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, including those risks set forth in Part I, Item 1A of this report, along with the factors and risks set forth below. 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.

Factors or risks that could cause actual results or circumstances to differ materially from those set forth or contemplated in forward-looking statements include, but are not limited to, the following:

† Our ability to respond to continual competition in our markets as well as the extent, timing and success of such competition;

† Our ability to expand into new markets and to effectively manage our growth;

† Access to sufficient working capital to meet our operating and financial needs;

† General economic conditions or material adverse changes in markets we serve;

† Changes in, or failure to comply with, applicable legislation or governmental regulation;

† Changes in tax laws or rates;

† Risk that our analyses of these risks could be incorrect and that the strategies developed to address them could be unsuccessful;

† Changes in our accounting assumptions that regulatory agencies, including the SEC, may require or that results from changes in the accounting rules or their application, which could result in an impact on our earnings; and,

† Various other factors discussed in this filing.

There may be other factors not mentioned above, or in Part I, Item 1A of this report, in the discussion below or included in our other SEC 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 statement 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 Form 10-K for the fiscal year ended June 30, 2008. The estimates used by management are based upon our historical experiences combined with management's 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

Our 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. Excess fashion apparel inventories, consisting of discontinued or aging merchandise, are a natural component of a seasonal apparel business. While certain fashion apparel items will sell out in any particular selling season, quantities of other fashion apparel items will remain at the end of each selling season. We market excess fashion apparel 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 excess inventories. We perform analyses on a quarterly basis to identify unsold excess inventories and adjust our reserves for inventory obsolescence to reduce the carrying value of excess inventories to their estimated net realizable value, which is estimated based on management's disposition plans and historical experiences. Generally, branded apparel inventories are not prone to impairment, because we usually order branded apparel in quantities per specific customer orders.

During fiscal 2008, we recorded fashion apparel inventory write-downs of $210,000, including a write-down of $51,000 during the fourth fiscal quarter. We recorded write-downs of $20,000 with regard to branded apparel during fiscal 2008. 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

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 maintain a valuation allowance to reduce our 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 Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes," and based upon a review at June 30, 2008, 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, including increasing our presence in retail markets for our SPORT HALEY® and Ben Hogan® fashion apparel, 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.

Allowance for Doubtful Accounts

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 and anticipated customer performance. From time to time, we also identify delinquent customer accounts for which a specific reserve is required. At June 30, 2008, our allowance for doubtful accounts totaled $218,000, including a specific reserve of $116,000 with respect to the potential non-recovery of a net amount due to Reserve Apparel from a former inventory broker. In September 2008, the Court awarded judgment in our favor and against the former inventory broker in the amount of $291,135. In order to collect from the former broker, we will need to domesticate the judgment in the province of Ontario, Canada. Since collection is not assured, we maintained the $116,000 reserve for potential non-recovery at June 30, 2008. 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.

Allowance for Sales Returns

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 various customers the right to return certain fashion apparel 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, 2008, our allowance for sales returns was $80,000. Significant changes in general economic or industry conditions may yield sales returns that differ materially from our estimates.

Recent Pronouncements

In May 2008, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 163 ("SFAS 163"), "Accounting for Financial Guarantee Insurance Contracts - An Interpretation of FASB Statement No. 60." Diversity exists in practice in accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, "Accounting and Reporting by Insurance Enterprises." SFAS 163 requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. SFAS 163 requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of SFAS 163 are expected to improve the quality of information provided to users of financial statements. Our adoption of SFAS 163 upon its effective date is not expected to have a material effect on our financial condition or the results of our operations.

