The Company markets a wide range of merchandise, manufactured by a number of independent suppliers, both domestic and foreign. Suppliers located outside of the United States provided approximately 40% of the Company’s merchandise in 2006. Most of these suppliers have been associated with the Company for many years and manufacture products based upon the Company’s specifications. Suppliers are selected in accordance with their ability to produce high quality products in a cost-effective manner.

The Company markets its products mainly by direct mail. Catalogs depict the current styles of Womenswear (such as coordinates, dresses, tops, pants, skirts, lingerie, sportswear, suits, jackets, outerwear and shoes), Menswear (such as suits, shirts, outerwear, active wear, slacks, shoes, and accessories), and Home (such as bedspread ensembles, draperies, furniture covers, area rugs, bath accessories, kitchenware, gifts, collectibles and personal care items) are mailed directly to existing and prospective customers. Sales of the Menswear and Womenswear products accounted for 88% of the Company’s total sales in 2006, and sales of home products accounted for the remaining 12%.

Competition and Seasonality

The environment for our products is very competitive and the Company has numerous competitors throughout various channels within the industry. Our current and potential competitors include brick and mortar retailers and catalog retailers, many of which possess significant brand awareness, sales volume, and customer bases. Some of these competitors currently sell products through the internet, mail order, or direct marketing. We believe that the principal competitive factors in our market segments include value, credit, availability, convenience, brand recognition, customer service, and reliability. The Company’s annual earnings depend to a great extent on the results of operations for the last quarter of its fiscal year when a significant portion of the Company’s sales and profits are recorded.

The cyclical nature of the retail business requires the Company to carry a significant amount of inventory, especially prior to peak selling seasons when we and other retailers generally build up inventory levels. We review our inventory levels in order to identify slow-moving merchandise and broken assortments (items in stock that no longer have a sufficient range of sizes) and use markdowns to clear merchandise.

The Company considers its merchandise to be value-priced and competes for sales with other direct marketers, retail department stores, specialty shops, discount store chains, e-commerce and multi-channel marketers. The Company competes based on its sales expertise and its unique combination of product, quality, price, credit, guarantee and service.

Environmental

Environmental protection requirements did not have a material effect upon the Company’s operations during fiscal 2006. While management believes it would be unlikely, it is possible that compliance with such requirements would lengthen lead time in capital improvement plans and increase construction costs and therefore, operating costs due in part to the expense and time required to conduct environmental and ecological studies and any required remediation.

Trademarks

We believe that our registered and common law trademarks have significant value and are instrumental to our ability to market and sustain demand for our merchandise.

Direct Mail and Retail Business

As of December 31, 2006 the Company had $3,854,993 of backlog orders of which the Company reasonably did not expect to fill $419,423, compared to $4,866,035 of backlog orders as of December 31, 2005 of which the Company reasonably did not expect to fill $511,420. The majority of the backlog orders were the result of ordered items being out of stock at the time the order was originally placed. The reduction in backlog orders is the result of the Company’s enhanced inventory management efforts. Emphasis was placed on carrying greater quantities of recurring or staple products and, conversely, lower levels of newly introduced or untested products were maintained.

Media and co-op prospect advertising programs continue to be used as components of the Company’s customer acquisition strategy. The Company continued to expand its internet presence in 2006 generating $93.7 million in net sales, approximately 22% of the Company’s total net sales, as compared to approximately $86.1 million in net sales or 19% in 2005. The Company launched its e-commerce Web site in the third quarter of 2000 and has continued to expand its affiliate partnerships to extend the reach of the Web site. The Company’s Web site has also become an effective way to help liquidate excess inventory.

Catalog mailings are mailed from commercial printers engaged by the Company. Orders for merchandise are processed at the Company’s corporate offices in Warren, Pennsylvania (telephone orders via the call centers in Franklin, Pennsylvania, Erie, Pennsylvania and Warren, Pennsylvania) and orders are filled and mailed from the Company’s Distribution Center in Irvine, Pennsylvania. All of the Company’s products are warehoused in its Irvine, Pennsylvania Distribution Center. Currently, merchandise returns operations are located in Erie, Pennsylvania. However, in November 2006, the Company announced it would be relocating its returns operations to its Distribution Center in Irvine, Pennsylvania. The Company serves customers throughout the United States.

