Phoenix Footwear Group, Inc. saw net sales from continuing operations for the second quarter of fiscal 2007 decrease 11.3% to $25.2 million, compared to $28.4 million for the second quarter of fiscal 2006. The decline was primarily driven by a 47.7% decrease in Tommy Bahama Footwear, and a 17.8% decrease in Altama. The net sales decrease was partially offset by a 14.9% increase in Trotters.

“The past several months have been particularly productive as we accomplished several important objectives necessary to build our foundation for the future,” commented Jim Riedman, Phoenix Footwear's Chairman. “Cathy Taylor has quickly transitioned into her new role as CEO and is already having a significant impact at the Company.”

Cathy Taylor, Phoenix Footwear's Chief Executive Officer, added, “Over the last several months, we have been conducting an assessment of each of our brands and functional areas. Although we are only part way through this assessment, I am pleased with a number of initial findings. While we are disappointed in our financial performance for the current quarter, based on my experience in this industry, I have confidence in our ability to make some short-term gains for the remainder of 2007 and, more importantly, provide a strong foundation for substantial improvement in 2008. We expect to finish our assessment and complete the framework for our revitalization plan by the end of the third quarter.”

Ms. Taylor continued, “We do believe recent events are steps in the right direction. Specifically, we successfully closed the sale of our Royal Robbins division and paid down a significant portion of our long-term debt, providing us with a stronger balance sheet which will allow us to pursue our growth initiatives and strengthen our remaining brands. Our Altama unit secured a new five year contract from the Department of Defense (DoD) which solidifies this division's outlook. Additionally, our Tommy Bahama Footwear brand participated in Nordstrom's corporate-wide product style-out which we believe will result in an all region penetration with significant increases in our pattern and door penetration. While we do not expect Tommy Bahama to make up all the ground it lost in the first half of the year, we do believe this important increase in product and door penetration will result in double-digit year-over-year growth for the remainder of fiscal 2007, solid gross margins and positive earnings in the fourth quarter. We also expect to generate positive growth from most of our remaining brands for the second half of the year.”

Ms. Taylor concluded, “As we ramp our Altama operations back up without the benefit of shipments until very late in the third quarter, we expect to experience pressure on our consolidated gross margins during the current quarter. We anticipate, however, that we will be free of that burden as we enter the final quarter of fiscal 2007.”

Financial Results

For the second quarter of fiscal 2007, the company reported net loss of $929,000, or 12 cents per share, on 8.0 million weighted-average shares outstanding. Net loss for the second quarter of fiscal 2007 included a net loss of $149,000 from the discontinued operations of the Royal Robbins brand. For the second quarter of fiscal 2006, the company reported a net loss of $342,000, or 4 cents per share, on 7.9 million weighted-average shares outstanding. Net loss for the second quarter of fiscal 2006 included a net loss of $169,000, or 2 cents per share, from the discontinued operations of the Royal Robbins brand.

On July 2, 2007, Phoenix Footwear sold all of the outstanding capital stock of its wholly-owned subsidiary, Royal Robbins along with related assets of PXG Canada, to Kellwood Company. The net proceeds from the sale were applied to reduce the company's bank debt.

Due to the sale, the results of the Royal Robbins business, previously included in the footwear and apparel segment, have been segregated from continuing operations and reported as discontinued operations in the Consolidated Condensed Statements of Operations for the three and six month periods ended June 30, 2007 and July 1, 2006. Interest expense incurred on the debt that was required to be repaid as a result of the sale was allocated to discontinued operations for these periods. The gain from this transaction, which on a pre-tax basis was approximately $23 million, will be included in the third quarter of 2007 financial results.

Gross margin from continuing operations for the second quarter of fiscal 2007 was 30.0%, compared to 35.2% for the second quarter of fiscal 2006. The decrease in gross margin is primarily related to our Tommy Bahama Footwear division, higher manufacturing costs associated with lower production volumes at the company's Altama division and additional sourcing and logistic costs incurred during the period in connection with the company's product sourcing transition from Brazil to China.

