to date). Royal Robbins is not in default under or in violation of any provision of its charter or bylaws.

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(iii) PXG Canada is a corporation duly organized, validly existing and in good standing as a corporation under the laws of the Province of Ontario. PXG Canada is duly authorized to conduct business and is in good standing under the laws of those jurisdictions listed in Section 3(a)(iii) of Disclosure Schedules and there are no other jurisdictions in which the failure to be so qualified would have a Material Adverse Effect. PXG Canada has the full corporate power and authority and all material licenses, permits and authorizations necessary to carry on the business in which it is engaged and to own and use the properties owned and used by it.

(iv) Royal Robbins does not own, beneficially, directly or indirectly, any equity securities or similar interests of any corporation, bank, business trust, association or similar organization, and is not, directly or indirectly, a partner in any partnership or party to any joint venture or any other legal entity.

(b) Valid Agreement. This Agreement constitutes the valid and legally binding obligation of Seller, enforceable in accordance with its terms and conditions.

(c) Noncontravention.

(i) Neither Seller’s execution and delivery of this Agreement or PXG Canada’s execution and delivery of the PXG Canada Transfer Agreement, nor the consummation of the transactions contemplated hereby or thereby, will (A) conflict with or violate the Certificate of Incorporation, By-Laws or other organizational documents of Seller or the Companies, (B) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge or other restriction of any Government Authority to which Seller or either of the Companies is subject, (C) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under any agreement, contract, lease, license, instrument, or other arrangement to which Seller or either of the Companies is a party or by which it is bound or to which any of their assets is subject, or (D) result in the imposition or creation of a Security Interest upon or with respect to the Shares, or the assets of either of the Companies, in each case (excluding clause (i)(A) of this Section 3.1(c)) anything that would have a Material Adverse Effect.

(ii) No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any Governmental Authority is required (A) on the part of Seller for Seller to execute and deliver this Agreement and for the consummation of the transactions contemplated hereby; or (B) on the part of PXG Canada for PXG Canada to execute and deliver the PXG Canada Transfer Agreement and for the consummation of the transactions contemplated thereby.

(d) Capitalization. As of the date hereof, the entire authorized capital stock of Royal Robbins consists of 1,068,760 shares of common stock, 900,000 of which are issued and outstanding. All of the Shares have been duly authorized, are validly issued, fully paid and nonassessable, and are held of record by Seller. There are no outstanding or authorized options, warrants, purchase rights, subscription rights, conversion rights, exchange rights or other contracts or commitments that could require Royal Robbins to issue, sell or otherwise cause to become outstanding any of its capital stock or other securities which could give rise to such rights. There are no voting trusts, proxies or other agreements or understandings with respect to the voting of the Shares.

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(e) Title to the Shares. Seller holds of record and owns beneficially all of the outstanding shares of capital stock of Royal Robbins, free and clear of any restrictions on transfer (other than any restrictions under the Securities Act and state securities laws for non-registered or qualified transactions), Taxes, Security Interests, options, warrants, purchase rights, contracts, commitments, equities, claims and demands. Seller is not a party to any option, warrant, purchase right or other contract or commitment that could require such Seller to sell, transfer or otherwise dispose of the Shares (other than this Agreement). Seller has full voting power over the Shares and is not a party to any voting trust, proxy, or other agreement or understanding with respect to the voting of any Shares. Other than this Agreement, there is no agreement between Seller and any other Person with respect to the disposition of the Shares.

(f) Title to Assets. The Companies have good and marketable title to, or a valid leasehold interest in, all of the properties and assets used by them, located on their premises, or shown on the Schedule of Assets and Liabilities or acquired after the date thereof, except for inventory, obsolete equipment and other personal property sold or disposed of, supplies used and accounts receivable collected since December 30, 2006.

(g) Certain Financial Information. The Disclosure Schedules have attached thereto has Schedule A the unaudited internally prepared Schedule of assets and liabilities of Royal Robbins and PXG Canada with respect to the Royal Robbins Canadian Business as of December 30, 2006 (the “Schedule of Assets and Liabilities”) and summary schedule of profit and loss of Royal Robbins and Royal Robbins Canadian Business for the fiscal year ended December 30, 2006 (“Schedule of Profit and Loss”), both of which were. compiled from the books and records of Royal Robbins and PXG Canada maintained in accordance with U.S. GAAP on a basis consistently applied. The Schedule of Assets and Liabilities lists the tangible and intangible assets owned by Royal Robbins and PXG Canada to the extent used in the Royal Robbins Canadian Business as of the December 30, 2006 in accordance with U.S. GAAP and reports the Liabilities of Royal Robbins and PXG Canada to the extent related to the Royal Robbins Canadian Business as of December 30, 2006 required to be reported on a balance sheet as required by U.S. GAAP.

(h) Events Subsequent to December 30, 2006. Since December 30, 2006, none of the following have occurred, except for items occurring after the date hereof, which are contemplated by this Agreement or which involve the settlement of inter-company transactions between Seller, Royal Robbins and/or PXG Canada or to which Buyer has consented in writing prior to the occurrence thereof:

(i) Neither of the Companies has sold, leased, transferred or assigned any of its assets, tangible or intangible, except for the sale of inventory, the disposition of obsolete equipment, the use of supplies, and the collection of receivables, all such actions in the Ordinary Course of Business;

(ii) Neither of the Companies has entered into any agreement, contract, lease or license (or series of related agreements, contracts, leases and licenses) which (A) involves more than $50,000 singly or $100,000 in the aggregate, (B) cannot be terminated on thirty (30) days or less notice without penalty, payment or breach, or (C) is outside the Ordinary Course of Business;

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(iii) Neither of the Companies has accelerated, terminated, modified or canceled any agreement, contract, lease or license (or series of related agreements, contracts, leases and licenses) payments to or from the Companies of $50,000 or more;

(iv) Neither of the Companies has imposed any Security Interest upon any of its assets, tangible or intangible, except in favor of its lender or for Permitted Encumbrances;

(v) Neither of the Companies has made any capital investment in, any loan to, or any acquisition of the securities or assets of, any other Person involving more than $10,000 singly or $20,000 in the aggregate;

(vi) Neither of the Companies has created, incurred, assumed or guaranteed any indebtedness for borrowed money or capitalized lease obligation or incurred any other Liabilities that under GAAP would be required to be reflected on a balance sheet (other than current Liabilities incurred in the Ordinary Course of Business, including Supplier L/C Reimbursement Obligations) either involving more than $10,000 singly or $20,000 in the aggregate;

(vii) Neither of the Companies has canceled, compromised, waived or released any right or claim either involving more than $50,000 singly or $100,000 in the aggregate;

(viii) There has been no change made or authorized in the Restated Articles of Incorporation or By-Laws of Royal Robbins;

(ix) Neither of the Companies has suffered any damage, destruction or loss, whether or not covered by insurance, that has had or may have a Material Adverse Effect;

(x) Neither of the Companies has made any change in its accounting principles, practices or methodologies;

(xi) Neither of the Companies has (A) made any general increase in the rate of compensation payable to any of its employees other than in the Ordinary Course of Business or in any case more than 4% annually or (B) increased or created severance or termination obligations to any of its employees;

(xii) Neither of the Companies has entered into any employment, consulting, severance or termination agreement or established any severance or termination plan for any employees or contractors;

(xiii) Neither of the Companies has delayed or postponed the payment of accounts payable or other Liabilities nor have any of their customers delayed or postponed their payment of accounts receivable, in all cases, except in the Ordinary Course of Business;

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(xiv) Neither of the Companies has transferred, assigned, or granted any license or sublicense of any rights under or with respect to any Intellectual Property;

(xv) Neither of the Companies has made any loan to, or entered into any other transaction with, any of its directors, officers, and employees; and

(xvi) Neither of the Companies has committed to do any of the foregoing.

(i) Undisclosed Liabilities. Neither of the Companies has any Liability that is not reflected or reserved for in the Schedule of Assets and Liabilities or the Final Closing Date Working Capital Schedule, except for (i) contractual Liabilities (including supplier orders and customer orders) (ii) Liabilities which have arisen after December 30, 2006 in the Ordinary Course of Business, including Supplier L/Cs Reimbursement Obligations; or (iii) Liabilities incurred in connection with this Agreement and the other agreements and instruments being executed at the Closing by Royal Robbins and/or PXG Canada.

(j) Legal Compliance. The Companies have complied with all applicable Legal Requirements other than where the failure to comply would not have a Material Adverse Effect.

(k) Tax Matters.

(i) Royal Robbins has timely filed (taking into account all valid extensions of filing dates) with the appropriate Taxing Authorities all Tax Returns required to be filed by it, or requests for extension have been timely filed and any such extensions have been granted and have not expired. All such filed Tax Returns were accurate and complete in all material respects. All Taxes due and owing by Royal Robbins, or for which Royal Robbins may otherwise be responsible, including, without limitation, any liability as a member of an affiliated group under Code §1504 or the Treasury Regulations thereunder (whether or not shown on any Tax Return), have been paid. No claim has ever been made in writing or, to the Knowledge of Seller otherwise, by any Taxing Authority in a jurisdiction where Royal Robbins and/or any of its respective Affiliates does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. There are no Security Interests for Taxes upon any of the assets of Royal Robbins or any of its Affiliates, except for Permitted Encumbrances.

(ii) Royal Robbins has collected and forwarded all sales and use taxes due, and withheld and paid all Taxes required to have been withheld and paid by it in connection with any amounts paid or owing to any employee, independent contractor, creditor, stockholder, or other third party and all Forms W-2 and 1099 required with respect thereto have been properly completed and timely filed.

(iii) To the Seller’s Knowledge, no Taxing Authority is anticipated or expected to assess any additional Taxes for any period for which Tax Returns are required or have been filed. No United States federal, state, local, or non-United States tax audits or administrative or judicial Tax proceedings are pending or being conducted with respect to Royal Robbins. Royal Robbins has not received from any Taxing Authority any (A) notice indicating intent to open an audit or other review, (B) request for information related to Tax matters, or (C) notice of deficiency or proposed adjustment for any amount of Tax proposed, asserted, or assessed by any Taxing Authority against Royal Robbins.

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(iv) Royal Robbins has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency that would result in a Material Adverse Effect.

(v) Royal Robbins is and will be, as of the Closing Date, a member of Seller’s consolidated group under the Code.

(vi) Royal Robbins has not entered into any “closing agreement” as described in Code §7121 (or any corresponding or similar provision of state, local or foreign income Tax law) executed on or prior to the Closing Date that could affect its Tax liability after the Closing Date to any material extent.

(vii) Royal Robbins is not a partner for Tax purposes with respect to any joint venture, partnership, or other arrangement or contract which is treated as a partnership for Tax purposes.

(viii) Section 3(k)(viii) of the Disclosure Schedules lists all federal, state, local, and foreign Tax Returns filed by Royal Robbins for taxable periods ended on or after December 31, 2004. Seller has delivered to Buyer correct and complete copies of all Tax Returns, examination reports, and statements of deficiencies assessed against, or agreed to by Royal Robbins since December 31, 2004.

(l) Real Property. Neither of the Companies owns any real property. Section 3(l) of Disclosure Schedules lists all real property currently leased or subleased to Royal Robbins or PXG Canada for the Royal Robbins Canadian Business (the “Leases”). Royal Robbins has made available to Buyer correct and complete copies of such leases and subleases. With respect to each such lease and sublease:

(i) the lease or sublease is legal, valid, binding and in full force and effect;

(ii) Neither of the Companies is in breach or default, and no event has occurred which, with notice or lapse of time, would constitute a breach or default or permit termination, modification or acceleration thereunder;

(iii) Neither of the Companies has repudiated any provision thereof;

(iv) there are no disputes, oral agreements or forbearance programs in effect as to the lease or sublease; and

(v) Neither of the Companies has assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in the leasehold or subleasehold.

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(m) Intellectual Property.

(i) To Seller’s Knowledge, neither of the Companies has interfered with, infringed upon, misappropriated or violated any Intellectual Property rights of third parties in any respect or received any charge, complaint, claim, demand or notice alleging any interference, infringement, misappropriation, or violation by either of the Companies. To Seller’s Knowledge, no third party is interfering with, infringing upon, misappropriating or violating any Intellectual Property rights of the Companies.

(ii) Royal Robbins owns or has the right to use pursuant to a valid and enforceable written license, sublicense, agreement or permission all Intellectual Property necessary for the operation of the Royal Robbins Business as presently conducted. Each item of Intellectual Property owned by Royal Robbins immediately prior to the Closing hereunder will be owned by Royal Robbins on identical terms and conditions immediately subsequent to the Closing hereunder.

(iii) Section 3(m)(iii) of the Disclosure Schedules identifies each patent, trademark and copyright registration which has been issued to Royal Robbins with respect to any of its Intellectual Property, identifies each pending patent, trademark, and copyright application for registration which Royal Robbins has made with respect to any of its Intellectual Property, and identifies each license, agreement, or other permission which Royal Robbins has granted to any third party with respect to any of its Intellectual Property (together with any exceptions). Royal Robbins has delivered to Buyer correct and complete copies of all such patents, trademark registrations, applications, licenses, agreements and permissions (as amended to date). With respect to each item of Intellectual Property identified in Section 3(m)(iii) of the Disclosure Schedules:

(A) Royal Robbins possesses all right, title and interest in and to the item, free and clear of any Security Interest, license or other restriction or limitation regarding use or disclosure;

(B) the item is not subject to any outstanding injunction, judgment, order, decree, ruling or charge;

(C) no action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand is pending or, to Seller’s Knowledge, is threatened which challenges the legality, validity, enforceability, use or ownership of the item and there are no known grounds for the same; and

(D) to Seller’s Knowledge, no loss or expiration of the item is threatened, pending or reasonably foreseeable.

(n) Assets.

