FORM 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

(Mark One)

Commission file number:  33-74876-D

SPORT-HALEY, INC.

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code:  (303) 320-8800

Securities registered pursuant to Section 12(b) of the Exchange Act:

Securities registered pursuant to section 12(g) of the Exchange Act:

Common Stock, no par value per share

Indicate by checkmark 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 ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).Yes o No ý

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

As of December 31, 2004, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the 2,306,635 shares of Common Stock (the Registrant’s only common equity) held by non-affiliates was $10,541,000 based on the closing sale price of the Registrant’s Common Stock on the Nasdaq National Market® on such date. For purposes of the foregoing calculation only, each of the Registrant’s officers and directors is deemed to be an affiliate. This determination of affiliate status is not a conclusive determination for other purposes.

There were 2,770,252 shares of the Registrant’s Common Stock outstanding at the close of business on September 8, 2005.

DOCUMENTS INCORPORATED BY REFERENCE:

None

PART I

ITEM 1.  BUSINESS

General

Sport-Haley, Inc. (also the “Company”) designs, sources, markets and distributes men’s and women’s fashion golf apparel and outerwear under the SPORT HALEY™ and Ben Hogan® labels. Our fashion golf apparel collections, known for their innovative designs, quality fabrics, generous fits and classic styles, are primarily marketed in the premium and mid-price markets, through a network of independent sales representatives and distributors, to golf professional shops, country clubs, resorts and specialty retail stores, and to corporate, collegiate and other markets, throughout the United States and by certain distributors within international markets. We distribute Ben Hogan® apparel pursuant to a license agreement with Callaway Golf Company (“Callaway”). Appeal for the SPORT HALEY™ and Ben Hogan® brand names are enhanced because golf professional shops, country clubs and resorts generally prefer to sell quality apparel that is not broadly distributed in other retail markets. We have focused our marketing efforts on expanding brand recognition and appeal for SPORT HALEY™ and Ben Hogan® apparel by continually improving the styling, sourcing and fabrications of our garments in order to continue to offer our customers high-quality garments at competitive prices. Other services that we offer include optional custom embroidering of our apparel with a personalized club, resort or corporate logo. Sport-Haley, Inc. was incorporated in Colorado in January 1991. The principal executive offices are located at 4600 East 48th Avenue, Denver, Colorado 80216-3215, and the main telephone number is (303) 320-8800.

Products and Product Design

SPORT HALEY™ branded apparel is currently comprised almost exclusively of women’s garments and accessories, designed by utilizing classic styles with contemporary influences intended to develop and maintain brand recognition and loyalty, on or off the golf course. While each product in the SPORT HALEY™ apparel line is sold separately, it is designed in groups with coordinated styles, color schemes and fabrics to encourage customers to purchase multiple garments. SPORT HALEY™ branded apparel is manufactured using a variety of fabrics and weave patterns, including interlock, pique, French terry, jersey and twill, and may feature a unique trim, a special fabric finish or extra needlework. SPORT HALEY™ branded apparel is marketed in the premium and mid-price markets. Our SPORT HALEY™ men’s apparel for the spring 2006 season, introduced in July 2005, consists of four separate styles of polo shirts in several separate colors each plus one outerwear piece in five separate colors.

The following table presents the suggested retail price ranges for various HALEY® apparel items:

Ben Hogan® men’s apparel is designed utilizing elegant time-honored classic styles intended to garner nearly instantaneous brand recognition. While each product in the Ben Hogan® apparel line is sold separately, it is designed in groups with coordinated styles, color schemes and fabrics to encourage customers to purchase multiple garments. Ben Hogan® apparel is manufactured using a variety of fabrics, including wool, silk and cashmere, and weave patterns, including pique, jersey and twill, and most pieces feature a unique trim, a special fabric finish or extra

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needlework. Ben Hogan® men’s apparel is marketed in the premium-price markets to elite golf professional shops, upscale resorts and exclusive department stores.

The following table presents the suggested retail price ranges for various Ben Hogan® apparel items:

We closely coordinate the designing functions with our sales and production operations. The process for our design function for each collection of garments is a continual cycle of selecting fabric and weave patterns, coloring, styling, and sewing techniques, which includes supervising the production of prototype garments. We primarily utilize in-house designers to develop our apparel collections. Our design staff is responsible for negotiating price and minimum quantities with suppliers, arranging for pattern and sample manufacturing, and coordinating finished goods delivery schedules with production personnel. The design staff also supervises the quality controls for inspection of fabric samples, as well as the testing of fabric samples for die lots, shrinkage and colorfastness. Key persons within our design and production staffs periodically visit international and domestic factories that produce SPORT HALEY™ and Ben Hogan® apparel in order to assure that quality expectation standards and production schedules are met or exceeded.

Finished apparel is generally received at our warehouse, embroidery and distribution facilities in Denver, Colorado. Some apparel items, primarily shirts and tops, are embroidered with the SPORT HALEY® or Ben Hogan® sleeve logo. Approximately 80% of men’s apparel is custom embroidered with a golf course, country club, resort or company logo, whereas only approximately 30% of women’s apparel is similarly embroidered. We maintain an electronic library of over 10,000 custom logos and utilize ten computer-controlled embroidering machines, which cumulatively have the capacity to embroider up to 4,000 custom logos each day. After being embroidered to the customer’s specifications, apparel receives a final inspection by quality assurance personnel. Generally, customer orders are packaged and shipped from our Denver, Colorado facility.

Sales and Marketing

Overview. We continually implement marketing strategies designed to enhance our position as a high-quality provider of fashion golf apparel by capitalizing on the market awareness of the SPORT HALEY™ and Ben Hogan® brand names to establish, maintain and improve distribution channels. We implement these strategies by: (i) enhancing distribution channels through our network of independent wholesale sales representatives in an effort to add new golf professional shops to our customer base and maximize purchases from existing customers; (ii) diversifying product lines by developing new styles and designs that are natural variations on our existing apparel designs; and, (iii) intensifying marketing efforts in the premium, mid-priced and specialty retail markets.

 In fiscal 2005, 53% of our apparel sales were comprised of Ben Hogan® apparel, and SPORT HALEY™ garments and accessories accounted for 47% of our apparel sales. No single customer accounted for 5% or more of our fiscal 2005 net sales.

Golf Professional Shops, Country Clubs and Resorts. Domestic sales of SPORT HALEY™ and Ben Hogan® apparel are solicited primarily through a network of approximately 30 independent wholesale sales representatives that sell the apparel, on a commission basis, mainly to golf professional shops at country clubs, resorts, exclusive department stores and specialty retail stores in all of the 50 United States. Approximately 90% of our independent sales representatives market both our SPORT HALEY™ and Ben Hogan® apparel lines. The

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independent representatives, many of whom may also market other golf-related items, are responsible for generating new business and serving customers within specific geographic territories. Since January 1997, we have maintained buying programs with various entities whereby the participating golf professional shop operators may purchase apparel directly from us in accordance with specific group programs. The group programs accounted for about 25% of our gross sales in fiscal 2005. International sales are made through distributors in the United Kingdom, Caribbean Islands, Mexico and Japan, and to certain U.S. military bases overseas. Historically, the vast majority of our sales have been to domestic customers. International sales represented less than 1% of our net sales in fiscal 2005.

Our executive management continues to attempt to expand the international sales of Ben Hogan® apparel among the certain international territories specified within the license agreement by establishing and maintaining distribution agreements with individual distributors in the respective markets. However, the actual growth we have achieved within those markets has been minimal.

Our sales and marketing executives are responsible for implementing marketing plans and sales programs, coordinating our network of independent wholesale sales representatives, providing customer service support and participating in industry tradeshows. Our sales and marketing executives support the sales activities of our independent sales representatives and distributors by personally assisting and training the representatives, supporting their participation in regional tradeshows, assigning specific customer service personnel to assist them within specific geographic regions, advancing the distribution of sample garments, providing detailed catalogs that present pricing, sizing and style options for each collection of garments, and providing access to a private electronic network designed to expedite sales order processing. Via personal computers, each sales representative has access to current and future inventory availability and may create and transmit orders from remote locations. Remote computer access enhances the representatives’ order processing speed and accuracy and reduces the risk of placing customer orders that cannot be timely delivered. The electronic network also interfaces with our comprehensive management information system that provides key sales order data to assist management with planning, production scheduling, sales trends and cost controls.

Information regarding our SPORT HALEY™ and Ben Hogan® brands, as well as general corporate information, may be found on our respective websites. The websites were designed to individually portray the design images inherent in our SPORT HALEY™ and Ben Hogan® brands. The SPORT HALEY™ site, located at www.sporthaley.com, utilizes a distinctive contemporary and feminine feel. The Ben Hogan® site, located at www.benhoganapparel.com, generates a masculine sense through the use of dark rich colors and club house photos of various exclusive country clubs. The corporate site, located at www.sporthaleyinc.com, includes a basic corporate overview and links to pertinent investor relations information. Each of the websites contains active links to one another. The SPORT HALEY™ and Ben Hogan® websites each include a glimpse of current and future collection offerings, design philosophies and locator systems that can direct retail customers to establishments that sell our apparel and wholesale customers to our independent sales representative in their respective geographic area. While we have not been able to quantify the effectiveness of the locator systems, we believe that they enhance our marketing efforts by enabling the end consumer to find our product lines in their area, thereby creating “pull through” sales for our current retailers and affording new customers easy access to contact information for our independent sales representative in their respective geographic region.

We introduce our distinctive SPORT HALEY™ and Ben Hogan® golf apparel collections for the fall selling season at a major golf industry tradeshow that is generally held in January of each year in Orlando, Florida. Because many buyers for golf resorts and professional shops attend this particular tradeshow, we usually book a significant number of customer orders at or following the show. Retailers attending the tradeshow also provide us with direct feedback regarding apparel designs, fabrics, styles, fashion trends and other information necessary to assist management with the preparation of sales forecasts and production schedules.

In order to enhance the visibility of our SPORT HALEY™ and Ben Hogan® apparel, we may from time to time establish endorsement agreements with a limited number of PGA and LPGA professionals. In accordance with

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an endorsement agreement, we may compensate the respective professional with apparel allowances, cash and/or other compensation.

We periodically advertise our SPORT HALEY™ and Ben Hogan® apparel in several separate golf industry publications, including those that are distributed primarily to operators of golf professional shops. We also expend a portion of our advertising budget to support the sales activities of our independent sales representatives by supporting their participation in regional tradeshows. International distributors provide and pay for advertising, if any, in their respective geographic territories. In accordance with the license agreement, Callaway Golf Company also advertises the Ben Hogan® brand in golf trade industry publications and through other golf marketing channels.

We maintain a program that provided select customers with display fixtures dedicated to featuring SPORT HALEY™ brand apparel. We also maintain a program that provides certain of our customers with distinctive fixtures dedicated to featuring Ben Hogan® apparel collections. Upon the customer’s agreement to maintain a pre-determined amount of inventory for a specified period of time, the fixtures became the property of the customer for a nominal delivery fee. The display fixture programs encourage customers to reorder a sufficient amount of garments to maintain prominent displays of large selections of SPORT HALEY™ and Ben Hogan® apparel in their stores.

Corporate Market. While we believe that there is a natural synergy between the golf apparel market and the corporate apparel market, because both markets can be served from some of the same inventory, we do not maintain inventory levels sufficient to generate significant sales within corporate markets. We have developed a limited number of direct corporate accounts, and have historically pursued this market primarily though promotional-product companies that source and distribute a variety of products for corporate fulfillment programs and special events. These promotional-product companies generally produce corporate catalogs containing apparel and other products that may be used for employee recognition, customer appreciation and other corporate purposes. A promotional-product company may also source and supply a specific product or products for special events sponsored by a corporation. SPORT HALEY™ and Ben Hogan® apparel collections are currently included, or confirmed to be included, in a variety of catalogs, including catalogs for a few Fortune 500 companies. We do not enter into formal agreements or contracts with these promotional-product companies, but we do agree that we will make available the products advertised in any specific catalog during the period the catalog is being used, generally a one-year period. Because corporate apparel inventory must be maintained for a longer period of time and the classic styles of corporate apparel are generally not designed for one specific selling season, we typically feature only one collection of garments in our corporate collections each year. Corporate sales are made periodically throughout the year, and thus corporate sales are not historically quantifiable within the fixed or seasonal selling periods common to the other SPORT HALEY™ and Ben Hogan® apparel collections. On a limited basis, we utilize a combination of our independent wholesale sales representatives, sales management and executives to market SPORT HALEY™ and Ben Hogan® apparel collections directly within corporate markets.

