Phoenix Footwear Group, Inc. reported that net sales for the second quarter increased 127.1% to $34.9 million compared to $15.4 million for the second quarter of 2005. The strong top-line performance was primarily attributable to double-digit growth from the Altama and Royal Robbins brands and solid contributions from SoftWalk and Trotters.

The company reported strong organic growth of 27.4%, which excludes the Tommy Bahama and Chambers brands as these were acquired in the last twelve months. This revenue reflects an 87.8% increase in Altama, a 25.8% increase in Royal Robbins, a 5.1% increase in SoftWalk and a 2.5% increase in Trotters, offset by a 21.5% decline in H.S. Trask. On a trailing twelve month basis, net sales through the second quarter increased 66.6% to $142.6 million, compared to $85.6 million a year ago.

The company’s net loss for the second quarter was $342,000, or four cents per share, compared to net loss of $1.0 million, or 14 cents per share, for the comparable quarter a year ago. Included in the net loss is a severance charge of approximately $800,000, or six cents per diluted share. Excluding this charge, earnings per share were two cents. On a trailing twelve month basis, net income increased 200.6% to $3.7 million, compared to $1.2 million, a year ago.

Commenting on the quarter, Jim Riedman, Phoenix Footwear’s Chairman and CEO, said, “The second quarter results are a tangible validation of our multi-brand strategy. They represent the fourth consecutive quarter of improved financial performance. Of the brands weve owned more than twelve months, sales in four of five increased year-over-year, resulting in strong organic growth for the quarter. Additionally, we continued to expand Phoenix’s market presence by broadening our distribution network and further solidifying relationships with key customers. Over the past year, we have focused the organization on operating efficiencies and pursued optimization of our manufacturing and sourcing capabilities, which has resulted in improved margins and profitability.”

Mr. Riedman continued, “Based on the current trends, we are optimistic about Phoenix’s positioning for the balance of the year. We will continue to focus our sales efforts, further reduce our operating costs and pay down the company’s debt. Our management team is committed to maximizing returns to Phoenix’s shareholders.”

Gross margins in the second quarter of 2006 were 37.8%, compared to 38.2% in the second quarter of 2005. The decrease in gross margin reflects the contribution from the acquisition of Tommy Bahama and Chambers Belt company which are in lower gross margin businesses than the company’s other branded products.

Operating costs increased to $12.2 million, compared to $7.1 million in the second quarter of 2005 primarily associated with the Chambers and Tommy Bahama footwear brands acquired during late 2005. Operating expenses as a percentage of sales were 35.1% in the second quarter, down significantly as compared to 46.0% in the second quarter of 2005. Included in operating expenses is a severance charge of approximately $800,000. The improvement in operating expenses as a percentage of sales reflects higher sales volume and improved operating efficiencies.

Operating income for the second quarter was $935,000, compared to an operating loss of $1.2 million in the second quarter of 2005. On a trailing twelve month basis, operating income was $10.8 million, or 7.6% of total sales, compared to $3.5 million, or 4.1% of total sales, in the second quarter of 2005.

EBITDA for the second quarter was $1.6 million, compared to a loss of $748,000 in the second quarter of 2005. On a twelve trailing month basis, EBITDA increased 157.7% to $13.4 million, compared to $5.2 million in the same period a year ago.

During the second quarter of 2006, interest expense totaled $1.5 million, compared to $533,000 in the comparable prior year period. This increase is primarily related to increased acquisition and working capital debt associated with brand acquisitions and higher interest rates.

For the six months ended July 1, 2006, net sales increased 80.1% to $75.2 million compared to $41.8 million for the comparable prior-year period. Organic growth during the first six months of 2006 was 14.7% as increases at Altama and Royal Robbins were offset by declines in the other legacy brands. Chambers and Tommy Bahama contributed 24.9% and 11.5% to the year-to-date sales, respectively.

Net income for the six months ended July 1, 2006 was $2.7 million, or $0.33 per diluted share, compared to net income of $140,000, or $0.02 per diluted share, for the comparable period a year ago. Included in the six-month net income is a $1.5 million purchase price gain adjustment related to the Altama acquisition which was recorded in the first quarter. Weighted-average shares outstanding for the two periods were 8.3 million and 7.9 million, respectively.

