UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended ~~December 31, 2005~~April 1, 2006


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

For the transition period from to

Commission File Number 1-15583

DELTA APPAREL, INC.

(Exact name of registrant as specified in its charter)


GEORGIA		58-2508794
(State or other jurisdiction of		(I.R.S. Employer
Incorporation or organization)		Identification No.)

2750 Premiere Parkway, Suite 100
Duluth, Georgia 30097

(Address of principal executive offices) (Zip Code)

(678) 775-6900

(Registrant’s telephone number, including area code)

(Not Applicable)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesþ Noo.

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



Large accelerated filero	Accelerated filero	Non-accelerated filerþ

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act).

Yeso Noþ.

As of ~~February 1,~~April 24, 2006, there were outstanding ~~8,621,298~~8,598,498 shares of the registrant’s common stock, par value of $0.01, which is the only class of the outstanding common or voting stock of the registrant.

INDEX


	Page
PART I. Financial Information	~~Page~~
~~Item 1. Financial Statements~~
~~Interim~~ Item 1. Financial Statements
Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets—~~December 31, 2005~~April 1, 2006 and July 2, 2005		3
Condensed Consolidated Statements of Income—Three months and ~~six~~nine months ended ~~December 31,~~April 1, 2006 and April 2, 2005 ~~and January 1, 2005~~		4
Condensed Consolidated Statements of Cash Flows—~~Six~~Nine months ended ~~December 31,~~April 1, 2006 and April 2, 2005 ~~and January 1, 2005~~		5
Notes to Condensed Consolidated Financial Statements		6-14
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14-20
Item 3. Quantitative and Qualitative Disclosures about Market Risk		~~20-21~~	20
Item 4. Controls and Procedures		21
PART II. Other Information
Item ~~4. Submission~~2. Unregistered Sales of ~~Matters to a Vote~~Equity Securities and Use of ~~Security Holders~~Proceeds		22	21
Item 6. Exhibits and Reports on Form 8-K		22
Signatures		23
Exhibits	24-29
~~24-27~~EX-10.31 AMENDMENT OF EMPLOYMENT AGREEMENT BETWEEN DELTA APPAREL, INC AND HERBERT M. MUELLER
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CAO
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.2 SECTION 906 CERTIFICATION OF CAO

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

DELTA APPAREL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(in thousands, except shares and per share amounts)
(

~~Unaudited)~~(Unaudited)


	December 31,			July 2,			April 1,			July 2,
Assets	2005			2005			2006			2005
Current assets:
Cash	$	948		$	298		$	524		$	298
Accounts receivable, net		32,161			36,611			40,434			36,611
Income taxes receivable		1,662			—			737			—
Inventories		114,779			99,026			112,710			99,026
Prepaid expenses and other current assets		2,098			1,968			2,683			1,968
Deferred income taxes		2,619			1,252			3,002			1,252

Total current assets		154,267			139,155			160,090			139,155

Property, plant and equipment, net		20,692			19,950			20,959			19,950
Goodwill and other intangibles, net		19,717			—
Goodwill and intangibles, net								19,577			—
Other assets		1,855			409			2,170			409

Total assets	$	196,531		$	159,514		$	202,796		$	159,514


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable and accrued expenses	$	39,588		$	36,700		$	41,760		$	36,700
Income taxes payable		—			480			—			480
Current portion of long-term debt		3,683			15,065			3,683			15,065

Total current liabilities		43,271			52,245			45,443			52,245

Long-term debt		58,689			17,236			60,582			17,236
Deferred income taxes		1,111			171			789			171
Other liabilities		19			3,398			15			3,398

Total liabilities		103,090			73,050			106,829			73,050

Stockholders’ equity:
Preferred stock—2,000,000 shares authorized; none issued and outstanding		—			—			—			—
Common stock—par value $.01 a share, 15,000,000 shares authorized, 9,646,972 shares issued, and 8,621,298 and 8,522,052 shares outstanding as of December 31, 2005 and July 2, 2005, respectively		96			96
Common stock—par value $.01 a share, 15,000,000 shares authorized, 9,646,972 shares issued, and 8,611,198 and 8,522,052 shares outstanding as of April 1, 2006 and July 2, 2005, respectively								96			96
Additional paid-in capital		54,348			53,867			54,724			53,867
Retained earnings		45,019			39,106			47,495			39,106
Treasury stock—1,025,674 and 1,124,920 shares as of December 31, 2005 and July 2, 2005, respectively		(6,022	)		(6,605	)
Treasury stock—1,035,774 and 1,124,920 shares as of April 1, 2006 and July 2, 2005, respectively								(6,348	)		(6,605	)

Total stockholders’ equity		93,441			86,464			95,967			86,464

Total liabilities and stockholders’ equity	$	196,531		$	159,514		$	202,796		$	159,514

See accompanying notes to condensed consolidated financial statements.

DELTA APPAREL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(in thousands, except per share amounts)

(Unaudited)


	Three Months Ended					Six Months Ended					Three Months Ended					Nine Months Ended
	December 31,		January 1,			December 31,		January 1,			April 1,			April 2,		April 1,		April 2,
	2005		2005			2005		2005			2006			2005		2006		2005
Net sales	$	57,702	$	49,195		$	118,275	$	103,495		$	69,365		$	58,272	$	187,640	$	161,767
Cost of goods sold		39,433		38,379			81,312		81,102			50,149			43,528		131,461		124,631

Gross profit		18,269		10,816			36,963		22,393			19,216			14,744		56,179		37,136
Selling, general and administrative expenses		13,768		8,094			26,468		16,540			13,953			10,392		40,421		26,932
Other income (expense)		433		(15	)		404		(5	)

Operating income		4,934		2,707			10,899		5,848			5,263			4,352		15,758		10,204
Other (expense) income												(128	)		3,616		276		3,612
Interest expense, net		997		835			1,682		1,538			1,056			679		2,738		2,217

Income before income taxes		3,937		1,872			9,217		4,310			4,079			7,289		13,296		11,599
Provision for income taxes		1,561		718			3,464		1,712			1,335			1,844		4,799		3,556

Net income	$	2,376	$	1,154		$	5,753	$	2,598		$	2,744		$	5,445	$	8,497	$	8,043


Earnings per share
Basic	$	0.28	$	0.14		$	0.67	$	0.31		$	0.32		$	0.65	$	0.99	$	0.97
Diluted	$	0.27	$	0.13		$	0.67	$	0.30		$	0.31		$	0.64	$	0.98	$	0.95

Weighted average number of shares outstanding		8,621		8,292			8,577		8,288			8,622			8,376		8,591		8,316
Dilutive effect of stock options		60		270			44		271			108			182		54		164

Weighted average number of shares assuming dilution		8,681		8,562			8,621		8,559			8,730			8,558		8,645		8,480


Cash dividends declared per common share	$	0.04	$	0.35		$	0.08	$	0.07		$	0.04		$	0.035	$	0.12	$	0.105

See accompanying notes to condensed consolidated financial statements.

DELTA APPAREL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)


	Six Months Ended						Nine Months Ended
	December 31,			January 1,			April 1,			April 2,
	2005			2005			2006			2005
Operating activities:
Net income	$	5,753		$	2,598		$	8,497		$	8,043
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,392			2,383			3,544			3,285
Deferred income taxes		(384	)		(101	)		(879	)		(3,125	)
(Gain) loss on sale of property and equipment		(68	)		30
Gain on sale of property and equipment								(35	)		(3,538	)
Noncash compensation		1,758			828			2,447			1,742
Changes in operating assets and liabilities, net of assets acquired and liabilities assumed in connection with business acquisitions:
Accounts receivable		15,133			10,871			6,860			3,224
Inventories		(12,029	)		(1,014	)		(9,857	)		684
Prepaid expenses and other current assets		61			159			(524	)		(2,784	)
Other noncurrent assets		(21	)	��	(253	)		53			1,732
Accounts payable and accrued expenses		(3,579	)		(3,869	)		(1,962	)		9,865
Income taxes		(2,143	)		(2,623	)		(1,217	)		2,936
Other liabilities		(3,378	)		(2,994	)		(3,382	)		(8,597	)

Net cash provided by operating activities		3,495			6,015			3,545			13,467


Investing activities:
Purchases of property, plant and equipment		(2,691	)		(5,439	)		(4,093	)		(8,979	)
Proceeds from sale of property, plant and equipment		124			92			142			9,796
Acquisition of business		(28,237	)		—			(28,237	)		—
Cash invested in joint venture		(1,425	)		—			(1,814	)		—

Net cash used in investing activities		(32,229	)		(5,347	)
Net cash (used in) provided by investing activities								(34,002	)		817


Financing activities:
Repayment of Soffe revolving credit facility, net		(11,781	)		(3,969	)		(11,781	)		(2,190	)
Proceeds from long-term debt		84,951			24,476			121,852			41,302
Repayment of long-term debt		(43,100	)		(20,910	)		(78,107	)		(53,077	)
Cash paid for common stock								(408	)		—
Proceeds from exercise of stock options		—			35			158			447
Dividends paid		(686	)		(580	)		(1,031	)		(874	)

Net cash provided by (used in) financing activities		29,384			(948	)		30,683			(14,392	)


Increase (decrease) in cash		650			(280	)		226			(108	)

Cash at beginning of period		298			333			298			333

Cash at end of period	$	948		$	53		$	524		$	225


Supplemental cash flow information:
Cash paid during the period for interest	$	1,538		$	1,200		$	2,478		$	1,829

Cash paid during the period for income taxes	$	5,974		$	4,804		$	6,844		$	4,917

Noncash financing activity—common stock issued under option plan	$	1,428		$	59		$	1,428		$	59

See accompanying notes to condensed consolidated financial statements.

DELTA APPAREL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note A—Basis of Presentation

We prepared the accompanying interim condensed consolidated financial statements in accordance with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. We believe these condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation. Operating results for the three and ~~six~~nine months ended ~~December 31, 2005~~April 1, 2006 are not necessarily indicative of the results that may be expected for the year ending July 1, 2006. For more information regarding our results of operations and financial position refer to the consolidated financial statements and footnotes included in our Form 10-K for the year ended July 2, 2005, filed with the Securities and Exchange Commission.

“Delta Apparel,” the “Company,” and “we,” “us” and “our” are used interchangeably to refer to Delta Apparel, Inc. together with our wholly-owned subsidiaries, M. J. Soffe Co. (“M. J. Soffe”, or “Soffe”), Junkfood Clothing Company (“Junkfood”), and our other subsidiaries, as appropriate to the context.

Note B—Accounting Policies

Our accounting policies are consistent with those described in our Summary of Significant Accounting Policies in our Form 10-K for the year ended July 2, 2005 filed with the Securities and Exchange Commission.