Operating costs from continuing operations were $8.9 million for the quarter, compared to $9.6 million for the second quarter of fiscal 2006. Operating costs from continuing operations for the second quarter of fiscal 2006 include a severance charge of $829,000 associated with the departure of the company's prior CEO. Operating expenses from continuing operations as a percentage of net sales were 35.3% in the second quarter of fiscal 2007, compared to 33.8% in the second quarter of fiscal 2006. This percentage increase is a result of costs being expensed against a lower level of sales.

As of June 30, 2007 the company failed to meet its financial covenants with its bank. Since that date however, the company's term loan indebtedness has been repaid in full and the company is having ongoing discussions with its bank about a replacement facility consistent with the company's reduced funding needs. There is no assurance, when or if, an amended or new facility will be provided by the bank.

For the six months ended June 30, 2007, net sales from continuing operations were $57.6 million, compared to $57.5 million for the comparable prior-year period. During the period the company's military boot, accessories, and footwear and apparel segments grew, while its premium footwear segment experienced a decline.

Net loss for the six months ended June 30, 2007 was $515,000, or $0.06 per diluted share, and included net income of $774,000, or $0.10 per diluted share, from discontinued operations related to the Royal Robbins business unit. For the six months ended July 1, 2006, the company reported net income of $2.7 million, or $0.33 per diluted share. Included in the 2006 six-month period was net income of $1.1 million, or $0.13 per diluted share, from discontinued operations related to the Royal Robbins business unit. Additionally, the six month period ended July 1, 2006 includes a net one-time gain associated with the Altama purchase price adjustment of $1.5 million partially offset by the severance charge discussed earlier. Weighted-average shares outstanding for the two periods were 8.0 million and 8.3 million, respectively.

Balance Sheet

As of June 30, 2007, Phoenix Footwear's cash and cash equivalents totaled $1.1 million. Additionally, the company had $51.2 million in bank debt, including its outstanding line of credit. As of June 30, 2007 the company's had a working capital deficit of $8.5 million. On July 2, 2007 the company closed it divestiture of Royal Robbins resulting in the repayment of much of the company's outstanding debt. As of July 28, 2007 the company's total bank indebtedness amounted to $14.1 million.

                      Phoenix Footwear Group, Inc.
                Consolidated Condensed Statement of Operations
                                (In thousands)

                                               For the Quarter Ended
                                                    (Unaudited)

                                          June 30          July 1
                                           2007             2006

    Net sales                             $25,169  100.0%  $28,373  100.0%
    Cost of goods sold                     17,618   70.0%   18,391   64.8%

    Gross profit                            7,551   30.0%    9,982   35.2%

    Operating expenses:
      Selling and administrative expenses   8,467   33.6%    8,291   29.2%
      Non cash 401k stock grant
       compensation                           134    0.5%      161    0.6%
      Amortization                            279    1.1%      323    1.1%
      Other expense, net                      -        -%      829    2.9%
         Total operating expenses           8,880   35.3%    9,604   33.8%

    (Loss) Income from operations          (1,329)  -5.3%      378    1.3%

    Interest expense                          602              649

    (Loss) Income before income taxes and
     discontinued operations               (1,931)  -7.7%     (271)  -1.0%

    Income tax (benefit) expense           (1,151)             (98)

    (Loss) Income before discontinued
     operations                              (780)  -3.1%     (173)  -0.6%

    (Loss) Income from discontinued
     operations, net of tax                  (149)  -0.6%     (169)  -0.6%

    Net (loss) income                       $(929)  -3.7%    $(342)  -1.2%


    (Loss) earnings per common
     share:

    Basic
    Continuing operations                  $(0.10)          $(0.02)
    Discontinued operations                 (0.02)           (0.02)
    Net (loss) earnings                    $(0.12)          $(0.04)

    Diluted
    Continuing operations                  $(0.10)          $(0.02)
    Discontinued operations                 (0.02)           (0.02)
    Net (loss) earnings                    $(0.12)          $(0.04)


    Weighted-average shares
     outstanding:
    Basic                               8,044,871        7,911,531
    Diluted                             8,044,871        7,911,531