(i) Section 3(n)(i) of the Disclosure Schedules lists all of the material assets of Seller and its Affiliates that are used in the Royal Robbins Business. Section 3(n)(i) of the Disclosure Schedules also sets forth an accurate and complete list of all banks and financial institutions in which Seller has an account, deposit, safe-deposit box, lock box or other similar

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relationship related to the Royal Robbins Business; the names of all persons authorized to draw on those accounts or deposits, or to obtain access to such boxes; and an accurate and complete list of all certificates of deposit, debt or equity securities and other investments owned, beneficially or of record, by Royal Robbins.

(ii) Seller has delivered to Buyer a correct and complete list of the product ordered for the Royal Robbins Business and not yet delivered as of June 14, 2007 (which have a total F.O.B. cost of $4,933,621).

(iii) Seller has delivered to Buyer a correct and complete list of the Royal Robbins Product ordered by customers for purchase from the Royal Robbins Business and not yet delivered as of June 14, 2007 (which have a total price of $10,226,810).

(iv) Except for the assets described in Section 3(n)(i) of the Disclosure Schedules and any assets or product purchased or ordered for the Royal Robbins Business, Royal Robbins owns or leases (or Buyer’s Canadian Sub will acquire pursuant to the PXG Canada Transfer Agreement the rights to) all buildings, machinery, equipment and other tangible assets necessary for the conduct of the Royal Robbins Businesses in substantially the same manner as presently conducted. Each such tangible asset is in reasonably good operating condition and repair, subject to normal wear and tear.

(o) Inventory. All inventories of the Companies reflected on the Final Closing Date Working Capital Schedule will be, except as reserved for therein, (i) properly valued at the lower of cost or market value in accordance with U.S. GAAP as consistently applied in Seller’s prior annual financial statements; (ii) of good and merchantable quality and contain no material amounts that are not salable and useable for the purposes intended in the Ordinary Course of Business and meet the current standards and specifications of the Royal Robbins Business; and (iii) not excessive in relation to the circumstances of the Royal Robbins Business and in accordance with past inventory stocking practices. All inventories disposed of subsequent to December 30, 2006, have been disposed of only in the Ordinary Course of Business and at prices and under terms that are normal and consistent with past practice. No inventory is held by Seller on consignment, and Seller does not hold title to any inventory held by others. Except as set forth in Schedule 3(o) of the Disclosure Schedules, no tooling, forms, patterns or similar assets owned or leased by Seller are in the possession of vendors.

(p) Contracts. Section 3(p) of the Disclosure Schedules lists the following contracts and other agreements to which either of the Companies is a party:

(i) any agreement (or group of related agreements) for the lease of personal property to or from any Person providing for lease payments in excess of $50,000 per annum;

(ii) any agreement (or group of related agreements) for the purchase or sale of raw materials, commodities, supplies, products, or other personal property, or for the furnishing or receipt of services (including, but not limited to, any vendor, manufacturing, sourcing or purchasing agent agreements), the performance of which will extend over a period of more than one year or involve consideration in excess of $50,000;

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(iii) any agreement concerning a partnership or joint venture;

(iv) any agreement (or group of related agreements) under which it has created, incurred, assumed, or guaranteed any indebtedness for borrowed money, or any capitalized lease obligation, in excess of $50,000 or under which it has imposed a Security Interest on any of its assets, tangible or intangible;

(v) any agreement with any officer or director of the Companies, Seller and/or its Affiliates, or any entity in which any officer or director of the Companies, any Seller or any trustee or beneficiary of a Seller holds equity or any other economic interest;

(vi) any deferred compensation, severance or other plan or arrangement to which Royal Robbins is a party and is for the benefit of its current or former directors, officers, employees, consultants or sales representatives;

(vii) any collective bargaining agreement;

(viii) any agreement for the employment of any individual on a full-time, part-time, consulting or other independent contracting basis (including all sales representative agreements);

(ix) any agreement under which Royal Robbins has advanced or loaned any amount to any of its directors, officers, employees, consultants or sales representatives other than for reasonable business expenses;

(x) any agreement under which the consequences of a default or termination would have a Material Adverse Effect;

(xi) any agreement with respect to non-competition or non-solicitation of customers or employees to which Royal Robbins is a party;

(xii) any agreement under which Royal Robbins has advanced or loaned any other Person amounts in the aggregate exceeding $50,000; or

(xiii) any other agreement (or group of related agreements) the performance of which involves consideration in excess of $50,000 singly or $100,000 in the aggregate or cannot be terminated without penalty, payment or breach on thirty (30) days or less notice.

Seller has made available to Buyer a correct and complete copy of each written agreement or a written description of any oral agreement listed in Section 3(p) of the Disclosure Schedules. With respect to each such agreement: (A) the agreement is legal, valid, binding and in full force and effect; (B) Royal Robbins or PXG Canada, as the case may be, is not in material breach or default, and no event has occurred which with notice or lapse of time would constitute a material breach or default, or permit termination, modification, or acceleration, under the contract or agreement; and (C) neither of the Companies nor, to Seller’s Knowledge, any other party to any such agreement has repudiated any provision of the agreement.

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(q) Notes and Accounts Receivable. All notes and accounts receivable of the Companies set forth in the Final Closing Date Working Capital Schedule will be valid receivables and, are current and collectible amounts, subject only to the reserve for bad debts provided for therein, and chargebacks which could arise in the Ordinary Course of Business. All outstanding accounts and notes receivable reflected on the Final Closing Date Working Capital Schedule will be, due and valid claims against account debtors for goods or services delivered or rendered, and subject to no defenses, offsets or counterclaims known to Seller, except as reserved against in the Final Closing Date Working Capital Schedule by the Companies in accordance with U.S. GAAP consistently applied or for chargebacks which could arise in the Ordinary Course of Business. All receivables arose in the Ordinary Course of Business. No receivables are subject to prior assignment, claim, lien or security interest, except for the Security Interest in favor of Seller’s lender. Seller has not incurred any liabilities to customers for rebates, discounts, returns, refunds, promotional allowances or otherwise, except as are recorded in its books and records of the Companies or chargebacks which could arise in the Ordinary Course of Business or as provided for on the Final Closing Date Working Capital Schedule.

(r) Insurance. Section 3(r) of the Disclosure Schedules sets forth the following information with respect to each insurance policy (including policies providing property, casualty, liability, and workers’ compensation coverage and bond and surety arrangements) to which Royal Robbins has been a party, a named insured or otherwise the beneficiary of coverage at any time since January 1, 2004:

(i) the name of the insurer, the name of the policyholder and the name of each covered insured;

(ii) the policy number and the period of coverage; and

(iii) the type and amount (including deductible and ceiling amounts) of coverage.

(s) Litigation. Section 3(s) of the Disclosure Schedules sets forth as of the date hereof each instance in which either of the Companies (i) is subject to any outstanding injunction, judgment, order, decree, ruling or charge or (ii) is a party to, or to the Knowledge of Seller, is threatened to be made a party to any action, suit, proceeding, hearing or investigation of, in, or before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction or before any arbitrator.

(t) Product Warranty. Each product sold by the Companies has been in substantial conformity with all applicable contractual commitments and all express and implied warranties, and neither of the Companies has any material Liability for replacement or repair thereof or other damages in connection therewith.

(u) Product Liability. Neither of the Companies has any Liability arising out of any injury to individuals or property as a result of the ownership, possession or use of any product sold by either of the Companies.

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(v) Employees. Seller has provided Buyer with a complete list of all employees dedicated solely to the Royal Robbins Business as of the date hereof and a schedule of their base salaries and bonuses. Such list identified all employees who, as of the date hereof, are on leave for any reason or receiving disability or workers’ compensation or any other similar type of benefit from either of the Companies. The Companies are in material compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, including, without limitation, any such applicable laws respecting employment discrimination and occupational safety and health requirements, and have not committed any unfair labor practice. To Seller’s Knowledge no organizational effort is presently being made or threatened by or on behalf of any labor union with respect to employees of Royal Robbins.

(w) Employee Benefits.

(i) Section 3(w) of Disclosure Schedules lists each Employee Benefit Plan and Benefit Arrangement in which any Royal Robbins employees participate or that provides, previously provided or may provide benefits or payments for Royal Robbins employees or their dependents or former employees or dependents of former employees of Royal Robbins (other than individuals who are or remained employed by Seller or its ERISA Affiliates other than Royal Robbins, and their dependents) or which commits Royal Robbins to provide benefits or payments for any person upon or following retirement from Royal Robbins or other termination of employment with Royal Robbins.

(A) Each such Employee Benefit Plan and Benefit Arrangement (and each related trust, insurance contract or fund) has been maintained, funded and administered in accordance with the terms of such Employee Benefit Plan or Benefit Arrangement, and complies in all material respects in form and in operation in all respects with the applicable requirements of ERISA, the Code and other applicable laws.

(B) The requirements of Part 6 of Subtitle B of Title I of ERISA and of Code §4980B have been met with respect to any Employee Benefit Plan that is or has been subject to such requirements.

(C) All contributions (including all employer contributions and employee salary reduction contributions and employee after tax contributions) which are due have been made within the time periods prescribed by ERISA and the Code to each such Employee Benefit Plan and all contributions for any period ending on or before the Closing Date which are not yet due have been paid to each such Employee Benefit Plan or accrued in accordance with the past custom and practice of the sponsors of such Employee Benefit Plan and Benefit Arrangement. All premiums or other payments for all periods ending on or before the Closing Date which are due have been paid with respect to each such Employee Welfare Benefit Plan or accrued in accordance with the part custom and practice of such sponsors.

(D) Each such Employee Benefit Plan which is an Employee Pension Benefit Plan meets the requirements of a “qualified plan” under the Code §401(a). Each Employee Benefit Plan intended to so qualify has been timely amended for the legislation commonly known as “GUST” and “EGTRRA.”

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(E) No such Employee Pension Benefit Plan has been completely or partially terminated or been the subject of a Reportable Event.

(F) To Seller’s Knowledge, no fiduciary has any Liability for breach of fiduciary duty or any other failure to act or comply in connection with the administration or investment of the assets of any such Employee Benefit Plan. There is no outstanding judgment, decree, injunction or order of any court, governmental department, commission, agency, instrumentality or arbitrator against or affecting any such Employee Benefit Plan or Benefit Arrangement, any Fiduciary thereof or assets of any related trust, insurance or annuity contract thereunder. There have been no non-exempt Prohibited Transactions with respect to any such Employee Benefit Plan. No action, suit, proceeding, hearing or investigation is pending or, to Seller’s Knowledge, threatened.

(G) Neither Royal Robbins nor any of its ERISA Affiliates has incurred any Liability to the PBGC (other than PBGC premium payments) or otherwise under Title IV of ERISA (including any withdrawal Liability) or under the Code with respect to any such Employee Benefit Plan which is an Employee Pension Benefit Plan.

(H) To Seller’s Knowledge, there is no basis for any such action, suit, proceeding or hearing against or relating to any Employee Benefit Plan or Benefit Arrangement, any Fiduciary thereof or the assets of any related trust, insurance or annuity contract thereunder. Neither Royal Robbins nor any of its ERISA Affiliates maintains or contributes to, is not required to contribute, or has any Liability or potential Liability with respect to any Employee Welfare Benefit Plan providing medical, health or life insurance or other welfare-type benefits for current or future retired or terminated employees, their spouses or their dependents (other than in accordance with Code §4980B) and there has been no communication to employees by Royal Robbins which could reasonably be interpreted to promise or guarantee such employees retiree health or life insurance or other such “welfare-type” benefits;

(I) Neither Royal Robbins nor any of its ERISA Affiliates contributes to, has any obligation to contribute to, or has any Liability or potential Liability with respect to, any Employee Pension Benefit Plan that is a “defined benefit plan” as defined in ERISA §3(35) of ERISA. Neither Royal Robbins nor any of its ERISA Affiliates or ERISA Affiliates contributes to, has contributed to, has any obligation to contribute to, or has any Liability or potential Liability (including withdrawal liability as defined in ERISA §4201) under or with respect to any “multiemployer plan” as defined in ERISA §3(37).

(J) No provision of any such Employee Benefit Plan or Benefit Arrangement or any amendment thereto limits the sponsoring employer’s right to terminate any such Employee Benefit Plan or Benefit Arrangement.

(x) Guaranties. Section 3(x) of the Disclosure Schedules lists each guaranty that Royal Robbins has provided with respect any Liability or obligation (including indebtedness) of any other Person.

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(y) No Tariffs or Duties. The Companies’ payments of all tariffs and duties is current in all jurisdictions, and Royal Robbins does not owe any tariffs or duties other than those incurred in the Ordinary Course of Business (i) under any trade agreements; and (ii) to the U.S. Customs Service.

(z) Environmental, Health, and Safety Matters.

(i) Since October 31, 2003, the Companies have complied and are in compliance with all Environmental, Health, and Safety Requirements.

(ii) Since October 31, 2003 neither of the Companies has received any written or oral notice, report or other information regarding any actual or alleged violation of Environmental, Health, and Safety Requirements, or any Liabilities or potential Liabilities, including any investigatory, remedial or corrective obligations, relating to any of them or its facilities arising under Environmental, Health, and Safety Requirements.

(iii) Since October 31, 2003, neither of the Companies has treated, stored, disposed of, arranged for or permitted the disposal of, transported, handled, or released any substance, including, without limitation, any hazardous substance, or owned or operated any property or facility (and no such property or facility is contaminated by any such substance) in a manner that has given or would give rise to Liabilities, including any Liability for response costs, corrective action costs, personal injury, property damage, natural resources damages or attorney fees, pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”), the Solid Waste Disposal Act, as amended (“SWDA”) or any other Environmental, Health, and Safety Requirements.