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162 ("SFAS 162"), "The Hierarchy of Generally Accepted Accounting Principles ("GAAP")." The current GAAP hierarchy, as set forth in the American Institute of Certified Public Accountants ("AICPA") Statement on Auditing Standards No. 69, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles,"has been criticized because: (i) it is directed to the auditor rather than the entity; (ii) it is complex; and, (iii) it ranks FASB Statements of Financial Accounting Concepts. The FASB believes that the GAAP hierarchy should be directed to entities, because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. Accordingly, the FASB concluded that the GAAP hierarchy should reside in the accounting literature established by the FASB and is issuing SFAS 162 to achieve that result. SFAS 162 is effective 60 days following the Securities and Exchange Commission's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles." Our adoption of SFAS 162 upon its effective date is not expected to have a material effect on our financial condition or the results of our operations.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 ("SFAS 161"), "Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133."FASB Statement No. 133 ("SFAS 131"), "Accounting for Derivative Instruments and Hedging Activities," establishes, among other things, the disclosure requirements for derivative instruments and for hedging activities. SFAS 161 amends and expands the disclosure requirements of SFAS 131 with the intent to provide users of financial statements with an enhanced understanding of: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations; and, (iii) how derivative instruments and related hedged items affect an entity's financial position, financial performance and cash flows. To meet those objectives, SFAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008, with earlier adoption encouraged. SFAS 161 further encourages, but does not require, comparative disclosures for earlier periods at initial adoption. We do not anticipate early adoption, and our adoption of SFAS 161 upon its effective date is not expected to have a material effect on our financial condition or the results of our operations.

We have reviewed all recently issued, but not yet effective, accounting pronouncements and do not believe the future adoption of any such pronouncements may be expected to cause a material impact on our financial condition or the results of our operations.

Results of Operations

In August 2008, we determined that we were underpaying customs duties with regard to imported fashion apparel for which fabric had been purchased separately from another foreign supplier. This issue was brought to our attention by a third party and was not an intentional concealment or act on the part of the Company or any of its officers, directors or employees. For such imports, the information received by our customs agent had failed to

include the value of the fabric in the total declared value of the apparel. See Part II, Item 9B for a detailed explanation of this matter.

In order to correct the underpaid customs duties, in September 2008 we began voluntarily preparing a Prior Disclosure that we expect to submit to US Customs and Border Protection in October 2008. A Prior Disclosure is a specific procedure proscribed by US Customs and Border Protection for the purpose of identifying and correcting amounts which were previously declared or omitted from declaration. Our Prior Disclosure will correct amounts with regard to our imports for the five-year period immediately prior to the date the Prior Disclosure is submitted to US Customs and Border Protection.

Using the guidance set forth in Staff Accounting Bulletin No. 108 ("SAB 108"), "Considering the Effects of Prior Year Misstatements in Current Year Financial Statements," and FASB Concepts Statement No. 2, "Qualitative Characteristics of Accounting Information," we determined that the quantitative and qualitative effects with regard to correction of underpaid customs duties in prior years were immaterial in all cases. However, correction of the underpaid customs duties within fiscal 2008 for the combined amount due for fiscals 2007, 2006 and 2005 and the applicable portions of fiscal 2004 would cause our 2008 financial statements to be materially misstated. Therefore, in accordance with SAB 108, we have corrected our fiscal 2007 and 2006 financial statements included in this report for the aforementioned matter.

The following table sets forth the percentage of net sales represented by items included in or derived from our consolidated statements of income for fiscal years ended June 30, 2008, 2007 (as corrected) and 2006 (as corrected). The consolidated statements of operations data include the amounts of Sport Haley and Reserve Apparel.

Results of Operations Data                          Fiscal Year Ended June 30,
(2007 and 2006 Corrected)                        2008          2007          2006
Net sales                                          100.0 %       100.0 %       100.0 %
Total cost of goods sold                            62.9          65.3          67.6
Gross profit                                        37.1          34.7          32.4
Total other operating costs                         43.1          43.8          38.2
Loss from operations                                (6.0 )        (9.1 )        (5.8 )
Other income and expenses, net                       1.4           1.9           2.1
Loss from operations before minority
interest in subsidiary loss and provision
for income taxes                                    (4.6 )        (7.2 )        (3.7 )
Minority interest in subsidiary income/loss          0.0          (0.2 )         1.2
Provision for income taxes                          (0.0 )        (0.2 )        (0.0 )
Net loss                                            (4.6 )%       (7.6 )%       (2.5 )%

