The following discussion should be read in conjunction with the interim unaudited condensed consolidated financial statements contained in this report, and Management's Discussion and Analysis of Financial Condition and Results of Operations, the historical consolidated financial statements and the related notes and the other financial information included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) for the fiscal year ended January 3, 2009. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of any number of factors, including those set forth under "Cautionary Statement Concerning Forward-Looking Statements" and "Risk Factors" below.

Our operating and reporting period is on a 52-53 week fiscal year ending on the Saturday nearest to December 31. We refer to the fiscal year ended January 3, 2009 as "fiscal 2008," the fiscal year ending January 2, 2010 as "fiscal 2009" and the fiscal year ending January 1, 2011 as "fiscal 2010." The 52-week fiscal years consist of four equal quarters of 13 weeks each, and our 53-week fiscal years consist of three 13-week fiscal quarters and one 14-week fiscal quarter. The financial results for our 53-week fiscal years and 14-week fiscal quarters will not be exactly comparable to our 52-week fiscal years and 13-week fiscal quarters. Fiscal 2009 and fiscal 2010 each include 52 weeks and fiscal 2008 includes 53 weeks.

Overview

We design, develop and market men's and women's footwear, belts, and accessories. The brands we own are Trotters®, SoftWalk ®, and H.S. Trask ®, and for the reported period, our licenses included Tommy Bahama®, Wranglers and Riders.

During fiscal 2008, our operations were comprised of three reportable segments:
footwear, premium footwear, and accessories. Our footwear segment included our Trotter and SoftWalk brands. Our premium footwear segment consisted of H.S. Trask and Tommy Bahama. In our accessories segment, we sold predominately leather belts and accessories. With the discontinuance of the Company's Tommy Bahama operations in the first quarter of 2009, the Company believes the results of H.S. Trask are more appropriately reported with our Trotters and SoftWalk brands, leaving only one reportable segment.

Since 2000, our portfolio of brands has changed through a series of acquisitions and divestitures, including two divestitures expected to be completed in fiscal 2009.

We have been in continuing default under our Wells Fargo Credit facility since September 27, 2008 by failing to meet the financial covenant for income before income taxes. We have been in continuing discussions with Wells Fargo regarding our restructuring activities in an effort to obtain a waiver of the past financial covenant default and amend future financial covenants. The bank is continuing to evaluate our restructuring activities and has provided no assurance that is will provide a waiver or amend our agreement. Accordingly, there can be no assurance when, or if, an amendment or waiver will be provided. As discussed below under "Liquidity" we are also pursuing with our bank a possible increase in borrowing availability under our revolving line of credit.

On November 11, 2008 we announced the formation of a Special Committee of independent directors to explore strategic opportunities. The Committee retained BB&T Capital Markets as its independent financial advisor to assist it in its work. Since its formation, the committee has explored ways to increase value for our stockholders including a potential sale of our company as well as our separate operating divisions. After evaluating available opportunities, the Special Committee directed management to focus on ways to return our Company to profitability and reduce our bank debt to an appropriate level. On April 23, 2009, it was determined that the Special Committee had completed its work and was dissolved.

In response to the Special Committee's directive, during the first quarter of fiscal 2009, the Company developed and implemented the following key initiatives:

• We exited the Tommy Bahama business and subsequently liquidated its working capital;

• We restructured and reduced the size of our business operations; and

• We began the process of exiting our Chambers belt and accessories business and subsequently entered into an agreement to sell certain of its assets, following which we plan to wind-down its remaining business as our remaining Wrangler licenses expire unrenewed.

In February 2009, we terminated our Tommy Bahama license agreement. At the same time, we discontinued production and sales of Tommy Bahama branded products other than pending orders and sales to Tommy Bahama Group to fulfill a products purchase agreement. By shutting down the Tommy Bahama footwear division, we eliminated a division which incurred operating losses of $2.4 million and $3.5 million during fiscal 2008 and fiscal 2007, respectively. In connection with the termination of the license agreements, the Company sold the majority of the Company's remaining Tommy Bahama-branded goods to Tommy Bahama at predetermined unit prices. The total purchase, net of outstanding royalty obligations, was approximately $2.1 million, all of which was paid on or before May 7, 2009. We used these proceeds to reduce our bank debt.

In the first quarter of fiscal 2009, we reported the results of our Tommy Bahama business as discontinued operations. The financial results of the Tommy Bahama business are reported separately as discontinued operations for all periods presented in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. In connection with ceasing the Tommy Bahama business operations, 3 positions were eliminated. In the first quarter of fiscal 2009, we incurred $286,000 of severance charges. We expect that all but $38,000 of cash expenditures relating to employee severance costs incurred as of April 4, 2009 will be paid by the end of fiscal 2009. The remaining amount is expected to be paid in the first quarter of fiscal 2010. In addition, we recorded non-cash charges in the first quarter of fiscal 2009 of $363,000 of inventory and other write-offs and $36,000 of fixed assets and intangible impairment charges.