Note C—New Accounting Standards

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Staff Position (“FSP”) Nos. 109-1,Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Actof 2004 (“FSP 109-1”), and 109-2,Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004(“FSP 109-2”). The American Jobs Creation Act of 2004 (the “Jobs Creation Act”) was enacted on October 22, 2004. Under guidance in FSP 109-1, the qualified production activities deduction will be treated as a “special deduction” as described in FASB Statement No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date of the Jobs Creation Act. We have determined that our production activities will qualify under the Jobs Creation Act and expect ~~the benefit of~~that this deduction could ~~have up to a 1% reduction on~~reduce our effective income tax rate for fiscal year ~~2006.~~2006 by up to 1%. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Creation Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS 109. Although we have not finalized our evaluation of the impact of the repatriation provisions, based on our analysis to date, we do not expect to repatriate any foreign earnings pursuant to the Jobs Creation Act.

On December 16, 2004, the FASB issued Statement No. 123 (revised 2004),Share-Based Payment (“Statement 123(R)”), which is a revision of FASB Statement No. 123,Accounting for Stock-Based Compensation(“Statement 123”). Statement 123(R) supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees(“APB 25”), and amends FASB Statement No. 95,Statements of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R)requiresall share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) must be adopted for annual periods beginning after June 15, 2005. Accordingly, effective July 3, 2005, we adopted the fair-value recognition provisions of Statement 123(R). See Note I, Stock Options and Incentive Stock Awards, for further information on the implementation of Statement 123(R).

On November 10, 2005, the FASB issued Staff Position No. FAS 123(R)-3,Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards. This provides for a simplified method to establish the beginning balance of the additional paid-in capital pool related to the tax effects of share-based compensation. Since our adoption of Statement 123, we have not recorded any excess tax benefits associated with our stock options and therefore we have no initial pool of excess tax benefits upon adoption of Statement 123(R).

In May 2005, the FASB issued Statement No. 154,Accounting Changes and Error Corrections(“SFAS 154”). This Statement requires retrospective application for voluntary changes in accounting principle unless it is impracticable to do so. Statement 154’s retrospective application requirement replaces APB Opinion No. 20’s,Accounting Changes,requirement to recognize most voluntary changes in accounting principle by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Earlier application is permitted for accounting changes and corrections of errors occurring in fiscal periods beginning after the date this Statement is issued. We do not expect the adoption of SFAS 154 to have a material impact on our financial statements.

In March of 2005, The FASB issued Interpretation No. 47Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143(“FIN 47”). FIN 47 clarifies the termconditional asset retirement obligationas used in FASB Statement No. 143,Accounting for Asset Retirement Obligations. FIN 47 defines a conditional asset retirement obligation as a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. An entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. The fair value of the liability for the conditional asset retirement obligation should be recognized when incurred, generally upon acquisition, construction or development and (or) through normal operation of the asset. FIN 47 is effective no later than fiscal years ending after December 15, 2005. We plan to adopt FIN 47 in our fiscal quarter ended July 1, 2006 and do not expect the adoption of FIN 47 to have a material impact on our financial position or results of operations.

Note D—Acquisitions

Intensity Athletics, Inc.
On October 3, 2005, our wholly-owned subsidiary, M. J. Soffe Company, purchased substantially all of the assets of Intensity Athletics, Inc. and its business of designing, manufacturing, and marketing of athletic apparel pursuant to an Asset Purchase Agreement among M. J. Soffe Company, Intensity Athletics, Inc. (“Seller”), and the shareholder of the Seller, Tim Maloney Sales, Inc.

The aggregate consideration paid to Seller for substantially all of the assets of the Seller was a cash payment of $0.8 million. Additional amounts are payable to Seller in cash during each of fiscal years 2007, 2008, 2009 and 2010 if specified financial performance targets are met by the Intensity Athletics ~~Inc.~~business during annual periods beginning on October 3, 2005 and ending on September 26, 2009 (the “Earnout Amounts”). The Earnout Amounts are capped at a maximum aggregate amount of $0.6 million. No goodwill was recorded related to this acquisition.

The results of Intensity Athletics operations have been included in the consolidated financial statements since the acquisition date.

Junkfood Clothing Company

On August 22, 2005, we entered into an Asset Purchase Agreement with Liquid Blaino Designs, Inc. d/b/a Junkfood Clothing (“Seller”) and the shareholders of Seller, Natalie Grof and Blaine Halvorson, pursuant to which we purchased substantially all of the assets of the Seller and its business of designing, marketing, and selling licensed and branded apparel. The closing of the purchase (the “Closing”) occurred simultaneously with the execution of the Asset Purchase Agreement.

The aggregate consideration paid to Seller at Closing for substantially all of the assets of Seller consisted of (1) a cash payment of $20 million; and (2) issuance to Seller of a promissory note in the original principal amount of $2,500,000 (the “Note”). The Note bears interest at 9% and has a three-year term. Pursuant to the Asset Purchase Agreement, on December 1, 2005 we paid the Seller $4.4 million for the Closing Date Working Capital Adjustment, which was based upon the closing date balance sheet of ~~Liquid Blaino Designs, Inc.~~Seller. Additional amounts are payable to Seller in cash during each of fiscal years 2007, 2008, 2009, and 2010 if financial performance targets are met by the Junkfood business during the period beginning on August 22, 2005 and ending on July 2, 2006 and during each of the three fiscal years thereafter (ending on June 27, 2009).

The acquisition of Junkfood is an important part of our expansion strategy. The addition of the Junkfood business to Delta Apparel keeps with our strategy of acquiring profitable apparel operations that expand our channels of distribution.

The acquisition of Junkfood was accounted for using the purchase method of accounting. The purchase price of the acquisition was allocated to the assets and related liabilities based on their fair values. We have identified certain intangible assets associated with the Junkfood business, including the trade name and trademarks, customer relationships, non-compete agreements and goodwill. Components of intangible assets are as follows:



			Useful Life				Economic Life
Goodwill	$	10,877		N/A	$	10,877		N/A
Intangibles
Intangibles:
Tradename/trademarks		1,530	20 yrs			1,530	20 yrs
Customer relationships		7,220	20 yrs			7,220	20 yrs
Non-compete agreements		250	5 yrs			250	5 yrs

Total intangibles		9,000				9,000



Total goodwill and intangibles	$	19,877			$	19,877

The $10.9 million of goodwill was assigned to the Retail-Ready Apparel segment of our business. The total amount of goodwill is expected to be deductible for tax purposes.

The results of Junkfood’s operations have been included in the consolidated financial statements since the acquisition date. The following table summarizes the fair values of the assets acquired and liabilities assumed at the date of the ~~acquisition.~~acquisition:


Cash consideration paid	$	24,353
Promissory note issued		2,500
Direct merger costs		582

Total purchase price	$	27,435


Accounts receivable	$	10,514
Inventories		2,982
Other current assets		125
Other assets		26
Property, plant and equipment		268
Goodwill and other intangible assets		19,877
Current liabilities		(6,357	)

Fair value of net assets acquired	$	27,435

The unaudited pro forma financial information presented below gives effect to the Junkfood acquisition as if it had occurred as of the beginning of fiscal year 2006 and fiscal year 2005. Amounts are in thousands, except per share amounts. The information presented below is for illustrative purposes only and is not indicative of results that would have been achieved or results that may be achieved in the future.


	Three Months Ended				Six Months Ended				Three Months Ended				Nine Months Ended
	December 31,		January 1,		December 31,		January 1,		April 1,		April 2,		April 1,		April 2,
	2005		2005		2005		2005		2006		2005		2006		2005
Net sales	$	57,702	$	54,941	$	129,641	$	112,885	$	69,365	$	65,422	$	199,006	$	178,327
Net income		2,376		1,556		6,657		3,185		2,744		5,955		9,401		9,141
Net income per share
Basic	$	0.28	$	0.19	$	0.78	$	0.38	$	0.32	$	0.71	$	1.09	$	1.10
Diluted	$	0.27	$	0.18	$	0.77	$	0.37	$	0.31	$	0.70	$	1.09	$	1.08

Note E—Goodwill and Intangible Assets

Components of intangible assets are as follows:


	December 31,							April 1,
	2005			Useful Life				2006			Economic Life
Goodwill	$	10,877			N/A			$	10,877			N/A
Intangibles
Intangibles:
Tradename/trademarks		1,530		20 yrs					1,530		20 yrs
Customer relationships		7,220		20 yrs					7,220		20 yrs
Non-compete agreements		250		5 yrs					250		5 yrs

Total intangibles		9,000							9,000


Total goodwill and intangibles		19,877							19,877

Less accumulated amortization		(160	)						(300	)


						$	19,577
	$	19,717

Amortization expense for intangible assets was ~~$0.2~~$0.1 million for the ~~three months ended December 31, 2005.~~third quarter of fiscal year 2006. We estimate amortization expense will be approximately ~~$0.2~~$0.1 million for the remainder of fiscal year 2006 and $0.5 million for each of the ~~five~~fiscal years 2007 through 2010, and approximately $0.4 million in succeeding fiscal years.

Note F—Inventories

Inventories consist of the following:


	December 31,		July 2,		April 1,		July 2,
	2005		2005		2006		2005
Raw materials	$	6,048	$	4,496	$	6,173	$	4,496
Work in process		27,251		21,231		28,514		21,231
Finished goods		81,480		73,299		78,023		73,299

	$	114,779	$	99,026	$	112,710	$	99,026

Note G—Debt

On August 22, 2005, in conjunction with our acquisition of Junkfood, Delta Apparel, Junkfood, and M. J. Soffe Co. refinanced Delta Apparel’s $42.75 million credit facility and consolidated M. J. Soffe Co.’s $38.5 million credit facility with it pursuant to a Second Amended and Restated Loan and Security Agreement (the “Amended Loan Agreement”) with Wachovia Bank National Association (the successor by merger to Congress Financial Corporation (Southern)), as Agent, and the financial institutions named in the Amended Loan Agreement as Lenders.

Pursuant to the Amended Loan Agreement, Delta Apparel, Junkfood, and M. J. Soffe Co. became co-borrowers under a single credit facility, the maturity of the loans under the credit facility was extended to August 2008, and the line of credit available to Delta Apparel, Junkfood, and M. J. Soffe Co. was increased to $85 million (subject to borrowing base limitations based on the value and type of collateral provided), which represents an increase of $3.75 million in the aggregate amount that was previously available under Delta Apparel’s credit facility and M. J. Soffe Co.’s credit facility.

The new credit facility is secured by a first-priority lien on substantially all of the real and personal property of Delta Apparel, Junkfood, and M. J. Soffe Co. All loans under the credit agreement bear interest at rates based on an adjusted LIBOR rate plus an applicable margin or a bank’s prime rate plus an applicable margin. The facility requires installment payments of approximately $265,000 per month in connection with fixed asset amortizations, and these amounts reduce the amount of availability under the facility.