(aa) Customers and Suppliers. Since December 30, 2006, to Seller’s Knowledge, no customer or supplier of the Royal Robbins Business has notified Seller that it intends to stop doing business with Royal Robbins or in the case of a supplier, to materially decrease the rate of, supplying materials, products or services to Royal Robbins. Section 3(aa) of the Disclosure Schedules sets forth accurate and complete lists of the ten (10) largest customers and ten (10) largest suppliers of the Royal Robbins Business, determined on the basis of revenues from items sold (with respect to customers) or costs of items purchased (with respect to suppliers) for the year ended December 30, 2006.

(bb) Brokers’ Fees. Except for Seller’s agreement with KSA Capital Advisors, neither Seller nor Royal Robbins has any Liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which Buyer or Royal Robbins could become liable or obligated.

(cc) No Other Representations or Warranties. EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS AGREEMENT, NEITHER SELLER NOR EITHER OF THE COMPANIES MAKES ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED (INCLUDING ANY IMPLIED WARRANTY OR REPRESENTATION AS TO CONDITION, MERCHANTABILITY, OR SUITABILITY AS TO ANY OF THE PROPERTIES OR ASSETS EMPLOYED BY ROYAL ROBBINS), AND SELLER, ON BEHALF OF ITSELF AND THE OTHER COMPANIES HEREBY DISCLAIMS ANY SUCH REPRESENTATION OR

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WARRANTY, WHETHER BY SELLER, THE COMPANIES OR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES OR ANY OTHER PERSON, WITH RESPECT TO THE EXECUTION, DELIVERY OR PERFORMANCE BY SELLER OF THIS AGREEMENT OR PXG CANADA OF THE PXG CANADA TRANSFER AGREEMENT OR WITH RESPECT TO THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. NOTWITHSTANDING THE DELIVERY OR DISCLOSURE TO BUYER OR ANY OF ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES OR ANY OTHER PERSON OF ANY DOCUMENTATION OR OTHER INFORMATION BY SELLER, THE COMPANIES OR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES OR ANY OTHER PERSON WITH RESPECT TO ANY ONE OR MORE OF THE FOREGOING. WITHOUT LIMITING THE FOREGOING, IT IS UNDERSTOOD THAT ANY ESTIMATES, PROJECTIONS OR OTHER PREDICTIONS CONTAINED OR REFERRED TO IN THE OFFERING MATERIALS THAT HAVE BEEN PROVIDED TO BUYER ARE NOT AND SHALL NOT BE DEEMED TO BE REPRESENTATIONS OR WARRANTIES OF SELLER.

4. Buyer’s Representations and Warranties. Buyer represents and warrants to Seller as follows:

(a) Organization of Buyer and Buyer Canadian Sub. Buyer and Buyer Canadian Sub are corporations duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Buyer Canadian Sub is a wholly-owned subsidiary of Buyer.

(b) Authorization of Transaction.

(i) Buyer has full power and authority (including full corporate power and authority) to execute and deliver this Agreement, and to perform its obligations hereunder. This Agreement constitutes the valid and legally binding obligation of Buyer, enforceable in accordance with its terms and conditions.

(ii) Buyer Canadian Sub has full power and authority (including full corporate power and authority) to execute and deliver the PXG Canada Transfer Agreement and each of the agreements and instruments required thereby, and to perform its obligations thereunder. The PXG Canada Transfer Agreement constitutes the valid and legally binding obligation of PXG Canada, enforceable in accordance with its terms and conditions.

(c) Noncontravention.

(i) Neither the execution and delivery of this Agreement nor the Ancillary Agreements to be executed by Buyer, nor the consummation of the transactions contemplated hereby or thereby, will (i) violate or be a breach of its governing or organizational documents (ii) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge or other restriction of any government, governmental agency or court to which Buyer is subject or (iii) conflict with, result in a breach of, constitute a default under any material agreement, contract, lease, license, instrument or other arrangement to which Buyer is a party.

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(ii) Neither the execution and delivery of the PXG Canada Transfer Agreement nor the agreements, instruments or contracts to be executed by PXG Canada, nor the consummation of the transactions contemplated thereby, will (A) violate or be a breach of its governing or organizational documents of Buyer Canadian Sub (B) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge or other restriction of any government, governmental agency or court to which Buyer Canadian Sub is subject or (iii) conflict with, result in a breach of, constitute a default under any material agreement, contract, lease, license, instrument or other arrangement to which Buyer Canadian Sub is a party.

(d) Governmental Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any Governmental Authority on the part of Buyer is required for Buyer to execute and deliver this Agreement and for the consummation of the transactions contemplated hereby. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any Governmental Authority on the part of Buyer Canadian Sub is required for it to execute and deliver the PXG Canada Transfer Agreement and for the consummation of the transactions contemplated thereby.

(e) Investment Representation. Buyer acknowledges that the transfer of the Shares by Seller to Buyer hereunder will not be registered under the Securities Act of 1933, as amended, or under any state securities laws, that the Shares will be transferred in a private placement transaction exempt from the registration requirements under such Act, and that the Shares may not be further transferred by Buyer except pursuant to an effective registration under such Act or in a transaction exempt from such registration requirements. Buyer is acquiring the Shares hereunder for its own account, for investment and not with the intention of distributing the Shares.

(f) Brokers’ Fees. Except for Buyer’s agreement with Financo, Inc., Buyer has no Liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which any Seller could become liable or obligated.

(g) Sufficient Financial Capability. Buyer and Buyer Canadian Sub have sufficient cash resources or immediate access to available credit to pay the Purchase Price and the price due under the PXG Canada Transfer Agreement and will have such funds on the Closing Date.

5. Pre-Closing Covenants. The Parties agree as follows with respect to the period between the execution of this Agreement and the Closing.

(a) General. Each of the Parties will use its commercially reasonable best efforts to satisfy the closing conditions set forth in Section 7 below under its control, excluding, however, the waiver of its closing conditions.

(b) Notices and Consents. Seller will give any notices to third parties, and will use its commercially reasonable best efforts to obtain the third party consents set forth in Sections 7(a)(v) and 7(b)(v).

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(c) Preservation of Business. Seller will cause Royal Robbins and PXG Canada with respect to its portion of the Royal Robbins Business to keep their businesses and properties substantially intact, including their present operations, physical facilities, working conditions, and relationships with lessors, licensors, foreign purchasing agents, suppliers, customers, employees and sales representatives.

(d) Operation of Business. Seller will not cause or permit the Companies (provided that in the case of PXG Canada limited only to the portion of the Royal Robbins Business in which it is engaged and the assets and liabilities contemplated by the PXG Transfer Agreement) to engage in any practice, take any action or enter into any transaction of the sort described in Section 3(h) above.

(e) Full Access. Seller will permit representatives of Buyer to have full access at all reasonable times, and in a manner so as not to interfere with the normal business operations of the Companies, to all premises, properties, personnel, books, records (including Tax records), contracts and documents of the Companies; provided, however, that the Companies shall not be required to allow Buyer access to its employees or customers without reasonable prior notice thereof to either James Riedman, Cathy Taylor or Kenneth Wolf and in the case of PXG Canada the foregoing shall be limited only to the portion of the Royal Robbins Business in which it is engaged and the assets and liabilities contemplated by the PXG Canada Transfer Agreement.

(f) No Solicitation; Acquisition Proposals. Seller agrees that it will not, and it will not permit either of the Companies to, directly or indirectly, through any officer, director, employee, partner, stockholder, agent, or Affiliate or otherwise, except in furtherance of the transactions contemplated by this Agreement and in connection with the sale of inventory in the Ordinary Course of Business (i) solicit, initiate, or encourage submission of proposals or offers from any Person relating to any transactions contemplated herein or to the direct or indirect purchase of a material amount of the assets of the Royal Robbins Business, or any equity interest in, or any merger, consolidation, or business combination with, either of the Companies (collectively, an “Acquisition Proposal”), (ii) participate in any discussions or negotiations regarding, or furnish to any other Person any information with respect to, or otherwise cooperate in any way with or assist, facilitate, or encourage, any Acquisition Proposal by any Person, (iii) enter into any agreement, arrangement, or understanding with respect to an Acquisition Proposal, or (iv) sell, transfer, or otherwise dispose of, or enter into any agreement, arrangement, or understanding with respect to, any interest in the assets of the Royal Robbins Business, capital stock or other equity interests of either of the Companies.

(g) Confidentiality. The Confidentiality Agreement dated December 16, 2006 and as amended April 13, 2007, between Seller and Buyer shall continue in full force and effect after the date hereof and shall not be modified or amended hereby.

(h) Update of Schedules. From time to time on or prior to the Closing Date, Seller may supplement or amend the Disclosure Schedules delivered in connection herewith with respect to any matter arising after the date hereof, which, if arising prior to the date of this Agreement, would have been required to be set forth or described in such Schedule or which is necessary to correct any information in such Disclosure Schedule which has been rendered inaccurate as a result of a matter arising after the date hereof.

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(i) Tax Matters. Without the prior written consent of Buyer, Royal Robbins shall not make or change any election, change an annual accounting period, adopt or change any accounting method, file any amended Tax Return, enter into any closing agreement, settle any Tax claim or assessment relating to Royal Robbins, surrender any right to claim a refund of Taxes, consent to any extension or waiver of the limitation period applicable to any Tax claim or assessment relating to Royal Robbins, or take any other similar action relating to the filing of any Tax Return or the payment of any Tax, if such election, adoption, change, amendment, agreement, settlement, surrender, consent or other action would have the effect of increasing the Tax liability of Seller or Royal Robbins for any period ending after the Closing Date or decreasing any Tax attribute of Seller or Royal Robbins existing on the Closing Date

6. Post-Closing Covenants. The Parties agree as follows with respect to the period following the Closing.

(a) General. In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, each of the Parties will take such further action (including the execution and delivery of such further instruments and documents) as any other Party reasonably may request, all at the sole cost and expense of the requesting Party (unless the requesting Party is entitled to indemnification therefor under Section 8 below).

(b) Litigation Support. In the event and for so long as any Party actively is contesting or defending against any action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand of a third party (i.e., someone other than one of the Parties or their respective Affiliates) in connection with (i) any transaction contemplated under this Agreement or (ii) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act or transaction on or prior to the Closing Date involving either of the Companies, each of the other Parties will cooperate with it and its counsel in the contest or defense, make available their personnel, and provide such testimony and access to their books and records as shall be necessary in connection with the contest or defense, all at the sole cost and expense of the contesting or defending Party (unless the contesting or defending Party is entitled to indemnification therefor under Section 8 below).

(c) Confidentiality.

(i) Seller will treat and hold as such all of the Confidential Information, refrain from using any of the Confidential Information except in connection with this Agreement, and deliver promptly to Buyer or destroy, at the request and option of Buyer, all tangible embodiments (and all copies) of the Confidential Information which are in its possession. In the event that Seller is requested or required (by oral question or request for information or documents in any legal proceeding, interrogatory, subpoena, civil investigative demand, or similar process) to disclose any Confidential Information, that Seller will notify Buyer promptly of the request or requirement so that Buyer may seek an appropriate protective order or waive compliance with the provisions of this Section 6(c) at its expense. If, in the absence of a protective order or the receipt of a waiver hereunder, Seller is, on the advice of

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counsel, compelled to disclose any Confidential Information to any tribunal or else stand liable for contempt, that Seller may disclose the Confidential Information to the tribunal. The foregoing provisions shall not apply to any Confidential Information which is generally available to the public immediately prior to the time of disclosure (other than as a result of a disclosure directly or indirectly by a Seller or its agents or representatives in violation of this Section 6(c)).

(ii) Notwithstanding anything to the contrary set forth in this Agreement or in any other written or oral understanding or agreement to which the parties hereto are parties or by which they are bound, the parties acknowledge and agree that any obligations of confidentiality contained herein and therein shall not apply to the tax treatment and tax structure of the transactions contemplated by this Agreement upon the earlier to occur of (A) the date of the public announcement of discussions relating to such transactions, (B) the date of the public announcement of such transactions, or (C) the date of the execution of this Agreement, all within the meaning of Treasury Regulations Section 1.6011-4; provided, however, that each party recognizes that the privilege each has to maintain, in its sole discretion, the confidentiality of a communication relating to such transactions, including a confidential communication with its attorney or a confidential communication with a federally authorized tax practitioner under Section 7525 of the Code, is not intended to be affected by the foregoing.

(d) Sellers Covenants. For a period of two (2) years following the Closing Date, Seller and its Affiliates shall not:

(i) Interfere with the business relationships or disparage the name or reputation of the Royal Robbins Business, or the Intellectual Property or take any action, including making any disparaging public statements or publishing or participating in the publication of any accounts or stories relating to the Royal Robbins Business, Buyer or the Intellectual Property which brings the Royal Robbins Business, Buyer or the Intellectual Property into public ridicule or disrepute.

(ii) Design, promote, sell, license, distribute or market anywhere within or outside of the Unites States specialty outdoor apparel for men and women, which is competitive with Royal Robbins Products.

(iii) Solicit for employment or employ any individual who is then an employee or consultant of Buyer or request, induce or advise any such employee or consultant to leave the employ of Buyer; provided that general solicitations not specifically targeting the Buyer’s personnel, and any hiring resulting therefrom, shall not be prohibited.

(iv) Request, induce or advise customers or suppliers of the Royal Robbins Business to withdraw, curtail or cancel their business with Buyer.

(v) Use the words “Royal Robbins”, or any variation thereof or any words similar thereto, or any phrase or combination of words utilizing such words, any derivation thereof or any words similar thereto, and any other words or phrases similar phonetically or in meaning to any of the foregoing as a brand or product designation, in any business or commercial enterprise or context, whether or not in connection with apparel, accessories or footwear, and whether or not in competition with the Royal Robbins Business.

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(vi) The Parties agree and acknowledge that the duration, scope and geographic areas applicable to the covenants in this Section 6(d) are fair, reasonable and necessary, that adequate compensation has been received by Seller for such obligations. If, however, for any reason any court determined that the restrictions in Section 6(d) are not reasonable or that consideration is inadequate such restrictions shall be interpreted, modified or rewritten to include as much of the duration, scope and geographic area identified in this section as will render such restrictions valid and enforceable.

