Management's discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes related thereto of the Walking Company Holdings, Inc. and subsidiaries (collectively, the "Company"). Certain minor differences in the amounts below result from rounding of the amounts shown in the unaudited consolidated financial statements.

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of federal securities laws, which are intended to be covered by the safe harbors created thereby. Those statements include, but may not be limited to, the discussions of the Company's operating and growth strategy. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, those set forth under the caption "risk factors" in the business section of the Company's annual report on Form 10-K for the year ended December 31, 2007. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could prove to be inaccurate, and therefore, there can be no assurance that 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 the Company or any other person that the objectives and plans of the company will be achieved. The Company undertakes no obligation to publicly release any revisions to any forward-looking statements contained herein to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events.

The following discussion should be read in conjunction with the Company's unaudited consolidated financial statements and notes thereto included elsewhere in this quarterly report on Form 10-Q, and the annual audited consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission.

RESULTS OF OPERATIONS

Factors Affecting Comparability

As previously explained, the Company's subsidiary, The Walking Company ("TWC"), acquired assets of Natural Comfort, Inc. on January 15, 2008 (see Note 2 to the Notes to the Consolidated Financial Statements). Additionally, management periodically reviews and adjusts the allocation of expenses to ensure an appropriate distribution between the subsidiaries. As a result, period-to-period comparisons may not always be meaningful. See Note 2 to the unaudited consolidated financial statements.

Three Months Ended September 30, 2008 and 2007

NET SALES. Net sales consist of sales from the Company's stores, catalog, internet website, and corporate accounts, all net of returns and allowances. Net sales increased to $59.5 million for the three months ended September 30, 2008 from $56.6 million for the same period in 2007, an increase of $2.9 million, or 5.1%. The increase was primarily attributable to $0.5 million related to a 1.5% increase in comparable store sales for TWC (stores open more than one year), $5.3 million that was attributable to an increase in TWC sales for stores not yet qualifying as comparable stores (i.e. stores not open at least one full year), which includes new stores opened in the period and retrofitted stores, and $1.7 million attributable to a 12.6% increase in Big Dog Sportswear comparable store sales for the period. The increases were offset by $4.3 million attributable to a decrease in Big Dog Sportswear sales for stores not qualifying as comparable stores (i.e. stores closed during the period), and a $0.3 million decrease in mail order and internet sales. The increase in TWC stores not yet qualifying as comparable store sales is primarily related to the opening of new TWC stores and the acquisition of Natural Comfort, Inc. on January 15, 2008. The decrease in Big Dog Sportswear store sales not qualifying as comparable store sales is primarily related to the continued closing of stores, such closure of Big Dog Sportswear retail stores is expected to continue in the future due to their continued unprofitability. As part of a long-term restructuring and strategic plan, the Company has been successful in negotiating a plan to close-out the Big Dogs chain of retail stores. The Company has reached agreements with many of its landlords to close the remaining stores. It is expected that the chain will be reduced to approximately eight stores by the end of January 2009, and these stores will liquidate remaining inventory in 2009. As a result of these planned closures and related inventory liquidation, Big Dog comparable store sales increased in excess of 10%, albeit at reduced margins. Substantially all the remaining Big Dogs stores have implemented the same inventory liquidation and store closing plan, and the Company expects inventory to continue to be liquidated through the end of the year.

GROSS PROFIT. Gross profit decreased to $28.7 million for the three months ended September 30, 2008 from $30.2 million for the same period in 2007, a decrease of $1.5 million, or 5.0%. As a percentage of net sales, gross profit decreased to 48.2% in the three months ended September 30, 2008 from 53.4% for the same period in 2007 primarily due to higher freight and handling costs. TWC's gross profit for the three months ended September 30, 2008 decreased to 50.1% from 51.6% in the comparable period in 2007. Big Dog Sportswear's gross profit decreased to 43.4% in the three months ended September 30, 2008 compared to 56.8% in 2007. The 13.4% decrease was primarily due to a shift in the period towards promotional sales in connection with the continued store closings. Gross profit may not be comparable to those of other retailers, since some retailers include distribution costs and store occupancy costs in cost of goods sold, while we exclude them from the gross margin, including them instead in selling, marketing and distribution expenses.

