RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, information derived
from our Interim Unaudited Condensed Consolidated Financial Statements,
expressed as a percentage of net sales. The discussion that follows the table
should be read in conjunction with our Interim Unaudited Condensed Consolidated
Financial Statements.

                                                       Three Months Ended                  Nine Months Ended
                                                          September 30,                      September 30,
                                                      2008             2007              2008             2007
Net Sales                                             100.0 %          100.0 %           100.0 %          100.0 %
Cost Of Goods Sold                                     62.6 %           64.4 %            60.0 %           60.9 %

Gross Margin                                           37.4 %           35.6 %            40.0 %           39.1 %

Selling, General and Administrative Expenses           30.3 %           30.5 %            34.0 %           34.6 %


Income From Operations                                  7.1 %            5.1 %             6.0 %            4.5 %

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
Net sales. Net sales for the three months ended September 30, 2008 were $72.5 million compared to $82.3 million for the same period in 2007. Wholesale sales for the three months ended September 30, 2008 were $55.6 million compared to $64.1 million for the same period in 2007. The $8.5 million decrease is primarily attributable to supply chain disruptions combined with difficult economic conditions which resulted in a decrease in sales across all footwear and apparel categories with the exception of a small increase in the sales of duty footwear. Retail sales for the three months ended September 30, 2008 were $15.3 million compared to $18.2 million for the same period in 2007. The $2.9 million decrease is primarily the result of customers' decisions to close plants, reduce headcount, and defer safety shoe purchases due to current economic conditions. Military segment sales for the three months ended September 30, 2008, were $1.6 million, compared to zero in the same period in 2007. Shipments in 2008 were under the $6.4 million contract issued in July 2007 and the $5.0 million contract issued in January 2008.
Gross margin. Gross margin for the three months ended September 30, 2008 was $27.1 million, or 37.4% of net sales, compared to $29.3 million, or 35.6% of net sales, for the same period in 2007. Wholesale gross margin for the three months ended September 30, 2008 was $19.7 million, or 35.4% of net sales, compared to $20.0 million, or 31.3% of net sales, in the same period last year. The 410 basis point increase reflects an increase in sales price per unit, as well as a decrease in manufacturing costs resulting from increased operating efficiencies from increased production at our manufacturing facilities. Retail gross margin for the three months ended September 30, 2008 was $7.3 million, or 47.5% of net sales, compared to $9.2 million, or 50.8% of net sales, for the same period in 2007. The 330 basis point decrease is primarily the result of increased costs to purchase products. Military gross margin for the three months ended September 30, 2008 was $0.1 million, or 8.2% of net sales, compared to zero for the same period in 2007.

SG&A expenses. SG&A expenses were $22.0 million, or 30.3% of net sales, for the three months ended September 30, 2008, compared to $25.1 million, or 30.5% of net sales for the same period in 2007. The $3.1 million reduction is primarily the result of decreases in salaries and commissions of $1.2 million, shipping and freight expenses of $1.2 million, professional and consulting fees of $0.3 million, show expenses of $0.3 million, and advertising expenses of $0.3 million.
Interest expense. Interest expense was $2.3 million in the three months ended September 30, 2008, compared to $2.9 million for the same period in the prior year. The decrease in interest expense was primarily due to reductions in the amount of outstanding debt combined with lower interest rates compared to the same period last year.
Income taxes. Income tax expense for the three months ended September 30, 2008 was $0.5 million, compared to $0.2 million for the same period a year ago. We provided for income taxes at effective tax rates of 36%, our anticipated rate for 2008, and 37% for the three months ended September 30, 2008 and 2007, respectively. During the three-month period ended September 30, 2008, we recognized an adjustment to income tax expense related to the filing of the 2007 Federal income tax return of $0.6 million which reduced our effective tax rate for the three-month period ended September 30, 2008 to 17.4%. During the three months ended September 30, 2007, we recognized a prior year state income tax refund of $0.3 million which reduced the effective tax rate to 15.4%. Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007
Net sales. Net sales for the nine months ended September 30, 2008 were $193.5 million compared to $202.8 million for the same period in 2007. Wholesale sales for the nine months ended September 30, 2008 were $137.9 million compared to $150.6 million for the same period in 2007. The $12.7 million decrease is primarily attributable to supply chain disruptions combined with difficult economic conditions which resulted in a decrease in sales across all footwear and apparel categories with the exception of a small increase in the sales of duty footwear. Retail sales for the nine months ended September 30, 2008 were $50.4 million compared to $51.8 million for the same period in 2007. Retail sales were negatively impacted by customer decisions to close plants, reduce headcount, and defer safety shoe purchases as the result of a challenging economy. Military segment sales for the nine months ended September 30, 2008, were $5.2 million, compared to $0.4 million in the same period in 2007. Shipments in 2008 were under the $6.4 million contract issued in July 2007 and the $5.0 million contract issued in January 2008.
Gross margin. Gross margin for the nine months ended September 30, 2008 was $77.4 million, or 40.0% of net sales, compared to $79.3 million, or 39.1% of net sales, for the same period in 2007. Wholesale gross margin for the nine months ended September 30, 2008 was $51.6 million, or 37.5% of net sales, compared to $51.3 million, or 34.1% of net sales, in the same period last year. The 340 basis point increase reflects an increase in sales price per unit, as well as a decrease in manufacturing costs resulting from increased operating efficiencies from increased production at our manufacturing facilities. Retail gross margin for the nine months ended September 30, 2008 was $25.3 million, or 50.2% of net sales, compared to $26.7 million, or 51.5% of net sales, for the same period in 2007. The 130 basis point decrease is primarily the result of increased costs to purchase products. Military gross margin for the nine months ended September 30, 2008 was $0.5 million, or 9.0% of net sales, compared to $1.3 million for the same period in 2007. The prior year's results included a $1.2 million reimbursement of contract related expenses incurred in prior periods.