7. Closing Conditions.

(a) Buyer’s Closing Conditions. Buyer’s obligation to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions:

(i) the representations and warranties set forth in Section 3 shall be true and correct in all material respects at and as of the Closing Date;

(ii) Seller shall have performed and complied with all of its covenants hereunder in all material respects through the Closing including the delivery at Closing of all items specified in Section 2(h)(i);

(iii) Seller shall have delivered to Buyer a certificate to the effect that each of the conditions specified above in Sections 7(a)(i) and (ii) is satisfied in all respects;

(iv) no action, suit or proceeding shall be pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling or charge would (A) prevent consummation of any of the transactions contemplated by this Agreement, (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation (C) affect adversely the right of Buyer to own Royal Robbins Shares; or (D) affect adversely the right of Royal Robbins to own its assets and to operate its businesses or otherwise have a Material Adverse Effect;

(v) Seller shall have received the third party consents specified in items 1 through 9, and 11 of Section 3(c) of the Disclosure Schedules; and

(vi) Since the date hereof, there shall not have occurred any event, change or circumstance which, individually or in the aggregate, constitutes a Material Adverse Effect on the Royal Robbins Business.

Buyer may waive any condition specified in this Section 7(a) if it executes a writing irrevocably stating so at or prior to the Closing and promptly delivers such waiver to Seller and Royal Robbins.

(b) Seller’s Closing Conditions. Seller’s obligation to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions:

(i) the representations and warranties set forth in Section 4 above shall be true and correct in all material respects at and as of the Closing Date;

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(ii) Buyer shall have performed and complied with all of its covenants hereunder in all material respects through the Closing including the delivery at Closing of all items specified in Section 2(h)(ii);

(iii) Buyer shall have delivered to Sellers a certificate to the effect that each of the conditions specified above in Sections 7(b)(i) and (ii) is satisfied in all respects;

(iv) no action, suit, or proceeding shall be pending before any court or quasi-judicial or administrative agency of any federal, state, local or foreign jurisdiction wherein an unfavorable injunction, judgment, order, decree, ruling or charge would (A) prevent consummation of any of the transactions contemplated by this Agreement or (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation;

(v) Seller shall have received the third party consents specified in items 1 through 9, and 11 Section 3(c) of the Disclosure Schedules; and

(vi) Seller, Royal Robbins, PXG Canada and all other subsidiaries shall have received satisfactory evidence of their release from the Supplier L/C Reimbursement Obligations and that such amount is not, and shall not be, blocked from its availability under Seller’s line of credit with Seller’s lender.

Seller may waive any condition specified in this Section 7(b) if it executes a writing irrevocably stating so at or prior to the Closing and promptly delivers such waiver to Buyer.

8. Survival Period and Indemnification.

(a) Survival of Representations and Warranties.

(i) The representations and warranties contained in Sections 3(a),(b),(c), (d),(e) and 3(k) (except as provided in Section 8(a)(ii) below) (“Seller Class I Representations and Warranties”) and Sections 4(a) and (b) (“Buyer Class I Representations and Warranties”) shall survive the Closing indefinitely. All of the other representations and warranties of Seller contained in Section 3 (the “Seller Class II Representations and Warranties”) and of Buyer in Section 4 (the “Buyer Class II Representations and Warranties”) shall survive the Closing for a period of eighteen (18) months.

(ii) Notwithstanding anything herein to the contrary, any aspect of any representation or warranty herein made by Seller that relate to, arise out of or involve sales, use or similar Taxes (other than in the States of Washington and California), shall survive the Closing for a period of eighteen (18) months.

(iii) Notwithstanding the foregoing if at the stated expiration of any representation and warranty there shall then be pending any indemnification claim by a Person made in accordance with the terms hereof, such Person shall continue to have the right to pursue indemnification as provided herein with respect to such claim notwithstanding such expiration.

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(b) Indemnification Provisions for Benefit of Buyer Indemnitees. Subject to the terms and conditions herein, in the event the Seller breaches any of its representations, warranties or covenants contained herein (other than in Section 3(k)) and Buyer has made a written claim for indemnification against Seller in accordance with the terms hereof during the survival period, if applicable, provided for in Section 8(a) above, then Seller shall indemnify Buyer and all of its officers, directors and agents (“Buyer Indemnitees”) from and against any Adverse Consequences any of Buyer Indemnitees may suffer through and after the date of the claim for indemnification to the extent resulting from or arising out of any such misrepresentation or breach of warranty when the aggregate amount of all such claims are in excess of a One Hundred Seventy Five Thousand Dollars ($175,000), and then up to: (i) with respect to all claims relating solely to the Seller Class II Representations and Warranties, a maximum aggregate amount of Ten Million Dollars ($10,000,000) and (ii) with respect to all claims based solely on a Seller Class I Representations and Warranties up to a maximum aggregate amount of Thirty Eight Million Dollars ($38,000,000). Notwithstanding the foregoing, the maximum aggregate amount that Seller shall by liable for and obligated to pay the Buyer Indemnitees for all indemnification and other claims under this Agreement shall be Thirty Eight Million Dollars ($38,000,000).

(c) Indemnification Provisions for Benefit of Seller Indemnitees.

(i) In the event Buyer breaches any of its representations and warranties in Section 4 and Seller makes a written claim for indemnification claim in accordance with the terms hereof against Buyer within the survival period, then Buyer shall indemnify Seller from and against any Adverse Consequences Seller may suffer through and after the date of the claim for indemnification to the extent resulting from or arising out of the breach when the aggregate amount of all such claims are in excess of One Hundred Seventy Five Thousand Dollars ($175,000) in the aggregate, and then up to a maximum aggregate amount: (i) with respect to all claims relating solely to the Buyer Class II Representations and Warranties, Ten Million Dollars ($10,000,000) and (ii) with respect to all claims based solely on a Buyer Class I Representations and Warranties, Thirty Eight Million Dollars ($38,000,000). In the event that Buyer Canadian Sub fails to pay, satisfy and discharge in full any Liabilities of PXG Canada assumed by it under the PXG Canada Transfer Agreement in a timely manner, then Buyer shall indemnify Seller and PXG Canada from and against any Adverse Consequences Seller and/or PXG Canada may suffer through and after the date of the claim for indemnification to the extent resulting from or arising out of such Liability. Buyer shall indemnify Seller, Royal Robbins and PXG Canada from and against any Adverse Consequences Seller and/or PXG Canada may suffer through and after the date of the claim for indemnification to the extent resulting from or arising out of the Supplier L/C Reimbursement Obligations. Notwithstanding the foregoing, the maximum aggregate amount that Buyer shall by liable for and obligated to pay the Seller Indemnitees for all indemnification and other claims under this Agreement shall be Thirty Eight Million Dollars ($38,000,000).

(ii) Buyer shall also indemnify the Seller and PXG Canada from and against any Adverse Consequences Seller to the extent resulting from or arising out any Liabilities of Royal Robbins or the Royal Robbins Business arising after the Closing.

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(d) Procedure for Making Claims for Indemnification. For purposes of this Agreement, the Party seeking indemnification under this Section 8 shall be the “Indemnified Party” and the Party from whom such indemnification is sought shall be the “Indemnifying Party.” If a claim (a “Claim”) resulting from Adverse Consequences is to be made by an Indemnified Party, such Indemnified Party shall give written notice (the “Claim Notice”) to the Indemnifying Party, as soon as practicable after the Indemnified Party becomes aware of any fact, condition or event which may result in Adverse Consequences for which indemnification may be sought under subsections (b) or (c) above. Failure to submit any such Claim Notice to any Indemnifying Party shall not relieve such Indemnifying Party of any liability hereunder, except to the extent the Indemnifying Party is actually prejudiced by such failure. The Indemnifying Party shall be deemed to have accepted the Claim Notice unless it shall have provided written notice to the Indemnified Party that it has agreed to pay the Claim within thirty-five (35) calendar days after receiving the Claim Notice, and in such case payment procedures shall be as set forth in subsection (d)(ii) below. Such acceptance shall be referred to as an “Acceptance” herein. In the case of a disputed Claim, the parties shall follow the procedures set forth in subsection (d)(i) below.

(i) If the Indemnifying Party disputes the validity, amount or calculation of any Claim, the following procedures shall be followed with respect to such Claim:

(A) If the Indemnifying Party and the Indemnified Party reach an agreement with respect to the proper determination of the Claim, the Parties shall follow the procedures set forth in subsection (d)(ii) below.

(B) If the Indemnifying Party and the Indemnified Party are unable to reach agreement with respect to the proper determination of the Claim within ninety (90) days after delivery by the Indemnified Party of the Claim Notice to the Indemnifying Party, each of the parties agrees that any party may commence legal action either to obtain a judicial determination of the Claim unless the amount of the Claim is at issue in pending litigation with a third party, in which event the action shall not be commenced until such amount is ascertained or such Parties agree to the commencement of such action. As used herein, a “judicial determination” means (i) a written compromise or settlement signed by the party asserting the Claim and the party against which the Claim is asserted or (ii) a binding arbitration award or judgment of a court of competent jurisdiction in the United States of America (the time for appeal having expired and no appeal having been perfected) which resolves a Claim. Upon resolution the parties shall follow the procedures set forth in subsection (ii) below.

(ii) In the event of any Acceptance with respect to a Claim or any dispute regarding such Claim has been resolved pursuant to the procedures set forth in subsection (d)(i) above, the Indemnifying Party shall pay the Claim within fifteen (15) days of the Acceptance or the resolution of the dispute, which shall occur pursuant to the procedures set forth in subsection (d)(i) above.

(e) Defense of Third-Party Claims. If any lawsuit or enforcement action is filed against any Indemnified Party by a third party (a “Third Party Claim”) for which indemnification may be available to the Indemnified Party in this Agreement, written notice thereof shall be given to the Indemnifying Party as promptly as practicable (and in any event within fifteen (15) calendar days after the service of the citation or summons); provided,

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however, the failure of any Indemnified Party to give timely notice hereunder shall not affect its rights to indemnification hereunder, except to the extent that any Indemnifying Party is prejudiced by such failure. After such notice, the Indemnifying Party may assume the defense of such Third Party Claim by written notice to the Indemnified Party. Upon delivery of such notice, the Indemnifying Party shall (i) take control of the defense and investigation of the Third Party Claim, and (ii) employ and engage attorneys of its own choice to handle and defend the same unless the named parties to such Third Party Claim include both any Indemnifying Party and any Indemnified Party and the Indemnified Party has been advised in writing by counsel that there may be one or more legal defenses available to such Indemnified Party that are different from or additional to those available to the Indemnifying Party, in which event the Indemnified Party shall be entitled, at the Indemnifying Party’s cost, risk and expense, to separate counsel of its own choosing, provided that to compromise or settle such claim, which compromise or settlement shall be made only with the written consent of the Indemnifying Party, such consent not to be unreasonably withheld. The Indemnified Party shall cooperate in all reasonable respects with the Indemnifying Party and its attorneys in the investigation, trial and defense of the Third Party Claim and any appeal arising therefrom; provided, however, that the Indemnified Party may, at its own cost, participate in the investigation, trial and defense of the Third Party Claim and any appeal arising therefrom. If the Indemnifying Party fails to assume the defense of the Third Party Claim within fifteen (15) calendar days after receipt of the notice of the Third Party Claim, the Indemnified Party against which such Third Party Claim has been asserted will upon delivering notice to such effect to the Indemnifying Party have the right to undertake, at the Indemnified Party’s cost, risk and expense, the defense, compromise or settlement of such Third Party Claim on behalf of and for the account and risk of Indemnifying Parties; provided, however, that such Third Party Claim shall not be compromised or settled without the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld. If the Indemnified Party assumes the defense of the Third Party Claim, the Indemnified Party will keep the Indemnifying Party reasonably informed of the progress of any such defense, compromise or settlement of any action effected pursuant to and in accordance with this subsection (e) for any final judgment (subject to any right of appeal), and the Indemnifying Party agrees to indemnify and hold harmless the Indemnified Party from and against any Adverse Consequences by reason of such settlement or judgment, subject to any limitations set forth herein.

(f) Calculation of Adverse Consequences. Notwithstanding the foregoing, the amount of any Adverse Consequences for which indemnification is provided under this Section 8 shall be net of any amounts recovered or recoverable by the Indemnified Party under any contracts or applicable insurance policies with respect to such Adverse Consequences.

(g) No Duplication. Any liability for indemnification hereunder shall be determined without duplication of recovery by reason of the state of facts giving rise to such liability constituting a breach of more than one representation, warranty, covenant or agreement.

(h) Treatment of Indemnification Payments. Any amounts payable under this Section 8 shall be, to the extent permitted by Legal Requirements, an adjustment to the Purchase Price.

(i) Exclusive Remedy. From and after the Closing, the indemnification provided in Section 8 with respect to the misrepresentations or breached warranties by Seller or Buyer shall be the sole and exclusive remedy for such claims other than for common law fraud,

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intentional breaches and claims for equitable remedies. Buyer shall first seek payment for any indemnification claim by making a draw on the Indemnification L/C or the Escrow Agreement, as applicable, in accordance with the terms thereof to the extent that there is a sufficient amount of funds may be drawn thereunder for payment thereof.

9. Tax Matters.

(a) Tax Indemnity.

(i) Subject to Buyer’s compliance with Section 9(g), Seller shall indemnify and hold Buyer Indemnitees harmless from and against the following: (A) Taxes (or the non-payment thereof) of Royal Robbins for all Pre-Closing Periods and, with respect to any Straddle Period, the portion of such Taxes for such Straddle Period allocated to the Pre-Closing Portion pursuant to Section 9(c); (B) any Taxes (or the non-payment thereof) for any Pre-Closing Periods to the extent, resulting from or arising out of any liability or obligation of the Royal Robbins for Taxes of any person other than Royal Robbins (1) under Treasury Regulations Section 1.1502-6 (or any predecessor or successor provisions thereof and any similar provision of state, local or foreign Law) and (2) as a transferee or successor by, assumption transferee liability, operation of law or otherwise.