The new facility contains a subjective acceleration clause and a “springing” lockbox arrangement (as defined in EITF 95-22), whereby remittances from customers will be forwarded to our general bank account and will not reduce the outstanding debt until and unless a specified event or an event of default occurs. Pursuant to EITF 95-22, we classify borrowings under the new facility as noncurrent debt.

In addition to the credit facilities with Wachovia Bank, National Association, we have a seller note payable to the former Junkfood shareholders pursuant to the Asset Purchase Agreement dated as of August 22, 2005. The $2.5 million seller note bears interest at 9% and has a three-year term.

In conjunction with the acquisition of Junkfood and entry into the Amended Loan Agreement, on August 23, 2005, M. J. Soffe Co. paid approximately $5 million to satisfy in full the Promissory Note of M. J. Soffe Co. dated as of October 3, 2003, which was made in connection with our acquisition of M. J. Soffe Co. The Promissory Note was made in favor of the Soffe sellers, James F. Soffe, John D. Soffe, and Anthony M. Cimaglia.

Note H—Selling, General and Administrative Expense

We include in selling, general and administrative expenses, costs incurred subsequent to the receipt of finished goods at our distribution facilities, such as the cost of stocking, warehousing, picking and packing, and shipping goods for delivery to our customers. In addition, selling, general and administrative expenses include costs related to sales associates, administrative personnel cost, advertising and marketing expenses and general and administrative expenses. For the ~~second~~third quarter of fiscal years 2006 and 2005, distribution costs included in selling, general and administrative expenses totaled ~~$3.5~~$3.7 million and ~~$1.9~~$2.3 million, respectively. For the first ~~six~~nine months of fiscal years 2006 and 2005, distribution costs included in selling, general and administrative expenses totaled ~~$6.5~~$10.2 million and ~~$3.8~~$6.2 million, respectively. The increase in selling, general and administrative expenses is primarily ~~related~~the result of the acquisition of Junkfood.

Note I—Stock Options and Incentive Stock Awards

We maintain certain stock-based compensation plans that are described in Note 11 to the Consolidated Financials Statements included in our 2005 Annual Report to Shareholders. Under the Delta Apparel Stock Option Plan (the “Option Plan”), we authorized the grant of options for up to 2,000,000 shares of common stock. Options are granted by the compensation grants committee of our board of directors to officers and

key and middle level executives for the purchase of our stock at prices not less than the fair market value of the shares on the dates of grant. Under the Delta Apparel Incentive Stock Award Plan (the “Award Plan”), the compensation grants committee of our board of directors has the discretion to grant awards for up to an aggregate maximum of 800,000 shares of common stock. The Award Plan authorizes the compensation grants committee to grant to our officers and key and middle level executives rights to acquire shares at a cash purchase price of $0.01 per share.

Prior to July 2, 2005, we accounted for these plans under Statement 123. As permitted under this standard, compensation cost was recognized using the intrinsic value method described in APB 25 and related Interpretations. Effective July 3, 2005, we adopted the fair-value recognition provisions of Statement 123(R) and the Securities and Exchange Commission Staff Accounting Bulletin No. 107 (“SAB 107”) using the modified-prospective transition method; therefore, prior periods have not been restated. Compensation cost recognized in the ~~three-month~~nine-month period ended ~~October~~April 1, ~~2005~~2006 includes compensation cost for all share-based payments granted, but not yet vested as of July 3, 2005, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and compensation cost for all share-based payments granted subsequent to July 3, 2005, based on the grant date fair value estimated in accordance with the provisions of
Statement 123(R).

Option Plan

Stock options are granted with exercise prices not less than the fair market value of our common stock at the time of the grant, with an exercise term (as determined by the Compensation Grants Committee) not to exceed 10 years. The Compensation Grants Committee determines the vesting period for our stock options. Generally, such stock options become exercisable over four years. Certain option awards provide for accelerated vesting upon meeting specific retirement, death or disability criteria. No options for shares of our common stock were granted during the ~~three-month period ended December 31, 2005. No stock options~~third quarter of fiscal year 2006. Options to purchase 14,000 shares were exercised under the Option Plan during the ~~three months ended December 31,~~third quarter of fiscal year 2006. During the third quarter of fiscal year 2005, ~~and January 1, 2005.~~options to purchase 169,500 shares (adjusted to reflect the 2-for-1 stock split on May 18, 2005) were exercised under the Option Plan.

No stock-based compensation cost related to stock options was recognized in the statements of income for the years ended July 2, 2005 and July 3, 2004, as all options granted in these periods had an exercise price equal to the market price at the date of grant. As a result of adopting Statement 123(R), our operating income for the ~~three-month period ended December 31, 2005~~third quarter of fiscal year 2006 is $0.2 million lower than if we had continued to account for stock-based compensation under APB ~~No.~~ 25. Stock compensation expense is included in our cost of sales and selling, general and administrative expense in our statements of income over the vesting periods.

The table below presents the pro forma effect on net income and earnings per share if we had applied the fair value recognition provision to options granted under our stock option plan for the three and ~~six~~nine months ended ~~January 1,~~April 2, 2005. For purposes of this pro forma disclosure, the value of the options is estimated using the Black-Scholes option-pricing model and amortized to expense over the options’ vesting periods. For the three and ~~six~~nine month periods ended ~~January 1,~~April 2, 2005, expenses net of tax totaling ~~$0.2~~$0.3 million and ~~$0.3~~$0.6 million, respectively, related to

our ~~Stock~~ Award Plan, described below, were included in our net income and earnings per share, as reported.


	Three Months			Six Months			Three Months			Nine Months
	Ended			Ended			Ended			Ended
	January 1,			January 1,			April 2,			April 2,
	2005			2005			2005			2005
Net income, as reported	$	1,154		$	2,598		$	5,445		$	8,043

Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		155			290			341			631

Deduct: Total stock-based employee compensation expense determined under fair value based method for all options and awards, net of related tax effects		(323	)		(626	)		(509	)		(1,135	)


Pro forma net income	$	986		$	2,262		$	5,277		$	7,539


Earnings per share:
Basic—as reported	$	0.14		$	0.31		$	0.65		$	0.97
Basic—pro forma	$	0.12		$	0.27		$	0.63		$	0.91

Diluted—as reported	$	0.13		$	0.30		$	0.64		$	0.95
Diluted—pro forma	$	0.12		$	0.26		$	0.62		$	0.89

A summary of the status of our nonvested ~~shares~~options as of ~~December 31, 2005,~~April 1, 2006, and changes during the ~~six~~nine months ended ~~December 31, 2005,~~April 1, 2006, is presented below:


	Six Months Ended
	December 31, 2005
				Weighted-
				Average					Weighted- Average
				Grant-Date					Grant-Date
	Shares			Fair Value		Shares			Fair Value
Nonvested at July 2, 2005		158,500		$	4.23		158,500		$	4.23
Granted		734,000		$	5.18		734,000		$	5.18
Vested		(158,500	)	$	4.23		(158,500	)	$	4.23
Forfeited		—			—		(60,000	)	$	5.18
Expired		—			—		—			—

Nonvested at December 31, 2005		734,000		$	5.18
Nonvested at April 1, 2006							674,000		$	5.18

As of ~~December 31, 2005,~~April 1, 2006, there was ~~$3.1~~$2.6 million of total unrecognized compensation cost related to non-vested stock options under the Option Plan. This cost is expected to be recognized over a period of ~~3.5~~3.25 years.

In December 2005, the FASB issued FSP FAS No. 123R-3 (“FSP123R”),Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards, which provides for a simplified method of calculating the initial pool of excess tax benefits upon adoption of Statement ~~123R.~~123(R). The Option Plan meets the requirements of IRC Section 422 to qualify as an Incentive Stock Option (“ISO”). We had no knowledge of any disqualifying dispositions, and accordingly, we did not have any tax deductions and there were no excess tax benefits, associated with our Option Plan. As such, we have no initial pool of excess tax benefits upon the adoption of Statement ~~123R.~~123(R).

During fiscal year 2006, we have recorded expense associated with our Option Plan pursuant to Statement ~~123R. As~~123(R). Prior to March 2006 our Option Plan ~~qualifies~~qualified as an ISO, ~~this~~and therefore the related expense iswas not tax deductible and ~~results~~resulted in a permanent tax difference, thus increasing our effective income tax rate. ~~Statement 123R precludes companies~~During the third quarter of fiscal 2006 we amended all of our outstanding unvested options to convert them from ~~anticipating disqualifying dispositions by employees.~~ISO type options to nonqualified type options. Upon the ~~occurrence~~future exercise of ~~any future disqualifying dispositions,~~these options we will be able record a tax benefit equal to the lesser of the actual benefit of the tax deduction or the cumulative compensation cost previously recognized in earnings. Any excess benefit will be recognized as an increase to additional paid-in capital.

Award Plan

Under the Award Plan, awards are granted to acquire shares of stock at a cash purchase price of $0.01 per share. The Award Plan contains certain provisions that require it to be accounted for as a liability under Statement 123(R) and previously required it to be accounted for as a variable plan under ~~APB25.~~APB 25. In fiscal year 2003, a three-year performance award was granted. These awards vested when we filed our Annual Report on Form 10-K for fiscal year 2005 based on the achievement of performance criteria for the three-year period ended July 2, 2005. In the ~~three months ended October 1, 2005,~~first quarter of fiscal year 2006 awards for 125,000 shares of our common stock were granted. These awards will vest upon the filing of our Annual Report on Form 10-K for fiscal year 2007 based on the achievement of performance criteria for the two-year period ended June 30, 2007. Awards provide for accelerated vesting upon meeting specific retirement, death or disability criteria.

Compensation expense recorded under the Award Plan was $0.5 million and ~~$0.4~~$0.9 million in the ~~three months ended December 31,~~third quarter of fiscal years 2006 and 2005, respectively and ~~January 1,~~$1.8 million and $1.7 million for the year-to-date periods of fiscal years 2006 and 2005, respectively. Stock compensation expense is included in our cost of sales and selling, general and administrative expense in our statements of income over the vesting periods.

No ~~options~~awards for shares of our common stock were granted ~~during the three-month period ended December 31, 2005. No stock options were exercised~~ under the Award Plan during the ~~three months ended December 31, 2005 and January 1,~~third quarter of fiscal year 2006. No awards vested under the Award Plan during third quarter of fiscal year 2006 or 2005.