The Company has retail facilities in Grove City and Warren, Pennsylvania, and Wilmington, Delaware.

(d) FOREIGN OPERATIONS AND EXPORT SALES.

The Company does not conduct export sales of merchandise from the United States.

The Company conducts its foreign operations through foreign offices maintained in Hong Kong, Singapore, India, Pakistan and China that directly source more than 40%, 32% and 28% of the Company’s merchandise from foreign suppliers in 2006, 2005 and 2004, respectively. All activity is intercompany and the foreign offices have insignificant amounts of cash and fixed assets.

As the Company continues to diversify merchandise sourcing opportunities, it expects to increase its investment in product development and source more merchandise directly from foreign vendors. The increased volume of purchases will further expose the Company to new and greater risks and uncertainties, the occurrence of which could substantially impact the Company’s ability to source merchandise through foreign vendors and to realize any perceived cost savings. These risk factors are further discussed in ITEM 1A. RISK FACTORS.

(e) AVAILABLE INFORMATION.

The Company makes available free of charge copies of its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments made to these reports pursuant to Section 13(a) and 15(d) of the Exchange Act, on its Web site at www.blair.com . Such reports are posted as soon as reasonably practicable after being filed with the SEC.

ITEM 1A.   RISK FACTORS

In addition to the other information contained in this Form 10-K, the following risk factors should be considered carefully in evaluating our business. Our business, financial condition, or results of operations could be materially adversely affected by any of these risks. Please note that additional risks not presently known to the Company or that the Company currently deems immaterial may also impair its business and operations.

Obtaining required approvals and satisfying closing conditions may delay or prevent completion of the proposed acquisition of the Company by Appleseed’s Topco, Inc.

On January 23, 2007, the Company, Appleseed’s Topco, Inc. (“Appleseed’s”) and BLR Acquisition Corp. entered into the Agreement and Plan of Merger (“Merger Agreement”), which provides for the acquisition of the Company by Appleseed’s. The completion of the proposed acquisition of our company by Appleseed’s is conditioned upon the receipt of all material governmental authorizations, consents, orders and approvals. Completion of the acquisition is also conditioned upon approval of the transaction by the stockholders of the Company and the absence of injunctions, court order or law that would restrain or prohibit consummation of the acquisition. No assurance can be given that the required consents and approvals will be obtained or that the required conditions to closing will be satisfied, and, if all required consents and approvals are obtained and the conditions are satisfied, no assurance can be given as to the terms, conditions and timing of the approvals or that they will satisfy the terms of the Agreement and Plan of Merger entered into on January 23, 2007. Further, we are subject to recent claims related to the proposed acquisition from plaintiffs who are seeking an injunction to prohibit consummation of the proposed acquisition and other relief including monetary damages.

Significant increases in the costs associated with its direct mail business could negatively affect results of operations.

The Company incurs substantial costs associated with its catalog mailings, including paper, postage, and human resource costs associated with catalog layout and design, production and circulation and increased inventories. The cost of printing, paper and postage are governed by contracts and other long term arrangements which serve to mitigate the risk of sudden or unexpected increases. Most of these costs are incurred prior to mailing. As a result, it is not possible to adjust the costs of a particular advertising mailing to reflect the actual subsequent performance of the mailing.

Since the direct mail business accounts for the majority of total net sales, any performance shortcomings experienced by the direct mail business, such as the damage or delay of delivery of catalogs or errors therein, would likely have a material adverse effect on the overall business, financial condition, results of operations and cash flows.

Net sales could be negatively impacted by a decline in response rates to advertising promotions, by a decline in operating results or a reduction in the customer file.