Comparison of Fiscal Years Ended June 30, 2008 and 2007 (as corrected)

Total net sales for fiscal 2008 were $17,117,000, a decrease of $1,776,000, or 9%, as compared with sales of $18,893,000 for fiscal 2007. Net sales of fashion apparel for fiscal 2008 were $16,399,000, a decrease of $389,000, or 4%, as compared with fashion apparel sales of $17,088,000 for fiscal 2007. Net sales of branded apparel for fiscal 2008 were $160,000, a decrease of $1,025,000, or 86%, as compared with branded apparel sales of $1,185,000 for fiscal 2007. The remainder of our net sales for fiscal 2008 and 2007 were comprised of embroidery and shipping revenues.

Our consolidated 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, freight out, embroidery costs and other charges in our cost of goods sold. Our overhead allocation includes our production costs plus a portion of our distribution costs, such as receiving and inspection 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. Our gross margins also include, on a consolidated basis, the operations of Reserve Apparel, which distributed Top-Flite® branded apparel until November 2007 to the mass retail market at much lower price points and gross margins than those expected to be achieved in the premium and mid-price markets

where we distribute our SPORT HALEY® and Ben Hogan® fashion apparel brands. Other fashion apparel companies within the golf industry may or may not also operate within the lower price markets. We include royalty payments, relating to sales of licensed apparel, in selling, general and administrative expenses.

Fashion Apparel

For fiscal 2008, net sales of SPORT HALEY® women's fashion apparel were $8,170,000, an increase of $1,257,000, or 18%, from net sales of $6,913,000 for fiscal 2007. We attribute the increase to customer awareness of the SPORT HALEY® brand, our keen sense of observing fashion trends within the women's golf apparel market and the cohesiveness of our women's design staff, which has kept the SPORT HALEY® brand fresh and in pace with customer demand for technical fabrics and athletic styling. We believe our SPORT HALEY® women's fashion apparel is well positioned to weather continued competition within golf apparel markets and is also well suited for certain retail markets, which we have begun to pursue.

For fiscal 2008, net sales of Ben Hogan® men's fashion apparel were $8,229,000, a decrease of $1,946,000, or 19%, from net sales of $10,175,000 for fiscal 2007. We attribute the decrease primarily to further entrenchment of brands such as Nike, Adidas and Under Armour within the country club and resort markets in which we operate. Historically, the country club and resort markets preferred to sell high-quality apparel that was not widely distributed in other retail markets. Broad market acceptance of the polyester moisture-wicking and other performance garments offered by apparel brands such as Nike, Adidas and Under Armour has continued to grow within the country club and resort markets. We believe that the penetration of Nike, Adidas and Under Armour into golf apparel markets has continued to dilute the value with regard to the exclusivity of fashion apparel brands such as Ben Hogan®. In order to bolster market acceptance of our Ben Hogan® fashion apparel, we've introduced moisture-wicking cotton and cotton-blend garments and have also infused some younger-looking, more athletic styled garments into our fashion collections. We have also continued to market Ben Hogan® fashion apparel to upscale retail stores and to corporate markets and expect that our efforts will achieve increased sales within those markets in fiscal 2009. Ben Hogan® men's fashion apparel is marketed in accordance with a license agreement we maintain with Callaway, which we consider to be a key component of our overall business strategies.