SELLING, MARKETING AND DISTRIBUTION EXPENSES. Selling, marketing and distribution expenses consist of expenses associated with creating, distributing and selling products through all channels of distribution, including occupancy, payroll and catalog costs. Selling, marketing and distribution expenses increased to $29.3 million in the three months ended September 30, 2008 from $26.9 million for the same period in 2007, an increase of $2.4 million, or 8.9%. As a percentage of net sales, selling, marketing and distribution expenses increased to 49.2% in the three months ended September 30, 2008 from 47.5% for the same period in 2007, an increase of 1.7%. The increase is primarily related to recording $1.0 million of Big Dog store closure expense, as well as spreading the operating expenses over a smaller Big Dog sales base. The Company's decrease in sales resulted from the closure of Big Dogs stores. This trend is expected to continue as more Big Dog Sportswear stores are closed in the future.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses consist of administrative salaries, corporate occupancy costs and other corporate expenses. General and administrative expenses decreased to $2.3 million for the three months ended September 30, 2008 from $2.4 million for the same period in 2007. As a percentage of net sales, these expenses decreased to 3.9% in the three months ended September 30, 2008 from 4.2% for the same period in 2007, a decrease of 0.3%. The decrease relates to certain staffing and other cost saving initiatives that were implemented in early 2008.

INTEREST INCOME. Interest income for the three month periods ended September 30, 2008 and 2007 was less than $0.1 million. Interest income is primarily earned on excess cash balances invested on an overnight basis. As the Company generally uses excess cash to reduce the outstanding balances on their lines of credit, interest income in future periods is not expected to be significant.

INTEREST EXPENSE. Interest expense decreased to $1.0 million for the three months ended September 30, 2008 from $1.2 million for the same period in 2007, a decrease of $0.2 million.

INCOME TAXES. The Company recorded an income tax benefit at an effective tax rate of 35.0% and 37.5% in the three month periods ended September 30, 2008 and 2007, respectively. The decrease in the effective tax rate is related to an anticipated decrease in certain state income tax benefits. The Company believes it will fully realize the benefit considering both its history of taxable income as well as projected seasonal sales and profits in the fourth quarter as discussed in "Seasonality" below.

Nine Months Ended September 30, 2008 and 2007

NET SALES. Net sales increased to $161.9 million for the nine months ended September 30, 2008 from $156.6 million for the same period in 2007, an increase of $5.3 million, or 3.4%. The increase was primarily attributable to $14.6 million in increased TWC sales for stores not yet qualifying as comparable stores (i.e. stores not open at least one full year), which includes new stores opened in the period, and $1.7 million attributable to a 4.9% increase in Big Dog Sportswear comparable store sales for the period. The increase was offsetby $0.7 million related to a 0.7% decrease in comparable store sales for TWC, $9.9 million attributable to a decrease in Big Dog Sportswear sales for stores not qualifying as comparable stores (i.e. stores closed in the period) and a $0.4 million decrease in the Company's Big Dog Sportswear catalog/Internet business. The increase in TWC store sales not yet qualifying as comparable store sales is primarily related to newly opened TWC stores and the acquisition of Natural Comfort, Inc. on January 15, 2008. The decrease in Big Dog Sportswear store sales not yet qualifying as comparable store sales is primarily related to the continued closing of stores. Such closure of Big Dog Sportswear retail stores is expected to continue in the future due to their continued unprofitability. As part of a long-term restructuring and strategic plan, the Company has been successful in negotiating a plan to close-out the Big Dogs chain of retail stores. The Company has reached agreements with many of its landlords to close the remaining stores. It is expected that the chain will be reduced to approximately eight stores by the end of January 2009, and these stores will liquidate remaining inventory in 2009. As a result of these planned closures and related inventory liquidation, Big Dog comparable store sales increased. Substantially all the remaining Big Dogs stores have implemented the same inventory liquidation and store closing plan, and the Company expects inventory to continue to be liquidated through the end of the year.