License Agreement. In May 2001, we entered into a license agreement with Spalding Sports Worldwide, Inc. (“Spalding”) that granted us the right to market men’s premium golf apparel under the Ben Hogan® brand name. In July 2002,  the license agreement was amended to expand the applicable territory covered by the agreement to include the United Kingdom, Sweden, Mexico and various Caribbean countries. The original license agreement had previously granted us the right to market Ben Hogan® apparel within the United States. In May 2003, Spalding changed its corporate name to The Top-Flite Golf Company, Inc. (“Top-Flite Golf”). In June 2003, the license agreement was amended to reflect Spalding’s name change to Top-Flite Golf and to grant us an additional license to market a full line of golf apparel bearing the Top-Flite™ brand name in the United States and its territories, Mexico, Aruba, the Cayman Islands, Jamaica, the Dominican Republic, the Bahamas and the British Virgin Islands. In September 2003, Callaway Golf Company (“Callaway”) purchased substantially all of the assets of Top-Flite Golf including the Ben Hogan® and Top-Flite™ brand names licensed to us. Subsequently, Callaway requested that we delay our planned launch of Top-Flite™ branded apparel. We maintain the right to market men’s and women’s golf apparel bearing the Top-Flite™ brand name, in accordance with the terms of the license agreement. Recently, we’ve had discussions with Callaway, and we plan to introduce collections of Top-Flite™ branded apparel within the United States in the future.

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Competition

The fashion golf apparel market, both domestically and internationally, is highly fragmented, and the market leader has a share of only between 10% and 15% of the total market, per the most recent “Darrell Survey” of the golf industry. We currently consider Ashworth, Cutter & Buck, Polo, Fairways & Greene, Tehama and EP Pro as our most significant competitors in the fashion golf apparel market. In addition to competing with fashion golf apparel manufacturers, we must also compete with manufacturers of high quality men’s and women’s sportswear and general leisure wear such as Nike and Adidas. Many of these same fashion golf apparel and sportswear companies are also competitors in the corporate market. The intense competition throughout both the fashion golf and corporate apparel markets is defined primarily by brand recognition and loyalty, quality, price, styling and design, service and availability of shelf space in the fashion golf apparel and leisure wear markets. Many of our competitors have longer operating histories, better name recognition and greater financial, marketing and other resources. Because of the intense competition in the golf apparel and leisure wear markets, we cannot be assured of obtaining additional market share or maintaining our current market share; and, market and general economic conditions may dictate reductions in selling prices that could result in reduced margins that could adversely impact our financial condition and the results of our operations.

Finished Goods Sourcing

Many of the SPORT HALEY™ and Ben Hogan® garments are made from 100% cotton fabrics. Certain men’s and women’s garments contain silk, wool, rayon or micro-fiber and certain outerwear garments contain micro-fiber, fleece or nylon. The Company’s production personnel assist the design department with the sourcing of finished goods apparel, negotiating costs consistent with desired profit margins and the inspection of sample fabrics and garments prior to the commencement of actual production. Production personnel are also responsible for ensuring timely-receipt of finished goods. We do not initiate any formal contractual arrangements with our suppliers, but we issue purchase orders as apparel purchases are initiated.

We contract with several outside suppliers which produce garments in accordance with our specifications regarding quality, fabrication and custom styling. Almost all of our purchases are denominated in United States dollars. We do not own or operate any domestic or foreign manufacturing facilities. While we do not maintain long-term contracts with any of our suppliers, we highly value the long-term relationships that we have established with several separate suppliers. We place orders with our suppliers as needed for delivery of specific quantities within particular date ranges by utilizing relationships we have established with certain foreign agents and foreign or domestic factories. In fiscal 2005, we purchased approximately 95% of our SPORT HALEY™ and Ben Hogan® apparel from a variety of foreign suppliers. In fiscal 2005, we purchased 43%, 11%, 8%, 7%, 6% and 5% of our finished apparel from six separate vendors, respectively. The loss of any of these significant vendors could cause substantial disruption to the Company’s short-term ability to fulfill its customers’ orders on a timely basis.

 We receive sales orders for our SPORT HALEY™ and Ben Hogan® spring and fall collections over a period commencing when samples are first shown to customers and continuing through the respective selling seasons. Because the apparel industry has long lead times, we must begin to schedule purchases and production of apparel collections in advance of sales order placements. Because the receiving and delivery of apparel collections is time-sensitive, management devotes considerable time and effort to the revision of sales projections, item by item within our apparel collections. Our computerized management information systems provide management with key data that facilitates sales forecasting, product tracking and standard cost controls as well as providing perpetual inventory records and inventory availability.

Seasonal Nature of Business

Fashion apparel sales within the golf industry tend to be seasonal in nature, with disproportionately higher sales occurring from early spring through early summer. Accordingly, our sales are disproportionately higher from January through June, which are our third and fourth quarters of each fiscal year, than sales from July to December,

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which are our first and second fiscal quarters. Pre-booked orders for our spring collections are generally solicited from July through December, and customer deliveries for the spring season are generally shipped from November through April each year. Pre-booked orders for our fall collections are generally solicited from January through June, and customer deliveries for the fall season are generally shipped from May through October each year. Spring collections typically account for about 60% of our annual sales, with the fall collections accounting for the remaining sales.

Management Information Systems and Inventory Management

We utilize integrated computer systems to manage all business transactions, historical data and record keeping, including sourcing, warehousing, embroidering and shipping. The computer systems provide information to our executives, management, all of our internal departments and our independent wholesale sales representatives. The electronic computer system used by our independent sales representatives interfaces with the main system to provide representatives with inventory information and order entry capability and allows the representatives to order against actual inventory availability. The computer systems provide valuable information for forecasting such as analyses of sales histories, purchasing histories, and future customer commitments, all of which facilitate the management of finished goods inventories.

After we implemented our operations software in January 2004, we discovered certain programming and human errors within the new system that adversely affected the software’s ability to accurately compute the valuation of our finished goods inventories using a weighted average method. We consider the programming and human errors, which caused us to use a standard cost assumption, to be a material weakness in our internal controls over financial reporting with respect to inventory valuation. The system was designed to utilize a series of complex valuation computations, and we determined that a manual reconstruction of the numerous amount of transactions affected by the programming and human errors was impracticable. This weakness in our controls prevented us from relying upon the system-recorded transactions with respect to inventory valuations during fiscal 2005 and 2004. Based upon analyses performed to compare the landed cost components of our finished goods inventories with respect to our standard cost components and analyses of the allocated overhead portion of our standard costs, we concluded with reasonable assurance that recomputing the value of our finished goods inventories using a standard cost method yielded a fair estimation of the value of our finished goods inventories. We used the standard cost method to value our finished goods inventories from the fiscal quarter ended March 31, 2004, through the fiscal quarter ended March 31, 2005. At June 30, 2005, certain inventory items remained on hand that had been valued using the standard cost method. The methods we use to determine the standard costs of our finished good inventories have not changed since our initial analyses of such costs were performed in fiscal 2004. Had we been able to rely upon the system to properly compute the cost of our finished goods inventories using the weighted average method, we believe that the weighted average method would not have yielded a materially different computation of the value than the standard cost method that we applied.

The material weakness in our internal controls over financial reporting with respect to inventory valuation impaired our ability to rely upon information created by our computer system to fairly present, in all material respects, our financial condition, results of operations and cash flows for fiscal 2005 and 2004. The inability of our computer system to properly calculate the valuation of our finished goods inventories using a weighted average cost assumption also affected the system-recorded amounts within our cost of goods sold during fiscal 2005 and 2004. Costs associated with invoiced sales and returns as well as inventory adjustments are natural components of our cost of goods sold. Because we concluded with reasonable assurance that our using a standard cost assumption yielded a fair estimation of our finished goods inventories during fiscal 2005 and 2004, and because we consistently recorded adjustments to inventories as components of cost of goods sold, we believe with reasonable assurance that our cost of goods sold are fairly stated for fiscal 2005 and 2004. Therefore, we believe that the procedures we applied to value our finished goods inventories in fiscal 2005 and 2004 provide us with reasonable assurance that our financial statements and the notes thereto fairly state, in all material respects, our financial condition, the results of our operations and our cash flows.

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 Based upon tests we performed subsequent to June 30, 2005, we believe that the computer software has been properly programmed, and employees have been adequately trained to utilize the system procedures, to accurately compute our finished goods inventory valuations using a weighted average cost assumption beginning in fiscal 2006.

We maintain a significant amount of finished goods inventories to meet customers’ delivery expectations and to support the continued increase in sales of Ben Hogan® apparel. Because of such factors as the long lead time between ordering and receiving packaged apparel from foreign vendors, receiving advance orders from and delivery of finished apparel to customers, and the considerable number of individual items that comprise apparel collections within a single selling season, an excess of finished goods inventories remaining at the end of a selling season is common within the golf apparel industry. Excess and previous seasons’ finished goods inventory items usually must be marketed at reduced selling prices, which negatively affects gross margins. We utilize our computer systems to assist management with controlling finished goods inventories by providing information with regard to sales forecasting, initial and reorders of finished apparel and warehouse management. The computer system was designed to increase operating efficiencies by providing better information with regard to sales forecasting, purchasing and inventory management. In fiscal 2005, we improved the methods we use to assess the recoverability of our finished goods inventories. We developed a system to better estimate our anticipated future sales in order to better forecast inventories expected to remain at the end of a current or future distribution period. Having better information available to forecast quantities and mix of unsold inventories allows us to better estimate valuations of excess inventories expected to be on hand in a future period. Having such information also allows us to better plan marketing strategies for the sales of such inventories through existing marketing channels and to better estimate the overall recoverability of our finished goods inventories. We believe that the methods we now use to evaluate our finished goods inventories produce fair valuations of our excess inventories, but, if actual market conditions are less favorable than those we have projected, additional allowances may be required or losses on dispositions may be recorded, thereby adversely affecting our financial position and the results of our operations.

Order Placement and Backlog

Advance sales orders for the fall selling season are typically received by the beginning of June each year. Similarly, advance sales orders for the spring selling season are typically received by the beginning of December each year. Due to economic drivers such as the general economic health of and competition within the golf apparel industry, the overall USA economy and the geopolitical climate throughout the world, the trend in our advance sales orders indicates decreases in advance sales orders and increases in “at once” business. This trend adds to the difficulty associated with sales forecasting and the timing of inventory purchasing that is already complicated by the long lead times associated with procuring finished product from overseas suppliers.

Generally, we ship partial orders if they are at least 85% complete. We usually allow advance orders to be changed or canceled up to 30 days prior to the scheduled shipping date of the merchandise. Generally, we do not sell our apparel on consignment and generally do not accept returns of purchased apparel, other than apparel that is defective or damaged or which was shipped to the customer after their specified delivery date. Our new operations software affords us the ability to ship merchandise within customer-specified delivery dates, thereby reducing sales returns due to refused shipments for late delivery. As a percentage of net sales, sales returns were approximately 6% in fiscal 2005, 5% in fiscal 2004 and 5% in fiscal 2003.

Historically, the backlog of orders has not materially impacted our sales with respect to cancellations and rejections of back orders. Back orders are common occurrences within the apparel industry in general. The amount of back orders outstanding at any particular time may be affected by a number of factors, including the timely receipt of first-quality products from suppliers, which can impact an apparel distributor’s ability to ship garments on time, and the timing of orders placed by customers. Accordingly, a comparison of the Company’s backlog of orders from period to period is not necessarily meaningful and may not be indicative of actual shipments during any specific period. Our backlog of unfilled customer orders was less than $100,000 at June 30, 2005, which compares to approximately $400,000 in back orders as of June 30, 2004. We filled the majority of the June 30, 2005, back orders within the first few months of fiscal 2006.

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Payment Terms

Generally, sales to customers are collectible within 30 days of the sale. However, on a limited basis, we may offer discounted or extended payment terms of up to 90 days. On rare occasions, payment terms may be extended on specific sales to as much as 180 days.

