According to a press release dated May 4, 2004, the Company announced that on April 29, 2004, the United States District Court for the District of Colorado (the "Court") entered a Final Order and Judgment approving the settlement of the class action that had been pending since October 2001 against the Company, two officers and directors and one former officer and director (the "Defendants"). The Defendants settled the class action while continuing to deny any liability in connection with the asserted claims. A settlement in principle was reached between the parties during a settlement conference in November 2003. The Court granted preliminary approval of the settlement on January 30, 2004, pursuant to which approval, notice of the class action and proposed settlement were distributed to applicable shareholders. The Court conducted a hearing on the proposed settlement on April 23, 2004. No members of the class opted out of the class or objected to the proposed settlement. In accordance with the settlement agreement, the Defendants will pay to the class a total of $1,000,000, from which will be deducted certain administrative costs and awards made to the named Plaintiffs and to Plaintiff's counsel for attorneys' fees and costs. The Company expects that the settlement amount will be derived from proceeds of the Defendants' liability insurance coverage.

The original Complaint alleges that Sport-Haley and certain of its officers and directors with violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. The complaint alleges that during the Class Period, Sport-Haley continually reported artificially inflated earnings via false and misleading press releases and filings with the Securities and Exchange Commission ("SEC"). As a result, on October 16, 2000, the company announced that it would be forced to restate its financial statements for the 1998 and 1999 fiscal years. This disclosure prompted the NASDAQ to suspend trading of Sport-Haley stock. It also prompted the SEC to commence an informal inquiry. On November 6, 2000, the company announced the extent of its restatements. Specifically, defendants admitted that they had materially overstated the company's earnings for the 1996, 1997, 1998 and 1999 fiscal years, and that the company would restate its net income for the year ended June 30, 1998, from $4.3 million to $2.5 million, and from $814,000 to $147,000 for the year ended June 30, 1999. When the NASDAQ finally resumed trading, the company's stock initially lost 37% of its value. Moreover, after receiving documents from the company and interviewing company employees, the SEC began a formal investigation into possible violations of the federal securities laws.