(ii) Buyer shall indemnify and hold harmless Seller and its Affiliates from and against (and Seller and Seller’s Affiliates shall have no liability under Section 9(a)(i) on account of) any and all Adverse Consequences for or in respect of any and all Taxes of Royal Robbins that are not described in Section 9(a)(i).

(b) Preparation and Filing of Tax Returns and Payment of Taxes.

(i) To the extent not filed prior to the Closing Date, Seller shall prepare (or cause to be prepared) all Tax Returns of Royal Robbins for any taxable period ending on or before the Closing Date (including the consolidated Federal income Tax of the affiliated group (within the meaning of Section 1504 of the Code) of which Seller is the common parent and any similar state or local Tax Returns) (each such period, a “Pre-Closing Period” and such Tax Returns, the “Pre-Closing Tax Returns”). All Pre-Closing Tax Returns shall be prepared in a manner that is consistent in all material respects with the prior practice of Seller, except as required by applicable law and copies of such Tax Returns shall be provided to Buyer within thirty (30) days after filing.

(ii) Buyer shall prepare all Tax Returns of Royal Robbins for any taxable period beginning on or before the Closing Date and ending after the Closing Date (each such period, a “Straddle Period” and such Tax Returns, the “Straddle Tax Returns”), subject to Seller’s review and approval (which approval shall not be unreasonably withheld or delayed). In order to permit Seller’s review and approval, no later than thirty (30) days prior to the due date (taking into account any valid extensions thereof) (“Due Date”) for the filing of such Tax Return, Buyer shall submit, or cause to be submitted, a draft of such Tax Return to Seller, including, in the case of any Straddle Tax Return, calculations of the Taxes allocated to Seller pursuant to Section 9(c). Buyer shall not nor shall it permit Royal Robbins to, except to the extent contrary to the law or applicable regulations, take any position in the Straddle Tax Returns inconsistent with that taken in a Pre-Closing Tax Return for which Seller has filing responsibility.

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(c) Allocation of Taxes. The Parties shall, to the extent permitted under applicable Legal Requirements, elect with the relevant Taxing Authority for all Tax purposes to treat the Closing Date as the last day of the taxable period of Royal Robbins. Where not so permitted, the portion of any Taxes that are allocable to the Pre-Closing Portion of the Straddle Period shall be either (A) in the case of Taxes that are imposed on a periodic basis (without regard to net income), deemed to be the amount of such Taxes of the entire period (or, in the case of such Taxes determined on an arrears basis, such as real property Taxes, the amount of such Taxes for the immediately preceding period) multiplied by a fraction the numerator of which is the number of calendar days in the Pre-Closing Portion of the Straddle Period and the denominator of which is the number or calendar days in the entire Straddle Period or (B) in all other cases, deemed equal to the amount that would be payable if the taxable period ended on and included the Closing Date. In all other cases, any allocation required to determine any Taxes attributable to the Pre-Closing Portion of the Straddle Period shall be made by means of a closing of the books and records of Royal Robbins as of the close of business on the Closing Date, and, to the extent not susceptible to such allocation, by apportionment on the basis of elapsed days, except that extraordinary items described in Treasury Regulations Section 1.1502-76(b)(2)(ii)(C) shall be allocated to the day they are taken into account. Any deferred items taken into income pursuant to Treasury Regulations Sections 1.1502-13 (or any predecessor or successor provisions thereof) and any excess loss accounts taken into income under Treasury Regulations Section 1.1502-19 (or any predecessor or successor provisions thereof) as a result of this transaction shall for these purposes be allocated to the Pre-Closing Period.

(d) Tax Refunds. Upon request by Seller, Buyer shall apply for and exercise reasonable best efforts to obtain Tax Refunds to which Royal Robbins may be entitled for any Pre-Closing Period or the Pre-Closing Period of any Straddle Period. Seller agrees to pay Buyer for any reasonable documented out-of-pocket costs and expenses incurred by Buyer with respect to obtaining the Tax Refunds contemplated in this Section. Buyer shall pay or cause to be paid to Seller all Tax Refunds that are actually received by Royal Robbins after the Closing Date (within ten (10) days of the actual receipt of such refund) for (i) a Pre-Closing Period and (ii) a portion of all Tax Refunds paid to Royal Robbins for any Straddle Period (such portion to be allocated consistent with the principles set forth in Section 9(c)), in each case, net of (1) any Taxes (or increase in Taxes) imposed upon or attributable to such Tax Refund and (2) all reasonable out-of-pocket costs and expenses of Buyer Indemnitees incurred in connection with applying for and obtaining such Tax Refund.

(e) Assistance and Cooperation.

(i) After the Closing, Buyer and Seller shall (A) reasonably assist (and cause their respective Affiliates to reasonably assist) the other party in preparing and filing any Tax Returns that such other party is responsible for preparing, (B) reasonably cooperate in preparing for any audits of, or disputes or other proceedings with any Tax Authority or with respect to any matters with respect to, Taxes of or relating to Royal Robbins and (C) make available to the other party and to any Tax Authority as reasonably requested all information, records, and documents relating to Tax matters of or relating to Royal Robbins. In addition, Seller and Buyer shall make themselves (and their respective employees) reasonably available, on a mutually convenient basis, to provide explanations of any documents or information provided under this Section 9(e). Each Party shall keep any information obtained under this

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Section 9(e) confidential except (1) as may be necessary in connection with the filing of Tax Returns or the conduct of any Tax Proceeding or (2) with the consent of the other Party. Seller shall not settle any audit in a manner that would adversely affect Royal Robbins after the Closing Date without the prior written consent of Buyer, which consent shall not be unreasonably withheld.

(ii) Seller and Buyer will retain all Tax Returns, schedules and work papers and all material records (whether paper, electronic or other format) or other documents or electronic data in its possession (or in the possession of their respective Affiliates) relating to Tax matters relevant to Royal Robbins for the Pre-Closing and Straddle Periods until the later of (A) the expiration of the statute of limitations of the taxable periods to which such Tax Returns and other documents relate, taking into account all extensions thereof, or (B) six years following the Due Date for such Tax Returns. After such time, before Seller or Buyer dispose of any such documents in its possession (or in the possession of its respective Affiliates), the other party shall be given the opportunity, after thirty (30) days prior written notice, to remove and retain all or any part of such documents as such other party may select (at such other party’s expense).

(f) Tax Claims.

(i) If any audit, assessment, suit, proposed adjustment, deficiency, dispute, administrative or judicial proceeding or similar claim is commenced, proposed or made by any Tax authority that, if successful, could result in indemnification of Buyer Indemnitees pursuant to Section 9(a) (a “Tax Claim”), then Buyer shall promptly notify Seller and transmit to Seller a written notice describing in reasonable detail the nature of the Tax Claim and all related information in connection with such Tax Claim. Failure to promptly provide such notice shall not affect the right of Buyer Indemnitees to indemnification hereunder, except and only to the extent Seller is prejudiced by such delay or omission. Seller shall notify Buyer that Seller elects to control the Tax Claim at its own cost and expense in all appropriate Tax Proceedings. Notwithstanding anything to the contrary contained in this Section 9(f), if either (A) Seller (1) fails to properly notify Buyer that Seller elects to control the Tax Claim pursuant to the preceding sentence, or (2) after commencing or undertaking any such defense or settlement, fails to prosecute or withdraw from such defense or settlement or (B) the Tax Claim involves a Straddle Period, then Buyer shall have the right to control the Tax Claim in all appropriate Tax Proceedings and Buyer Indemnitees shall have the right to be reimbursed by Seller for their reasonable out-of-pocket costs and expenses relating to the control of the Tax Claim; provided that with respect to any portion of a Tax Claim that relates to a Straddle Period, Seller shall be required to reimburse Buyer Indemnitees only for their pro rata share of such reasonable out-of-pocket costs and expenses. The party controlling the Tax Claim pursuant to this Section 9(f) is hereinafter referred to as the “Controlling Party.”

(ii) The Controlling Party shall defend the Tax Claim in good faith with counsel of its own choosing (who shall be reasonably satisfactory to the other Party) and have full control of such defense and proceedings, including any compromise or settlement thereof; provided that the Controlling Party shall not enter into any settlement agreement or otherwise dispose of such Tax Claim without the prior written consent of the other Party, which consent shall not be unreasonably withheld, conditioned or delayed. The other Party shall have the right with the prior written consent of the Controlling Party, not to be unreasonably withheld, to attend meetings, participate in hearings or proceedings and review and comment on any documents prior to their submission that relate to any defense or settlement of any Tax Claim controlled by the Controlling Party and shall bear its own costs and expenses of such participation.

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(g) Scope and Survival Period. Notwithstanding anything to the contrary contained in this Agreement (other than Section 8(a)(ii)), this Section 9 shall be the exclusive remedy for any Adverse Consequences relating or attributable to Taxes. Except as provided in Section 8(a)(ii), Seller’s obligations under this Section 9 shall expire 60 days after the applicable statute of limitations with respect to the Taxes involved expires

(h) Treatment of Tax Indemnification Payment. Any amounts payable under this Section 9 shall be, to the extent permitted by Legal Requirements, an adjustment to the Purchase Price.

(i) Recognition of Net Tax Benefits. To the extent a Buyer Indemnitee recognizes any net Tax Benefits as a result of any Adverse Consequences for which indemnity is paid under this Section 9 by Seller, the Buyer Indemnitee shall pay the amount of such Tax Benefits (but not in excess of the indemnification payments received from Seller with respect to such Adverse Consequences) to the Indemnifying Party within sixty (60) days of such Tax Benefits being recognized by Buyer Indemnitee (to the extent such Tax Benefits are realized prior to the payment of the indemnity for the Adverse Consequences, the amount of the indemnity for the Adverse Consequences shall be reduced by the amount of Tax Benefits actually realized).

(j) Tax-Sharing Agreements. All tax-sharing agreements or similar agreements with respect to or involving Royal Robbins shall be terminated as of the Closing Date and, after the Closing Date, Royal Robbins shall not be bound thereby or have any liability thereunder.

(k) Certain Taxes and Fees. All transfer, documentary, sales, use, stamp, registration and other such Taxes, and all conveyance fees, recording charges and other fees and charges (including any penalties and interest) incurred in connection with the consummation of the transactions contemplated by this Agreement shall be borne 50% by Buyer and 50% by Seller.

10. Information. Each Party agrees that it will cooperate with and make available for review and reproduction to the other Party, during normal business hours, all books, records, information and employees (without substantial disruption of employment) retained and remaining in existence after the Closing which are necessary or useful in connection with any tax inquiry, audit, investigation or dispute, any litigation or investigation or any other matter requiring any such books, records, information or employees for any reasonable business purpose (subject to any limitations that are reasonably required to preserve any applicable attorney-client privilege). The Party requesting any such books, records, information or employees shall bear all of the out-of-pocket costs and expenses (including, without limitation, attorneys’ fees, but excluding reimbursement for salaries and employee benefits) reasonably incurred in connection with providing such books, records, information or employees. All information received pursuant to this Section 10 shall be subject to the terms of Section 6(c). Each Party further agrees to retain all books, records and information covered by this Section 10 for a period of at least four (4) years following the Closing.

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11. Termination.

(a) Termination of Agreement. This Agreement may be terminated as follows:

(i) Buyer and Seller may terminate this Agreement by mutual written agreement at any time prior to the Closing;

(ii) Buyer may terminate this Agreement by giving written notice to Seller at any time prior to the Closing (A) in the event that Seller breaches any representation, warranty, or covenant contained in this Agreement in any material respect, Buyer notifies Seller of the breach, and the breach continues after such notice without cure for a period of fifteen (15) or more consecutive days or (B) if the Closing shall not have occurred on or before July 15, 2007, by reason of the failure of any condition precedent under Section 7(a) hereof (unless the failure results primarily from Buyer itself breaching any representation, warranty or covenant contained in this Agreement); and

(iii) Seller may terminate this Agreement by giving written notice to Buyer at any time prior to the Closing (A) in the event that Buyer breaches any representation, warranty, or covenant contained in this Agreement in any material respect, Seller notifies Buyer of the breach, and the breach continues after such notice without cure for a period of fifteen (15) or more consecutive days or (B) if the Closing shall not have occurred on or before July 15, 2007, by reason of the failure of any condition precedent under Section 7(b) hereof (unless the failure results primarily from Seller itself breaching any representation, warranty or covenant contained in this Agreement).

(b) Effect of Termination. If any Party terminates this Agreement pursuant to Section 11(a) above, all rights and obligations of the Parties hereunder shall terminate without any Liability of any Party to any other Party (except for any Liability of any Party then in breach).

12. Miscellaneous.

(a) No Third-Party Beneficiaries. Except for the Persons expressly named in Section 8, this Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns.

(b) Entire Agreement; Confidentiality Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement among the Parties and supersedes any prior understandings, agreements or representations by or between the Parties, written or oral, to the extent they related in any way to the subject matter hereof. The Confidentiality Agreement shall nevertheless continue in full force and effect.

(c) Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests or obligations hereunder without the prior written approval of the other Party.

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(d) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument.

(e) Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement.