Gross margins for the six months ended July 1, 2006 were 38.4% of net sales, compared to 39.4% for the comparable prior-year period. The decrease in the gross margin percentage was due to the recent acquisitions, which generate lower gross margins than the company’s other branded products and a higher level of footwear close-out and mark down sales as compared to the prior year period.

Operating costs for the first six months of 2006 totaled $22.5 million, or 30.0% of net sales, versus $15.2 million, or 36.5% of net sales for the comparable prior year period. Operating income for the first six months of 2006 was $6.3 million, or 8.4% of net sales, up considerably from $1.2 million, or 2.9% of net sales, for the same period a year ago. The 2006 year-to-date operating income is inclusive of the severance charge discussed earlier.

For the six months ended July 1, 2006, interest expense totaled $2.8 million, compared to $965,000 in the comparable prior-year period. This increase is related to increased acquisition and working capital debt associated with brand acquisitions and higher interest rates.

Royal Robbins

Second quarter 2006 net sales for Royal Robbins were strong at $6.5 million, an increase of 25.8%, compared to $5.2 million a year ago. The company continued to solidify its position in Canada and maintained strong growth momentum in the domestic market as well. During the quarter Royal Robbins added Sport Chalet as a new customer and plans to have 15 doors open for its Spring 2007 line of merchandise. Additionally, Judson Taylor has joined the organization as Vice President of Sales. Finally, the current backlog suggests continued growth in the second half of the year.

Tommy Bahama

Sales from the Tommy Bahama Footwear brand, which was acquired in August of 2005, totaled $4.3 million, or 12.3% of total sales. During the quarter, the company successfully proceeded with integrating Tommy Bahama operations and moving its product lines toward more competitive and cost efficient third party sourcing partners. The company has yet to finalize its footwear product offering for 2007; however the Tommy Bahama belt line has been updated to reflect the apparel line for Fall 2006 and Spring 2007 seasons. The company also continued to reduce Tommy Bahama’s inventory from the 2005 season and launched a new Tommy Bahama small accessories line to select specialty accounts. The company has made several organizational changes within its Tommy Bahama business unit including promoting Kelly Green to lead the organization. Previously she was responsible for overseeing the company’s women’s belt and accessories business. Additionally, Cathy Taylor, formerly President of Cole Haan, is consulting with the company on the integration of this unit and the development of the footwear line. Lastly during the quarter the company hired Peter Ferrer as a Sales Manager for Tommy Bahama — Men’s. Ferrer will work on developing a national sales team for the brand.

Chambers

The acquisition of the Chambers Belt company was completed in June of 2005. In the second quarter, net sales contribution was $11.0 million, representing 31.6% of total sales. The company continued to fortify relationships with its key customers, such as Wal-Mart, Kmart and Tractor Supply company (TSC), which resulted in strong growth in each of the accounts. In addition to robust sales of existing labels, the company picked up several new private label programs with Wal-Mart, TSC and Kmart. The program at Kmart, Route 66, is expected to expand to 1,400 of Kmart’s doors over the next 12 months.

Altama

Altama’s net sales for the second quarter of 2006 increased 87.8% to $6.5 million, compared to net sales of $3.5 million for the second quarter of 2005. The brand performed extremely well during the quarter due, in part, to the strong demand from the EXO-Speed(TM) tactical boots. The company opened 40 new accounts in the quarter, bringing the year-to-date total to 90. Additionally, Phoenix signed up five new rep groups during the quarter. The company made considerable progress in commercializing the new license agreement with The American Red Cross. The prototypes have been developed and the company has secured important sourcing partners. The new line was introduced at The WSA Show in Las Vegas in early August and received positive feedback. The company expects the products to be generating revenue in the first quarter of 2007. The company is under the final option year of its contract with the DoD to manufacture mil-spec boots, which expires in September 2006. In August 2006, Altama submitted a bid for a new five-year solicitation for hot weather combat boots and corresponding awards to be made no later than the first quarter of fiscal 2007. There is no certainty that Altama will be notified of an award by that time or whether it will be awarded that or future DoD boot solicitations. If Altama does not receive an award from this upcoming solicitation, or future awards, the company could be adversely affected for several years.

