OVERVIEW

The Company is a distributor of men's casual, dress and fashion shoes. The principal brands of shoes sold by the Company are "Florsheim," "Nunn Bush" and "Stacy Adams." Inventory is purchased from third-party overseas manufacturers. The majority of foreign-sourced purchases are denominated in U.S. dollars. In the wholesale division, the Company's products are sold to shoe specialty stores, department stores and clothing retailers primarily in North America, with some distribution in Europe. The Company also has a retail division, which as of September 30, 2008, consisted of 38 Company-owned retail stores in the United States, two in Europe and an Internet business. Sales in retail outlets are made directly to consumers by Company employees. The Company also has licensing agreements with third parties who sell its branded shoes overseas, as well as licensing agreements with apparel and accessory manufacturers in the United States. As such, the Company's results are primarily affected by the economic conditions and the retail environment in the United States.

Consolidated net sales for the third quarter of 2008 were $57.2 million, down 2% compared with last year's third quarter. Consolidated net earnings for the quarter ended September 30, 2008 were $4.3 million as compared with $5.3 million last year. Diluted earnings per share this quarter were $.37 as compared with $.45 in the third quarter of 2007. Sales in the wholesale division were down 2%, and sales in the retail division were flat. The Company's consolidated operating earnings for the current quarter were $6.3 million, down $1.6 million from $7.9 million last year. In the wholesale division, operating earnings were down $1.2 million, and in the retail division, operating earnings were down $0.4 million. Approximately half of the decrease in the wholesale division was due to lower gross margins. Wholesale gross margins were 31.2% of net sales for the third quarter of 2008, down 140 basis points compared to 2007. The rest of the decrease was due to the lower wholesale sales volume and increased selling and administrative expenses. The higher selling and administrative expenses were primarily due to higher bad debt expense associated with two customer receivable accounts written off this quarter following their bankruptcy filings. The operating earnings decrease in the retail division was primarily due to increased selling and administrative expenses, principally rent and occupancy costs, along with increased depreciation and employee related costs.

Consolidated net sales through September 30, 2008 were $171 million, up 0.6% compared with last year. Consolidated net earnings year-to date were $13.5 million compared with $15.1 million last year. Diluted earnings for the nine months ended September 30, 2008 and 2007 were $1.15 per share and $1.25 per share, respectively. In the wholesale division, sales were up 1%, and retail sales were down 2%. Consolidated operating earnings through September 30, 2008 were $19.8 million, down $2.7 million as compared with $22.5 million in 2007. Operating earnings in the wholesale and retail divisions were down $1 million and $1.7 million, respectively. The wholesale decrease was due to a decrease in gross margins of 70 basis points and slightly higher selling and administrative expenses primarily resulting from the write off of the two customer receivable accounts mentioned above. The decrease in retail operating earnings was due mainly to increased selling and administrative expenses reflecting higher rent and occupancy costs, additional employee costs and depreciation. A detailed analysis of operating results follows.

RESULTS OF OPERATIONS

Wholesale Sales

Sales in the Company's wholesale division for the three- and nine-month periods
ended September 30, 2008 and 2007 were as follows:

Wholesale Division Sales

                                     Three Months Ended September 30,                        Nine Months Ended September 30,
                                        2008                  2007           % Change            2008                2007          % Change
                                          (Dollars in thousands)                                  (Dollars in thousands)
North American Sales
Stacy Adams                       $          12,911     $          15,716         -17.8 %  $         44,341    $         44,031           0.7 %
Nunn Bush                                    18,508                16,013          15.6 %            52,414              49,588           5.7 %
Florsheim                                    16,349                17,397          -6.0 %            45,509              47,945          -5.1 %
Foreign Sales                                 1,550                 1,378          12.5 %             4,887               4,328          12.9 %
Total Wholesale                   $          49,318     $          50,504          -2.3 %  $        147,151    $        145,892           0.9 %
Licensing                                       991                   807          22.8 %             3,010               2,729          10.3 %
Total Wholesale Division          $          50,309     $          51,311          -2.0 %  $        150,161    $        148,621           1.0 %

Third quarter sales of Stacy Adams fell 18% this year compared with last year. The decline was due both to the timing of shipments between the second and third quarter and the continued decline in the business of independent shoe and clothing retailers. In the second quarter, Stacy Adams benefited from shipments of some new contemporary footwear programs. This pipeline fill resulted in a volume shift away from the third quarter with several key retailers. While the current quarter was challenging, overall Stacy Adams's sales year-to-date remain flat compared to last year.