(f) Notices. All notices, requests, demands, claims, and other communications hereunder will be in writing and shall be deemed effectively given (i) upon personal delivery to the Party notified, (ii) five (5) days after deposit with the United States Post Office, by registered or certified mail, postage prepaid, return receipt requested, (iii) one day after deposit with a nationally recognized air courier service such as DHL or Federal Express for next day delivery, or (iv) on the day of facsimile transmission, with confirmed transmission, to the facsimile number shown below (or to such other facsimile number as the Party to be notified may indicate by ten (10) days advance written notice to the other Party in the manner herein provided), provided that notice is also given under clauses (i), (ii) or (iii) above; in any such case addressed to the Party to be notified at the address indicated below for that Party, or at such other address as that Party may indicate by ten (10) days advance written notice to the other Party in the manner herein provided:

If to Seller:	Phoenix Footwear Group, Inc.
	5840 El Camino Real, Suite 106
	Carlsbad, California 92008
	Attn: James R. Riedman, Chairman
	Fax: (760) 602-9684
with a copy to:	Woods Oviatt Gilman LLP
	700 Crossroads Building
	2 State Street
	Rochester, New York 14614
	Attn: Gordon E. Forth, Esq.
	Fax: (585) 987-2901
If to Buyer:	Kellwood Company
	600 Kellwood Parkway
	Chesterfield, Missouri 63017
	Attn: Thomas H. Pollihan
	Fax: (314) 576-3388
with a copy to:	Financo, Inc.
	535 Madison Avenue
	New York, New York 10022
	Attn: Karen Goodman
	Fax: (212) 593-0309

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Any Party may send any notice, request, demand, claim or other communication hereunder to the intended recipient at the address set forth above using personal delivery, expedited courier, messenger service, telecopy, telex or ordinary mail), but no such notice, request, demand, claim or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any Party may change the address to which notices, requests, demands, claims and other communications hereunder are to be delivered by giving the other Parties notice in the manner herein set forth.

(g) Governing Law. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Delaware.

(h) Amendments and Waivers. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by both Parties. No waiver by any Party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence.

(i) Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction.

(j) Expenses. Each of the Parties shall bear its own costs and expenses (including legal fees and expenses) incurred in connection with this Agreement and the transactions contemplated hereby.

(k) Construction. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. All references to dollar amounts are to U.S. dollars.

(l) Incorporation of Exhibits and Schedules. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof.

(m) Submission to Jurisdiction. Each of the Parties submits to the jurisdiction of any state or federal court located in the State of Delaware, in any action or proceeding arising out of or relating to this Agreement and agrees that all claims in respect of the action or proceeding may be heard and determined in any such court. Each Party further agrees not to bring any action or proceeding arising out of or relating to this Agreement in any other court. Each of the Parties waives any defense of inconvenient forum to the maintenance of any action or proceeding so brought and waives any bond, surety, or other security that might be required of

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any other Party with respect thereto. Any Party may make service on any other Party by sending or delivering a copy of the process to the Party to be served at the address and in the manner provided for the giving of notices in Section 11(f) above. Nothing in this Section 11(m), however, shall affect the right of any Party to serve legal process in any other manner permitted by law or at equity. Each Party agrees that a final judgment in any action or proceeding so brought shall be conclusive and may be enforced by suit on the judgment or in any other manner provided by law or at equity.

(n) Time of the Essence. With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence.

[Signature Page Follows]

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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written.

SELLER:
PHOENIX FOOTWEAR GROUP, INC.
By:	/s/ James R. Riedman
Name:	James R. Riedman
Title:	Chairman
BUYER:
KELLWOOD COMPANY
By:	/s/ W. Lee Capps, III
Name:	W. Lee Capps, III
Title:	Chief Operating Officer

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List of Exhibits:

A. Form of PXG Canada Transfer Agreement

B. Working Capital Guidelines

C. Form of Indemnification L/C

D. Form of Escrow Agreement

List of Disclosure Schedules

Section 3(a)(ii)	-	Jurisdictions in Which Royal Robbins is Qualified to do Business
Section 3(a)(iii)	-	Jurisdictions in Which PXG Canada is Qualified to do Business
Section 3(c)	-	Third Party Consents
Section 3(e)	-	Title to the Shares
Section 3(f)	-	Title to Assets
Section 3(h)	-	Events Subsequent to December 30, 2006
Section 3(j)	-	Legal Compliance
Section 3(k)	-	Tax Matters
Section 3(l)	-	Real Property Leases
Section 3(m)(i)	-	Intellectual Property
Section 3(m)(iii)	-	Intellectual Property
Section 3(n)(i)	-	Material Assets of Royal Robbins Business
Section 3(o)	-	Tooling, Forms, Patterns or Similar Assets in Possession of Vendors
Section 3(p)	-	Contracts
Section 3(q)	-	Notes and Accounts Receivable
Section 3(r)	-	List of Insurance Policies
Section 3(s)	-	Litigation
Section 3(w)	-	Employee Benefit Plans
Section 3(x)	-	Guaranties
Section 3(aa)	-	Customers and Suppliers

Schedule of Assets and Liabilities and Schedule of Profit and Loss

-44-

EX-2.2

Exhibit 2.2

AGREEMENT REGARDING ASSIGNMENT OF

BUSINESS ASSETS AND ASSUMPTION OF OBLIGATIONS

This Agreement Regarding Assignment of Business Assets and Assumption of Obligations (hereinafter this “Agreement”) is made and entered into by and between PXG CANADA INC., an Ontario corporation (hereinafter “PXG Canada”) and Canadian Recreation Products, Inc., a Quebec corporation (hereinafter “Buyer”). In this Agreement, PXG Canada and Buyer may be referred to collectively as the “Parties” or individually as a “Party”. Capitalized terms used herein and not defined herein shall have the meaning given thereto in the Stock Purchase Agreement (as defined below).

RECITALS

WHEREAS, Phoenix Footwear Group, Inc. (“Phoenix Footwear”) designs, develops and markets a diversified selection of men’s and women’s dress and casual footwear, belts, personal items, outdoor sportswear and travel apparel, including Royal Robbins branded outdoor sportswear and travel clothing (“Royal Robbins Products”) through its wholly-owned subsidiary, Royal Robbins, Inc. (“Royal Robbins”).

WHEREAS, PXG Canada, which is a wholly-owned subsidiary of Phoenix Footwear, purchases a variety of products from Phoenix Footwear, including Royal Robbins Products, and markets, distributes and sells them in Canada;

WHEREAS, Phoenix Footwear and Kellwood Company (“Kellwood”) have agreed that Kellwood will purchase all outstanding shares of stock of Royal Robbins pursuant to the terms and conditions of the Stock Purchase Agreement dated June 18, 2007 (the “Stock Purchase Agreement”) between Phoenix Footwear and Kellwood; and

WHEREAS, the Stock Purchase Agreement contemplates that concurrent with the closing of the transactions thereunder Buyer, which is a wholly-owned subsidiary of Kellwood, will purchase from PXG Canada all PXG assets (other than as provided below) that relate solely to the portion of PXG Canada’s business which is comprised only of the purchase, marketing, distribution and sale of Royal Robbins Products (the “Royal Robbins Canadian Business”) and the assumption by Buyer from PXG Canada of liabilities associated with that same business, all on the terms and conditions herein;

NOW, THEREFORE, in consideration of the premise set forth above and the mutual agreements, conditions, covenants, promises, representations, undertakings, and warranties contained herein.

1. Assignment of Transferred Assets.

(a) Subject to the terms and conditions of this Agreement and in consideration of the payment of the Purchase Price (as defined below) to PXG Canada by Buyer, PXG Canada shall transfer, assign and convey all of its right, title, interest, and responsibility in and to the all

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of PXG Canada’s assets, properties, rights and claims to the extent exclusively used in or arising from the Royal Robbins Canadian Business, excluding, however, the “Excluded Assets” (as defined below) (collectively, “Transferred Assets) to Buyer effective as of the closing of the transactions contemplated in the Stock Purchase Agreement (the “Transfer Date”). Without limiting the generality of the foregoing, the Transferred Assets shall include each of the following as they exist on the Transfer Date:

(i) All pending contracts and orders for purchase or sale of Royal Robbins Products with respect to the Royal Robbins Canadian Business (the “Assigned Pending Orders”), including but not limited to those orders set forth in the list of vendor orders and customer orders dated June 14, 2007 provided by Phoenix Footwear to Kellwood which are unfulfilled as of the Transfer Date;

(ii) All Royal Robbins Products (including all inventory, product samples and raw materials, if any) located at PXG Canada’s facilities or in-transit to or from PXG Canada’s facilities or held by PXG Canada’s contractors, third-party warehouses or on consignment, in all cases to the extent included in the Closing Date Working Capital set forth in the Final Closing Date Working Capital Schedule;

(iii) All accounts receivable arising exclusively from the sale of Royal Robbins Products with respect to the Royal Robbins Canadian Business to the extent included in the Closing Working Capital set forth in the Final Closing Date Working Capital Schedule;

(iv) All goodwill associated solely with the Royal Robbins Canadian Business;

(v) All books, data and information pertaining exclusively to the Royal Robbins Canadian Business, whether in electronic or written form, including, but not limited to, any and all books, accounting records, audit reports, ledgers, designs, drawings, files, customer lists, papers, records, and research;

(vi) All licenses, permits, and pending applications for such to conduct the Royal Robbins Canadian Business to the extent transferrable and assignable; and

(vii) The assets owned by PXG Canada and identified as such in the list of material assets provided by Phoenix Footwear to Kellwood in Section 3(n)(i) of the Disclosure Schedules to the Stock Purchase Agreement.

Buyer acknowledges that the Management Services Agreement dated January 1, 2006 between PXG Canada and Double J Fashion Group, Inc. (“Double J”) shall not be assigned by PXG Canada or assumed by Buyer under this Agreement.

(b) Buyer expressly acknowledges and agrees that the Transferred Assets do not include any of the following assets (the “Excluded Assets”):

(i) any assets of Phoenix Footwear or its other subsidiaries (other than Royal Robbins);

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(ii) any cash or cash equivalents investments (including stock, debt instruments, options and other instruments and securities), bank deposits, bank accounts, lock boxes and lock box receipts and all certificates of deposit and other bank deposits owned or held by Seller;

(iii) any claims or rights against Double J or any other third parties not expressly described in Sections 1(a)(i) through 1(a)(vii) above;

(iv) the minute books or stock records of Seller;

(v) any all prepaid income taxes, tax receivables or deferred income tax asset;

(vi) any insurance policies and workers compensation benefits and other rights (including indemnification, defense, counterclaim or setoff) and claims and recoveries under actual or potential litigation of Seller against third parties to the extent relating to events prior to the Transfer Date; and

(vii) any assets related to, involving or arising out of PXG Canada’s sale of non-Royal Robbins Products, including, but not limited to, H.S. Trask, Softwalk and Tommy Bahama branded products or any rights in or to the PXG Canada name (or any derivative thereof) or any intellectual property rights (other than owned by Royal Robbins).

(c) Buyer acknowledges and agrees that PXG Canada has not made any representations or extended any warranties whatsoever, express, implied or statutory, with respect thereto, including, without limitation, any implied warranties of title, enforceability or non-infringement and that Buyer shall have no recourse whatsoever with respect to such matters. However, the Parties agree that this acknowledgment does not in any way affect the representations and warranties made by Phoenix Footwear to Kellwood in the Stock Purchase Agreement with respect to such matters.

2. Assumption of Obligations and Liabilities; Deliveries on the Transfer Date.

(a) Subject to the terms and conditions of this Agreement, Buyer hereby acknowledges and agrees that as of the Transfer Date, Buyer shall assume and accept from and discharge, pay and perform in a timely manner on behalf of PXG Canada, only the following debts, liabilities, or responsibilities of PXG Canada and will continue to satisfy and, discharge the same in a timely manner in accordance with their respective terms (collectively the “Assumed Obligations”):

(i) The trade payables and accounts payable relating to the Royal Robbins Canadian Business to the extent set forth in the Final Working Capital Schedule (which shall include in the determination of the Closing Date Working Capital up to U.S. $750,000 of accounts payables to Phoenix Footwear, excluding, however, those payables owed to Phoenix Footwear for anything other than the purchase of Royal Robbins Products) (the “Assumed Payables”);

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(ii) Any past or future claims of PXG Canada’s customers relating to the Royal Robbins Canadian Business incurred by PXG Canada, including warranty claims; and

(iii) PXG Canada’s obligations of performance under the pending contracts and product orders for purchase or sale of Royal Robbins Products, including, but not limited to the Assigned Pending Orders.

(b) Except for the specific Assumed Obligations set forth in Section 2(a) above, Buyer shall not assume and shall not be liable or responsible for any debt, obligation or liability of PXG Canada whether known or unknown, absolute or contingent, mature or unmatured, accrued or unaccrued, liquidated or unliquidated, due or to become due. Without limiting the foregoing, except as expressly set forth in Section 2(a) above, the Buyer shall not assume, undertake or accept, and shall have no responsibility with respect to liabilities and obligations related to or arising from PXG Canada’s ownership of the Transferred Assets or conduct of the Royal Robbins Canadian Business prior to the Transfer Date, including the following as they exist as of the Transfer Date:

(i) For damage or injury (real or alleged) to a person, persons, or property arising from the ownership, possession or use of any Transferred Assets or any Royal Robbins Product shipped through the Transfer Date;

(ii) For violation of any law applicable to PXG Canada’s conduct of the Royal Robbins Canadian Business, including violations of environmental laws, labor laws, and infringement of intellectual property rights;

(iii) With respect to litigation, if any, pending or threatened on or prior to the Transfer Date, including matters disclosed to Buyer; and

(iv) All bank overdrafts.

Buyer shall pay to PXG Canada the Assumed Payables owed to Phoenix Footwear within forty-five (45) days of the Transfer Date.

3. Purchase Price; Allocation; Elections.

(a) The Purchase Price for the Transferred Assets shall be U.S. $3,500,000. The Buyer shall pay the Purchase Price in immediately available funds on the Transfer Date as more specifically provided in Section 4(c) below.

(b) The Purchase Price shall be allocated among the Transferred Assets in accordance with the book value thereof as of the Transfer Date and any excess to the customer list of the Royal Robbins Canadian Business. The Parties agree that they shall prepare and file their respective tax returns in accordance with such allocation.