Trademarks

We market women’s and a limited amount of men’s fashion golf apparel under the SPORT HALEY™ label. We have begun the process to register our current SPORT HALEY™ trademarks with the United States Patent and Trademark Office. Certain of our former United States trademarks expired during 2005. We previously registered other of our former trademarks in a select number of international jurisdictions.   

We also market men’s fashion golf apparel under the Ben Hogan® label. Callaway has registered the Ben Hogan® trademark and the distinctive signature of Mr. Hogan with the United States Patent and Trademark Office. Callaway is also licensed to use the Ben Hogan® trademark outside of the United States. We are licensed by Callaway to use the Ben Hogan® trademark in the United States and certain other countries, subject to the terms of our license agreement with Callaway, as amended.

Callaway has begun the process to register the Top-Flite™ trademark with the United States Patent and Trademark Office. We are licensed by Callaway to use the Top-Flite™ trademark in the United States, and its territories and possessions, Mexico, Aruba, the Cayman Islands, Jamaica, the Dominican Republic, the Bahamas and the British Virgin Islands.

Employees

At June 30, 2005, we had 68 full-time and three part-time employees, including 23 full-time and one part-time executive and administrative employees, three full-time marketing and corporate sales employees, and 42 full-time and two part-time personnel in inspection, packaging, embroidering and distribution operations. The majority of our sales representatives are independent agents. None of our employees is a member of a trade union, and we consider our relations with our employees and agents to be satisfactory.

ITEM 2.  PROPERTIES

Our executive offices and warehouse facilities are located in Denver, Colorado. Prior to negotiating an extension of the lease in September 2001, we leased approximately 82,500 square feet of floor space at the Denver location. In conjunction with the lease extension, we negotiated a reduction in the floor space leased at the Denver location. As of October 2001, we lease approximately 66,640 square feet of the available 82,500 square feet of floor space. The Denver facilities were leased at an annual base rent of approximately $255,000 in fiscal 2005. We are obligated to pay our proportionate share of taxes, insurance and maintenance expenses for the leased space.

ITEM 3.   LEGAL PROCEEDINGS

As previously reported, in September 2003, the United States Securities and Exchange Commission (the “Commission”) filed suit in the United States District Court for the District of Colorado against Sport-Haley, Inc., Robert G. Tomlinson, our late Chairman and former Chief Executive Officer, and Steve S. Auger, our former Controller (the “Defendants”). The Commission filed an amended complaint in October 2003, which added one of our former auditors to the action as a Defendant. The suit seeks an injunction against future violations and other relief, including disgorgement, civil penalties and an order barring Mr. Tomlinson and Mr. Auger from serving as director or officer of any publicly held company. The suit alleges that the Defendants misrepresented inventories, period costs and losses on the sale of headwear equipment in annual and/or quarterly financial statements for Sport-

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Haley’s fiscal years 2000, 1999 and 1998. The amended complaint alleges that Sport-Haley, Inc. violated §17(a) of the Securities Act of 1933 (the “Securities Act”), §10(b), §13(b)(2) and §15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) and various other rules promulgated thereunder. The amended complaint further alleges that Mr. Tomlinson and Mr. Auger violated §17(a) of the Securities Act, §10(b) and §13(b)(5) of the Exchange Act and Rules 10b-5 and 13b-2 thereunder. Finally, the suit alleges that Mr. Tomlinson and Mr. Auger aided and abetted Sport-Haley, Inc. in violation of §13(b)(2) and §15(d) of the Exchange Act and various rules promulgated thereunder. The Commission’s suit primarily relates to errors in our previously issued financial statements that we previously reported when we voluntarily restated our financial statements for fiscal years 1999 and 1998 and subsequently corrected material financial information for the quarterly periods of fiscal years 2000, 1999 and 1998. The Defendants have answered the allegations of the amended complaint, denying the substantive allegations and asserting various defenses. Discovery in the action has concluded. No trial date has yet been determined. Subject to our Bylaws and Colorado law, we agreed to indemnify Mr. Tomlinson and Mr. Auger, and we have advanced the costs of their defenses, pending final adjudication of the Action. The costs of defense of the action by the Defendants are covered by the applicable liability insurance, subject to a policy retention, which has been satisfied, and other limitations. After Mr. Tomlinson’s death in September 2004, the Commission filed a motion to dismiss Mr. Tomlinson from the action without prejudice, and the Court granted the motion. In July 2005, we submitted a settlement proposal to the Commission’s Denver regional office, which the parties agreed to amend in September 2005. If the amended settlement proposal is approved by the full Commission in Washington D.C., the litigation against us would end, without further material impact on our financial position or the results of our operations. Counsel to Mr. Auger has informed us that a settlement proposal has also been submitted to the Denver office on his behalf, which, if approved, would also end the litigation against him. The Court has issued an Order requiring the settlements, if approved by the full Commission, be submitted to the Court by no later than October 30, 2005. Based upon the information that is currently available, management cannot reasonably estimate the amount of future costs that we will incur defending the Commission’s allegations if our amended settlement offer is not accepted. However, if the suit were determined in favor of the Commission and against the Defendants, the possible monetary penalties and other relief that we might be required to pay, and other relief, could further negatively impact our financial position and the results of our operations.

In filing our annual report on Form 10-K for fiscal 2000, we restated previously issued financial statements. In March 2001, we retained legal counsel to possibly pursue claims against our former auditors in connection with damages suffered as a result of the restatements of our financial statements for fiscal years 1999 and 1998 and the corrections of material information for the quarterly periods of fiscal years 2000, 1999 and 1998. Also, counsel to the former auditors previously advised us that the former auditors may file certain claims against us, possibly including allegations of unpaid fees. Neither have we nor our former auditors filed any legal action to assert any of these claims. Based upon the information that is currently available, we do not believe the impact, if any, of an award to the former auditors, if they were to initiate a formal action against us, would materially affect our financial position or the results of our operations. The parties have scheduled a non-binding mediation session before a neutral party in November 2005.

As of June 30, 2005, we had cumulatively incurred $1,100,000 in potentially recoverable costs related to the restatements of our fiscal year 1999 and 1998 financial statements and the correction of material information for the fiscal quarters of years 2000, 1999 and 1998, an investigation and subsequent civil action initiated by the Commission and a class action lawsuit that has been settled. The policy retention for such costs has been satisfied, and one of our insurance carriers had reimbursed us $401,000 as of June 30, 2005. Amounts recovered from our insurance carriers are generally offset against other related legal expenses in the period within which they are recovered, or recoverability is reasonably assured, except that amounts recovered are included in other income to the extent that such recovery exceeds legal expenses for related matters incurred within the period for which the recovery is recorded. We recorded offsets to legal expenses totaling $88,000, $204,000 in fiscal years 2005 and 2004, respectively, and recorded other income of $109,000 in fiscal year 2005 with regard to reimbursements from our insurance carriers.

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We are subject to various other legal proceedings and claims which arise in the ordinary course of our business. Based upon information that is currently available, management does not believe that the total impact of the various other legal proceedings will materially affect our financial position or the results of our operations.

PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Our common stock is quoted on the Nasdaq National Market® under the trading symbol “SPOR.” The following table sets forth the range of high and low sale prices of our common stock, as reported by The Nasdaq Stock Market®, from July 1, 2002 through June 30, 2005. The prices set forth below reflect interdealer quotations, without retail markups, markdowns or commissions, and may not be representative of actual transactions.

As of April 8, 2005, we estimate that there were approximately 900 holders of record of our common stock. The vast majority of our shares are held in “street name,” and the actual number of holders of record may differ from our estimate. Holders of common stock are entitled to receive such dividends as may be declared by our Board of Directors from time to time. No dividends have been paid on our common stock throughout the history of the Company, and the Board of Directors does not anticipate that dividends will be declared in the foreseeable future.

ITEM 6.   SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the Financial Statements and related Notes thereto, appearing elsewhere in this report on Form 10-K, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The statements of operations data for each of the fiscal years in the three-year period ended June 30, 2005, and the balance sheets data at June 30, 2005 and 2004, are derived from the financial statements of Sport-Haley, Inc. which have been audited by Hein & Associates LLP, an independent registered public accounting firm, as indicated in their report included herein. The consolidated statements of operations data for each of the fiscal years ended June 30, 2002 and 2001, and the balance sheets data at June 30, 2002 and 2001, include the amounts of Sport-Haley, Inc. and our former wholly-owned subsidiary, B&L Sportswear, Inc., which ceased business operations in August 2001 and was liquidated in May 2002. All significant inter-company transactions were eliminated from the consolidated financial data. The selected financial data provided below is not necessarily indicative of the future results of operations or future financial performance of Sport-Haley, Inc.

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The following table summarizes selected quarterly financial information for each of the quarterly periods in the fiscal years ended June 30, 2005 and 2004:

ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements made in this filing that are not historical facts are forward-looking statements. The reader should be aware that our actual results could differ materially from those contained in forward-looking statements. When used in this report, the words “may,” “will,” “will likely result,” “will continue,” “expect,” “anticipate,” “continue,” “estimate,” “plan,” “project,” “intend,” “believe” and similar expressions, variations or negative of these words, and any statement regarding possible or assumed future results of operations of our business, the markets for our products, anticipated expenditures, regulatory developments or competition, or other statements regarding matters that are not historical facts, are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, although not all forward-looking statements contain such identifying words. Such statements are based on management’s current expectations and are subject to risks, uncertainties and assumptions. The reader should be aware that, should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, the actual plan of operations, business strategies, operating results and financial position of Sport-Haley, Inc. could differ materially from those expressed in, or implied by, such forward-looking statements.

Our business in general is subject to certain risks including the following:

•                  The demand for our products may decrease if the popularity of golf decreases or if other factors, such as adverse business conditions, a sluggish economy or inclement weather, cause golfers not to patronize golf professional shops.

•                  We must continue to successfully anticipate fashion trends, design apparel that is accepted by consumers as fashionable and stylish and maintain an adequate product mix thereof in order to continue to have market acceptance.

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•                  Our sales are seasonal, and historically sales from July through December, which comprise our first and second fiscal quarters, are weaker than sales from January through June, which comprise our third and fourth fiscal quarters.

•                  The market for golf apparel is extremely competitive; price competition or industry consolidation could weaken our competitive position. In order to maintain our competitive position, we must effectively advertise and communicate within the marketplace and successfully penetrate our chosen distribution channels.

•                  We maintain a significant level of finished goods inventories to support our sales volume and our limited corporate apparel program. Disposal of excess prior seasons’ inventories at reduced margins is an inherent characteristic within the golf apparel industry, but a significant amount of sales at the lower margins dictated by the disposition of excess inventories may impair our financial condition and the results of our operations. Write-downs with regard to obsolete inventories could also continue to adversely affect our financial condition.

•                  We depend on timely delivery of finished garments from our suppliers. The loss of certain suppliers, and/or delays in receiving garments from suppliers caused by various factors, including lost or reduced manufacturing capacity of significant suppliers, labor shortages, timely performance of third parties, and transportation difficulties, and others, could adversely affect our ability to make timely delivery of finished garments to our customers.

•                  Our significant reliance on foreign suppliers enhances the risk that revenues might be adversely affected if a foreign shipment were lost or significantly delayed. We maintain insurance for risk of loss including those relating to raw materials inventories shipped between foreign vendors and finished goods inventories shipped from foreign suppliers to our distribution facilities in Denver, Colorado. However, significant reliance on foreign suppliers heightens the risk that we would be left with inadequate or unsatisfactory recourse should the goods received from the foreign suppliers be nonconforming.

•                  Our significant reliance on foreign suppliers sustains the risk that revenues might be adversely affected by changes in international trade quota systems for apparel or by deterioration in political and international trade relations between the United States of America and the foreign countries where the suppliers are located.

•                  We purchase significant amounts of finished apparel from several separate foreign suppliers. While we believe that we could obtain finished apparel from numerous other suppliers, if we were to lose or terminate the services of any of these significant suppliers, our short-term ability to fulfill customers’ orders on a timely basis could be substantially impaired, thereby negatively affecting our financial position and the results of our operations.

•                  We maintain a close working relationship with a certain foreign person who is responsible for maintaining relationships with and monitoring the performance of certain of our foreign suppliers. While we believe that we could utilize other such persons to perform similar services, if we were to lose or terminate the services of this individual, our short-term ability to fulfill customers’ orders on a timely basis could be substantially impaired, thereby negatively affecting our financial position and the results of our operations.