Response rates are impacted by the Company’s ability to continually develop and/or select the right merchandise assortment, maintain appropriate inventory levels and creatively present merchandise in a way that is appealing to customers. Consumer preferences cannot be predicted with certainty, as they continually change and vary from region to region. On average, the design process for apparel is initiated nine to ten months before merchandise is available to customers. Further, purchase commitments are made four to six months in advance. These lead times make it difficult to respond quickly to changing consumer preferences and magnify the consequences of any misjudgments made in anticipating customer preferences. Consequently, if the Company misjudges customer merchandise preferences or purchasing habits, sales may decline significantly, and markdowns may be required to significantly lower prices in order to sell excess inventory, which would result in lower margins.

Response rates to advertising promotions and, as a result, the net sales generated by each promotion, can be affected by other factors beyond the Company’s control such as weak economic conditions, and unseasonable weather in key geographic markets. In addition, a portion of all advertising promotions are to prospective customers. These promotions involve risks not present in promotions to existing customers, including lower and less predictable response rates. Additionally, it has become more difficult for the Company and other direct marketers to obtain quality prospect mailing lists, which may limit the Company’s ability to maintain the size of its active customer file. Lower response rates could result in lower-than-expected full-price sales, higher inventory levels and/or subsequently higher-than-expected clearance sales at significantly reduced margins.

In addition, the Company faces substantial competition from discount retailers for basic elements in the merchandise lines, and net sales may decline or grow at a reduced pace if it is unable to differentiate its merchandise and shopping experience from discount retailers. Further, the retail apparel industry has experienced significant price deflation over the past several years largely due to the downward pressure on retail prices caused by discount retailers.

The Company’s sales, revenue and operating income may be adversely impacted by changes in minimum customer credit scores determined by a third party.

Historically, the Company has managed its own credit portfolio and set the minimum credit scores a consumer must have to be entitled to purchase the Company’s merchandise on credit. The Company sold its receivables portfolio to World Financial Capital Bank, an industrial bank subsidiary of Alliance Data Systems Corporation in November, 2005, and going forward they will have discretion over the minimum credit score necessary to be eligible to purchase Blair merchandise on credit. If the bank decides to raise the applicable credit rating standards, certain consumers will no longer qualify to purchase Blair merchandise on credit, which could lower sales thereby lowering revenue and operating income.

In addition, lower sales may result from hesitancy on the part of the Company’s credit reliant customers to purchase using the new Blair credit card.

In the third quarter of 2006, the Company and Alliance Data Systems executed Amendment Number 2 to the ADS Credit Program Agreement whereby credit is granted to customers with credit scores below the originally established FICO level. Customers granted credit in this new FICO scoring range are deemed “Full Recourse Accounts” and the Company assumes the bad debt risk. The recourse program is an annual program that either party may discontinue with 60 days notice. While this program affords the Company the ability to offer credit to customers who have been a profitable segment in the past, the increased credit risk assumed by the Company could reduce operating income.

Consumer concerns about purchasing items via the Internet as well as external or internal infrastructure system failures could negatively impact e-commerce sales and costs.

The e-commerce business is vulnerable to consumer privacy concerns relating to purchasing items over the Internet, security breaches, and failures of Internet infrastructure and communications systems. If consumer confidence in making purchases over the Internet declines as a result of privacy or other concerns, e-commerce sales could decline. The Company may be required to incur increased costs in order to address any system failures or security breaches.

The Company’s net sales, operating income and inventory levels fluctuate on a seasonal basis.

The Company experiences seasonal fluctuations in its net sales and operating income. Seasonal fluctuations also affect our inventory levels, since we usually order merchandise in advance of peak selling periods and sometimes before new fashion trends are confirmed by customer purchases. We must carry a significant amount of inventory. If we are not successful in selling inventory we may have to sell the inventory at significantly reduced prices or we may not be able to sell the inventory at all.

The Company’s sales and reputation depend on key vendors for timely and effective sourcing and delivery of quality merchandise.

As a direct marketer, business depends largely on the ability to fulfill orders on a timely basis. The Company generally maintains non-exclusive relationships with multiple vendors that manufacture its merchandise. However, there are no contractual assurances of continued supply, pricing or access to new products, and any vendor could discontinue selling to the Company at any time. If the Company was required to change vendors or if a key vendor was unable to timely supply desired merchandise in sufficient quantities on acceptable terms, delays in filling customer orders could be experienced resulting in lost sales and a decline in customer satisfaction.