SG&A expenses. SG&A expenses were $65.9 million, or 34.0% of net sales, for the nine months ended September 30, 2008, compared to $70.2 million, or 34.6% of net sales for the same period in 2007. The $4.3 million reduction is the result of decreases in shipping and freight expenses of $2.3 million, salaries and commissions of $2.2 million, professional and consulting fees of $1.1 million and, offset by increases in expenses related to service agreements for computer hardware and software of $0.5 million and vehicle fuel and repairs of $0.5 million compared to the same period last year.
Interest expense. Interest expense was $7.1 million for the nine months ended September 30, 2008, compared to $8.8 million for the same period in the prior year. The decrease in interest expense was primarily due to reductions in the amount of outstanding debt combined with lower interest rates; and the write off of prepaid financing costs of $0.8 million related to the refinancing of our term loans in the second quarter of 2007.
Income taxes. Income tax expense for the nine months ended September 30, 2008 was $1.1 million, compared to a benefit of $0.2 million for the same period a year ago. We provided for income taxes at effective tax rates of 36%, our anticipated tax rate for 2008, and 37% for the nine months ended September 30, 2008 and 2007, respectively. During the nine-month period ended September 30, 2008, we recognized an adjustment to income tax expense related to the filing of the 2007 Federal income tax return of $0.6 million which reduced our effective tax rate for the nine-month period ended September 30, 2008 to 23.7%. During the nine-month period ended September 30, 2007, we recognized a prior year state income tax refund of $0.3 million which when combined with the income tax provision of 37% resulted in the recognition of the aforementioned tax benefit. Liquidity and Capital Resources
Our principal sources of liquidity have been our income from operations, borrowings under our credit facility and other indebtedness. Over the last several years our principal uses of cash have been for our acquisitions of EJ Footwear and certain assets of Gates-Mills, as well as for working capital and capital expenditures to support our growth. Our working capital consists primarily of trade receivables and inventory, offset by accounts payable and accrued expenses. Our working capital fluctuates throughout the year as a result of our seasonal business cycle and business expansion and is generally lowest in the months of January through March of each year and highest during the months of May through October of each year. We typically utilize our revolving credit facility to fund our seasonal working capital requirements. As a result, balances on our revolving credit facility will fluctuate significantly throughout the year. Our capital expenditures relate primarily to projects relating to our property, merchandising fixtures, molds and equipment associated with our manufacturing operations, retail sales fleet and for information technology. Capital expenditures were $4.0 million for the first nine months of 2008, compared to $4.7 million for the same period in 2007. Capital expenditures for all of 2008 are anticipated to be approximately $5.0 million.
In May 2007, we entered into a Note Purchase Agreement, totaling $40 million, with Laminar Direct Capital L.P., Whitebox Hedged High Yield Partners, L.P. and GPC LIX L.L.C., and issued notes to them for $20 million, $17.5 million and $2.5 million, respectively, at an interest rate of 11.5% payable semi-annually over the five year term of the notes. Principal repayment is due at maturity in May 2012. The proceeds from these notes were used to pay down the GMAC Commercial Finance term loans which totaled approximately $17.5 million and the $15 million ACAS term loan. The balance of the proceeds, net of debt acquisition costs of approximately $1.4 million, was used to reduce the outstanding