•                  Our significant reliance on foreign suppliers requires that we maintain satisfactory relationships with a commercial banking institution in order to have adequate access to capital to finance inventory purchases from the foreign suppliers via import letters of credit. While we believe that we could obtain access to capital from other sources, if the commercial banking institution were to terminate or not to renew the line of credit agreement that we maintain with the institution, our short-term ability to purchase finished goods inventories from foreign suppliers could be substantially impaired, thereby negatively affecting our financial position and the results of our operations.

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•                  An ever increasing percentage of our net sales are derived from sales related to the license agreement with Callaway to market and distribute Ben Hogan® apparel. While we believe that we maintain a satisfactory relationship with Callaway, an early termination of the license agreement could negatively impact our financial position and results of our operations significantly.

•                  As previously reported, Sport-Haley, Inc., our late Chairman and our former Controller, have been named in a civil enforcement action by the Securities and Exchange Commission (the “SEC”). We have incurred a significant amount of legal and other expenses defending the SEC action. Subject to the terms of applicable insurance coverage, we may incur additional expenses, including Company resources and executive time, in responding to and defending the action, which could negatively impact our financial position and the results of our operations. We have submitted a settlement proposal to the SEC, but, if the settlement proposal is not approved by the full Commission, Sport-Haley, Inc. and the named individuals could be subject to certain civil penalties and disgorgement, if the SEC action were successful, which could negatively impact our financial position and the results of our operations.

•                  The increased threats of terrorist activities in the United States, the conflict in Iraq and other international conflicts may have adversely affected our sales. Business trends of the golf apparel industry closely follow trends in the travel and leisure sectors of the United States economy. International conflicts and other geopolitical conditions resulting from threats or acts of war or terrorism and responses thereto may have continued to affect the travel and leisure sectors that had already been negatively impacted by the general economic downturn experienced during previous years. Our sales could decrease if the USA economy weakens due to these or other factors.

•                  We may experience an increase in the number and magnitude of delinquent or uncollectible customer accounts during periods of economic downturn.

•                  Businesses in general are ever increasingly dependent upon computer information systems. We must continually establish and sustain controls with regard to maintaining the integrity of our technology and information systems in order to adequately manage business activities and control costs and expenses.

•                  On a limited basis, we advance monies to certain of our independent wholesale sales representatives under agreements whereby the sales representatives reimburse us as they earn monthly sales commissions. Our financial results may be adversely affected should the sales representatives not generate wholesale sales sufficient to justify the amounts advanced to them under the agreements.

There may be other factors not mentioned above, in the discussion below or included in our other Securities and Exchange Commission filings that may cause actual results to differ materially from any forward-looking statements. Neither the Company nor any of its corporate officers or key employees assumes any obligation to update any forward-looking statements as a result of new information, future events or developments, except as required by applicable securities laws.

The following discussion should be read in conjunction with the Financial Statements and Notes thereto.

Critical Accounting Policies and Estimates

Our financial statements have been prepared in accordance with standards of the Public Company Accounting Oversight Board (United States), which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. A summary of those significant accounting policies can be found in the Footnotes to the Financial Statements included in this Report on 10-K. The estimates used by management are based upon our historical experiences combined with management’s

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understanding of current facts and circumstances. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial condition and the results of our operations and require significant or complex judgments on the part of management. We believe that the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our financial statements.

Inventories, predominately comprised of finished goods, are generally valued at the lower of cost (weighted average) or market. Costs include amounts paid to suppliers for packaged apparel and/or materials and labor, import costs, such as customs duties, freight-in and other miscellaneous costs, and allocated overhead. After we implemented our operations software in January 2004, we discovered certain programming and human errors within the new system that adversely affected the software’s ability to accurately compute the valuation of our finished goods inventories using a weighted average method. We consider the programming and human errors, which caused us to use a standard cost method, to be a material weakness in our internal controls over financial reporting with respect to inventory valuation. The system was designed to utilize a series of complex valuation computations, and we determined that a manual reconstruction of the numerous amount of transactions affected by the programming and human errors was impracticable. This weakness in our controls prevented us from relying upon the system-recorded transactions with respect to inventory valuations during fiscal 2005 and 2004. Based upon analyses performed to compare the landed cost components of our finished goods inventories with respect to our standard cost components and analyses of the allocated overhead portion of our standard costs, we concluded with reasonable assurance that recomputing the value of our finished goods inventories using a standard cost method yielded a fair estimation of the value of our finished goods inventories. We used the standard cost method to value our finished goods inventories from the fiscal quarter ended March 31, 2004, through the fiscal quarter ended March 31, 2005.  At June 30, 2005, certain inventory items remained on hand that had been valued using the standard cost method. The methods we use to determine the standard costs of our finished good inventories have not changed since our initial analyses of such costs were performed in fiscal 2004. Had we been able to rely upon the system to properly compute the cost of our finished goods inventories using the weighted average method, we believe that the weighted average method would not have yielded a materially different computation of the value than the standard cost method that we applied.

The material weakness in our internal controls over financial reporting with respect to inventory valuation impaired our ability to rely upon information created by our computer system to fairly present, in all material respects, our financial condition, results of operations and cash flows for fiscal 2005 and 2004. The inability of our computer system to properly calculate the valuation of our finished goods inventories using a weighted average cost assumption also affected the system-recorded amounts within our cost of goods sold during fiscal 2005 and 2004. Costs associated with invoiced sales and returns as well as inventory adjustments are natural components of our cost of goods sold. Because we concluded with reasonable assurance that our using a standard cost assumption yielded a fair estimation of our finished goods inventories during fiscal 2005 and 2004, and because we consistently recorded adjustments to inventories as components of cost of goods sold, we believe with reasonable assurance that our cost of goods sold are fairly stated for fiscal 2005 and 2004. Therefore, we believe that the procedures we applied to value our finished goods inventories in fiscal 2005 and 2004 provide us with reasonable assurance that our financial statements and the notes thereto fairly state, in all material respects, our financial condition, the results of our operations and our cash flows.

 Based upon tests we performed subsequent to June 30, 2005, we believe that the computer software has been properly programmed, and employees have been adequately trained to utilize the system procedures, to accurately compute our finished goods inventory valuations using a weighted average cost assumption beginning in fiscal 2006.

Excess finished goods inventories are a natural component of a seasonal apparel business. While certain finished goods items will sell out in any particular selling season, quantities of other finished goods items will remain at the end of each selling season. We market previous seasons’ finished goods inventories at reduced wholesale prices to our customers in the normal course of business. Remaining excess inventories are liquidated through other markets. In the ordinary course of business, we maintain reserves for inventory write downs due to the obsolescence of discontinued or aging merchandise. We perform analyses on a quarterly basis to identify unsold discontinued or aging merchandise and adjust our reserves for inventory obsolescence to reduce the carrying value of discontinued or

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aging merchandise to its estimated net realizable value. The net realizable value of the discontinued or aging merchandise is estimated based on management’s disposition plans and historical experiences. During fiscal 2005, we recorded finished goods inventories write-downs of $1,403,000, including a write-down of $165,000 during the fourth fiscal quarter. While management believes that our processes produce fair valuations of obsolete inventories, if actual market conditions are less favorable than those projected by management, additional allowances may be required.

Deferred income taxes are recognized for the expected tax consequences in future years for differences between the tax bases of assets and liabilities and their financial reporting amounts, based upon enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Our significant deferred tax assets are related to net operating loss carry forwards for federal and state income tax purposes, stock-based compensation and an unrealized loss for tax purposes on a common stock investment. Governing regulations require that our operating losses be carried forward for income tax purposes. We have established a valuation allowance to reduce deferred tax assets to the net amount expected to be recovered in future periods. The estimates for deferred tax assets and the corresponding valuation allowance require us to exercise complex judgments. We periodically review and adjust those estimates based upon the most current information available. In accordance with SFAS 109 and based upon a review at June 30, 2005, of our utilization of deferred tax assets, we maintained a valuation allowance that effectively reduces our net deferred tax assets to zero. While we continue to explore various strategies to return the Company to profitability, we cannot be certain that our efforts will result in the generation of future profits. Because the recoverability of deferred tax assets is directly dependent upon future operating results, actual recoverability of deferred tax assets may differ materially from our estimates.

Our allowance for doubtful accounts reflects a reserve that reduces our customer accounts receivable to the net amount estimated to be collectible. Estimating the credit worthiness of customers and the recoverability of customer accounts requires us to exercise considerable judgment. In estimating the reserve for uncollectible accounts, we consider factors such as general economic and industry-specific conditions, historical customer performance and anticipated customer performance. From time to time, we also identify delinquent customer accounts for which a specific reserve is required. At June 30, 2005, our allowance for doubtful accounts totaled $377,000, including specific reserves approximating $151,000 with respect to certain delinquent customer accounts. While we consider our processes to be adequate to effectively quantify our exposure to doubtful accounts, changes in economic, industry or specific customer conditions may result in recoverability of our doubtful accounts that differs materially from our estimates.

We record allowances for sales returns as net adjustments to customer accounts receivable. When recording an allowance, the net method reduces customer accounts receivable and net sales by the estimated gross margin effect of the anticipated sales return. Generally, our selling terms preclude return of our products subsequent to the sale. However, we have traditionally maintained limited programs that offer some customers the right to return certain finished goods items under predefined conditions, which we include as a component within our estimate of allowance for sales returns. We review historical data and consider factors such as general economic and industry-specific conditions and anticipated customer performance when evaluating the adequacy of our allowance for sales returns. At June 30, 2005, the Company’s allowance for sales returns was $286,000. Significant changes in general economic or industry conditions may yield sales returns that differ materially from our estimates

During fiscal 2004, we began offering our independent wholesale sales representatives the right to return sample garments, at the end of the related marketing period for such merchandise, at no charge to the sales representative. Previously, we invoiced the sales representatives for sample garments at discounted wholesale prices. The right to return offered to the representatives caused us to adopt a policy to account for the sample garments in a manner consistent with our accounting for consigned inventories, whereby we capitalize the cost of sales of such shipments. Further, we record an allowance to completely offset the amount receivable from the representatives for the garments and reverse the corresponding revenue effect of the sale. The sales representative’s accounts receivable balance, the related allowance and inventory costs are adjusted and a sale is recorded when the sales representative reimburses us for the cost of sample garments or the term for which the right of return was granted, expires. Upon

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return of the garments to us, the sales representative’s accounts receivable balance and the related allowance are adjusted accordingly, the corresponding revenue effect of the return is reversed and the inventory items are returned to stock. During 2005, we discontinued the program that granted our independent sales representatives the right to return sample garments. At June 30, 2005, our allowance for returns of sales representatives sample garments was $28,000. Because the shipments and returns of sample garments made under the right to return policy must be tracked and adjusted manually, actual shipments and returns made in accordance with that policy may differ from our estimates.

Results of Operations

The following table sets forth the percentage of net sales represented by items included in or derived from our statements of income for its fiscal years ended June 30, 2005, 2004 and 2003, 2002 and 2001:

Comparison of Fiscal Years Ended June 30, 2005 and 2004. Net sales for fiscal 2005 were $22,041,000, an increase of $1,241,000, or 6%, as compared with net sales of $20,800,000 for fiscal 2004. We attribute the difference in net sales to factors such as the continued growth in sales of Ben Hogan® apparel collections offset by the discontinuance of our HALEY RESERVE men’s fashion apparel and a continued decrease in sales of SPORT HALEY™ women’s fashion apparel.

For fiscal 2005, our net sales of Ben Hogan® apparel collections were $11,209,000, an increase of $4,257,000, or 61%, from net sales of $6,951,000 in fiscal 2004. The increase in net sales between the fiscal years is indicative of the growth we have achieved with our Ben Hogan® collections within the premium-priced golf apparel market. Ben Hogan® is marketed in accordance with a license agreement we maintain with Callaway Golf Company (“Callaway”). The growth we have achieved with the Ben Hogan® collections since the inception of the license agreement far exceeds the minimum calendar year sales requirements of the agreement, and we consider the license agreement with Callaway to be a key component of our overall business strategies. While we believe that we have a strong working relationship with Callaway, our trend of continuing increases in sales of licensed apparel since the introduction of Ben Hogan® golf apparel collections, sustains a risk of loss should the license agreement with Callaway be terminated by either party.