SoftWalk

SoftWalk net sales increased 5.1% to $2.2 million, compared to $2.1 million for the second quarter of 2005. The brand returned to positive core growth after losing the Dillard’s account in early 2005. SoftWalk opened 41 new accounts year-to-date led by the expansion of Marshall Fields from 3 to 13 doors. As margins and sell-throughs remain healthy, the company believes that SoftWalk is well positioned for continued growth during the fall season.

Trotters

Second quarter Trotters sales increased 2.5% to $3.0 million, compared to $2.9 million for the same quarter a year ago. The brand was able to correct design problems, normalize its sales and enjoy significantly improved gross margins during the quarter. Trotters opened 53 new accounts year-to-date including its re-established relationship with Brown Shoe Fit in the first quarter.

H.S. Trask

Net sales for H.S. Trask decreased 21.5% to $1.3 million in the second quarter, compared to $1.7 million a year ago. The company made considerable progress in reducing H.S. Trask’s inventory and reducing the number of pairs by 25% on a year-to-date basis. Additionally, sourcing has been moved from Brazil to Asia, which should lead to stronger margins in 2007. Most recently, the brand introduced a new holiday line of product which it expects will rejuvenate growth in the second half of the year.

Balance Sheet

As of July 1, 2006, Phoenix Footwear’s cash and cash equivalents totaled $1.1 million. Total debt, including the company’s outstanding line of credit, was $56.5 million versus $60.2 million at the end of the first quarter of 2006.

The company violated several of its bank debt covenants during its second quarter ending July 1, 2006, primarily as a result of approximately $800,000 in severance charges associated with the departure of its CEO during the quarter. The company received a waiver from its bank related to the violations of these financial covenants. On August 9, 2006 the company received a commitment letter from its bank to enter into a Modification Agreement to amend and renew its revolving credit facility, term loan and bridge loan. The proposed agreement would establish a $54 million first lien senior credit facility consisting of a $28 million revolving credit facility and a $26 million first lien term loan facility. The revolving credit facility and term loan bears interest at a base rate elected by the company plus a margin. The commitment proposal also includes an $8.5 million second lien term facility which bears interest at LIBOR plus 7%. The proposed modification agreement is subject to standard closing conditions including loan fees and loan documentation. The company is evaluating this loan proposal and has not yet accepted the commitment letter but is in discussions with its lender and expects to execute the modification agreement within the next 30 days. Under applicable accounting rules, the company is required to classify its entire bank debt as a current liability in its July 1, 2006 consolidated condensed unaudited balance sheet included with this press release. Once the Modification Agreement is executed the company can reclassify the approximately $47 million long-term portion of its bank debt to long-term liabilities. There can be no assurance, however, that this loan modification will occur.

                       Phoenix Footwear Group, Inc.
              Consolidated Condensed Statement of Operations

                               For the Quarter Ended
                                    (Unaudited)
                       July 1,                   July 2,
                        2006                      2005

  Net sales          $34,871,000       100.0%  $15,353,000       100.0%
  Cost of goods sold  21,694,000        62.2%    9,481,000        61.8%

  Gross profit        13,177,000        37.8%    5,872,000        38.2%

  Operating expenses:
    Selling and
     administrative
     expenses        $10,929,000        31.3%   $6,444,000        42.0%
    401k stock grant
     compensation        161,000         0.5%      233,000         1.5%
    Amortization         323,000         0.9%      386,000         2.5%
    Other (income)
     expense, net        829,000         2.4%        2,000         0.0%
      Total operating
       expenses       12,242,000        35.1%    7,065,000        46.0%

  Income (Loss) from
   operations            935,000         2.7%   (1,193,000)       -7.8%

  Interest expense    $1,470,000                  $533,000

  Income (Loss)
   before income
   taxes                (535,000)       -1.5%   (1,726,000)      -11.2%

  Income tax provision
   (benefit)           $(193,000)                $(685,000)

  Net Income (Loss)    $(342,000)       -1.0%  $(1,041,000)       -6.8%


  Earnings (Loss) per
   common share:

  Basic                   ($0.04)                   ($0.14)
  Diluted