As a percentage of sales, gross profit of our fashion apparel was 37% for fiscal 2008 and was 35% for fiscal 2007, as corrected. Gross profit of fashion apparel has increased somewhat since fiscal 2007 primarily because we located alternative markets for our excess fashion apparel inventories in fiscal 2008 that garnered higher sales prices for such apparel, and because negotiated prices for finished apparel purchased from foreign suppliers have remained relatively unchanged over the same period. Excess inventories are common within the fashion apparel industry. We market excess fashion apparel inventories at reduced wholesale prices to our customers in the normal course of business. Remaining excess inventories are liquidated through other markets. The valuation of excess inventories, when the market price for such inventories is lower than cost, negatively impacts our gross profit percentage, because a reduction of inventory value causes a corresponding increase in our cost of goods sold, thereby reducing our gross profit. Gross profit with regard to our fashion apparel was negatively impacted by $230,000 and $312,000 for fiscal 2008 and 2007, respectively, by the adjustment of our finished goods inventories to the lower of cost or market. The disposition of excess inventories also negatively impacts our gross profit percentage, even when such inventories are properly valued to the lower of cost or market, because such valuation causes sales to be recorded with gross profit at or near zero. In fiscal 2008, we recorded net sales of $778,000 and loss of $1,000 with regard to the disposition of excess fashion apparel inventories. Comparatively, in fiscal 2007, we recorded net sales of $543,000 and loss of $176,000 with regard to the disposition of excess fashion apparel inventories.

Selling, general and administrative expenses with regard to fashion apparel were $6,624,000 for fiscal 2008, an increase of $81,000, or 1%, from $6,705,000 in fiscal 2007. During fiscal 2008, decreases in sales commissions, audit and tax preparation fees, directors' fees, shareholder costs, travel expenses and depreciation expense were more than offset by increases in salaries and severance costs, computer expenses, shipping supplies and use taxes. The decrease in sales commissions correlates to our comparative decrease in sales in fiscal 2008 when compared with sales in fiscal 2007. Severance costs in fiscal 2008 consisted of $55,000 in compensation paid to our former eastern regional sales manager. We did not record any severance compensation cost in fiscal 2007. As a percentage of net

fashion apparel sales, related selling, general and administrative expenses were 39% for fiscal 2008 as compared with 38% for fiscal 2007.

We recorded royalty expense of $569,000 for fiscal 2008, a decrease of $106,000, or 16%, as compared with royalty expense of $675,000 for fiscal 2007. The decrease in royalty expense generally corresponds to the decrease in sales of Ben Hogan® fashion apparel over the comparative period. Royalty expense with regard to fashion apparel is due to Callaway in accordance with the license they previously granted us to market men's fashion apparel bearing the Ben Hogan® label. While our sales have historically generated royalties which have consistently exceeded the minimum annual royalties required by the license agreement with regard to Ben Hogan® fashion apparel, we expect that royalties generated on sales of Ben Hogan® fashion apparel will be insufficient to meet the contractual minimum royalty requirement for calendar 2008. Accordingly, we recorded a contingent liability of $80,000 with regard to calendar year 2008 minimum royalties due for Ben Hogan® fashion apparel as of June 30, 2008.

Primarily due to the factors discussed above, loss from operations with regard to fashion apparel was ($838,000) for fiscal 2008, an improvement of $563,000, or 40%, from ($1,401,000) for fiscal 2007, as corrected.

Branded Apparel

We previously considered Top-Flite® branded apparel, which we marketed pursuant to our licensing agreement with Callaway for such apparel, to be a key component in our overall business strategies, designed to return the Company to sustained profitability. We marketed Top-Flite® branded apparel to Wal-Mart and other mass retailers and big-box type high sales volume retail stores from November 2005 to November 2007. Net sales of Top-Flite® branded apparel for fiscal 2007 were $1,185,000, including sales to Wal-Mart of $1,000,000. Net sales of Top-Flite® branded apparel for fiscal 2007 were $160,000, primarily comprised of sales to a retailer for a test in 50 of its stores. In March 2008, we reached an agreement with Callaway to remove the Top-Flite® brand from the license agreement, effective January 1, 2008.

Our distribution of Top-Flite® branded apparel to the mass retail market generally generated gross margins lower than those expected to be achieved in the premium and mid-price markets where we distribute our SPORT HALEY® and Ben Hogan® fashion apparel brands. Wholesale prices are generally expected to be . . .