The Nunn Bush growth this quarter reflected the successful introduction of the brand's new Dynamic Comfort line of slip resistant footwear. The quarter and year-to-date increases at Nunn Bush also reflect the strong performance of the Nunn Bush Comfort Gel product and the brand's solid performance at retail.

Sales of Florsheim for the quarter were down 6% compared with last year, reflecting the general slowdown in the market. The Florsheim brand is positioned at the higher end of the mid tier department store pricing matrix and as such has been more affected by the slower economic environment, resulting in lower sales. Year-to-date Florsheim sales were also impacted by the timing of new programs. In the first quarter of 2007, Florsheim rolled out a number of new shoe programs introducing contemporary and casual styles. In 2008, there were no new product introductions of a similar scale.

Licensing revenues for the quarter and nine months ended September 30, 2008 were up compared with last year. Licensee sales of Stacy Adams branded products were down for the quarter and nine months, as the independent clothing retailers continue to face a challenging retail environment. However, Stacy Adams royalties increased this year because the Company terminated its agreement with its licensing agent, to whom the Company previously paid a percentage of the royalties. The services performed by the licensing agent are now handled in house, and the related costs are included in selling and administrative expenses and offset a portion of the royalty gain. Licensing revenues from the sales of Florsheim footwear overseas and branded products in the US were up for the quarter and year-to-date.

Retail Sales

Net sales in the Company's retail division were flat at $6.9 million in both the third quarter of 2008 and 2007. Year-to-date retail net sales were down 2% compared with the same period last year. Same store sales in the US for the quarter were down 2% in comparison to 2007, while overall same store sales, including Europe, were flat. For the nine months ended September 30, 2008, overall same store sales in the US were down 6%, while overall same store sales, including Europe, were down 4% as compared with 2007. Stores are included in same store sales beginning in the store's 13th month of operations after its grand opening. As of September 30, 2008, the Company had 38 retail stores in the US, two in Europe and an Internet business. The Company's management believes the decrease in same store sales this year was due to the current challenges facing the overall retail environment.

Gross Earnings

Overall, the Company's gross earnings were 36.6% of net sales in the three months ended September 30, 2008 compared with 37.5% of net sales in 2007. Wholesale and retail gross margins decreased 140 and 70 basis points, respectively, this quarter as compared to last year's third quarter. Wholesale gross earnings were 31.2% of net sales in the third quarter of 2008 compared with 32.6% in 2007. In the retail division, gross earnings were 65.7% of net sales compared with 66.4% in the third quarter of 2007.

Consolidated gross earnings for the nine months ended September 30, 2008 were 36.7% of net sales compared with 37.3% of net sales in 2007. Wholesale gross earnings year-to-date were 31.1% of net sales this year compared with 31.8% last year. The decrease in wholesale gross earnings for both the quarter and nine months ended September 30, 2008 was a reflection of cost increases from the Company's overseas vendors due to higher material and labor costs, the weak US dollar and higher freight and transportation costs, which have been partially offset by wholesale price increases. Retail gross earnings in the nine months ended September 30, 2008 were 66.2% of net sales compared with 66.5% last year.

The Company's cost of sales does not include distribution costs (e.g., receiving, inspection or warehousing costs). Distribution costs for the three months ended September 30, 2008 and 2007 were approximately $1,893,000 and $1,866,000 respectively. The Company's distribution costs to date in 2008 and 2007 were approximately $5,800,000 and $5,444,000, respectively. These costs were included in selling and administrative expenses. Therefore, the Company's gross earnings may not be comparable to other companies, as some companies may include distribution costs in cost of sales.