GROSS PROFIT. Gross profit decreased to $80.6 million for the nine months ended September 30, 2008 from $84.0 million for the same period in 2007, a decrease of $3.4 million, or 4.0%. As a percentage of net sales, gross profit decreased to 49.8% for the nine months ended September 30, 2008 from 53.6% for the same period in 2007. TWC's gross profit for the nine month period ended September 30, 2008 decreased to 50.8% from 52.0% for the same period in 2007. Big Dog Sportswear's gross profit decreased to 46.6% in the nine months ended September 30, 2008 from 57.2% for the same period in 2007. The 10.6% decrease was primarily due to a shift in the period towards promotional sales in connection with the continued store closings. Gross profit may not be comparable to those of other retailers, since some retailers include distribution costs and store occupancy costs in cost of goods sold, while we exclude them from the gross margin, including them instead in selling, marketing and distribution expenses.

SELLING, MARKETING AND DISTRIBUTION EXPENSES. Selling, marketing and distribution expenses increased to $85.3 million in the nine months ended September 30, 2008 from $80.7 million for the same period in 2007, an increase of $4.6 million, or 5.7%. As a percentage of net sales, selling, marketing and distribution expenses increased to 52.7% in the nine months ended September 30, 2008 from 51.5% for the same period in 2007, an increase of 1.2%. The increase is primarily related to recording $1.0 million of Big Dog store closure expense, as well as spreading the operating expenses over a smaller Big Dog sales base. The Company's decrease in sales resulted from the closure of Big Dogs stores, a decline in TWC comparative store sales, as well as operating lag experienced from certain newly opened TWC stores and retrofitting certain TWC stores. This trend is expected to continue as more Big Dog Sportswear stores are closed in the future.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased to $7.1 million for the nine months ended September 30, 2008 from $7.5 million for the same period in 2007. As a percentage of net sales, these expenses decreased slightly to 4.4% in the nine months ended September 30, 2008 and 4.8% for the same period in 2007. The decrease relates to a corporate cost reduction program and spreading fixed costs over a larger sales base.

INTEREST INCOME. Interest income for the nine month periods ended September 30, 2008 and 2007 was less than $0.1 million. Interest income is primarily earned on excess cash balances invested on an overnight basis. As the Company generally uses excess cash to reduce the outstanding balances on their lines of credit, interest income in future periods is not expected to be significant.

INTEREST EXPENSE. Interest expense increased to $3.1 million for the nine month period ended September 30, 2008 from $3.0 million for the same period in 2007, an increase of $0.1 million, or 3.3%.

INCOME TAXES. The Company recorded an income tax benefit at an effective tax rate of 35.0% and 37.5% in the nine month periods ended September 30, 2008 and 2007, respectively. The decrease in the effective tax rate is related to an anticipated decrease in certain state income tax benefits. The Company believes it will fully realize the benefit considering both its history of taxable income as well as projected seasonal sales and profits in the fourth quarter as discussed in "Seasonality" below.

LIQUIDITY AND CAPITAL RESOURCES

During the nine months ended September 30, 2008, the Company's primary uses of cash were for merchandise inventories, capital expenditures, the acquisition of Natural Comfort, Inc. and general operating activity. The Company primarily satisfied its cash requirements from existing cash balances and borrowings from the line of credit.

Cash used in operating activities was $2.9 million and $18.9 million for the nine months ended September 30, 2008 and 2007, respectively. The decrease in cash used in operating activities is principally due to reduced inventory purchases for the nine months ended September 30, 2008.

Cash used in investing activities was $11.8 million and $13.7 million for the nine months ended September 30, 2008 and 2007, respectively. Cash used in investing activities in the first nine months of 2008 primarily relates to $10.2 million of capital expenditures for TWC new store openings and retrofitting existing TWC and Big Dog Sportswear stores. An additional $2.1 million was used for the acquisition of Natural Comfort, Inc. Cash used in investing activities in the first nine months of 2007 primarily relates to $13.9 million for capital expenditures for TWC new store openings, retrofitting existing TWC stores and corporate additions.

Cash provided by financing activities was $12.7 million and $29.9 million for the nine months ended September 30, 2008 and 2007, respectively. The decrease in the 2008 period is primarily related to not issuing long term debt in 2008 and a reduction in stock option exercises.