A summary of the status of our nonvested ~~shares~~awards as of ~~December 31, 2005,~~April 1, 2006, and changes during the ~~six~~nine months ended ~~December 31, 2005,~~April 1, 2006, is presented below:


	Six Months Ended
	December 31, 2005
				Weighted-					Weighted
				Average					Average
				Grant-Date					Exercise
	Shares			Fair Value		Shares			Price
Nonvested at July 2, 2005		94,402		$	0.01		94,402		$	0.01
Granted		125,000		$	0.01		125,000		$	0.01
Vested		(94,402	)	$	0.01		(94,402	)	$	0.01
Forfeited		—			—		(12,000	)	$	0.01
Expired		—			—		—			—

Nonvested at December 31, 2005		125,000		$	0.01
Nonvested at April 1, 2006							113,000		$	0.01

As of ~~December 31, 2005,~~April 1, 2006, there was ~~$3.1~~$2.8 million of total unrecognized compensation cost related to non-vested ~~stock options~~awards under the Award Plan. This cost is expected to be recognized over a period of ~~1.7~~1.4 years.

Note J—Income Taxes

Our effective income tax rate for the ~~six~~nine months ended ~~December 31, 2005~~April 1, 2006 was ~~37.6%~~36.1%, compared to 34.3% for the fiscal year ended July 2, 2005. During the year ended July 2, 2005, we decided to indefinitely reinvest our foreign earnings in Honduras. Therefore, we reversed the $0.7 million tax liability associated with the foreign earnings, as no provision for the U.S. federal and state tax ramifications of repatriating the earnings is necessary. Our effective income tax rate for the ~~six~~nine months ended ~~December 31, 2005~~April 1, 2006 is lower than the statutory tax rate primarily as the result of the manufacturing deduction relating to income attributable to U.S. production activities under the American Jobs Creation Act of 2004 ~~partially offset by the~~and other state tax ~~implications associated with the expensing of our stock options.~~planning strategies.

Note K—Purchase Contracts

We have entered into agreements, and have fixed prices, to purchase yarn and apparel fabric and finished ~~apparel~~ products for use in our manufacturing ~~operations.~~operations with non-cancelable contract terms. At ~~December 31, 2005,~~April 1, 2006, minimum payments under these contracts to purchase yarn were $23.1 million and to purchase apparel fabric and finished ~~apparel~~ products were $2.6 million. In addition, we have entered into agreements, and have fixed prices, to purchase natural gas for use in our manufacturing operations. At April 1, 2006, minimum payments under these contracts to purchase natural gas with non-cancelable ~~contract~~ terms were ~~$22.3 million and $3.1 million, respectively.~~$0.1 million.

Note L—Computation of Basic and Diluted Net Earnings per Share (EPS)

We compute basic net earnings per share by dividing net income by the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share includes the dilutive effect of stock options and non-vested stock awards granted under our Stock Option Plan and our Incentive Stock Award Plan unless such shares would be anti-dilutive. Options to purchase 734 thousand shares of our common stock were excluded from the computation of diluted weighted average common shares outstanding because the assumed proceeds related to these shares would have allowed us to repurchase at the average price during the quarter more shares than could have been exercised, and therefore were anti-dilutive.

Note M—Stockholders’ Equity

Stock Split

On April 21, 2005, our Board of Directors approved a 2-for-1 stock split of our common stock. On May 31, 2005, shareholders received one additional share of common stock for each share held of record on May 18, 2005. All references in the financial statements with regard to the number of shares or average number of shares of common stock and related prices, dividends and per share amounts have been restated to reflect the 2-for-1 stock split.

Stock Repurchase Program

~~We have authorization from our Board~~During the three months ended April 1, 2006, we purchased 24,100 shares of ~~Directors to spend up to an aggregate~~stock at a cost of ~~$6.0 million for share repurchases under the Stock Repurchase Program.~~approximately $0.4 million. All purchases are made at the discretion of our management. WeDuring the three months ended April 2, 2005, we did not purchase shares of our common ~~stock during the three months ended December 31, 2005.~~stock. Since the inception of the Stock Repurchase Program through April 1, 2006, we have purchased ~~755,524~~779,624 shares of our common stock ~~pursuant to the program~~ for an aggregate of ~~$4.5~~$4.9 million. On April 20, 2006, the Board authorized an additional $5 million for share repurchases under the Stock Repurchase Program, bringing the aggregate total to $11 million. As of April 20, 2006, $5.9 million remains available for future purchases.

Quarterly Dividend Program

On ~~October 28, 2005,~~January 16, 2006 our Board declared a cash dividend of four cents per share of common stock pursuant to our quarterly dividend program. We paid the dividend on November 28, 2005 to shareholders of record as of the close of business on November 16, 2005. On January 17, 2006, our Board declared a cash dividend of four cents per share of common stock payable on February 27, ~~2005~~2006 to shareholders of record as of the close of business on February 15, 2006. On April 20, 2006, our Board increased our dividend payment by 25%, bringing the quarterly dividend payment to five cents per common share. The dividend is payable on May 30, 2006 to shareholders of record as of the close of business on May 17, 2006. Although the Board may terminate or amend the program at any time, we currently expect to continue the quarterly dividend program.

Note N—Segment Reporting

We operate our business in two distinct segments: Activewear Apparel and Retail-Ready Apparel. Although the two segments are similar in their production processes and regulatory environment, they are distinct in their economic characteristics, products and distribution methods.

The Activewear Apparel segment comprises our business units primarily focused on undecorated garment styles that are characterized by low fashion risk. We market, distribute and manufacture unembellished knit apparel under the brands of “Delta Pro Weight^®”, “Delta Magnum Weight™” and “Quail Hollow™.” The products are primarily sold to screen printing companies. In addition, we manufacture products under private labels for retailers, corporate industry programs and sports licensed apparel marketers.

The Retail-Ready Apparel segment comprises our business units primarily focused on more specialized apparel garments to meet consumer preferences and fashion trends. These embellished and unembellished products are sold through specialty and boutique stores, high-end and mid-tier retail stores and sporting goods stores. In addition to these retail channels, we also supply college bookstores and produce products for the U.S. Military. Our products in this segment are marketed under the “Soffe^®”, “Junkfood^®” and “Sweet and Sour^®” labels.

Corporate and Unallocated is a reconciling category for reporting purposes and includes intercompany eliminations and other costs that are not allocated to the operating segments.

Our management evaluates performance and allocates resources based on profit or loss from operations before interest, income taxes and special charges (“Segment Operating Income”). Our Segment Operating Income may not be comparable to similarly titled measures used by other companies. The accounting policies of our reportable segments are the same as those described in Note B. Intercompany transfers between operating segments are transacted at cost and have been eliminated within the segment amounts shown below. Prior year information has been restated so the operating segments are disclosed net of intercompany transfers (with the intercompany elimination removed from the Corporate and Unallocated category.)

Information about our operations as of and for the three months ended ~~December 31, 2005~~April 1, 2006 and ~~January 1,~~April 2, 2005, by operating segment, is as ~~follows (in thousands):~~follows:


			Retail-									Retail-
	Activewear		Ready		Corporate and					Activewear		Ready		Corporate and
	Apparel		Apparel		Unallocated			Consolidated		Apparel		Apparel		Unallocated			Consolidated
Fiscal Year 2006:
Net sales	$	28,501	$	29,201	$	—		$	57,702	$	36,550	$	32,815	$	—		$	69,365
Segment operating income		2,191		2,673		70			4,934		1,282		3,935		46			5,263
Segment assets		99,103		97,428		—			196,531		102,471		100,325		—			202,796

Fiscal Year 2005:
Net sales	$	33,872	$	15,323	$	—		$	49,195	$	35,863	$	22,409	$	—		$	58,272
Segment operating income		1,935		865		(93	)		2,707		2,499		1,993		(140	)		4,352
Segment assets		96,169		67,032		—			163,201		96,570		70,508		—			167,078

Information about our operations for the ~~six~~nine months ended ~~December 31, 2005~~April 1, 2006 and ~~January 1,~~April 2, 2005, by operating segment, is as ~~follows (in thousands):~~follows:


			Retail-									Retail-
	Activewear		Ready		Corporate and					Activewear		Ready		Corporate and
	Apparel		Apparel		Unallocated			Consolidated		Apparel		Apparel		Unallocated			Consolidated
Fiscal Year 2006:
Net sales	$	58,067	$	60,208	$	—		$	118,275	$	94,617	$	93,023	$	—		$	187,640
Segment operating income		4,200		6,569		130			10,899		5,139		10,443		176			15,758

Fiscal Year 2005:
Net sales	$	66,852	$	36,643	$	—		$	103,495	$	102,715	$	59,052	$	—		$	161,767
Segment operating income		1,944		3,998		(94	)		5,848		4,496		5,943		(235	)		10,204

The following reconciles the Segment Operating Income to the consolidated income before income taxes for the three and ~~six~~nine months ended ~~December 31, 2005~~April 1, 2006 and ~~January 1,~~April 2, 2005.


	Three Months Ended				Six Months Ended				Three Months Ended					Nine Months Ended
	December 31,		January 1,		December 31,		January 1,		April 1,			April 2,		April 1,		April 2,
	2005		2005		2005		2005		2006			2005		2006		2005
Segment operating income	$	4,934	$	2,707	$	10,899	$	5,848	$	5,263		$	4,352	$	15,758	$	10,204
Other (expense) income										(128	)		3,616		276		3,612
Unallocated interest expense		997		835		1,682		1,538		1,056			679		2,738		2,217

Consolidated income before taxes	$	3,937	$	1,872	$	9,217	$	4,310	$	4,079		$	7,289	$	13,296	$	11,599

Note O—Other Items

We assign a portion of our trade accounts receivable at our Junkfood division under a factor agreement. The assignment of these receivables is without recourse, provided that the customer orders are approved by the factor prior to shipment of the goods, up to a maximum for each individual account. The agreement does not include provisions for advances from the factor against the assigned receivables. The factor funds upon collection, or, exclusive of disputed claims, upon 90 days after the due date.

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

~~SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995~~FORWARD LOOKING STATEMENTS

~~The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company.~~ We may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the Securities and Exchange Commission and in reports to our shareholders. All statements, other than statements of historical fact, that address activities, events or developments that we expect or anticipate will or may occur in the future are forward-looking statements. Examples are statements that concern future revenues, future costs, future earnings, future capital expenditures, business strategy, competitive strengths, competitive weaknesses, goals, plans, references to future success or difficulties and other similar information. The words “estimate”, “project”, “forecast”, “anticipate”, “expect”, “intend”, “believe” and similar expressions, and discussions of strategy or intentions, are intended to identify forward-looking statements.