As previously reported, we discontinued our HALEY RESERVE men’s fashion apparel beginning with our spring 2005 selling season, in part because of its diminishing sales and in part because we had expected to introduce Top-Flite™ branded apparel in its place within our distribution channels. We began shipping our spring 2005 apparel collections during November 2004. We believe that the discontinuance of our HALEY RESERVE men’s fashion apparel negatively impacted our fiscal 2005 sales by at least $2,500,000, the total of our net sales for such apparel during our spring 2004 selling season. Historically, sales within our HALEY branded apparel have been disproportionately comprised of greater sales of women’s apparel than of men’s apparel. Overall, net sales of our HALEY branded apparel decreased by $3,000,000, or 23%, from net sales of $12,786,000 for fiscal 2004 to net sales

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of $9,786,000 for fiscal 2005. The continued decline in sales of our SPORT HALEY™ women’s fashion apparel appears to be related to a shrinking market for women’s golf apparel, because our customers appear to be placing less importance on women’s fashion golf apparel within their shops. In fiscal 2004, we consolidated our network of independent wholesale sales representatives to allow our representatives to market both our SPORT HALEY™ women’s collections and our Ben Hogan® men’s collections simultaneously. We believe that the natural synergies between the two brands will assist us with mitigating the negative effects on our operations associated with a shrinking of the women’s golf apparel market.

For fiscal 2005, Ben Hogan® branded apparel revenues accounted for 51%, HALEY® branded apparel revenues accounted for 44% and embroidering and shipping revenues accounted for 5% of our net sales, respectively. Comparatively, for fiscal 2004, Ben Hogan® branded apparel revenues accounted for 33%, HALEY® branded apparel revenues accounted for 61% and embroidering and shipping revenues accounted for 6% of our net sales, respectively.

Gross profit for fiscal 2005 was $6,352,000, a decrease of $829,000, or 12%, as compared with $7,181,000 in fiscal 2004. The difference in gross profit between the fiscal years was primarily attributable to the following factors: (i) As previously reported, during fiscal 2005, we revised our procedures used to assess the recoverability of our finished goods inventories by using an improved method that calculates the estimated sales value based upon the quantities and mix of inventories that are expected to remain at the end of the selling season, rather than an estimate based upon the total number of units on hand that we used previously. Using the new recoverability assessment method, the net effect of inventory write-downs negatively impacted our gross profit for fiscal 2005 by $1,403,000. Comparatively, in fiscal 2004, inventory write-downs negatively impacted our gross profit by $635,000. (ii) In fiscal 2005, we disposed of a significant portion of our excess finished goods inventories relating to our fall 2004 and prior selling seasons. As we previously reported, in December 2004, we sold substantially all of our discontinued or aging finished goods inventories from the spring 2004 and earlier selling seasons to a major retailer. While we had previously estimated the recoverability of those inventories, we recognized an additional loss of $179,000 upon their disposition in December 2004. Because we have not recognized a material loss on additional dispositions of aging or obsolete finished goods inventories after December 2004, we believe that the methods we now use to estimate the recoverability of our finished goods inventories produce a fair estimate of their respective value. (iii) As previously reported, in conjunction with performing procedures recommended by the developer of our software that were designed to correct a prior system malfunction, we performed a physical count of our finished goods inventories and performed a detailed review of our component inventories at December 31, 2004. The physical inventory caused us to reduce the value of our finished goods inventories by $53,000 and the detailed review caused us to reduce the value of our component inventories by $300,000 at December 31, 2004. The reductions in value similarly increased our cost of goods sold at December 31, 2004, thereby negatively impacting our gross profit for the period.

Gross margin for fiscal 2005 was 29%, a decrease of 6%, from 35% in fiscal 2004. Our gross margins may not be comparable to other companies within the golf apparel industry. We have consistently included the cost of merchandise sold, including import charges, in-bound freight, allocated overhead and other charges, custom embroidery costs and freight-out in our cost of goods sold. Amounts invoiced to our customers for custom embroidery as well as shipping and handling charges are included as components of our net sales. Our overhead allocation includes certain of our distribution costs, such as receiving, inspection and shipping costs, but we include some of the other costs of distribution, such as a portion of our warehousing and other handling costs, in selling, general and administrative expenses. We include royalty payments, relating to sales of licensed apparel, in other operating costs.

Selling, general and administrative expenses were $9,036,000 in fiscal 2005, an increase of $831,000, or 10%, from $8,205,000 in fiscal 2004. The increase between fiscal years was due to a combination of several separate factors. Subsequent to the death of our Chairman in September 2004, we paid $650,000 in severance and other compensation expense to the late Chairman’s estate. Similarly, upon the departure of our former Chief Executive Officer in October 2004, we accrued $520,000 in severance and other compensation that is generally payable to the former executive over a three-year period ending in March 2008. The death of our former Chairman and the

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departure of our former Chief Executive Officer contributed to a decrease in our total salary and other payroll expenses for fiscal 2005. Salary and other payroll expenses, net of severance costs, totaled $3,341,000 in fiscal 2005, a decrease of $149,000, or 4%, from $3,490,000 in fiscal 2004. As we previously reported, near the end of December 2004, we performed a detailed analysis of the individual categories of our selling, general and administrative expenses, and we used our evaluation as a tool to streamline our operations further. We are continuing to focus our efforts to find additional ways to decrease our overall operating expenses. As a percentage of sales, our selling, general and administrative expenses were 41% and 39% for fiscal 2005 and 2004, respectively.

Royalty expense for fiscal 2005 was $797,000, an increase of $265,000, or 50%, from $532,000 for fiscal 2004. The increase in royalty expense between the fiscal years was directly related to the increase in net sales of our Ben Hogan® apparel collections.

Total other income, net, for fiscal 2005 was $208,000, an increase of $92,000, or 79%, from $116,000 in fiscal 2004. The increase was primarily due to the difference between the fiscal years in the amounts of and the rates of interest earned on cash equivalents and marketable securities. During fiscal 2005, interest rates earned on our near risk-free investments improved slightly over the nearly all-time lows earned on such investments in fiscal 2004. Cash equivalents and marketable securities are purchased from time to time in accordance with guidelines, which our Board of Directors previously approved, designed to maximize the rates of return achieved on near risk-free investment balances.

Loss from operations before provision for income taxes for fiscal 2005 was ($3,273,000), a difference of ($1,833,000), or 127%, from ($1,440,000) for fiscal 2004. Net loss for fiscal 2005 was ($3,281,000), a difference of ($1,095,000), or 50%, from ($2,186,000) for fiscal 2004. The proportional disparity between the difference in losses from operations before provision for income taxes and the difference in net loss arose because of the differences in the financial statement effects of our valuations with respect to net deferred tax assets between the fiscal years. The valuation of net deferred taxes between years may cause variations in effective tax rates that can vary significantly due to differences between the methods of recording certain transactions for financial statement purposes versus the methods for recognizing those transactions for tax purposes within the same fiscal period. Certain expenses recorded for financial statement purposes may not be deductible for tax purposes and certain deductions for tax purposes may not be recorded for financial statement purposes within the same fiscal year. For fiscal 2004, our provision for income taxes was $746,000, primarily because we increased a valuation allowance to effectively reduce our net deferred tax assets to zero. We periodically review and adjust our valuation for deferred tax assets based upon the most current information available. Because of our trend of net losses in the current and most-recent prior years, we believe that it is more probable than not that none of our deferred tax assets will be recovered, and, in fiscal 2005, we maintained the valuation allowance that effectively reduces our deferred tax assets to zero. While we continue to explore strategic alternatives to return the Company to profitability, we cannot be certain that our efforts will result in the generation of future profits. Because the recoverability of deferred tax assets is directly dependent upon future operating results, actual recoverability of our deferred tax assets may differ materially from our estimates. Income tax expense for the period equals taxes payable for the period plus the change during the period in our net deferred tax assets. In fiscal 2005 and 2004, we paid $8,000 and $0 in applicable federal and state income taxes, respectively.

Basic and diluted losses per share were ($1.29) and ($0.89) for fiscal years 2005 and 2004, respectively. Due to the net losses for the respective fiscal years, all outstanding options were anti-dilutive and therefore excluded from the loss per share calculations.

Comparison of Fiscal Years Ended June 30, 2004 and 2003. Net sales for fiscal 2004 were $20,800,000, an increase of $1,604,000, or 8%, as compared with $19,196,000 for fiscal 2003.The increase was primarily attributable to a continued increase in the sales of Ben Hogan® apparel combined with a continued decline in the sales of SPORT HALEY™ apparel. The increase in Ben Hogan® apparel sales exhibits growth we achieved within the premium price market for such apparel and is indicative of our effective strategies to maximize revenues associated with the Callaway license agreement. The continued decline in sales of SPORT HALEY™ apparel greatly concerned us. We believed that the generally flat United States economy throughout fiscal 2004 contributed greatly to the depressed

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sales of SPORT HALEY™ apparel. The sluggish economic conditions especially adversely affected sales of women’s golf apparel throughout fiscal 2004. Since women’s apparel comprises a predominant portion of SPORT HALEY™ apparel sales, we may have been more significantly affected by the sluggish economic conditions than other competitors within the golf apparel industry. While the golf apparel market is basically comprised of 75% men’s apparel and 25% women’s apparel, historically, our SPORT HALEY™ apparel sales have typically been comprised of 30% men’s apparel and 70% women’s apparel. Sales of SPORT HALEY™ men’s apparel steadily declined for several years and were considerably less in fiscal 2004 than in previous years. Management spoke with a few long-time customers that have indicated they were beginning to place less of an importance on stocking women’s golf apparel collections. Therefore, we expected that the trend of increasing sales of Ben Hogan® apparel and declining sales of SPORT HALEY™ apparel may continue into the foreseeable future. We believe that there are natural synergies common to Ben Hogan® men’s apparel and SPORT HALEY™ women’s apparel. Thus, during fiscal 2004, we continued to consolidate our independent wholesale sales forces, and approximately 90% of our independent sales representatives marketed both brands at June 30, 2004. By marketing Ben Hogan® men’s apparel in conjunction with SPORT HALEY™ women’s apparel, we attempt to maintain our market share with current women’s apparel customers and to expand the distribution channels for women’s apparel into markets that we had previously only been able to penetrate via the marketing of Ben Hogan® men’s apparel, which has broader appeal within the golf apparel markets.

For fiscal 2004, the SPORT HALEY™ men’s and women’s lines accounted for 21% and 30% of total net sales, respectively. The SPORT HALEY™ Elements line accounted for 10% of total net sales, and Ben Hogan® apparel accounted for 33% of total net sales. The remaining 6% was comprised of embroidering and shipping revenues.

For fiscal 2003, the SPORT HALEY™ men’s and women’s lines accounted for 29% and 34% of total net sales, respectively. The SPORT HALEY™ Elements line accounted for 8% of total net sales, and Ben Hogan® apparel accounted for 23% of total net sales. The remaining 6% was comprised of embroidering and shipping revenues plus sales at the retail factory outlet store, which we used to sell prior seasons’ and other inventories at discounted retail prices. The retail factory outlet store was closed in January 2002.

Gross profit for fiscal 2004 was $7,181,000, a decrease of $142,000, or 2%, as compared with $7,323,000 in fiscal 2003. The decrease was primarily attributable to the continued build up of excess and obsolete finished goods inventories during fiscal 2004. While excess and obsolete inventories are common within any apparel business, maintaining a minimum level of such inventories is a critical factor to the success an apparel business. Obsolete inventories are an especially critical factor to our success, because a significant portion of our inventories is comprised of women’s apparel. While obsolete men’s golf apparel may be disposed of through several different outlets, market options available for the disposal of women’s golf apparel are very limited. Therefore, our obsolete women’s inventories are much more sensitive to devaluation than are our men’s inventories. Our management performs quarterly analyses of our obsolete inventories and adjusts our reserve for inventory obsolescence to reduce the carrying value of obsolete inventories to their estimated net realizable value. Adjustments to the inventory valuation allowance are included as a component of our cost of goods sold. An increase in obsolete inventories in fiscal 2004 affected cost of goods sold by $635,000, while a decrease in obsolete inventories in fiscal 2003 affected cost of goods sold by ($895,000), respectively.