balance on the revolving credit facility. The Note Purchase Agreement is secured by a security interest in our assets and is subordinate to the security interest under the GMAC line of credit.
The total amount available under our revolving credit facility is subject to a borrowing base calculation based on various percentages of accounts receivable and inventory. As of September 30, 2008, we had $64.5 million in borrowings under this facility and total capacity of $85.7 million. Our credit facilities contain certain restrictive covenants, which require us to maintain a minimum fixed charge coverage ratio and limit the annual amount of capital expenditures. As of September 30, 2008, we were in compliance with these restrictive covenants.
We believe that our existing credit facilities coupled with cash generated from operations will provide sufficient liquidity to fund our operations for at least the next twelve months. Our continued liquidity, however, is contingent upon future operating performance, cash flows and our ability to meet financial covenants under our credit facilities.
Operating Activities. Cash used in operating activities totaled $2.7 million for the nine months ended September 30, 2008, compared to $7.3 million in the same period of 2007. Cash provided by operating activities was primarily impacted by the seasonal buildup of both inventory and accounts receivable.
Investing Activities. Cash used in investing activities was $3.5 million for the nine months ended September 30, 2008, compared to $4.9 million in the same period of 2007. Cash used in investing activities in 2008 reflects an investment in property, plant and equipment of $3.5 million. Our 2008 and 2007 expenditures primarily relate to investments in molds and equipment associated with our manufacturing operations, retail sales fleet and for information technology. Financing Activities. Cash provided by financing activities for the nine months ended September 30, 2008 was $4.0 million and reflects an increase in net borrowings under the revolving credit facility of $3.9 million and information technology software financing of $0.3 offset by repayments on long-term debt of $0.2 million. Cash provided by financing activities for the nine months ended September 30, 2007 was $11.2 million, reflecting an increase in net borrowings under the revolving credit facility of $4.9 million, repayments on long-term debt of $32.7 million, offset by proceeds from the exercise of stock options of $0.4 million and the issuance of long term debt of $40 million, less debt financing costs of $1.4 million.
Inflation
We cannot determine the precise effects of inflation; however, inflation continues to have an influence on the cost of materials, salaries, and employee benefits. We attempt to offset the effects of inflation through increased selling prices, productivity improvements, and reduction of costs. Critical Accounting Policies and Estimates "Management's Discussion and Analysis of Financial Condition and Results of Operations" discusses our interim condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these interim condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the interim condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. A summary of our significant accounting policies is included in the Notes to Consolidated Financial Statements included in the Annual

Report on Form 10-K for the year ended December 31, 2007.
Our management regularly reviews our accounting policies to make certain they are current and also to provide readers of the interim condensed consolidated financial statements with useful and reliable information about our operating results and financial condition. These include, but are not limited to, matters related to accounts receivable, inventories, pension benefits and income taxes. Implementation of these accounting policies includes estimates and judgments by management based on historical experience and other factors believed to be reasonable. This may include judgments about the carrying value of assets and liabilities based on considerations that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our management believes the following critical accounting policies are most important to the portrayal of our financial condition and results of operations and require more significant judgments and estimates in the preparation of our interim condensed consolidated financial statements. Revenue recognition
Revenue principally consists of sales to customers, and, to a lesser extent, license fees. Revenue is recognized when the risk and title passes to the customer, while license fees are recognized when earned. Customer sales are recorded net of allowances for estimated returns, trade promotions and other discounts, which are recognized as a deduction from sales at the time of sale. Accounts receivable allowances
Management maintains allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Management also records estimates for customer returns and discounts offered to customers. Should a greater proportion of customers return goods and take advantage of discounts than estimated by us, additional allowances may be required.
Sales returns and allowances
We record a reduction to gross sales based on estimated customer returns and allowances. These reductions are influenced by historical experience, based on customer returns and allowances. The actual amount of sales returns and allowances realized may differ from our estimates. If we determine that sales returns or allowances should be either increased or decreased, then the adjustment would be made to net sales in the period in which such a determination is made.
Inventories
Management identifies slow moving or obsolete inventories and estimates appropriate loss provisions related to these inventories. Historically, these loss provisions have not been significant as the vast majority of our inventories are considered saleable, and we have been able to liquidate slow moving or obsolete inventories through our factory outlet stores or through various discounts to customers. Should management encounter difficulties liquidating slow moving or obsolete inventories, additional provisions may be necessary. Management regularly reviews the adequacy of our inventory reserves and makes adjustments to them as required. Intangible assets