The Company’s increasing reliance on direct sourcing from foreign vendors may negatively impact the cost to source and deliver merchandise.

As it continues to diversify merchandise sourcing opportunities, the Company expects to increase its investment in product development and source more merchandise directly from foreign vendors. For the year ended December 31, 2006, the Company was importer of record on approximately 40% of total merchandise purchases. The increased volume of purchases will further expose the Company to new and greater risks and uncertainties, the occurrence of which could substantially impact the Company’s ability to source merchandise through foreign vendors and to realize any perceived cost savings. Considerations include, among other things:
•  
Failure of foreign vendors to adhere to quality assurance standards or standards for conducting business;
 
•  
Changing or uncertain economic conditions, political uncertainties or unrest, or epidemics or other health or weather-related events in foreign countries resulting in the disruption of trade from exporting countries;
 
•  
Restrictions on the transfer of funds or transportation delays or interruptions; and
 
•  
Delays or cancellation of shipments as a result of geopolitical factors or other events related to factory or shipping lines.

The Company enforces a code of conduct that sets guidelines for vendors regarding employment practices such as wages and benefits, health and safety, working hours and working age, and for environmental, ethical and legal matters. Although management believes it is allocating appropriate resources to monitor compliance with such standards, if management or an outside third party discovers that any of the Company’s vendors are engaged in practices that materially violate vendor code of conduct or other generally accepted social responsibility standards, sales could be materially affected by any resulting negative publicity.

The Company may be unable to fill customer orders efficiently, which could negatively impact customer satisfaction.

If the Company is unable to efficiently process and fill customer orders, customers may cancel or refuse to accept orders, and customer satisfaction could be harmed. Considerations include, among other things:
•  
Failures in the efficient and uninterrupted operation of customer service call centers or the Company’s sole distribution center, including system failures caused by telecommunications systems providers and order volumes that exceed present telephone or Internet system capabilities;
 
•  
Delays or failures in the performance of third parties, such as shipping companies and the U.S. postal and customs services, including delays associated with labor disputes, labor union activity, inclement weather, natural disasters, health epidemics and possible acts of terrorism; and
 
•  
Disruptions or slowdowns in order processing or fulfillment systems resulting from increased security measures implemented by U.S. customs, or from homeland security measures, telephone or Internet down times, system failures, computer viruses, electrical outages, mechanical problems, human error or accidents, fire, natural disasters or comparable events.

The Company’s success is dependent upon its management team.

The loss of key personnel could have a material adverse effect on the business. Furthermore, the location of the Company’s corporate headquarters outside of a major metropolitan area may make it more difficult to replace key employees who leave, or to add qualified employees needed to manage growth opportunities.

Any determination that the Company has a material weakness in its internal control over financial reporting could have a negative impact on stock price.

Management continues to apply significant management and financial resources to document, test, monitor and enhance internal control over financial reporting in order to meet the ongoing requirements of the Sarbanes-Oxley Act of 2002. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. In addition, because of changes in conditions, the effectiveness of internal control may vary over time. Management cannot be certain that internal control systems will be adequate or effective in preventing fraud or human error. Any failure in the effectiveness of internal control over financial reporting could have a material effect on financial reporting or cause the Company to fail to meet reporting obligations, which upon disclosure, could negatively impact the market price of the Company’s common stock.

The Company’s stock price is susceptible to significant fluctuation.

Blair’s stock price may fluctuate substantially as a result of limited public float or as a result of quarter-to-quarter variations in the actual or anticipated financial results of Blair or other companies in the retail industry or markets served by Blair. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of many retail and other stocks and that have often been unrelated or disproportionate to the operating performance of these companies.

The Company’s business, results of operations and future financial performance will depend on the risk factors listed above, as well as other risk factors not currently known to management and the board of directors that may arise in the future. Any one or more of these risk factors could have a material adverse effect on the Company.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

Not applicable.