Gross margin for fiscal 2004 was 35%, a decrease of 3%, from 38% in fiscal 2003. The margin erosion in fiscal 2004 was primarily attributable to the effects of our build-up in excess and obsolete finished goods inventories. Our management was extremely concerned about the continued build up. In April 2004, we performed an extensive evaluation of the processes we used for merchandise planning, product forecasting and excess inventory disposal. The evaluation spawned inventory reduction initiatives for the disposal of excess inventories that utilized both current channels of distribution and large discount retail chains. Management expected that the inventory reduction initiatives and enhancements to our software systems would enable us to significantly reduce the levels of our finished goods inventories throughout fiscal 2005. Management expected to reduce our finished goods inventories to approximately $6,000,000 by December 31, 2004, and to further reduce them to around $5,000,000 by June 30, 2005.

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Selling, general and administrative expenses for fiscal 2004 were $8,737,000, an increase of $711,000, or 9%, as compared with $8,026,000 in fiscal 2003. A significant portion of the increase was attributable to operating costs associated with Ben Hogan® apparel. Selling, general and administrative expenses with respect to Ben Hogan® for fiscal 2004 were approximately $1,839,000, an increase of $355,000, or 24%, from $1,484,000 in fiscal 2003. Contributing factors included in the increased Ben Hogan® selling, general and administrative costs were: higher amount of royalties paid to Callaway and commissions paid to independent sales representatives on a corresponding increase in sales of Ben Hogan® apparel; and, other increases in general expenses necessary to support the continued increase sales of Ben Hogan® apparel. Another contributing factor to the total increase in selling, general and administrative expenses was an increase in total personnel expenses, a significant portion of which was attributable to severance compensation of $150,000 payable to the Company’s former President upon his termination at March 31, 2004. Legal defense costs with respect to a Securities and Exchange Commission investigation and civil enforcement action and a class action lawsuit filed against Sport-Haley, Inc. and certain of its current and former officers and directors continued to contribute to increased selling, general and administrative expenses in fiscal 2004. Such legal costs approximated $402,000 and $103,000 in fiscal 2004 and 2003, respectively. In September 2004, the Company received a reimbursement of approximately $204,000 from one of its insurance carriers relating to legal costs associated with the Securities and Exchange Commission civil action and class action matters. The Company recorded the $204,000 as a receivable at June 30, 2004, and offset fiscal 2004 legal expenses by the same amount. Subject to the terms of the applicable insurance policies, we expected to receive further reimbursements for the costs of defense of the Securities and Exchange Commission action as we had met the applicable retention amount. As a percentage of net sales, selling, general and administrative expenses were 42% for both fiscal 2004 and 2003.

Total other income, net, for fiscal 2004 was $116,000, a decrease of $19,000, or 14%, as compared with $135,000 in fiscal 2003. The decrease was primarily due to the difference between the fiscal years in the amounts of, and the rates of interest earned on, cash equivalents and marketable securities. During fiscal 2004, interest rates on virtually risk-free investments continued at or near all-time lows. We continued to search for investment alternatives available within the guidelines approved by our Board of Directors in order to maximize the rates of return achieved on cash equivalents and marketable securities.

Income (loss) from operations before (provision for) benefit from income taxes for fiscal 2004 was ($1,440,000), a decline of $872,000, or 154%, as compared with ($568,000) in fiscal 2003. Net loss for fiscal 2004 was ($2,186,000), a decline of $1,798,000, or 463%, as compared with ($388,000) in fiscal 2003. The proportional disparity between the difference in losses from operations before provision for income taxes and the difference in net losses between the fiscal years arose because of the differences in effective tax rates for financial statement, as opposed to tax, purposes. The effective tax rate in any fiscal year can vary significantly from the effective tax rate in another year due to differences between the methods of recording certain transactions for financial statement versus the methods of recognizing those transactions for tax purposes. Certain deductions recognized for tax purposes may not be recorded for financial purposes in the same fiscal year, and certain expenses recorded for financial statement purposes may not be deductible for tax purposes in the same fiscal year. The proportional disparity in (provision for) benefit from income taxes between fiscal 2004 and fiscal 2003 was primarily caused by differences in the valuation of net deferred tax assets. Because of the Company’s trend of net losses in the current and most recent prior years, management believed that it was more probable than not that none of our net deferred tax assets would be recovered. Therefore, we increased our valuation allowance at June 30, 2004, to effectively reduce our net deferred tax assets to zero.

Liquidity and Capital Resources

Our primary sources of liquidity are derived from our available cash and cash equivalents, cash flows from operations and a working capital line of credit with a commercial bank. We require cash for our general working capital purposes. We do not anticipate requiring material amounts of cash for capital expenditures over the next 12 months. To the extent our cash balance is insufficient to finance our working capital needs, we may also make periodic borrowings under our revolving line of credit. Our working capital requirements are highly seasonal in

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nature, with greater requirements from approximately August through October and February through April of each fiscal year due to the purchases of finished goods inventories for the spring/summer and fall/holiday selling seasons, respectively.

Working capital was $14,814,000 and $17,503,000 at June 30, 2005 and 2004, respectively. Cash and cash equivalents plus marketable securities totaled $ 7,721,000 and $4,429,000 at June 30, 2005 and 2004, respectively. For purposes of the statements of cash flows, we consider all highly liquid instruments purchased with an original maturity of three months or less, that are readily convertible to known amounts of cash and present an insignificant risk of change in value due to changes in interest rates, to be cash equivalents.

Net cash provided by (used in) operating activities totaled $3,134,000, ($1,893,000) and ($1,398,000) for fiscal years 2005, 2004 and 2003, respectively. The primary components of adjustments to reconcile net loss to cash provided by (used in) operating activities were changes between fiscal years relating to impairments and write-downs, deferred taxes, provisions for doubtful accounts and sales returns, accounts receivable, inventories, income taxes receivable, accounts payable, and accrued commissions and other expenses.

•                  Adjustments for impairments and write-downs affected net cash provided by (used in) operating activities by $1,403,000 in fiscal 2005, $707,000 in fiscal 2004 and $259,000 in fiscal 2003. The effects on net cash provided by (used in) operating activities caused by impairments and write-downs represent the expense effects of recording impairments and write-downs in the respective fiscal years. Because of the seasonal nature of the apparel business, excess inventories left over at the end of each selling season (“previous seasons’ inventories”) are common within the industry. Throughout each fiscal year, we market previous seasons’ inventories through our ordinary marketing channels. At or near the end of each fiscal quarter, we identify and revalue obsolete inventories, primarily consisting of previous seasons’ inventories, to estimated disposition values. Write-down charges relating to excess inventories have adversely affected our earnings and cash flows for the last several years. In fiscal 2004, we enacted initiatives directed to significantly reduce the levels of finished goods inventories in order to minimize the future adverse financial effect associated with the devaluation of obsolete inventories. In fiscal 2005, we sold a significant portion of our previous seasons’ inventories and refined our procedures to better estimate the recoverability our finished goods inventories, and we established new procedures for purchasing finished goods inventories designed to minimize the quantities expected to remain at the end of each selling season.

•                  The effects on net cash provided by operating activities caused by changes in deferred taxes primarily represent the change in expected tax consequences in future years for differences between the tax bases of assets and liabilities and their financial reporting amounts. We maintain a valuation allowance to reduce our net deferred tax assets to the net amount expected to be recovered in future periods. In fiscal 2004, because of the Company’s trend of net losses in the current and most recent prior years, we determined that it was more probable than not that none of our deferred tax assets would be recovered. Accordingly, since June 30, 2004, we have maintained a valuation allowance that effectively reduces our net deferred tax assets to zero. While we continue to explore various strategies to return the Company to profitability, we cannot be certain that our efforts will result in the generation of future profits. Because the recoverability of deferred tax assets is directly dependent upon future operating results, actual recoverability of deferred tax assets may differ materially from our estimates. Deferred taxes affected net cash provided by (used in) operating activities by $0 in fiscal 2005, $746,000 in fiscal 2004 and ($170,000) in fiscal 2003.

•                  The effects on net cash provided by operating activities caused by changes in provisions for doubtful accounts and sales returns primarily represent the net expense effects of the changes in allowances for doubtful accounts and sales returns between the respective years. As of June 30, our allowances for doubtful accounts were $377,000 in fiscal 2005, $454,000 in fiscal 2004 and $316,000 in fiscal 2003. The allowances for 2005 and 2004 included specific reserves of $151,000 and $175,000 with respect to certain customer accounts receivable, respectively. We believe that the decrease in the fiscal 2005 allowance, when compared with fiscal 2004 allowance, is attributable to the changes in our collection methods that we instituted in fiscal

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2004. The changes in our collection methods help us to shorten the collection process with regard to past due accounts, thereby minimizing potentially uncollectible amounts. Our allowances for customer sales returns at June 30 were $286,000 in fiscal 2005, $342,000 in fiscal 2004 and $226,000 in fiscal 2003. The percentage of sales returns has remained fairly constant for the last three fiscal years. The decrease in the allowance for sales returns in fiscal 2005, as compared with the allowance in fiscal 2004, was primarily due to the decrease in our customer accounts receivable at June 30, 2005, as compared with the receivable balance at June 30, 2004. We also initiated a reserve for the return of samples garments from our independent wholesale sales representatives pursuant to a procedural change with regard to such sample garments effective with the fall 2004 selling season which granted the representatives the right to return sample garments. During fiscal 2005, we discontinued the policy that granted the representatives the right to return sample garments. As of June 30, our allowances for sample garments were $28,000 in fiscal 2005, $332,000 in fiscal 2004 and $0 in fiscal 2003. The relative decrease in the allowance in fiscal 2005, as compared with the allowance in fiscal 2004, was due to our discontinuance of the right to return policy effective with the spring 2006 marketing season. Provisions for doubtful accounts and sales returns affected net cash provided by (used in) operating activities by approximately ($205,000) in fiscal 2005, $856,000 in fiscal 2004 and $484,000 in fiscal 2003.

•                  Accounts receivable, not including the effects of provisions for doubtful accounts and sales returns, provided operating cash of $1,656,000 in fiscal 2005, used operating cash of $1,846,000 in fiscal 2004 and used operating cash of $1,068,000 in fiscal 2003. Accounts receivable, net of allowances, decreased from $5,946,000 at June 30, 2004 to $4,495,000 at June 30, 2005. The decrease in fiscal 2005, as compared with the fiscal 2004 receivable balance, was primarily attributable to the shortening of our collection cycle discussed above combined with differences in our net sales for the month of June 2005 of $2,391,000 versus our net sales for the month of June 2004 of $3,036,000.

•                  Inventories, not including the effects of inventory write-downs, provided operating cash of $3,252,000 in fiscal 2005, used operating cash of $1,687,000 in fiscal 2004, and used operating cash of $1,383,000 in fiscal 2003. We reduced our inventories from $8,808,000 at June 30, 2004 to $4,153,000 at June 30, 2005. In fiscal 2004, we enacted initiatives directed to significantly reduce the levels of finished goods inventories in order to minimize future adverse financial effects associated with excess quantities of finished goods inventories. In fiscal 2005, we disposed of significant amounts of our obsolete or aging finished goods inventories and implemented initiatives designed to further minimize the quantities of unsold inventories expected to remain at the end of a selling season.

•                  Income taxes receivable provided operating cash of approximately $0 in fiscal 2005, $0 in fiscal 2004 and $1,071,000 in fiscal 2003. The income taxes receivable in prior years affected net cash provided by (used in) operating activities by the amounts recoverable via utilizing federal income tax carry backs and with cash deposits of income tax refunds received. Our losses prior to fiscal 2003 exhausted the federal amounts recoverable by utilizing net operating loss carry backs. Therefore, our net tax operating losses generated in fiscal 2005, 2004 and 2003 may only be used to offset future taxable income and have been included as a component of our net deferred tax assets, accordingly.

•                  Accounts payable used operating cash of $799,000 in fiscal 2005, provided operating cash of $792,000 in fiscal 2004, and used operating cash of $460,000 in fiscal 2003. Accounts payable decreased from $1,381,000 at June 30, 2004 to $582,000 at June 30, 2005. Changes in accounts payable relate to differences in the timing between the years in the recording and payments of expenditures for inventory purchases, ordinary business expenses and other.