The forward-looking statements in this Quarterly Report are based on our expectations and are necessarily dependent upon assumptions, estimates and data that we believe are reasonable and accurate but may be incorrect, incomplete or imprecise. Forward-looking statements are also subject to a number of business risks and uncertainties, any of which could cause actual results to differ materially from those set forth in or implied by the forward-looking statements. Many of these risks and uncertainties are described under the subheading “Risk Factors” in our Form 10K for the year ended July 2, 2005 filed with the Securities and Exchange Commission and are beyond our control. Accordingly, any forward-looking statements do not purport to be predictions of future events or circumstances and may not be realized.

We do not undertake publicly to update or revise the forward-looking statements even if it becomes clear that any projected results will not be realized.

BUSINESS OUTLOOK

For the ~~second~~third quarter of fiscal 2006, net sales rose ~~17.3%~~$11.1 million, or 19%, to a record ~~$57.7~~$69.4 million, as compared to ~~$49.2~~$58.3 million for the same quarter of the prior year. We improved our gross profit margin by 240 basis points to 27.7%. Selling, general and administrative expenses were 20.1% of sales, up from the prior year quarter of 17.8% of sales. This increase is primarily associated with the higher selling costs associated with the Junkfood business. In addition, we continued to incur higher distribution costs associated with our move and duplication of costs associated with the West Coast distribution facility. During the quarter, we moved the Soffe distribution center into our combined facility with no shipping disruptions. During the fourth quarter, we expect to move the remaining portion of the Intensity Athletics business, so our duplication of costs should be over by our fiscal year-end. Our net income for the third quarter of fiscal 2006 was $2.7 million, or $0.32 per basic share, and $0.31 per diluted share as compared to $5.4 million or $0.65 per basic, and $0.64 per diluted share for the prior year period. During the third quarter of fiscal 2005, we recorded a gain on the sale of our Edgefield, South Carolina yarn spinning facility and the reversal of the tax liability associated with our decision to permanently reinvest our foreign earnings in Honduras. Adjusting for these items, earnings per share would have been $0.31 per basic share, or $0.30 per diluted share, in the prior year third quarter.

Sales in our Retail-Ready segment, which includes both the Soffe and Junkfood businesses, increased 46% to $32.8 million for the third quarter up from $ 22.4 million in the prior year quarter. Gross margins improved 970 basis points to 31.7% compared to 22.0% in the prior year second quarter and improved 80 basis points from the first fiscal quarter of 2006. Selling, general and administrative expensesSales were ~~23.9% of sales compared to 16.5% of sales in the prior year quarter,~~

primarily related to higher distribution costs, increased selling costs associated with the Junkfood business, and higher management incentive expenses. The increased distribution costs are primarily related to the addition of the New Jersey distribution center and the move to a new West Coast facility. Operating margin increased 300 basis points to 8.6% compared to 5.5% in the prior year period. Our net income for the quarter ended December 31, 2005 increased 105.9% to $2.4 million, or $0.28 per basic share, compared to the prior year’s level of $1.2 million, or $0.14 per basic share.

Sales in our Retail-Ready Apparel segment, which includes our Soffe and Junkfood businesses, increased 90.6% to $29.2 million for the second quarter of fiscal year 2006 from $15.3 million in the prior year quarter. The sales increase was primarily driven by our Junkfood acquisition ~~which was completed on August 22, 2005,~~ and a ~~slight~~strong sales increase ~~in sales in our Soffe business. We are continuing to focus on increasing our penetration in our~~at Soffe. Each of the four ~~Soffe~~ distribution channels ~~through~~at Soffe showed sales growth, with the ~~enhancement~~strongest growth coming from our Military and broadening of our product line. We have an expanded fashion product offering planned for spring, as well as a new outerwear product line that will roll out in the second half of the fiscal year. In theRetail channels. At Junkfood, ~~business,~~ we continue to ~~take the appropriate steps~~focus our efforts to position the business for ~~growth ahead. Over the past quarter, we have focused on~~future growth. We are making good progress improving the operating infrastructure at Junkfood with the installation of our new operating system. We expect to complete our initial installation of the ~~business~~system by the end of this fiscal year. We are continuing to add new licensed products at Junkfood, as well as developing new product for mid tier department stores. We have also reached an agreement in principal for the distribution of Junkfood products in the ~~areas of management, information technology~~UK and ~~distribution. These improvements, along with our focus~~are working on product design, should allow us to meet our current demand and continue to increase the number of specialty and department stores carrying our products around the world. Junkfood is currently shipping to over 1,500 customers, and there is considerable interest from business partners in other countries who want to distribute our products. We also believe we can develop new products and new brands to serve the mid-tier department stores.a more formal distribution strategy for Japan. We are encouraged by the sales growth in our Retail-Ready Apparel segment and the strong demand for our product over the broad range of distribution channels we serve.

In the Activewear ~~Apparel~~ segment of our business, sales ~~declined $5.4 million~~increased 1.9% to ~~$28.5 million, from the all time record we achieved for the second quarter of last year. The sales decline~~$36.6 million. This was ~~primarily~~ driven by a ~~reduction~~12.6% increase in unit sales, offset by a lower priced mix and lower overall pricing. We continued to build sales with our ~~private label~~direct customers which comprises almost 87% of our business ~~which had an especially strong quarter last year. Additionally, our long sleeve shirt business did not perform to our expectations due to competitive fleece pricing~~ in the ~~marketplace. Our margins improved~~quarter, up from 74% in ~~the Activewear segment compared to~~ the prior year ~~due~~quarter. We believe our strategy of building this direct customer base is appropriate for our Activewear business. We plan to ~~less expensive raw material cost flowing through cost~~continue to develop and source additional products to service the needs of ~~sales, combined with manufacturing efficiencies~~these customers. We believe that our additional and ~~improvements in quality that were achieved. These improvements were partially offset by higher~~expanded distribution centers will give us the platform to continue to increase our service levels and earn additional business. While we still have some duplication of distribution cost, ~~driven by our new capacity in the Northeast, the move to an expanded facility in California and the unbalanced inventories caused by~~most of this year’s hurricane season. While the changes in our distribution facilities have increased our fixed cost in the short term, we believe we are now well positioned to build future sales with our catalog direct customers in the second half of the fiscal year. In addition,will be behind us by the end of ~~the third~~this fiscal quarter we plan to have the Soffe business, including Intensity Athletics, and the Activewear segment operating out of the same facility on the west coast, which should lower our distribution costs in the future.year.

We continue to diversify our customer base in the Activewear segment and are encouraged by the steady growth of our direct customer base, which increased by more than 15% in the first six months of fiscal year 2006. During the second quarter of this year, approximately 86% of our shipments were catalog direct, with private label sales making up the remaining 14%.

~~While we~~ are pleased with our results for the first ~~six~~nine months of fiscal year 2006, weand are looking forward to the ~~second half of~~completing the year with a strong fourth quarter. Demand for our products remains strong, and our efforts to improve customer service have resulted in a higher level of on time delivery and additional reorders. Our manufacturing operations are becoming more efficient and our process improvement programs have helped us further reduce cost and lowered our production rates of off-quality garments. We have a number of cost reduction initiatives in place which ~~we intend to build~~should have a positive impact on our ~~accomplishments and position ourselves for further growth~~bottom line in fiscal year 2007. AsIn summary, we ~~enter our third quarter we are encouraged~~expect to complete fiscal year 2006 with ~~the direction of both our Retail-Ready~~record sales, record operating profit, and ~~Activewear segments but remain cautious of the high energy costs and its potential impact on consumer spending for apparel products. While~~record per share earnings. We also believe that we have ~~not seen a slowdown~~the foundation in place to grow sales ~~we consider the high cost of energy to be a risk factor that could negatively affect our sales. We expect the higher energy~~ and ~~transportation costs will have a greater impact on our Activewear segment than our Retail-Ready segment.~~

We believe each of our business units are well positioned to grow. We currently have a broad range of distribution channels for apparel products and believe this diversity of distribution gives us a strong foundation to continue to build our business for the future.earnings in fiscal year 2007.

EARNINGS GUIDANCE

For the ~~third~~fourth fiscal quarter ending ~~April~~July 1, 2006, we expect sales to be in the range of ~~$66~~$81 to ~~$70~~$88 million and basic earnings to be in the range of ~~$0.29~~$0.72 to ~~$0.33~~$0.77 per share. ~~This compares~~These ranges compare to the prior year fiscal ~~third~~fourth quarter sales of ~~$58.3~~$66.3 million and basic earnings of ~~$0.65~~$0.38 per share. In the prior year third quarter, we recorded a $0.26 per share gain related to the sale of our Edgefield, South Carolina yarn facility in January 2005 as well as a $0.08 per share gain related to the reversal of a foreign earnings tax liability. Excluding both of these one-time items, basic earnings per share in the prior year period would have been $0.31.

For the year ending July 1, 2006, we ~~continue to expect~~have narrowed our expectation of sales to be in the range of ~~$265~~$268 to $275 million and basic earnings to be in the range of $1.71 to ~~$1.80~~$1.77 per share. When comparing fiscal 2006 estimates to fiscal 2005 results, the following chart highlights our fiscal year 2005 basic earnings per share, adjusted for the impact of the sale of our Edgefield, South Carolina yarn spinning facility and ~~adjusted for~~ the reversal of the tax liability associated with our decision to permanently reinvest our foreign earnings in Honduras.


Actual FY05 Basic Earnings Per Share	$	1.35
Sale of Edgefield Plant		(0.26	)
Reversal of Foreign Earnings Tax Liability		(0.08	)

Adjusted FY05 Basic Earnings per Share	$	1.01

The adjusted basic earnings per share, a non-GAAP financial measure, will not be comparable to similarly titled measures reported by other companies. We are presenting adjusted basic earnings per share for the fiscal year ended July 2, 2005 because we believe it provides a more complete understanding of our business results than could be obtained absent this disclosure. The sale of our yarn spinning plant in Edgefield, South Carolina and the reversal of the foreign earnings tax liability ~~are~~were infrequent and unusual transactions. We believe it is a useful tool for

investors to assess the operating performance of the business without the effect of these transactions.

RESULTS OF OPERATIONS

Our results for the first ~~six~~nine months of fiscal year 2006 included ~~nineteen~~thirty-two weeks of operations from Junkfood Clothing Company, which was acquired on August 22, 2005.