(c) The Parties will jointly execute, and each of them will file at the time of the determination of the Final Closing Date Working Capital Schedule, an election under Section 22 of the Income Tax Act (Canada), as amended, with respect to the accounts receivables of the Royal Robbins Canadian Business included in the Transferred Assets, which shall be the book value thereof included in the Final Closing Date Working Capital Schedule.

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4. Deliveries on the Transfer Date. On the Transfer Date, the Parties shall make the following deliveries:

(a) PXG Canada shall execute and deliver to Buyer an executed Bill of Sale covering the Transferred Assets in the form attached hereto as Exhibit A (the “Bill of Sale”);

(b) PXG Canada and Buyer shall execute and deliver to one another an Assignment and Assumption Agreement regarding the assignment of the Transferred Assets and the assumption of the Assumed Obligations in the form attached hereto as Exhibit B (the “Assignment and Assumption Agreement”); and

(c) Buyer shall deliver to PXG Canada a wire transfer of immediately available funds in the amount of the Purchase Price to an account designated by PXG Canada to Buyer. The Purchase Price shall be payable in United States dollars.

5. Post-Transfer Date Covenants.

(a) Additional Transfer Documents. Each Party covenants and agrees that it shall cooperate with the other, take such further action, and execute and deliver such further documents, as may be reasonably requested by the other in order to carry out the terms and purposes of this Agreement.

(b) Maintenance of Books and Records. Each of Buyer (or its successor or assigns) and PXG Canada will preserve until at least the seventh anniversary of the Transfer Date all records possessed or to be possessed by it relating to any of the Transferred Assets, the Assumed Obligations or the Royal Robbins Canadian Business prior to the Transfer Date. After the Transfer Date, each of Buyer (or its successor or assign) and PXG Canada (or its successor and assigns) covenant and agree to provide the other with access, upon prior reasonable written request specifying the need therefor, during regular business hours, to the books and records of that Party, but, in each case, only to the extent relating to the Transferred Assets, the Assumed Obligations or the Royal Robbins Canadian Business prior to the Transfer Date. The other Party and its representatives will have the right to make copies of those books and records to the extent relating to the purpose for which such information is requested.

(c) The Parties shall, on the Closing Date, elect jointly under Subsection 167(1) of the Excise Tax Act (Canada), in the form prescribed for the purposes of that subsection, in respect of the sale and transfer of the Transferred Assets hereunder, and the Buyer shall file such election with Revenue Canada Agency within the time set out in Subsection 167(1.1) of such Act. The Buyer will indemnify PXG Canada against any tax, interest or penalties arising from a determination that the conditions for filing the election pursuant to Subsection 167(1) of the Excise Tax Act (Canada) have not been satisfied for any reasons.

6. Bulk Sales Laws. The Parties hereby waive any required compliance with the bulk sales law and any other similar laws in any applicable jurisdiction in respect of the transactions contemplated by this Agreement, including, without limitation, any applicable state or provincial tax law that may require notification of state taxing authorities and related actions in respect of bulk sales of assets outside of the ordinary course of business.

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7. Entire Agreement. This Agreement, and when executed and delivered, the Bill of Sale and Assignment and Assumption Agreement, embodies the entire agreement and understanding between the Parties hereto relating to the subject matter hereof, and all prior or contemporaneous negotiations, agreements, and understandings, oral or written, are hereby revoked, cancelled, and rescinded, and are all merged herein and superseded hereby. The provisions of this Agreement may be waived, altered, amended, modified, or repealed, in whole or in part, only on the written agreement of both Parties to this Agreement.

8. Notices. All notices, requests, demands, claims, and other communications hereunder will be in writing and shall be deemed effectively given (i) upon personal delivery to the Party notified, (ii) five (5) days after deposit with the post office, by registered or certified mail, postage prepaid, return receipt requested, (iii) one day after deposit with a nationally recognized air courier service such as DHL or Federal Express for next day delivery, or (iv) on the day of facsimile transmission, with confirmed transmission, to the facsimile number shown below (or to such other facsimile number as the Party to be notified may indicate by ten (10) days advance written notice to the other Party in the manner herein provided), provided that notice is also given under clauses (i), (ii) or (iii) above; in any such case addressed to the Party to be notified at the address indicated below for that Party, or at such other address as that Party may indicate by ten (10) days advance written notice to the other Party in the manner herein provided:

If to Buyer:	Canadian Recreation Products, Inc.
	1224 Fern Ridge Parkway
	St. Louis, MO 63141
	Attn: President
	Fax: (314) 576-8001
with a copy to:	Kellwood Company
	600 Kellwood Parkway
	Chesterfield, MO 63017
	Attn.: General Counsel
	Fax: (314) 576-3388
If to PXG Canada:	PXG Canada Inc.
	5575 Royalmount Avenue
	Mount Royal, Quebec H4P 1J3
with a copy to:	Phoenix Footwear Group, Inc.
	5840 El Camino Real, Suite 106
	Carlsbad, California 92008
	Attn: James R. Riedman, President
	Fax: (760) 602-9684

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Any Party may send any notice, request, demand, claim or other communication hereunder to the intended recipient at the address set forth above using personal delivery, expedited courier, messenger service, telecopy, telex or ordinary mail), but no such notice, request, demand, claim or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any Party may change the address to which notices, requests, demands, claims and other communications hereunder are to be delivered by giving the other Parties notice in the manner herein set forth.

9. Succession and Assignment. Upon written notice, this Agreement may be assigned by either Party without the other Party’s prior written consent; provided, however, that an assignment by either Party shall not constitute a novation and the assigning Party shall remain fully liable and responsible for all of its responsibilities and obligations under this Agreement following any such assignment. This Agreement and each of its provisions shall be binding on and inure to the benefit of the Parties hereto, their respective successors, and permitted assigns.

10. Construction. The terms of this Agreement have been negotiated by the Parties hereto and the language used in this Agreement shall be deemed to be the language chosen by the Parties to express their mutual intent. The Parties agree that this Agreement and any amendments or exhibits hereto shall be construed without regard to any presumption or rule requiring construction against the Party causing such instrument or any portion thereof to be drafted, or in favor of the Party receiving a particular benefit under the Agreement. No rule of strict construction shall be applied against any Party.

11. Date and Delivery of Agreement; Termination. Notwithstanding anything to the contrary contained in this Agreement, the Parties hereto intend that this Agreement shall be deemed effective, executed, and delivered for all purposes under this Agreement, and for the calculation of any statutory time periods as of the date of the closing of the transactions under the Stock Purchase Agreement, and that this Agreement shall terminate concurrently with the termination of the Stock Purchase Agreement.

12. Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction.

13. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall not be effective until the execution and delivery between each of the Parties hereto of at least one set of counterparts. The Parties authorize each other to detach and combine original signature pages and consolidate them into a single identical original of this Agreement. Any one of such completely executed counterparts shall be sufficient proof of this Agreement. Facsimile and electronic signatures shall be deemed originals for purposes of this Agreement.

14. Waivers and Amendments. No waiver by any Party of any provision of this Agreement will be deemed a waiver of any other provision hereof or of any subsequent breach by any other Party of the same or any other provision. Any Party’s consent to, or approval of any act will not be deemed to render unnecessary the obtaining of that Party’s consent to or approval of any subsequent act by the Party seeking consent. Any amendment to this Agreement will be effective only upon the written consent of both parties.

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15. Governing Law. This Agreement will be governed by and construed under the laws of the Province of Ontario and the federal laws of Canada applicable therein, irrespective of choice-of-law principles.

16. Exclusive Remedies. Except for equitable remedies, including specific performance, the Parties agree that the exclusive remedy(ies) for any breach, violation or default under this Agreement shall be Kellwood’s rights and remedies against Phoenix Footwear under the Stock Purchase Agreement, and neither Kellwood nor Buyer shall have any other remedy conferred by law or conferred under any other documents (including this Agreement) between PXG Canada and Buyer shall be available to the Parties. The Parties further agree that Phoenix Footwear (as to PXG Canada only) and Kellwood (as to Buyer only) shall serve as agents and attorneys-in-fact for the Parties and shall act for and on behalf of PXG Canada and Buyer to make all decisions, determinations and agreements with respect to the terms and conditions of this Agreement (and any agreements or documents delivered in connection herewith) and the Stock Purchase Agreement, including, without limitation, to give and receive notices and communications on behalf of Parties as set forth in this Agreement, to enforce any rights or remedies under this Agreement or the Stock Purchase Agreement and to otherwise take all actions necessary or appropriate in their judgment for the accomplishment of the foregoing.

[SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, each Party has signed this Agreement indicating its assent and agreement hereto, and also indicating the date of signing.

CANADIAN RECREATION PRODUCTS, INC.
By:	/s/ W. Lee Capps, III
Name:	W. Lee Capps, III
Title:	Senior Vice President Finance
Date:	June 18, 2007
PXG CANADA INC., an Ontario corporation
By:	/s/ James R. Riedman
Name:	James R. Riedman
Title:	Chairman and CEO
Date:	June 18, 2007

LIST OF SCHEDULES AND EXHIBITS

Exhibit A	-	Bill of Sale
Exhibit B	-	Assignment and Assumption Agreement

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EX-10.2

Exhibit 10.2

IRREVOCABLE STANDBY LETTER OF CREDIT NO. SB-910538-2000

ISSUER:	MANUFACTURERS AND TRADERS TRUST COMPANY TRADE SERVICES ONE FOUNTAIN PLAZA - 2ND FLOOR BUFFALO, NEW YORK 14203-1495
ADVISING BANK:	BANK OF AMERICA, N.A. FLEET WAY MAIL CODE: PA6-580-02-30 SCRANTON, PA 18507
ISSUE DATE:	JULY 2, 2007
BENEFICIARY:	KELLWOOD COMPANY, UNDER THE STOCK PURCHASE AGREEMENT DATED JUNE 18, 2007 BETWEEN PHOENIX FOOTWEAR GROUP, INC., AS SELLER AND KELLWOOD COMPANY, AS BUYER
RE:	LETTER OF CREDIT ISSUED IN CONNECTION WITH SECTION 2(F) OF THE STOCK PURCHASE AGREEMENT DATED JUNE 18, 2007 BETWEEN PHOENIX FOOTWEAR GROUP, INC., AS SELLER, AND KELLWOOD COMPANY, AS BUYER, TO FUND INDEMNIFICATION PAYMENTS DUE FROM SELLER TO BUYER THEREUNDER
APPLICANT:	PHOENIX FOOTWEAR GROUP, INC. 5840 EL CAMINO REAL, SUITE 106 CARLSBAD, CALIFORNIA 92008
STATED EXPIRATION DATE:	JANUARY 2, 2009
MAXIMUM STATED AMOUNT:	$3,000,000 (subject to reduction as provided below)

Manufacturers and Traders Trust Company (the “Issuer”) hereby issues this Irrevocable Standby Letter of Credit (the “Credit”) for the account of Phoenix Footwear Group, Inc. (the “Applicant”) in favor of Kellwood Company (the “Beneficiary”) under the Stock Purchase Agreement dated June 18, 2007 between Applicant and Beneficiary (the “Stock Purchase Agreement”).

Amount: The Credit is available in an aggregate amount (the “Maximum Stated Amount”) not to exceed $3,000,000 which shall be automatically reduced on July 2, 2008 to the greater of (i) $1,500,000, and (ii) the amount of any Unresolved Claims, as defined in Exhibit A below, of which the Beneficiary gives the Issuer written notice of by delivery to it of a certificate in the form of Exhibit A annexed hereto prior to July 2, 2008 (“Unresolved Claims Notice”). In no event, however, shall the Maximum Stated Amount be increased or at any time be greater than $3,000,000 less the amount of all previous Draws honored by the Issuer.

Requisites for Drawing: Issuer hereby agrees with the Beneficiary that any request for a Draw (each a “Draw Request”) under and in compliance with the terms of this Credit (each a “Draw” or a “Drawing”) shall be duly honored by Issuer, upon presentation in the form and by the means provided below on a Business Day before the Stated Expiration Date. A “Business Day” means any day other than (i) a Saturday or Sunday, or (ii) a day on which the commercial banks in Buffalo, New York, are authorized by law or executive order to close. Draws shall be paid in immediately available United States funds.

Each Draw Request under the Credit shall be documented by:

1. The Beneficiary’s certificate in the form of Exhibit B or Exhibit C on Beneficiary’s letterhead bearing the clause “Drawn under M&T Bank Irrevocable Standby Letter of Credit Number SB-910538-2000”, stating the amount of the Draw and executed on behalf of Beneficiary (each a “Draw Certificate”) and delivered simultaneously to Issuer and Applicant; and

2. For any Drawing which exhausts the Maximum Stated Amount of this Letter of Credit, the original of this Credit shall accompany the Beneficiary’s Draw Certificate.

Each Drawing honored shall automatically reduce the Maximum Stated Amount. In no event shall the aggregate Draws hereunder exceed the Maximum Stated Amount.

Issuer shall have no duty to verify the correctness or completeness of any certificate or instructions delivered to Issuer by Beneficiary, but rather may rely without question on any Draw Certificate as to the amount for any Drawing.

Notices; Timing of Payments: All notices, requests, demands, claims and other communications hereunder will be in writing and shall be deemed effectively given (i) upon personal delivery to the party notified, (ii) five (5) days after deposit with the United States Post Office, by registered or certified mail, postage prepaid, return receipt requested, (iii) one day after deposit with a nationally recognized air courier service such as DHL or Federal Express for next day delivery, or (iv) on the day of facsimile transmission, with confirmed transmission, to the facsimile number shown below (or to such other facsimile number as the party to be notified may indicate by ten (10) days advance written notice to the other parties in the manner herein provided), provided that notice is also given under clauses (i), (ii) or (iii) above; in any such case addressed to the party to be notified at the address indicated below for that party, or at such other address as that party may indicate by ten (10) days advance written notice to the other parties in the manner herein provided:

Manufacturers and Traders Trust Company

Trade Service Department

One Fountain Plaza - 2^ND Floor

Buffalo, New York 14203-1495

Telephone: 716-848-3655

Telecopy: 716-848-3777

Phoenix Footwear Group, Inc.