•                  Accrued commissions and other expenses provided operating cash of $402,000 in fiscal 2005, provided operating cash of $238,000 in fiscal 2004, and used operating cash of $175,000 in fiscal 2003. Accrued commissions and other expenses increased from $767,000 at June 30, 2004 to $1,169,000 at June 30, 2005. The increase primarily relates to higher royalties due on correspondingly higher Ben Hogan® sales for the

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fourth fiscal quarter, comparatively between the 2005 and 2004 fiscal years, and accrued severance compensation payable to our former chief executive officer.

Net cash provided by (used in) investing activities totaled $363,000, $1,221,000, and ($1,675,000) for fiscal years 2005, 2004, and 2003, respectively. The primary components of net cash provided by (used in) investing activities were maturities (purchases) of marketable securities and purchases and disposals of fixed assets.

•                  Net maturities (purchases) of marketable securities provided investing activities cash of $539,000 in fiscal 2005, provided investing activities cash of $1,642,000 in fiscal 2004, and used investing activities cash of $1,076,000 in fiscal 2003. Marketable securities decreased from $539,000 at June 30, 2004 to $0 at June 30, 2005. Marketable securities primarily consisted of United States government and mortgage-backed debt securities that matured within one year or less. Due to the short-term nature of the investments, we did not recognize material unrealized gains or losses on marketable securities in fiscal 2005, 2004 or 2003. Therefore, the carrying values of marketable securities approximated their fair values.

•                  Purchases of fixed assets used investing activities cash of approximately $176,000, $427,000 and $611,000, in fiscal 2005, 2004, and 2003, respectively. Property and equipment, at cost, increased from $4,368,000 at June 30, 2004, to $4,423,000 at June 30, 2005. As of June 30, 2005, a significant portion of the fixed assets used in our operations were fully depreciated.

Net cash provided by (used in) financing activities totaled $334,000, $258,000, and ($1,051,000) for fiscal 2005, 2004, and 2003, respectively. Net cash provided by financing activities in fiscal 2005 and 2004 related solely to exercises of stock options by former executive officers and another former employee. Net cash used in financing activities in fiscal 2003 related solely to repurchases of common stock. Since December 1994, we have been authorized by our Board of Directors to repurchase shares of Sport-Haley, Inc. common stock. The Board’s authorization is based on its belief that our common stock is underpriced at times given our working capital, liquidity, assets, book value and future prospects. We have no commitment or obligation to purchase all or any portion of the authorized shares. The shares may be repurchased from time to time in the open market or in privately negotiated transactions depending upon market conditions and other factors. All shares purchased are canceled and returned to the status of authorized but unissued common stock. We did not repurchase any shares during fiscal 2005 or 2004. During fiscal 2003, we repurchased 286,400 shares of our common stock. Since the inception of the repurchase program through June 2005, we repurchased a total of 2,512,800 shares of our common stock at a cumulative cost of $13,488,000.

We had no long-term debt at June 30, 2005 or 2004. Since April 1994, we have maintained a revolving line of credit with a commercial bank. The line of credit, which has been renewed through December 5, 2005, bears interest at the bank’s prime rate. The renewal provides for a maximum loan amount of $5,000,000 and is secured with a lien on substantially all of our assets. We generally maintain the line of credit to facilitate the issuance of letters of credit for inventory purchases from offshore suppliers and to fund any temporary working capital needs. The amended terms of the line of credit agreement require that we maintain minimum tangible net worth of not less than $14,000,000. We had no outstanding borrowings under the line of credit at either June 30, 2005, or June 30, 2004.

In the ordinary course of our business, we enter into letters of credit arrangements with a commercial bank to facilitate the purchase of finished and packaged inventory and/or raw fabric from various offshore suppliers. As of June 30, 2005 and 2004, we had outstanding letters of credit totaling $2,012,000 and $2,665,000, respectively, relating to commitments to purchase finished goods inventories from various suppliers. Amounts outstanding on letters of credit reduce the amount available for borrowing under the line of credit.

Historically, gross proceeds received from the exercise of stock options have fluctuated significantly from year to year. We realized proceeds of $334,000, $258,000 and $0 in fiscal 2005, 2004 and 2003, respectively, from the exercise of stock options.

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Substantially all of our purchases from offshore manufacturers and sales to foreign distributors are U.S. Dollar denominated and, consequently, we have no material currency exchange risk. We believe that inflation has not materially affected the results of our operations during the three most recent fiscal years.

Off-Balance Sheet Arrangements

During fiscal years 2005 and 2004, we did not have any relationships or arrangements with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Contractual Obligations

The following table summarizes our significant contractual cash obligations as of June 30, 2005. Certain of these contractual obligations are reflected in our balance sheet, while others are disclosed as future obligations under accounting principles generally accepted in the United States.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and rates. We are exposed to market risk with regard to changes in United States interest rates. This exposure is directly related to our normal operating and funding activities. Historically and as of June 30, 2005, we have not used derivatives instruments or engaged in hedging activities. Our market risk has not changed significantly from June 30, 2004.

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Interest Rate Risk

We maintain a revolving line of credit agreement with a commercial bank that provides for interest at the bank’s prime rate. The agreement provides for a maximum loan amount of $5,000,000 collateralized by a lien on substantially all of our assets. We generally maintain the line of credit to facilitate the issuance of letters of credit for inventory purchases from offshore suppliers and, if necessary, to fund any temporary working capital needs. We did not have any outstanding borrowings the line of credit at June 30, 2005. Increases in the bank’s prime rate could, however, increase the interest expense with respect to future borrowings, including borrowings under the line of credit. Outstanding letters of credit reduce the amount available for borrowing under the line of credit. We had outstanding letters of credit of approximately $2,012,000 at June 30, 2005.

From time to time, we maintain short-term investments in low risk and no risk financial instruments, readily convertible into cash, which earn interest at variable rates. Periodically, our cash balances held at financial institutions exceed federally insured limits.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.    CONTROLS AND PROCEDURES

(a)         Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Interim Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based on that evaluation, management, including the Interim Chief Executive Officer and Chief Financial Officer, concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in reaching a reasonable level of assurance that:  (a) all material information relating to the Company, required to be disclosed in this report, was made known to management in a timely manner; and (b) information was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations.

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As discussed in Part I, Item 1, in “Management Information Systems and Inventory Management” and in Part II, Item 7, in “Critical Accounting Policies and Estimates,” we consider the programming and human computational errors, which caused us to use a standard cost method, to be a material weakness in our internals control over financial reporting with respect to inventory valuation during the period covered by this report. After we implemented our operations software in January 2004, we discovered certain programming and human errors within the new system that adversely affected the software’s ability to accurately compute the valuation of our finished goods inventories using a weighted average method. The system was designed to utilize a series of complex valuation computations, and we determined that a manual reconstruction of the numerous amount of transactions affected by the programming and human errors was impracticable. This weakness in our controls prevented us from relying upon the system-recorded transactions with respect to finished goods inventory valuation during the period covered by this report. Based upon analyses performed to compare the landed cost components of our finished goods inventories with our respective standard cost components and analyses of the allocated overhead portion of our standard costs, we concluded that recomputing the value of our finished goods inventories using a standard cost method yielded a fair estimation of the value of our finished goods inventories. We used the standard cost method to value our finished goods inventories from the fiscal quarter ended March 31, 2004, through the fiscal quarter ended March 31, 2005. At June 30, 2005, certain inventory items remained on hand that had been valued using the standard cost method. The methods we use to determine the standard costs of our finished goods inventories have not changed since our initial analyses of such costs were performed in fiscal 2004. Had we been able to rely upon the system to properly compute the cost of our finished goods inventories using the weighted average method, the Interim Chief Executive Officer and the Chief Financial Officer believe that the weighted average method would not have yielded a materially different computation of the value than the standard cost method that we applied. The Interim Chief Executive Officer and the Chief Financial Officer believe that the procedures we applied to value our finished goods inventories for the period covered by this report provide us with reasonable assurance that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

The material weakness in our internal controls over financial reporting with respect to inventory valuation impaired our ability to rely upon information created by our computer system to fairly present, in all material respects, our financial condition, results of operations and cash flows for the period covered by this report. The inability of our computer system to properly calculate the valuation of our finished goods inventories also affected the system-recorded amounts within our cost of goods sold during the period covered by this report. Costs associated with invoiced sales and returns as well as inventory adjustments are natural components of our cost of goods sold. Because we concluded with reasonable assurance that our using a standard cost assumption yielded a fair estimation of our finished goods inventories during the period covered by this report, and because we consistently recorded adjustments to inventories as components of cost of goods sold during the period covered by this report, we believe with reasonable assurance that our cost of goods sold are fairly stated during the period covered by this report. Therefore, the Interim Chief Executive Officer and Chief Financial Officer believe that the procedures we applied to value our finished goods inventories for the period covered by this report provide us with reasonable assurance that our report fairly states, in all material respects, our financial condition, results of operations and cash flows.

Based upon tests we performed subsequent to June 30, 2005, we believe that the computer software has been properly programmed, and employees have been adequately trained to utilize the system procedures, to accurately compute our finished goods inventory valuations using a weighted average cost assumption for fiscal periods subsequent to this report.

(b)         Changes in Internal Control Over Financial Reporting. During the last quarter of fiscal 2005, we did not implement any changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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Our management, including our Interim Chief Executive Officer and our Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will, in all instances, prevent all errors and all fraud. A control system, no matter how well conceived or operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. While our control systems provide a reasonable assurance level, the design of our control systems reflects the fact that there are resource constraints, and the benefits of such controls were considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the financial reports of Sport-Haley, Inc. have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Additionally, a control can be circumvented by the individual act of some person, by collusion of two or more persons, or by management’s override of a specific control. The design of any system of controls is also based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

ITEM 9B.  OTHER INFORMATION

We entered into an amended employment agreement with Catherine B. Blair, effective June 1, 2005, to continue serving as our Vice President – Merchandising/Design. A description of the amended agreement is included in “Employment Agreements” below. A copy of the amended employment agreement is attached to this filing as Exhibit 10.2.5.1.

PART III

ITEM 10.                                             DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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Officers are appointed by and serve at the discretion of the Board of Directors. Each Director holds office until the next annual meeting of shareholders or until a successor has been duly elected and qualified. All of our officers devote full-time to our business and affairs. In October 2004, after the death of Robert G. Tomlinson, the Board of Directors approved a reduction of the Board from six to five Directors. Our former Chief Executive Officer and President, Kevin M. Tomlinson, resigned from the Board in November 2004, and, in February 2005, the Board of Directors reduced the number of Board members to four. At June 30, 2005, the Board was comprised of four non-employee Directors, all of whom we determined to be “independent” within the meaning of the applicable listing standards of The Nasdaq Stock Market® (the “NASD Rules”).

Donald W. Jewell was appointed by our Board of Directors in October 2004 to serve as our Interim Chief Executive Officer. Mr. Jewell was appointed in April 2005 to serve as our President and has served as our Senior Vice President since February 1, 2001. Mr. Jewell will serve as President for a term consistent with that of his service as our Interim Chief Executive Officer. Once a permanent Chief Executive Officer is appointed, we expect that Mr. Jewell will remain with us as our Senior Vice President. From 1996 until joining us, Mr. Jewell was the founder, president and director of Jewell Apparel Group, a Canadian distributor of premium and mid-priced men’s golf apparel. Mr. Jewell began designing, sourcing and marketing golf apparel in 1993 while serving as the president and chief executive officer of Jewell-Rung, positions that he held from 1980 to 1996.

Patrick W. Hurley has served as our Secretary, Treasurer and Controller since November 1999 and as our Chief Financial Officer since December 2000. Prior to joining us, Mr. Hurley was employed as a senior staff accountant at Saltzman Hamma Nelson Massaro LLP, Denver, Colorado, where among other things, he supervised or participated in the preparation of audited and unaudited financial statements and income tax returns, and provided advice and training for business clients regarding selection and implementation of accounting systems and procedures. Mr. Hurley is a certified public accountant and received a bachelor of science in accounting in 1991. Mr. Hurley is also a member of the American Institute of Certified Public Accountants and the Colorado Society of Certified Public Accountants. 

Catherine B. Blair has served as our Vice President - Merchandising/Design since her appointment in May 1996. Ms. Blair has been part of our design team since 1992, and was appointed Director of Design in 1995. Prior to joining us, Ms. Blair was a designer for a golfwear company and also worked as a freelance designer for companies such as Macy’s, Bloomingdale’s, Ann Taylor and The Gap.