Net sales for the ~~second~~third quarter of fiscal year 2006 increased ~~17.3%~~19% to ~~$57.7~~$69.4 million compared to ~~$49.2~~$58.3 million for the ~~second~~third quarter of the prior year. ~~The sales increase resulted from an increase in sales by~~Both the Retail-Ready ~~segment, partially offset by a decrease in sales by the~~and Activewear Apparel ~~segment.~~segments showed increases in sales. Retail-Ready Apparel sales increased ~~90.6%~~46.4% in the ~~second~~third quarter of fiscal year 2006 compared to the prior year quarter primarily ~~related~~due to the Junkfood acquisition and ~~a slight~~an increase in sales in the Soffe business. Sales in the Activewear Apparel segment ~~declined 15.9%~~increased 1.9%, primarily driven by a ~~reduction~~unit increase in our blank t-shirt products, offset partially by a decrease in private label ~~business, which had an especially strong quarter last year. Additionally, our long sleeve shirt business did not perform to our expectations due to competitive fleece pricing in the marketplace.~~business. For the ~~six~~nine months ended ~~December 31, 2005,~~April 1, 2006, net sales increased ~~14.3%~~16% to ~~$118.3~~$187.6 million compared to ~~$103.5~~$161.8 million in the prior year. The sales increase primarily relates to the acquisition of Junkfood Clothing Company and increased Soffe sales, offset partially ~~offset~~ by a decrease in sales by the Activewear Apparel segment.

Gross profit as a percentage of net sales increased to ~~31.7%~~27.7% in the ~~second~~third quarter of fiscal year 2006 from ~~22.0%~~25.3% in the ~~second~~third quarter of the prior year. The ~~970~~240 basis point improvement in gross margins ~~is primarily~~was driven by the higher gross margins associated with the Junkfood business ~~as well as less expensive raw material costs~~ and ~~lower manufacturing costs flowing through cost~~a net change in estimates related to the valuation of ~~sales.~~certain inventory totaling $0.9 million, primarily resulting from higher than expected gross profits in the Junkfood business. These improvements were offset partially by higher energy and transportation costs. Gross profit as a percentage of net sales increased to ~~31.3%~~29.9% in the first ~~six~~nine months of fiscal year 2006 from ~~21.6%~~23.0% in the same period of the prior year for the same reasons noted above. Our gross margins may not be comparable to other companies, since some entities include costs related to their distribution network in cost of goods sold and we exclude a portion of them from gross margin and include them in selling, general and administrative expenses.

Selling, general and administrative expenses, including the provision for bad debts, for the ~~second~~third quarter of fiscal year 2006 were ~~$13.8~~$14.0 million, or ~~23.9%~~20.1% of sales, compared to ~~$8.1~~$10.4 million, or ~~16.5%~~17.8% of sales for the same period in the prior year. The increase in selling, general and administrative expenses was primarily related to ~~higher distribution costs,~~ increased selling costs associated with the Junkfood ~~business, and higher management incentive expenses. The increased~~business. In addition, distribution costs ~~are primarily related~~were higher than the prior year due to the ~~addition~~moving expenses and duplication of ~~the New Jersey distribution center and the move to the~~costs associated with our new West Coast facility. Selling, general and administrative expenses, including the provision for bad debts, for the first ~~six~~nine months of fiscal year 2006 were ~~$26.5~~$40.4 million, or ~~22.4%~~21.5% of sales, compared to ~~$16.5~~$26.9 million, or ~~16.0%~~16.6% of sales for the same period in the prior year. The increase for the year-to-date period was driven primarily by the same items that drove the increase in the ~~second~~third quarter of fiscal year ~~2006.~~

~~Other income for the first six months of fiscal year~~ 2006, was $0.4 million compared to other expense of $5 thousand for the first six months of the prior year. During the three months ended December 31, 2005, we recorded a $0.4 million gain on the insurance recoverycoupled with costs associated with ~~inventory damaged during Hurricane Katrina.~~the addition of our New Jersey distribution center.

Operating income for the ~~second~~third quarter of fiscal year 2006 was ~~$4.9~~$5.3 million, an increase of ~~$2.2~~$0.9 million, or ~~82.3%~~20.5%, from ~~$2.7~~the $4.4 million reported for the ~~second~~third quarter of the prior year. This increase was primarily the result of the ~~improvement in gross margins and our other income, partially offset by higher selling, general and administrative costs described above.~~factors previously described. Operating income for the first ~~six~~nine months of fiscal year 2006 increased to ~~$10.9~~$15.8 million, or ~~86.4%~~by 54.9%, from ~~$5.8~~$10.2 million for the first ~~six~~nine months of the prior year.

~~Net interest~~Prior to July 2, 2005, we accounted for our option plans under Statement 123. As permitted under this standard, compensation cost was recognized using the intrinsic value method described in APB 25 and related Interpretations. Effective July 3, 2005, we adopted the fair-value recognition provisions of Statement 123(R) and the Securities and Exchange Commission Staff Accounting Bulletin No. 107 (“SAB 107”) using the modified-prospective transition method; therefore, prior periods have not been restated. No stock-based compensation cost related to stock options was recognized in the statements of income during the year ended July 2, 2005, as all options granted during that period had an exercise price equal to the market price at the date of grant. As a result of adopting Statement 123(R), our operating income for the third quarter of fiscal year 2006 is $0.2 million lower than if we had continued to account for stock-based compensation under APB 25. Stock compensation expense is included in our cost of sales and selling, general and administrative expense in our statements of income over the vesting periods.

Prior to March 2006 the options granted under our Option Plan qualified as ISOs, and therefore the related expense was not tax deductible and resulted in a permanent tax difference, thus increasing our effective income tax rate. During the third quarter of fiscal 2006 we amended all of our outstanding unvested options to convert them from ISOs to nonqualified options. Upon the future exercise of these options we will be able record a tax benefit equal to the lesser of the actual benefit of the tax deduction or the cumulative compensation cost previously recognized in earnings. Any excess benefit will be recognized as an increase to additional paid-in capital.

Other expense for the ~~second~~third quarter of fiscal year 2006 was ~~$1.0~~$0.1 million compared to income of $3.6 million for the same period of the prior year. During the third quarter of the prior year we recorded a gain on the sale of our Edgefield, South Carolina yarn spinning facility of approximately $3.6 million.

Net interest expense for the third quarter of fiscal year 2006 was $1.1 million, an increase of ~~$0.2~~$0.4 million, or ~~19.4%~~55.5%, from ~~$0.8~~$0.7 million for the prior year ~~second~~third quarter. The increase in interest expense was primarily due to ~~an increase in average interest rates of approximately 200 basis points and~~ higher average borrowings during the quarter ended ~~December 31, 2005~~April 1, 2006 as compared to the prior year ~~due to~~resulting primarily from the acquisition of Junkfood Clothing.

Our effective income tax rate for the ~~six~~nine months ended ~~December 31, 2005~~April 1, 2006 was ~~37.6%~~36.1%, compared to 34.3% for the fiscal year ended July 2, 2005. Our effective income tax rate for the nine months of fiscal year 2006 is lower than the statutory tax rate primarily as the result of the manufacturing deduction relating to income attributable to U.S. production activities under the American Jobs Creation Act of 2004 and other state tax planning strategies. During the year ended July 2, 2005, we decided to indefinitely reinvest our foreign earnings in Honduras. Therefore, we reversed the $0.7 million tax liability associated with the foreign earnings, as no provision for the U.S. federal and state tax ramifications of repatriating the earnings is necessary. Our effective income tax rate for the six months of fiscal year 2006 is lower than the statutory tax rate primarily as the result of the manufacturing deduction relating to income attributable to U.S. production activities under the American Jobs Creation Act of 2004, partially offset by the tax implications associated with the expensing of our stock options.

Net income for the second quarter of fiscal year 2006 was $2.4 million, an increase of $1.2 million, or 105.9%, compared to $1.2 million in the prior year second fiscal quarter. Net income for the first six months of fiscal year 2006 was $5.8 million, an increase of $3.2 million, or 121.4%, compared to $2.6 million in the prior year first six months. The results for the first six months of fiscal year 2006 include nineteen weeks of operations from Junkfood, which was acquired on August 22, 2005.

Accounts receivable ~~decreased $4.5~~increased $3.8 million from July 2, 2005 to ~~$32.2~~$40.4 million on ~~December 31, 2005.~~April 1, 2006. The ~~decrease~~increase is primarily related to ~~lower accounts receivable in our Delta and Soffe business, partially offset by~~ the acquisition of Junkfood Clothing. ~~The decrease in accounts receivable was primarily the result of lower sales during the quarter ended December 31, 2005 compared to the quarter ended July 2, 2005.~~

Inventories increased ~~$15.8~~$13.7 million from July 2, 2005 to ~~$114.8~~$112.7 million on ~~December 31, 2005.~~April 1, 2006. The increase in inventory is the result of ~~lower than expected sales in our Activewear Apparel segment and~~ the acquisition of Junkfood ~~Clothing.~~Clothing and increased inventories as we prepare for our spring selling season. We ~~closely monitor~~expect a decrease in inventory over our fourth quarter, and expect inventory ~~and are currently adjusting our production schedules~~ to ~~manage our overall inventory levels. We believe we will lower our overall inventory by approximately $20~~be in the range of $95 million ~~during the second half of fiscal year 2006.~~to $100 million at year-end.

Capital expenditures in the ~~second~~third quarter of fiscal year 2006, excluding our investment in the joint venture in Honduras, were ~~$1.5~~$1.4 million compared to ~~$3.1~~$3.5 million in the ~~second~~third quarter of the prior year. Capital expenditures in the first ~~six~~nine months of fiscal year 2006 totaled ~~$2.7~~$4.1 million compared to ~~$5.4~~$9.0 million in the first ~~six~~nine months of the prior year. Capital expenditures in fiscal year 2006 primarily related to our new West Coast distribution center and lowering our costs in our manufacturing facilities. The expenditures during fiscal year 2005 primarily related to the acquisition of the distribution center in Tennessee, and upgrading the air filtration system and adding an additional spinning frame at our Edgefield yarn plant, which was sold during fiscal year 2005. In addition to the capital expenditures, during the ~~second~~third quarter of fiscal year 2006 we invested $0.4 million in a joint venture in Honduras. ~~Through~~During the first nine months of fiscal year 2006, we have invested, through our Honduran subsidiary, ~~we have invested~~ a total of ~~$1.5~~$1.8 million with experienced partners in the Green Valley Industrial Park, which will construct and operate an industrial park in San Pedro Sula, Honduras. We have a 15% ownership interest in the Green Valley joint venture. During fiscal year 2006, we expect to spend a total of approximately ~~$8.5~~$8.2 million on capital expenditures, including approximately $2$2.2 million on our investment in the Honduran joint venture.

LIQUIDITY AND CAPITAL RESOURCES

Our primary cash needs are for working capital, capital expenditures, and ~~capital expenditures.~~debt repayments. In addition, we use cash to fund our dividend payments and share repurchases under our Stock Repurchase Program.