Intangible assets, including goodwill, trademarks and patents are reviewed for impairment annually, and more frequently, if necessary. In performing the review of recoverability, we estimate future cash flows expected to result from the use of the asset and our eventual disposition. The estimates of future cash flows, based on reasonable and supportable assumptions and projections, require management's subjective judgments. The time periods for estimating future cash flows is often lengthy, which increases the sensitivity to assumptions made. Depending on the assumptions and estimates used, the estimated future cash flows projected in the evaluation of long-lived assets can vary within a wide range of outcomes. We consider the likelihood of possible outcomes in determining the best estimate of future cash flows. A significant assumption of estimated cash flows from trademarks is future sales of branded products. Other assumptions include discount rates, royalty rates, cost of capital, and market multiples. An impairment charge may be recorded if the expected future cash flows decline. Based upon our review, none of our intangibles were impaired as of September 30, 2008.
Pension benefits
Accounting for pensions involves estimating the cost of benefits to be provided well into the future and attributing that cost over the time period each employee works. To accomplish this, extensive use is made of assumptions about inflation, investment returns, mortality, turnover, medical costs and discount rates. These assumptions are reviewed annually.
Pension expenses are determined by actuaries using assumptions concerning the discount rate, expected return on plan assets and rate of compensation increase. An actuarial analysis of benefit obligations and plan assets was determined as of September 30 each year. SFAS 158 requires a fiscal year end measurement of plan assets and benefit obligations, eliminating the use of earlier measurement dates currently permissible. The new measurement date requirement is effective for fiscal years ending after December 15, 2008. Effective January 1, 2008, we have changed our measurement date to December 31 and recognized the pension expense related to the period October 1, 2007 through December 31, 2007 as an adjustment to beginning retained earnings and accumulated other comprehensive loss.
As a result of the change in measurement date, we recognized the increase in the under-funded status of the defined benefit pension plan between September 30, 2007 and December 31, 2007 of $846,071, as well as the corresponding increase in accumulated other comprehensive loss of $526,850 and related decrease in our deferred tax liability of $296,125. The increase in accumulated other comprehensive loss of $526,850 has been recognized as an adjustment to the opening balance of accumulated other comprehensive loss as of January 1, 2008. We also recognized the net pension expense of $23,096 relating to the period October 1, 2007 through December 31, 2007 as a reduction of the opening balance of retained earnings as of January 1, 2008.
The funded status of our plans and reconciliation of accrued pension cost is determined annually as of December 31. Further discussion of our pension plan and related assumptions is included in Note 9, "Retirement Plans," to the unaudited condensed consolidated financial statements for the quarterly period ended June 30, 2008. Actual results would be different using other assumptions. Management records an accrual for pension costs associated with our sponsored noncontributory defined benefit pension plan covering our non-union workers. Future adverse changes in market conditions or poor operating results of underlying plan assets could result in losses or a higher accrual. At December 31, 2005, we froze the non-contributory defined benefit pension plan for all non-U.S. territorial employees.

Income taxes
Management has recorded a valuation allowance to reduce its deferred tax assets for a portion of state and local income tax net operating losses that it believes may not be realized. We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance; however, in the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
Except for the historical information contained herein, the matters discussed in this Quarterly Report on Form 10-Q include certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, all statements regarding our and management's intent, belief, and expectations, such as statements concerning our future profitability and our operating and growth strategy. Words such as "believe," "anticipate," "expect," "will," "may," "should," "intend," "plan," "estimate," "predict," "potential," "continue," "likely" and similar expressions are intended to identify forward-looking statements. Investors are cautioned that all forward-looking statements contained in this Quarterly Report on Form 10-Q and in other statements we make involve risks and uncertainties including, without limitation, the factors set forth under the caption "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2007, and other factors detailed from time to time in our other filings with the Securities and Exchange Commission. One or more of these factors have affected, and in the future could affect our businesses and financial results and could cause actual results to differ materially from plans and projections. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, there can be no assurance that any of the forward-looking statements included in this Quarterly Report on Form 10-Q will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. All forward-looking statements made in this Quarterly Report on Form 10-Q are based on information presently available to our management. We assume no obligation to update any forward-looking statements.