Mark Maley has served as our Vice President – Sales, since January 2004.  Mr. Maley served as our Director of Special Markets and Brands from July 2003 to December 2003 and was previously an independent wholesale sales representative for the Ben Hogan® apparel line. Prior to joining us, Mr. Maley served as general manager, director of golf and head golf professional for over seven years with Club Corporation of America. Mr. Maley is a member of the PGA.

Robert G. Tomlinson served as our Chairman and Director from October 1992 until his death in September 2004 and served as our Chief Executive Officer from October 1992 until March 2002. Prior to joining us, Mr. Tomlinson was a partner in Tomlinson Enterprises, a real estate investment partnership, and was also engaged in the

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management of his personal investment portfolio. Mr. Tomlinson was the father of Kevin M. Tomlinson, our former Chief Executive Officer, President and Director.

Kevin M. Tomlinson was appointed as our Chief Executive Officer in March 2002 and was elected as a Director in September 1999. Mr. Tomlinson was appointed as our President in March 2004. Previously, Mr. Tomlinson had served as our Chief Operating Officer and Executive Vice President-Operations from January 1999 until March 2002 and as our Vice President of Operations from December 1997 until January 1999. In October 2004, our Board of Directors approved a resolution not to renew the executive employment agreement of Mr. Tomlinson beyond March 17, 2005, the end of the term of the agreement. The Board and Mr. Tomlinson agreed that he would continue to act as our Chief Executive Officer and President until a new or an interim chief executive officer was appointed or the end of his employment agreement term, whichever occurred first. Mr. Tomlinson stepped down from his duties as Chief Executive Officer and President upon the appointment of Donald W. Jewell as our Interim Chief Executive Officer on October 29, 2004. In November 2004, Mr. Tomlinson resigned as a Director.

Independent Directors

Ronald J. Norick has been a Director since November 1993. In October 2004, subsequent to the death of Robert G. Tomlinson, Mr. Norick was appointed by the Board of Directors to fill the newly-created non-officer position of Chairman of the Board. Mr. Norick also serves on the Audit, Compensation and Nominating Committees of the Board. From April 1987 until April 1998, Mr. Norick served as the elected Mayor of the City of Oklahoma City, Oklahoma. From 1960 to 1992, Mr. Norick served in various capacities, including serving as president from 1981 to 1992, of a closely-held printing company, which was acquired by Reynolds & Reynolds in June 1992. Mr. Norick serves on a number of civic, community, educational, corporate and public boards, commissions and committees and is a director of Banc First Corporation, a publicly-held corporation based in Oklahoma City, Oklahoma. Mr. Norick also serves as controlling manager of Norick Investments Company LLC, a family-owned limited liability company, which is engaged in investments.

James R. TenBrook has been a Director since March 2004. Mr. TenBrook has served as the Chairman of the Audit Committee since March 2004 and also serves on the Nominating Committee. Mr. TenBrook is the president and a shareholder of Karsh Consulting, P.C. of Denver, Colorado, has been a certified public accountant since 1973, received his personal financial specialist certification in 1994 and is a certified valuation analyst. Mr. TenBrook’s practice consists primarily of litigation support, tax and estate planning. Mr. TenBrook is a member of the Colorado Society of Certified Public Accountants (“CSCPA”), served on the CSCPA’s board of directors from 1996-1999 and served on the CSCPA Personal Financial Planning Committee from 1991-1994 (serving as Chairman of the Committee in 1993 and 1994). Mr. TenBrook is also a member of the American Institute of Certified Public Accountants. Karsh Consulting, P.C. has performed income tax services for several years for our late Chairman, our former Chief Executive Officer, certain trusts formed by the late Chairman, and a related entity. The fees paid to Mr. TenBrook’s firm for these tax services have not exceeded $8,000 per year in the aggregate. While services rendered by the Karsh Consulting P.C. result in some pecuniary benefit to Mr. TenBrook, which is difficult to quantify, Mr. TenBrook believes that the direct compensation to him as a result of these engagements has been less than $500 per year. We believe that Mr. TenBrook nevertheless meets the definition of independence under both SEC and NASD Rules.

Mark J. Stevenson has been a Director since November 1993. Mr. Stevenson serves on the Audit Committee, the Compensation Committee (as its Chairman) and the Nominating Committee. Mr. Stevenson served as president and chief executive officer of Zenodata Corporation, a Colorado based financial services software company, from March 2001 until his retirement in April 2005. In May 2005, Zenodata Corporation made an assignment for the benefit of creditors. Mr. Stevenson held the positions of chairman of the board, president and chief executive officer of Electronic Manufacturing Systems, Longmont, Colorado, a contract manufacturer serving the computer, data storage, telecommunications and medical equipment industries, from June 1994 until that company was merged into E-M-Solutions in January 1999. At that time, Mr. Stevenson was appointed executive chairman and chairman of the board of E-M-Solutions, which filed for bankruptcy protection in the Northern District of California in approximately

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November 2001 and was immediately purchased by Sanmina/SCI. From 1992 to 1994, Mr. Stevenson served as chairman of the board for Micro Insurance Software, Inc., Boulder, Colorado, a manufacturer of computer software oriented to the insurance industry. Mr. Stevenson served on the Colorado Governor’s Commission on Science and Technology for five years ending in 2004 and currently serves on the Advisory Council of the University of Colorado Deming Center for Entrepreneurship. Mr. Stevenson formerly served as chairman of the American Electronics Association, the nation’s largest high technology trade association.

James H. Everest has been a Director since November 1993. Mr. Everest serves on the Compensation and Nominating Committees and served on the Audit Committee until March 2004. Mr. Everest has served as president of the Jean I. Everest Foundation, Oklahoma City, Oklahoma, since 1991. The Jean I. Everest Foundation was organized by Mr. Everest’s father to conduct charitable activities. Since 1984, Mr. Everest has been the managing partner of Everest Brothers, a general partnership active in oil and gas exploration and development and has also been engaged in managing his personal investments. Mr. Everest is a member of the Oklahoma Bar Association and the American Bar Association and serves in a number of capacities for various civic and community organizations.

Board Committees

The Board of Directors has delegated certain of its authority to an Audit Committee, a Compensation Committee and a Nominating Committee. The Audit Committee is comprised of Messrs. Norick, Stevenson and TenBrook. The Compensation Committee is comprised of Messrs. Stevenson, Norick and Everest. The Nominating Committee is comprised of Messrs. Norick, TenBrook, Stevenson and Everest. Mr. TenBrook serves as Chairman of the Audit Committee and Mr. Stevenson serves as Chairman of the Compensation Committee. No member of these three committees is a current or former officer or employee of Sport-Haley, Inc. We have determined that each member of the Audit Committee, Compensation Committee and Nominating Committee qualifies as an “independent” director under the applicable NASD Rules.

Audit Committee

The major functions of the Audit Committee are to review and approve the scope of audit procedures employed, to review and approve the audit reports rendered by our independent auditors and to approve the audit fee charged by the independent auditors. In addition, pursuant to the Sarbanes-Oxley Act of 2002 and rules promulgated thereunder, the Audit Committee is responsible for, among other things, pre-approving all audit and non-audit services performed by the independent auditors, approving the engagement of the auditors and receiving certain reports from the independent auditors prior to the filing of the audit report. The Audit Committee reports to the Board of Directors with respect to such matters and recommends the selection of independent auditors. James R. TenBrook has served as the Chairman of the Audit Committee since March 2004. The Audit Committee held four formal meetings during fiscal 2005. Each of the members of the Audit Committee attended all of the meetings held during fiscal 2005, except for Mark J. Stevenson, who attended all but one of the meetings.

As of March 2004, when James R. TenBrook was elected as Director and appointed to the Audit Committee as its Chairman, the Board determined that Mr. TenBrook meets the definition of an audit committee financial expert, as defined by SEC regulations. In addition, the board has determined that Mr. TenBrook also meets the requirements for independence under SEC rules and the applicable NASD Rules.

Compensation Committee

The primary function of the Compensation Committee is to review and make recommendations to the Board with respect to the compensation, including bonuses, of our officers and to administer our Stock Option Plan. See “Compensation Committee Report” included in Item 11 below. The Compensation Committee held two meetings in fiscal 2005, which all of its members attended.

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Nominating Committee

In 2004, the Board of Directors voted to form a Nominating Committee, to be comprised of Messrs. Norick, TenBrook, Stevenson and Everest. The Nominating Committee recommends to the Board the persons to be nominated for election as Directors at any meeting of stockholders, develops and recommends to the Board a set of corporate governance principles applicable to the Company and oversees the evaluation of the Board. The Board has determined that each of the members of the Nominating Committee is “independent,” as that term is defined by applicable NASD Rules. All of the members of the Nominating Committee met once during fiscal 2005.

Since forming the Nominating Committee, adopting a formal charter, and adopting nomination procedures, there have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.

Board Attendance

In fiscal 2005, the Board of Directors held ten formal meetings, three of which were attended by only the independent directors prior to the November 2004 resignation of Kevin M. Tomlinson, the only employee director remaining subsequent to the September 2004 death of Robert G. Tomlinson, our former Chairman. Each of the Directors attended all board meetings held during fiscal 2005, except that James H. Everest was not present at two meetings and Mark J. Stevenson was not present at one meeting. Kevin M. Tomlinson attended two meetings prior to his resignation from the Board. No Board meeting was held in fiscal 2005 prior to the death of Robert G. Tomlinson.

Code of Ethics

In January 2004, we adopted a Code of Ethics for Senior Financial Officers, which applies to all senior financial officers of the Company, including the Chief Executive Officer, the Chief Financial Officer, the Treasurer and any other person performing similar functions. In addition, in May 2004, we adopted a Code of Conduct and Ethics for Directors, Officers and Employees, which is applicable to all of our directors, officers and employees. A copy of these codes may be obtained without charge by written request for copies of them addressed to: Corporate Secretary, Sport-Haley, Inc., 4600 E. 48th Avenue, Denver, CO 80216-3215.

ITEM 11.   EXECUTIVE COMPENSATION

Summary Compensation Table.  The following table sets forth the annual and long-term compensation for services in all capacities to Sport-Haley, Inc. for the three fiscal years ended June 30, 2005, of Donald W. Jewell, Interim Chief Executive Officer, President and Senior Vice President, Patrick W. Hurley, Chief Financial Officer, Secretary, Treasurer and Controller, Catherine B. Blair, Vice President – Merchandising/Design and Mark Maley, Vice President – Sales, the only executive officers whose total annual salary and bonus exceeded $100,000 during the year ended June 30, 2005, and Robert G. Tomlinson (deceased), Kevin M. Tomlinson and Robert W. Haley (the “Named Officers”). 

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(1)               Comprised of contributions by the Company to the Named Officer’s 401(k) account plus term life insurance premiums paid by the Company.

(2)               Includes net taxable fringe benefits of $3,900 for country club dues.

(3)               Includes net taxable fringe benefits of $31,900 for country club dues, clothing allowance and personal use of company vehicle.

(4)               Robert G. Tomlinson, Chairman, died on September 8, 2004. His 2005 annual salary and all other compensation amounts include such amounts paid to him until the date of his death and do not include the $650,000 in severance and other compensation paid to his estate in October 2004, per the terms of a settlement agreement.

(5)               In October 2004, the Board elected not to renew the executive employment agreement between Sport-Haley, Inc. and Kevin M. Tomlinson upon its expiration in March 2005. Mr. Tomlinson stepped down from his duties as our Chief Executive Officer and President in October 2004. His annual salary and all other compensation amounts for 2005 include such amounts paid to him until the termination of the executive employment agreement in March 2005 and do not include payments for severance and other compensation that he began receiving in April 2005, per the terms of an executive employment agreement. We paid Mr. Tomlinson $76,000 in severance and other compensation in fiscal 2005.

(6)               Robert W. Haley resigned as our President, effective March 31, 2004. His 2005 and 2004 annual salary and all other compensation amounts do not include the bi-weekly payments for severance and other compensation that Mr. Haley began receiving in April 2004. We paid Mr. Haley $114,000 and $38,000 in severance and other compensation in fiscal 2005 and 2004, respectively.

Fiscal Year-End Options/Option Values Table.