Pursuant to the Amended Loan Agreement, Delta Apparel, Junkfood, and M. J. Soffe Co. became co-borrowers under a single credit facility, the maturity of the loans under the credit facility was extended to August 2008, and the line of credit available to Delta Apparel, Junkfood, and M. J. Soffe Co. was increased to $85 million (subject to borrowing base limitations based on the value and type of collateral provided), which represents an increase of $3.75 million in the aggregate amount that was available under Delta Apparel’s credit facility and M. J. Soffe Co.’s credit facility.

The new facility contains limitations on, or prohibitions of, cash dividends. We are allowed to make cash dividends in amounts such that the aggregate amount paid to shareholders since May 16, 2000 does not exceed twenty-five percent (25%) of our cumulative net income calculated from May 16, 2000 to the date of determination, provided, among other things, that as of the date of such dividend payment, and after giving effect to the dividend payment, our availability under our revolving credit facility is not less than $6.0 million. The new facility also contains limitations on, or prohibitions of, stock repurchases. We are allowed to repurchase the common stock of Delta Apparel in amounts such that the aggregate amount of all payments for such repurchases since May 16, 2000 shall not exceed $23,000,000 provided, among other things, that as of the date of such repurchase, and after giving effect to the stock repurchase, our availability under our revolving credit facility is not less than $3.0 million.

The new facility contains a subjective acceleration clause and a “springing” lockbox arrangement (as defined in EITF 95-22), whereby remittances from customers will be forwarded to our general bank account and will not reduce the outstanding debt until and unless a specified event or an event of default occurs. Pursuant to EITF 95-22, we classify our borrowings under the new facility as noncurrent debt.

At ~~December 31, 2005,~~April 1, 2006, we had ~~$59.9~~$61.8 million outstanding under our credit facility with Wachovia Bank, National Association, at an average interest rate of ~~5.9%~~6%.

In addition, we have a seller note payable to the former Junkfood shareholders pursuant to the Asset Purchase Agreement dated as of August 22, 2005. The $2.5 million seller note bears interest at 9% and has principal payments due as follows: $500,000 on August 22, 2006; $750,000 on August 22, 2007 and $1,250,000 on August 22, 2008.

Pursuant to the First Amendment to Amended and Restated Stock Purchase Agreement, amounts are payable to the prior shareholders of M. J. Soffe if specified financial performance targets are met by M. J. Soffe Co. during the annual period beginning on October 2, 2005 and ending on September 30, 2006 (the “Earnout Amount”.) The Earnout Amount is capped at a maximum aggregate amount of $4.0 million ~~per year~~ and is payable five business days subsequent to the filing of the Form 10-Q for the first fiscal quarter of fiscal year 2007. Based on current projections, we anticipate paying approximately ~~$3.0~~$2.5 million in Earnout Amount in November 2006.

As part of the consideration of the acquisition of Junkfood, additional amounts are payable to the Junkfood Sellers during each of fiscal years 2007, 2008, 2009, and 2010 if financial performance targets are met by Junkfood during the period beginning on August 22, 2005 and ending on July 2,1, 2006 and during each of the three fiscal years thereafter (ending on June 27, 2009). Based on current projections, we anticipate paying approximately ~~$3.4~~$4.0 million to the former Junkfood shareholders related to the earnout period ending July 1, 2006. Any contingent consideration related to the earnout period ending July 1, 2006 will be accrued on July 1, 2006, when the contingency has been resolved.

Operating Cash Flows

Net cash provided by operating activities was $3.5 million and ~~$6.0~~$13.5 million for the first ~~six~~nine months of fiscal years 2006 and 2005, respectively. Our cash flow from operating activities is primarily due to net income plus depreciation and changes in working capital. We monitor changes in working capital by analyzing our investment in accounts receivable and inventories and by the amount of accounts payable. During the first ~~six~~nine months of fiscal year 2006, our cash flow provided by operating activities was primarily from net income plus depreciation, non-cash compensation, and a decrease in accounts receivables, offset partially by an increase in inventory and a decrease in accounts payable and accrued ~~expenses.~~expenses and other liabilites. The cash provided by operating activities in fiscal year 2005 was primarily the result of net income plus depreciation and a reduction in accounts receivable, ~~partially offset by a decrease in~~coupled with an increase accounts payable and accrued ~~expenses.~~expenses and other liabilities.

Investing Cash Flows

During the ~~six~~nine months ended ~~December 31, 2005,~~April 1, 2006, we acquired the Junkfood business for $27.4 million and the Intensity Athletics ~~Inc.~~business for $0.8 million, inclusive of direct costs associated with the acquisitions. In addition, we used ~~$2.7~~$4.1 million in cash for purchases of property, plant and equipment, and invested ~~$1.4~~$1.8 million in a joint venture in Honduras. Capital expenditures in fiscal year 2006, excluding our investment in the Honduran joint venture, primarily related to our new West Coast distribution center and lowering our costs in our manufacturing facilities. Through our Honduran subsidiary, we have invested a total of ~~$1.5~~$1.8 million with experienced partners in the Green Valley Industrial Park, which will construct and operate an industrial park in San Pedro Sula, Honduras. We have a 15% ownership interest in the Green Valley joint venture. During fiscal year 2006, we expect to spend a total of approximately ~~$8.5~~$8.2 million on capital expenditures, including approximately $2$2.2 million on our investment in the Honduran joint venture. During the ~~six~~nine months ended ~~January 1,~~April 2, 2005, investing activities used ~~$5.3~~$9.0 million in ~~cash.~~cash and received $9.8 million in proceeds for the sales of property, plant and equipment. The capital expenditures primarily related to two new distribution centers, and $1.8 million related to the ~~acquisition~~Edgefield yarn spinning facility. The proceeds from the sale of property, plant and equipment primarily related to the ~~distribution center in Tennessee, and upgrading the air filtration system and adding an additional spinning frame at~~sale of our Edgefield ~~yarn~~ plant which ~~was~~we sold ~~during fiscal year~~in January 2005.

Financing Activities

For the first ~~six~~nine months of fiscal year 2006, financing activities provided us ~~$29.4~~$30.7 million in cash, primarily related to proceeds from our revolving credit facility with Wachovia Bank, National Association. The proceeds were primarily used for the acquisition of Junkfood Clothing on August 22, 2005. For the first ~~six~~nine months of fiscal year 2005, we used ~~$0.9~~$14.4 million in cash for financing activities, primarily related to the ~~payment of dividends and~~ repayment of long term debt. We paid dividends to our shareholders totaling ~~$0.7~~$1 million and ~~$0.6~~$0.9 million in the first ~~six~~nine months of fiscal years 2006 and 2005, respectively.

Based on our expectations, we believe that our $85 million credit facility should be sufficient to satisfy our foreseeable working capital needs, and that the cash flow generated by our operations and funds available under our credit facility should be sufficient to service our debt payment requirements, to satisfy our day-to-day working capital needs, to fund our planned capital expenditures, to fund purchases of our stock as described below and to fund the payment of dividends as described below. Any material deterioration in our results of operations, however, may result in ~~the Company~~us losing ~~its~~our ability to borrow under ~~its~~our credit facility and to issue letters of credit to suppliers or may cause the borrowing availability under the facility to be insufficient for our needs.

Purchases by Delta Apparel of its Own Shares

~~We have authorization from~~During the three months ended April 1, 2006, we purchased 24,100 shares of stock at a cost of approximately $0.4 million. As of April 1, 2006, approximately $1.1 million remained available for purchases of our ~~Board of Directors to spend up to an aggregate of $6.0 million for share repurchases~~common stock under ~~the~~our Stock Repurchase Program. During the three months ended April 2, 2005, we did not purchase shares of our common stock. All purchases are made at the discretion of our management. ~~We did not purchase shares of our common stock during the three months ended December 31, 2005.~~ Since the inception of the Stock Repurchase Program through April 1, 2006, we have purchased ~~755,524~~779,624 shares of our common stock ~~pursuant to the program~~ for an aggregate of ~~$4.5~~$4.9 million. On April 20, 2006, the Board authorized an additional $5 million for share repurchases under the Stock Repurchase Program, bringing the aggregate total to $11 million. As of April 20, 2006, $5.9 million remains available for future purchases.

Dividend Program

On ~~October 28, 2005,~~January 16, 2006 our Board ~~of Directors~~ declared a cash dividend of four cents per share of common stock pursuant to our quarterly dividend program. We paid the dividend on November 28, 2005 to shareholders of record as of the close of business on November 16, 2005. On January 17, 2006, our Board declared a cash dividend of four cents per share of common stock payable on February 27, 2006 to shareholders of record as of the close of business on February 15, 2006. On April 20, 2006, our Board increased our dividend payment by 25%, bringing the quarterly dividend payment to five cents per common share. The dividend is payable on May 30, 2006 to shareholders of record as of the close of business on May 17, 2006. Although the Board may terminate or amend the program at any time, we currently expect to continue the quarterly dividend program.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant estimates and assumptions relate to the adequacy of receivable and inventory reserves, self-insurance accruals and the accounting for income taxes.

The detailed Summary of Significant Accounting Policies is included in Note B to the Condensed Consolidated Financial Statements.

Revenue Recognition and Accounts Receivable

We consider revenue realized or realizable and earned when the following criteria are met: persuasive evidence of an agreement exists, title has transferred to the customer, the price is fixed and determinable and the collectibility is reasonably assured. Sales are recorded net of discounts and provisions for estimated returns and allowances. We estimate returns and allowances on an ongoing basis by considering historical and current trends. We record these costs as a reduction to net revenue. We estimate the net collectibility of our accounts receivable and establish an allowance for doubtful accounts based upon this assessment. Specifically, we analyze the aging of accounts receivable balances, historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms. Significant changes in customer concentration or payment terms, deterioration of customer credit-worthiness or weakening in economic trends could have a significant impact on the collectibility of receivables and our operating results.

Inventories

Our inventory is carried at the lower of FIFO cost or market. We regularly review inventory quantities on hand and record a provision for damaged, excess and out of style or otherwise obsolete inventory based primarily on our historical selling prices for these products and our estimated forecast of product demand for the next twelve months. If actual market conditions are less favorable than those projected, or if liquidation of the inventory is more difficult than anticipated, additional inventory write-downs may be required.

Self Insurance

Our medical, prescription and dental care benefits are primarily self-insured. Our self-insurance accruals are based on claims filed and estimates of claims incurred but not reported. We develop estimates of claims incurred but not reported based upon the historical time it takes for a claim to be reported and historical claim amounts. While the time it takes for a claim to be reported has been declining, if claims are

greater than we originally estimate, or if costs increase beyond what we have anticipated, our recorded reserves may not be sufficient, and it could have a significant impact on our operating results.