El Camino Real, Suite 106

Carlsbad, California 92008

Attention: James R. Riedman, Chairman of the Board

Telephone: 760-602-1200

Telecopy: 760-602-9684

Kellwood Company

600 Kellwood Parkway

Chesterfield, Missouri 63017

Attention: Thomas H. Pollihan

Fax: 314-576-3388

No notice, request, demand, claim or other communication shall be deemed to have been duly given unless and until it is actually received by the intended recipient.

Payment Instructions: Draws shall be paid by means of electronic funds transfer, provided that the Beneficiary shall provide complete funds transfer instructions in advance in the form requested by Issuer, or on the appropriate Draw Certificate. The Beneficiary is hereby notified that in executing such payment order, Issuer will rely on the accuracy of the instructions provided by the Beneficiary on the appropriate Draw Certificate, particularly the account and routing and transit numbers provided by the Beneficiary. Issuer has no duty to refer to names and has no liability for losses resulting from errors in the Beneficiary’s instructions. The Beneficiary is requested to use extraordinary care in providing electronic funds transfer instructions.

Expiration:

This Credit shall expire on the earliest of:

(i) 3:00 p.m. Eastern Time on January 2, 2009 (the “Stated Expiration Date”); and

(ii) the date on which Issuer honors a Drawing which exhausts the Maximum Stated Amount.

This Letter of Credit sets forth in full the undertaking of Issuer, and such undertaking shall not in any way be modified, amended, amplified or limited by reference to any documents, instrument or agreement referred to herein, and any such reference shall not be deemed to incorporate herein by reference any document, instrument or agreement.

ALL BANKING CHARGES ARE FOR THE ACCOUNT OF THE APPLICANT.

This Credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 Revision) International Chamber of Commerce Publication No. 500 (the “UCP”). As to matters not governed by the UCP, this Credit is subject to the laws of New York State as in effect from time to time.

MANUFACTURERS AND TRADERS TRUST COMPANY
By:	/s/ Claudia L. Conroy
Name:	Claudia L. Conroy
Title:	Vice President and Sr. Manager
By:	/s/ Annette Bucella
Name:	Annette Bucella
Title:	Assistant Vice President and Assistant Manager

EX-10.3

Exhibit 10.3

TERMINATION AGREEMENT

This Termination Agreement is made as of July 3, 2007 by and among Manufacturers and Traders Trust Company (“Agent”), as Administrative Agent for the Lenders (“Lenders”) described in the Credit Agreement referenced below and Phoenix Footwear Group, Inc. (“Borrower”).

WHEREAS, Borrower, the Agent, and the Lenders entered into an Amended and Restated Credit Facility Agreement as of November 13, 2006, as amended (the “Credit Agreement”, with defined terms therein being applicable hereto), pursuant to which the Lenders made certain credit accommodations to the Borrower and its wholly owned subsidiaries, including Revolving Credit Loans, the First Term Loan A, the First Term Loan B, and issuance of Letters of Credit, including those set forth on Exhibit A (the “Royal Supplier L/Cs”) issued for the benefit of vendors of the Royal products, and

WHEREAS, Royal Robbins, Inc. (“Royal”) and PXG Canada, Inc. (“PXG Canada”) each are wholly owned subsidiaries of Borrower, and

WHEREAS, the Borrower secured its obligations under the Credit Agreement with a pledge of its interests in the stock of its subsidiaries, including Royal, pursuant to a certain Pledge Agreement (the “Pledge Agreement”) dated as of November 13, 2006 made by the Borrower in favor of the Agent for the benefit of the Lenders, and

WHEREAS, in connection with receiving certain benefits related to the Credit Agreement, Royal and PXG Canada guaranteed the obligations of the Borrower to the Lenders under the Credit Agreement pursuant to a certain Unlimited Guaranty and Indemnity Agreement (the “Guaranty”) dated as of November 13, 2006 and made in favor of the Agent for the benefit of the Lenders by the signatories thereto, including among others Royal and PXG Canada, and

WHEREAS, Royal and PXG Canada secured their respective obligations under the Guaranty with grants of security interests and liens in all of their respective assets pursuant to the following agreements:

(a) Amended and Restated General Security Agreement dated as of November 13, 2006 and made in favor of the Agent for the benefit of the Lenders by the signatories thereto, including among others Royal and PXG Canada (the “2006 Security Agreement”),

(b) Deed of Hypothec dated November 17, 2006 by and between PXG Canada and the Agent (the “Deed”),

(c) Movable Hypothec on a Specific Claim dated November 17, 2006 between PXG Canada and the Agent (the “Movable Hypothec”),

(d) 25% Collateral Mortgage Demand Bond dated November 17, 2006 made by PXG Canada (the “Bond”, with the Deed, the Movable Hypothec, the Bond, and all related documents and agreements called the “Canadian Agreements”),

(e) Trademark Security Agreement dated June 29, 2005 made between Royal and Manufacturers and Traders Trust Company, recorded with the United States Patent and Trademark Office on December 23, 2005), reaffirmed by Confirmation of Certain Security Documents made as of August 3, 2005 by Royal and others in favor of the Agent for the benefit of the Lenders, and further reaffirmed by Reaffirmation of Security Agreements in Trademarks dated November 13, 2006 made by Royal in favor of the Agent for the benefit of the Lenders (collectively, the “Royal Trademark Agreement”), and

(f) Trademark Security Agreement dated June 29, 2005 made between PXG Canada and Manufacturers and Traders Trust Company, reaffirmed by Confirmation of Certain Security Documents made as of August 3, 2005 by PXG Canada and others in favor of the Agent for the benefit of the Lenders, and further reaffirmed by Reaffirmation of Security Agreements in Trademarks dated November 13, 2006 made by Royal in favor of the Agent for the benefit of the Lenders (collectively, the “PXG Canada Trademark Agreement”),

and

WHEREAS, the Borrower and Kellwood Company (“Purchaser”) have entered into a Stock Purchase Agreement dated as of June 18, 2007 pursuant to which Purchaser will purchase all of the stock of Royal, and certain PXG Canada assets related to Royal, from Borrower (the “Transaction”), and

WHEREAS, pursuant to and as required by the Credit Agreement, the Agent, for itself and on behalf of the Lenders consented to the Transaction by letter to the Borrower dated June 18, 2007 (the “Consent”), and

WHEREAS, in consideration of the application of net proceeds of the Transaction (expected to be approximately $37,000,000) to the payment of certain obligations under the Credit Agreement as provided below, the Agent on behalf of the Lenders has agreed to release the guarantee of Royal and the security interests and liens in the assets of Royal and the assets of PXG Canada being transferred as part of the Transaction, and

WHEREAS, as part of the Transaction, Purchaser has caused a letter of credit (the “Back-Up L/C”) to be issued for its account and the ratable benefit of the Agent and the Lenders to be drawn upon concurrent with draws on the Royal Supplier L/Cs for the ratable reimbursement of the Lenders therefor, and in consideration thereof, the Agent for and on behalf of the Lenders has agreed to have recourse only to the Back-Up L/C and no recourse to Borrower and each of its subsidiaries or their respective assets with respect to

any Reimbursement Obligations or other Obligations related to the Royal Supplier L/Cs; provided, however the Agent and the Lenders shall continue to have full recourse to the Borrower and each of its subsidiaries except Royal as to Royal Supplier L/C #709931 in favor of Keys International, Ltd. in the amount of $674,935.97 and #709932 in favor of Keys International, Ltd. in the amount of $39,130.30 (the “Continuing L/Cs”), and

NOW THEREFORE, the Agent for itself and on behalf of the Lenders hereby agrees as follows:

1. The Consent is and remains effective. Except as expressly provided herein and in the Consent, the Credit Agreement and the Loan Documents remain in full force and effect, no amendments or waivers are implied hereby, and all rights and remedies of the Agent and Lenders related thereto shall remain in full force and effect.

2. The Borrower hereby authorizes and directs the Agent to debit the Borrower’s account with the Agent for the net proceeds of the Transaction. Notwithstanding anything in the Credit Agreement to the contrary, such net proceeds shall be applied for the ratable benefit of the Agent and Lenders first to the repayment in full of the First Term Loan B Obligations, second to the First Term Loan A Obligations, and the balance to the Revolving Credit Obligations. No prepayment penalty or premium shall be due in connection therewith.

3. The 2006 Security Agreement is hereby terminated as it relates to Royal and Royal’s assets. The 2006 Security Agreement is hereby terminated as it relates to those assets of PXG Canada transferred to the Purchaser as part of the Transaction. The 2006 Security Agreement shall remain in full force and effect as to all parties thereto except for Royal and PXG Canada, and shall remain in full force and effect as to the assets of PXG Canada not transferred to the Purchaser as part of the Transaction.

4. Neither the Agent nor the Lenders shall have any further right, interest, or claim under or pursuant to the Canadian Agreements with respect to those assets of PXG Canada transferred to the Purchaser as part of the Transaction. The Canadian Agreements shall remain in full force and effect as to the assets of PXG Canada not transferred to the Purchaser as part of the Transaction.

5. The Royal Trademark Agreement is hereby terminated.

6. The PXG Canada Trademark Agreement is hereby terminated as it relates to those assets of PXG Canada transferred to the Purchaser as part of the Transaction. The PXG Canada Trademark Agreement shall remain in full force and effect as to the assets of PXG Canada not transferred to the Purchaser as part of the Transaction.

7. The Pledge Agreement is hereby terminated as it relates to the capital stock of Royal. The Pledge Agreement shall remain in full force and effect as to all other capital stock pledged thereunder.

8. The Guaranty is hereby terminated as it relates to Royal. The Guaranty shall remain in full force and effect as to all parties thereto except for Royal.

9. The Agent and Lenders shall have recourse only to the Back-Up L/C, and shall have no recourse to the Borrower and each of its subsidiaries and their respective assets with respect to the Letter of Credit Obligations and other Obligations of any kind (including whether outstanding pursuant to the Credit Agreement or another agreement with Agent or Manufacturers and Traders Trust Company), in each case related to the Royal Supplier L/Cs and any draws thereon; provided, however, that the Agent and Lenders shall continue to have no recourse to the Back-Up L/C and shall have full recourse to the Borrower, each of its subsidiaries, and their respective assets with respect to Letter of Credit Obligations and other Obligations of any kind (including whether outstanding pursuant to the Credit Agreement or another agreement with Agent or Manufacturers and Traders Trust Company) related to the Continuing L/Cs and any draws thereon. The Royal Supplier L/Cs, except the Continuing L/Cs, shall not be considered Letters of Credit, or Letters of Credit Obligations under the Credit Agreement. The availability under the Revolving Credit Commitment shall not be reduced in any respect as a result of the Royal Supplier L/Cs with the exception of the Continuing L/Cs. The Purchaser shall be a third party beneficiary of the Agent and Lender’s agreement that they shall have no recourse to the Back-Up L/C related to the Continuing L/Cs and any draws thereon.

10. The Agent shall take such further actions, and execute and deliver such further documents and agreements, as may be reasonably necessary and requested by the Borrower and Purchaser in order to carry out the expressed intentions of this Termination Agreement, including but not limited to filing applicable UCC termination statements.

11. This Termination Agreement shall be governed by the laws of the State of New York, including Section 5-1401 of the General Obligations Law of such State.

12. The Agent makes no representations or warranty of any kind or nature regarding the guaranties, security interests, pledges, or assets referenced herein.

13. This Termination Agreement shall be binding upon, and shall inure to the benefit of, the successors and assigns of the Agent, Lenders, and Borrower. This Termination Agreement may not be amended or modified without the written consent of the Agent and Borrower.

14. This Termination Agreement may be executed in counterparts, each of which shall be deemed to be an original.

IN WITNESS WHEREOF, the Agent has caused this Termination Agreement to be executed by its duly authorized officer as of the date first above written.

[Remainder of page left blank – signature pages follow]

MANUFACTURERS AND TRADERS TRUST COMPANY, AS ADMINISTRATIVE AGENT FOR ITSELF AND ON BEHALF OF THE LENDERS
By:	/s/ John C. Morsch
	John C. Morsch
	Administrative Vice President

PHOENIX FOOTWEAR GROUP, INC.
By:	/s/ James R. Riedman
	James R. Riedman
Title:	Chairman

EX-31.1

EXHIBIT 31.1

CHIEF EXECUTIVE OFFICER CERTIFICATIONS

I, Cathy B. Taylor, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Phoenix Footwear Group, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Cathy B. Taylor
Name:	Cathy B. Taylor
Title:	President and Chief Executive Officer
Date:	August 14, 2007

A signed original of this Certification has been provided to Phoenix Footwear Group, Inc. and will be retained by Phoenix Footwear Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-31.2

EXHIBIT 31.2

CHIEF FINANCIAL OFFICER CERTIFICATIONS

I, Kenneth E. Wolf, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Phoenix Footwear Group, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Kenneth E. Wolf
Name:	Kenneth E. Wolf
Title:	Chief Financial Officer
Date:	August 14, 2007

A signed original of this Certification has been provided to Phoenix Footwear Group, Inc. and will be retained by Phoenix Footwear Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT

TO 18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of Phoenix Footwear Group, Inc., (the “Company”), does hereby certify with respect to the Quarterly Report of the Company on Form 10-Q for the quarter ended June 30, 2007, as filed with the Securities and Exchange Commission (the “10-Q Report”), that:

(1) the 10-Q Report fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) the information contained in the 10-Q Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

The undersigned have executed this Certification effective as of August 14, 2007.

/s/ Cathy B. Taylor

Cathy B. Taylor

President and Chief Executive Officer

/s/ Kenneth Wolf

Kenneth Wolf

Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Phoenix Footwear Group, Inc. and will be retained by Phoenix Footwear Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.