Short-term Borrowings

In October 2001, the Company entered into a credit facility with Wells Fargo Retail Finance ("WFRF"), which was most recently amended in March 2008 (the "Amended Credit Agreement") and previously amended in November 2006. Subsequent to the November 2006 amendment, the Amended Credit Agreement provides for a total commitment of $60,000,000 with the ability for the Company to issue documentary and standby letters of credit of up to $3,000,000. Prior to the amendment, the agreement provided for a total commitment of $47,000,000. The Company's ability to borrow under the facility was determined using an availability formula based on eligible assets. The facility is collateralized by substantially all of the Company's assets and requires daily, weekly and monthly financial reporting as well as compliance with financial, affirmative and negative covenants. The most significant of the amended financial covenants, most recently amended in March 2008, includes compliance with a pre-defined annual maximum capital expenditure amount and a restriction on the payment of dividends. At December 31, 2007, the Company was not in compliance with one of its covenants and subsequently obtained a waiver from the WFRF. As of September 30, 2008, the Company was in compliance with all covenants, as amended. This credit agreement provides for a performance-pricing structured interest charge which was based on excess availability levels. The interest rate ranged from the bank's base rate (5.00 % as of September 30, 2008) or a LIBOR loan rate plus a margin ranging up to 1.75% (4.24 % as of September 30, 2008). The Company had $ 8,080,000 in borrowings based on the bank's base rate and $30,500,000 in LIBOR loans outstanding at September 30, 2008. The Amended Credit Agreement expires in October 2011. At September 30, 2008, the Company had approximately $818,000 of outstanding letters of credit expiring through November 2008, and had approximately $14,000,000 excess availability on its line of credit.

Long-term Borrowings

Notes Payable

On April 3, 2007, the Company entered into a Convertible Note Purchase Agreement with certain purchasers, including some officers of the Company, pursuant to which the Company issued and sold $18.5 million of 8.375% Convertible Notes ("Note" or "Notes") due March 31, 2012, interest payable quarterly. $3.0 million of the Notes were sold to management. The Notes are convertible into fully paid and nonassessable shares of the Company's common stock to an aggregate of up to 1,027,777 shares at any time after the issuance date, at an initial conversion price of $18.00 per share. Any time after the eighteen month anniversary of the issuance date, the Company has the right to require the holder of a Note to convert any remaining amount under a Note into common stock if: (i) (x) the closing sale price of the common stock exceeds 175% of the conversion price on the issuance date for each of any 20 consecutive trading days or (y) following the consummation of a bona fide firm commitment underwritten public offering of the common stock resulting in gross proceeds to the Registrant in excess of $30 million, the closing sale price of the common stock exceeds 150% of the conversion price on the issuance date for each of any 20 consecutive trading days and (ii) certain equity conditions have been met. In circumstances where Notes are being converted either in connection with a voluntary conversion or an exercise of the Company's right to force conversion, the Company has the option to settle such conversion by a net share settlement, for some or all of the Notes. If it exercises such right, the Company is to pay the outstanding principal amount of a Note in cash and settle the amount of equity in such Investor's conversion right by delivery of shares of common stock of equal value. If the Notes are not converted before its maturity, the Notes will be redeemed by the Company on the maturity date at a redemption price equal to 100% of the principal amount of the Notes then outstanding, plus any accrued and unpaid interest. The offer and sale of the notes were made in accordance with Rule 506 of Regulation D of the Securities Act of 1933. The net proceeds from the sale of the Notes were $17,132,000 after debt issuance costs. Such proceeds of this offering were used to reduce the outstanding balance of Company's line of credit. On June 21, 2007, the Company filed an S-3 Registration Statement to register the 1,027,777 shares of common stock which are convertible under the agreement and it became effective in September 2007.

On May 9, 2007, the Company purchased from the officers of the Company all of the vested employee stock options held by them that would otherwise have expired on or before May 9, 2008. Options for a total of 245,000 shares were purchased from five officers (no options were purchased from the CEO, Andrew Feshbach). The purchase price was $16.00 per share, less the exercise price of the options, which ranged from $6.50 to $10.00 per share. The $16.00 price represented a discount of approximately 5% from the May 9, 2007 closing price of $16.80. The net purchase price was $1,965,000. The Company paid for the options by delivery of notes bearing interest at 7% per annum and payable in two equal installments on April 10, 2008 and April 10, 2009. At September 30, 2008, the balance of the notes, $983,000, is classified as current portion of long-term debt to related parties in the accompanying consolidated balance sheet.