Selling and Administrative Expenses

The Company's selling and administrative expenses include, and are primarily related to, distribution costs, salaries and commissions, advertising costs, employee benefit costs, rent and depreciation. In the current quarter, selling and administrative expenses were 25.5% of net sales versus 23.9% of net sales in 2007. Wholesale selling and administrative expenses were 20.9% of net wholesale sales in 2008 compared with 19.7% in 2007. Retail selling and administrative expenses were 62.2% of net sales in 2008 and 57.6% of net sales in 2007. The increase in retail selling and administrative expenses was principally due to additional rent and occupancy costs, resulting from additional stores being operated in the third quarter of 2008 and from higher costs at existing stores. The remaining increase at retail was due to additional employee costs and depreciation.

For the nine months ended September 30, 2008, selling and administrative expenses were 25.1% of net sales versus 24.1% of net sales in 2007. Wholesale selling and administrative expenses to date were 20.4% of net sales versus 20.0% in 2007. The quarter and year-to-date increase in wholesale selling and administrative expenses was primarily the result of $380,000 of receivables written off this quarter following the bankruptcy filings of two of the Company's customers. Retail selling and administrative expenses to date this year were 61.7% of net sales compared with 54.4% of net sales last year. The year-to-date increase in retail selling and administrative expenses as a percent of sales reflects higher rent and occupancy costs and the impact of lower sales volume in the current year on fixed selling and administrative expenses.

Interest and Taxes

Interest expense during the quarter ended September 30 was $15,000 in 2008 and $80,000 in 2007. For the nine-month periods ended September 30, 2008 and 2007, interest expense was $45,000 and $288,000, respectively. The quarter and year-to-date decreases this year were due to lower average short-term borrowings this year compared with last year. The Company's effective tax rate in the third quarter of 2008 was 36.2% compared with 36.6% in the third quarter of 2007. The effective tax rate for the nine months ended September 30, 2008 was 36.4% compared with 36.8% in the prior year.

LIQUIDITY & CAPITAL RESOURCES

The Company's primary source of liquidity is its cash and short-term marketable securities. During the first nine months of 2008, the Company generated $9.2 million in cash from operating activities compared with $14.3 million in the same period one year ago. This decrease was primarily due to lower net earnings and changes in operating assets and liabilities. To date in 2008, the Company borrowed $1.5 million under the Company's short-term borrowing facility and used $2 million of cash for capital expenditures. Capital expenditures are expected to be approximately $2-$3 million for the full year of 2008.

The Company paid cash dividends of $4.1 million and $3.4 million in the nine months ended September 30, 2008 and 2007, respectively. On April 29, 2008, the Company's Board of Directors increased the quarterly dividend rate from $.11 to $.14 per share. This represents an increase of 27% in the quarterly dividend rate. The impact of this will be to increase cash dividends paid annually by approximately $1.4 million.

The Company continues to repurchase its common stock under its share repurchase program when the Company believes market conditions are favorable. To date in 2008, the Company has repurchased 296,182 shares at a total cost of $8.4 million. The Company currently has 620,725 shares available under its previously announced buyback program.

As of September 30, 2008, the Company had a total of $50 million available under its borrowing facility, under which total outstanding borrowings were $2 million. The facility includes one financial covenant that specifies a minimum level of net worth. The Company was in compliance with the covenant at September 30, 2008. The facility expires on April 30, 2009.

The Company will continue to evaluate the best uses for its free cash, including continued increased dividends, stock repurchases and acquisitions.

The Company believes that available cash and marketable securities, cash provided by operations, and available borrowing facilities will provide adequate support for the cash needs of the business in 2008.

FORWARD-LOOKING STATEMENTS

This report contains certain forward-looking statements with respect to the Company's outlook for the future. These statements represent the Company's reasonable judgment with respect to future events and are subject to risks and uncertainties that could cause actual results to differ materially. The reader is cautioned that these forward-looking statements are subject to a number of risks, uncertainties or other factors that may cause (and in some cases have caused) actual results to differ materially from those described in the forward-looking statements. These risks and uncertainties include, but are not limited to, the risk factors described under Item 1A, "Risk Factors," of the Company's Annual Report on Form 10-K for the year ended December 31, 2007.