Income Taxes

We use the liability method of accounting for income taxes, which requires recognition of temporary differences between financial statement and income tax basis of assets and liabilities measured by enacted tax rates. We have recorded deferred tax assets for certain state operating loss carryforwards and nondeductible accruals. We established a valuation allowance related to certain of the state operating loss carryforward amounts in accordance with the provisions of FASB Statement No. 109,Accounting for Income Taxes. We continually review the adequacy of the valuation allowance and recognize the benefits of deferred tax assets if reassessment indicates that it is more likely than not that the deferred tax assets will be realized based on earnings forecasts in the respective tax locations. As of ~~December 31, 2005,~~April 1, 2006, we had operating loss carryforwards of approximately ~~$7.6~~$7.4 million for state tax purposes. The valuation allowance against the operating loss carryforwards was $146 thousand at ~~December 31, 2005.~~April 1, 2006. These carryforwards expire at various intervals through 2020.

There have been no changes in our critical accounting policies since the filing of our Annual Report on Form 10-K for the year ended July 2, 2005.

~~NEW ACCOUNTING STANDARDS~~

~~In December 2004, the Financial Accounting Standards Board (“FASB”) issued Staff Position (“FSP”) Nos. 109-1,~~~~Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act~~~~of 2004 (“FSP 109-1”), and 109-2,~~~~Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004~~(“FSP 109-2”). The American Jobs Creation Act of 2004 (the “Jobs Creation Act”) was enacted on October 22, 2004. Under guidance in FSP 109-1, the qualified production activities deduction will be treated as a “special deduction” as described in FASB Statement No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date of the Jobs Creation Act. We have determined that our production activities will qualify under the Jobs Creation Act and expect the benefit of this deduction could have up to a 1% reduction on our effective tax rate for fiscal year 2006. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Creation Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS 109. Although we have not finalized our evaluation of the impact of the repatriation provisions, based on our analysis to date, we do not expect to repatriate any foreign earnings pursuant to the Jobs Creation Act.

~~On December 16, 2004, the FASB issued Statement No. 123 (revised 2004),~~~~Share-Based Payment~~ ~~(“Statement 123(R)”), which is a revision of FASB Statement No. 123,~~~~Accounting for Stock-Based Compensation~~~~(“Statement 123”). Statement 123(R) supersedes APB Opinion No. 25,~~~~Accounting for Stock Issued to Employees~~~~(“APB 25”), and amends FASB Statement No. 95,~~~~Statements of Cash Flows~~~~. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R)~~~~requires~~all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. Statement 123(R) must be adopted for annual periods beginning after June 15, 2005. Accordingly, effective July 3, 2005, we adopted the fair-value recognition provisions of Statement 123(R). See Note I, Stock Options and Incentive Stock Awards, for further information on the implementation of Statement 123(R).

~~On November 10, 2005, the FASB issued Staff Position No. FAS 123(R)-3,~~~~Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards~~. This provides for a simplified method to establish the beginning balance of the additional paid-in capital pool related to the tax effects of share-based compensation. Since our adoption of Statement 123, we have not recorded any excess tax benefits associated with our stock options and therefore we have no initial pool of excess tax benefits upon adoption of Statement 123(R).

Item 3. Quantitative and Qualitative Disclosures about Market Risk

COMMODITY RISK SENSITIVITY

On January 5, 2005, in conjunction with the sale of our yarn spinning facility in Edgefield, South Carolina, we entered into a five-year agreement with Parkdale to supply our yarn requirements. During this five-year period, we will purchase from Parkdale all yarn required by Delta Apparel and our wholly owned subsidiary, M. J. Soffe Co., for use in our manufacturing operations (excluding yarns that Parkdale did not manufacture as of the date of the agreement in the ordinary course of its business or due to temporary Parkdale capacity restraints). The purchase price of yarn is based upon the cost of cotton plus a fixed conversion cost. Thus, we are subject to the commodity risk of cotton prices and cotton price movements which could result in unfavorable yarn pricing for us. We fix the cotton prices as a component of the

purchase price of yarn with Parkdale, pursuant to the supply agreement, in advance of the shipment of finished yarn from Parkdale. Prices are set according to prevailing prices, as reported by the New York Cotton Exchange, at the time we elect to fix specific cotton prices.

Yarn with respect to which we have fixed cotton prices at ~~December 31, 2005~~April 1, 2006 was valued at ~~$22.3~~$23.1 million, and is scheduled for delivery between ~~January~~April 2006 and ~~September~~December 2006. At ~~December 31, 2005,~~April 1, 2006, a 10% decline in the market price of the cotton covered by our fixed price yarn would have had a negative impact of approximately ~~$1.5~~$1.6 million on the value of the yarn. At July 2, 2005, a 10% decline in the market price of the cotton covered by our fixed price yarn would have had a negative impact of approximately $2.6 million on the value of the yarn. The impact of a 10% decline in the market price of the cotton covered by our fixed price yarn would have had a smaller impact at ~~December 31, 2005~~April 1, 2006 than at July 2, 2005 due to having less fixed price yarn at ~~December 31, 2005~~April 1, 2006 than at July 2, 2005.

We may use derivatives, including cotton option contracts, to manage our exposure to movements in commodity prices. We do not designate our options as hedge instruments upon inception. Accordingly, we mark to market changes in the fair market value of the options as other income or expense ~~(income)~~ in the statements of income. We did not own any cotton options contracts on ~~December 31, 2005.~~April 1, 2006.

INTEREST RATE SENSITIVITY

Our credit ~~agreements provide~~agreement provides that outstanding amounts bear interest at variable rates. If the amount of outstanding indebtedness at ~~December 31, 2005~~April 1,

2006 under the revolving credit facility had been outstanding during the entire three months ended ~~December 31, 2005~~April 1, 2006 and the interest rate on this outstanding indebtedness were increased by 100 basis points, our interest expense would have increased by approximately ~~$150,000,~~$154,000, or ~~15.0%~~14.6% of actual interest expense, during the quarter. This compares to an increase of $323,000, or 10.7% of actual interest expense, for the 2005 fiscal year, or an average of $80,750 per quarter, based on the outstanding indebtedness at July 2, 2005. The effect of a 100 basis point increase in interest rates has a larger impact as of ~~December 31, 2005~~April 1, 2006 than during fiscal year 2005 due to the higher debt levels outstanding on ~~December 31, 2005,~~April 1, 2006, resulting primarily from the acquisition of the Junkfood business. The actual increase in interest expense resulting from a change in interest rates would depend on the magnitude of the increase in rates and the average principal balance outstanding.

Item 4: Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief ~~Financial~~Accounting Officer, has evaluated the effectiveness of our disclosure controls and procedures as of ~~December 31, 2005~~April 1, 2006 and, based on their evaluation, our Chief Executive Officer and Chief ~~Financial~~Accounting Officer have concluded that these controls and procedures are effective.

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information that we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief ~~Financial~~Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.

There was no change in our internal control over financial reporting during the ~~second~~third quarter of fiscal year 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. However, we are currently evaluating the internal control over financial reporting at Junkfood Clothing Company and expect that we will take action to strengthen the internal control over financial reporting at Junkfood Clothing Company in a manner consistent with the Company’s overall internal control over financial reporting during fiscal year ~~2006.~~2007.

PART II. OTHER INFORMATION

Item ~~4. Submission~~2. Unregistered Sales of ~~Matters~~Equity Securities and Use of Proceeds

(c) Repurchases of Stock

Total Number
of Shares Approximate
Total Purchased as Dollar Value of
Number of Average Part of Publicly Shares that May
Shares (or Price Paid Announced Yet Be Purchased
Units) per Share Plans or Under the Plans or
Period Purchased (or Unit) Programs Programs

January 1, 2006 - February 4, 2006 — — — $1.5 million
February 5, 2006 - March 4, 2006 — — — $1.5 million
March 4, 2006 - April 1, 2006 24,100 $ 16.91 24,100 $1.1 million

Total 24,100 $ 16.91 24,100 $1.1 million

On November 1, 2000, we announced our Board of Director approval of our Stock Repurchase Program. As of April 1, 2006, approximately $1.1 million remained available for purchases of our common stock under our Stock Repurchase Program. On April 20, 2006, the Board authorized an additional $5 million for share repurchases under the Stock Repurchase Program, bringing the aggregate total to ~~a Vote~~$11 million. As of ~~Security Holders~~April 20, 2006, $5.9 million remains available for future purchases.

On August 22, 2005, in conjunction with our acquisition of Junkfood, we refinanced our credit facility. The ~~following summarizes~~new facility contains limitations on, or prohibitions of, cash dividends. We are allowed to make cash dividends in amounts such that the ~~votes at~~aggregate amount paid to shareholders since May 16, 2000 does not exceed twenty-five percent (25%) of our cumulative net income calculated from May 16, 2000 to the ~~Annual Meeting~~date of determination, provided, among other things, that as of the ~~Company’s shareholders held~~date of such dividend payment, and after giving effect to the dividend payment, our availability under our revolving credit facility is not less than $6.0 million. The new facility also contains limitations on, ~~November 10, 2005:~~or prohibitions of, stock repurchases. We are allowed to repurchase the common stock of Delta Apparel in amounts such that the aggregate amount of all payments for such repurchases since May 16, 2000 shall not exceed $23,000,000 provided, among other things, that as of the date of such

repurchase, and after giving effect to the stock repurchase, our availability under our revolving credit facility is not less than $3.0 million.

Broker
Election of Directors For Against Withheld Abstentions Non-votes

David S. Fraser 7,275,788 N/A 4,215 N/A N/A
William F. Garrett 7,267,440 N/A 12,563 N/A N/A
Robert W. Humphreys 7,275,828 N/A 4,175 N/A N/A
Dr. Max Lennon 7,275,840 N/A 4,163 N/A N/A
E. Erwin Maddrey, II 7,268,900 N/A 11,103 N/A N/A
Philip J. Mazzilli 7,275,728 N/A 4,275 N/A N/A
Buck A. Mickel 7,275,460 N/A 4,543 N/A N/A
David Peterson 7,276,004 N/A 3,999 N/A N/A

Ratification of the Appointment of
Ernst & Young LLP as Independent
Auditors for Fiscal Year 2006
7,271,525 5,692 N/A 2,786 —

Item 6. Exhibits

Exhibits

10.31		Amendment of Employment Agreement between Delta Apparel, Inc. and Herbert M. Mueller dated March 10, 2006.

31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Chief ~~Financial~~Accounting Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of the Chief ~~Financial~~Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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


		DELTA APPAREL, INC. ~~(Registrant)~~

~~February 10, 2006~~	~~By: /s/ Herbert M. Mueller~~(Registrant)

~~Date~~	~~Herbert M. Mueller~~
May 12, 2006 Date		By: /s/ Deborah H. Merrill Deborah H. Merrill
		Vice President, Chief ~~Financial~~Accounting Officer and Treasurer