In conjunction with the TWC's acquisition of Footworks in 2005, WFRF issued a $3,000,000 four-year term loan facility. Monthly payments of $55,555 were due beginning in March of 2006 with the balance due at the maturity date of the loan, October 2009. The term loan interest charge is Prime plus .5% or LIBOR plus 2.75% (5.50% as of September 30, 2008). At September 30, 2008, $667,000 of the term loan facility is classified as current and is included in current portion of long-term debt in the accompanying consolidated balance sheet.

Additionally, in conjunction with the acquisition of Footworks, TWC issued a $3,000,000 three-year promissory note to the seller, Bianca of Nevada, Inc. As of September 30, 2008, the note was paid off.

As part of the acquisition of Natural Comfort, Inc., TWC issued a $1,700,000 three-year promissory note to the seller. The principal on this note is payable on January 15, 2011. The note bears an interest rate of 7.0% and accrued interest is payable quarterly beginning June 2008.

Capital Lease

In the first quarter 2007, the Company entered into a $2,973,000 four-year capital lease agreement to finance equipment purchased for the Company's new distribution center located in North Carolina. The capital lease agreement requires monthly payments of approximately $75,000 through March 2011 and includes a dollar purchase option at the end of the term. Depreciation expense of equipment purchased under this capital lease is included in selling, marketing and distribution expense in the accompanying consolidated statement of operations.

CRITICAL ACCOUNTING POLICIES

Other than accounting for restructuring and exit costs, which is described below, the Company has made no changes to its critical accounting policies as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2007.

Restructuring and Exit Costs

From time to time, the Company makes strategic decisions to close stores or exit locations or activities. If stores or operating activities to be closed or exited constitute components, as defined by SFAS No. 144, and will not result in a migration of customers and cash flows, these closures will be considered discontinued operations when the related assets meet the criteria to be classified as held for sale, or at the cease-use date, whichever occurs first. The results of operations of discontinued operations are presented retroactively, net of tax, as a separate component on the Consolidated Statements of Earnings, if material individually or cumulatively. Assets related to planned store closures or other exit activities are reflected as assets held for sale and recorded at the lower of carrying value or fair value less costs to sell when the required criteria, as defined by SFAS No. 144, are satisfied. Depreciation ceases on the date that the held for sale criteria are met. Assets related to planned store closures or other exit activities that do not meet the criteria to be classified as held for sale are evaluated for impairment in accordance with the Company's normal impairment policy, but with consideration given to revised estimates of future cash flows. In any event, the remaining depreciable useful lives are evaluated and adjusted as necessary. Exit costs related to anticipated lease termination costs, severance benefits and other expected charges are accrued for and recognized in accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."

During the third quarter of 2008, the Company announced its intent to close 86 of its 94 Big Dog Sportswear retail stores as part of a restructuring plan and recorded a pre tax charge of $1,294,000 related, in part, to the closure of 23 stores in the third quarter. The Company evaluated the planned store closures in accordance with the provisions of Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") and determined that the planned closure of these stores does not yet meet the criteria for discontinued operations because of the Company's continuing involvement with the remaining stores and their ongoing website sales. The Company will continue to evaluate, on a quarterly basis, if these closures meet the criteria for discontinued operations. See Note 10. Restructuring and Exit Costs.

COMMITMENTS AND OBLIGATIONS

As of September 30, 2008, the Company had the following obligations, which
includes both principal and interest payments:

                                      Total
                                     Amounts        Less than 1         1 to 3                             Over 5
                                    Committed           year            years         4 to 5 years         years
Debt:
Revolving lines of credit         $  40,231,000     $ 40,231,000     $          -     $           -     $          -
Notes payable                         3,364,000          893,000        2,471,000                 -                -
Convertible debt                     23,923,000        1,549,000        3,099,000        19,275,000                -
Notes payable, related party          1,018,000        1,018,000                -                 -                -

Contractual Obligations:
Operating leases                    223,176,000       33,142,000       54,887,000        49,740,000       85,407,000
Capital leases                        2,290,000          916,000        1,374,000                 -                -

Other Commercial Commitments:

Letters of credit                       818,000          818,000                -                 -                -

Total Commitments                 $ 294,820,000     $ 78,567,000     $ 61,831,000     $  69,015,000     $ 85,407,000

SEASONALITY

. . .