During the first quarter of fiscal 2009, we took steps to reduce our corporate overhead. In addition to the 3 positions eliminated relating to Tommy Bahama, 13 managerial and support positions were also eliminated. This restructuring is expected to result in an estimated savings of greater than $2.0 million in annual payroll and related expenses. In connection with this action, in the first quarter of fiscal 2009, we recorded a restructuring charge of $1.0 million not including the severances specifically related to discontinued operations. We expect that all but $39,000 of cash expenditures relating to employee severance costs incurred as of April 4, 2009 will be paid by the end of fiscal 2009. The remaining amount is expected to be paid in the first quarter of fiscal 2010. Based on our intention to continue to reduce our cost structure and corporate overhead, we may incur additional restructuring charges (both cash and non-cash) in future periods. These restructuring charges may have a material effect on our operating results.

On April 23, 2009, Chambers Belt Company (Chambers), our wholly owned subsidiary, entered into an Asset Purchase Agreement with Tandy Brands Accessories, Inc. (Tandy). Subject to the terms and conditions of the Asset Purchase Agreement, at

closing, Tandy will purchase Chambers' manufacturing equipment, certain inventory at cost, certain intellectual property and customer relationships. Chambers' cash and cash equivalents, accounts receivable and Wrangler licenses and other specified assets are excluded from the transaction. Tandy is also obligated to assume pending customer and supplier orders and Chambers' post-closing obligations under its Maquiladora agreement. Although under no obligation to do so, Tandy is also expected to hire certain key sales personnel and employees to facilitate the customer relationship transition.

The Asset Purchase Agreement provides for a purchase price equal to $500,000 plus inventory costs and earn-out payments equal to 21.5% of the revenue of the acquired business during the first 12 months following closing, subject to a $2 million minimum. The earn-out is payable in 12 monthly payments based on actual revenue during such period provided that an initial advance payment of $430,000 is required at closing. Tandy is not obligated to acquire inventory that is slow-moving or part of a program discontinued by a customer.

On April 29, 2009, Chambers and Tandy separately agreed that subject to, and concurrently with the closing of the transaction contemplated by the Asset Purchase Agreement, Chambers will assign to Tandy and Tandy will assume Chambers obligations arising thereafter under the Wrangler western license agreement, including the remaining minimum royalty payments of approximately $300,000. This assignment and assumption is subject to the approval and consent of Wrangler Apparel. We have been advised that Wrangler Apparel has verbally consented to this transfer; however, a written consent has yet to be delivered by Wrangler Apparel. There is no assurance Wrangler Apparel will deliver the requisite consent to such assignment and assumption or that it will be on acceptable terms and conditions.

At closing, the Asset Purchase Agreement contemplates a manufacturing and supply agreement which the parties may enter into for Tandy to supply Chambers with leather belts and accessories manufactured at the Mexican facility where Chambers currently acquires a portion of its inventory. However, as previously disclosed, Wrangler Apparel has notified the Company that it plans to take its mass market products in-house at December 31, 2009. Also, it is contemplated that the western license will be transferred to Tandy or if the requisite consent is not obtained that it will expire December 31, 2010. Accordingly, it is expected that Chambers' business operations will be wound down.

The closing of the transactions contemplated by the Asset Purchase Agreement is scheduled for July 1, 2009. The closing, however, is subject to standard closing conditions, including the consent of our bank. Tandy's closing obligation is not subject to a financing condition. Prior to closing, the Asset Purchase Agreement may be terminated by us or Tandy, including certain circumstances whereby the transaction does not close by July 1, 2009. Accordingly, no assurances can be provided that the transaction will be consummated or when it will be consummated.

The Asset Purchase Agreement also contains limited representations and warranties and customary covenants and indemnities. At closing, we are required to provide its guarantee of Chambers' obligations under the Asset Purchase Agreement.

After the Chambers sale is completed, our three main product lines will consist of our Trotters, SoftWalk and H.S. Trask products.

Results of Operations

The following table sets forth selected consolidated operating results for the
three months ended April 4, 2009 and March 29, 2008, presented as a percentage
of net sales:



                                               April 4, 2009          March 29, 2008          Increase (Decrease)
                                                          (In thousands)
Net sales                                    $   6,091     100 %    $    9,440     100 %    $      (3,349 )     (35 )%
Cost of goods sold(1)                            4,024      66 %         5,503      58 %           (1,479 )     (27 )%

Gross profit                                     2,067      34 %         3,937      42 %           (1,870 )     (47 )%
Operating expenses:
Selling, general and administrative
expense                                          3,782      62 %         5,038      53 %           (1,256 )     (25 )%
Other expenses (income), net                     1,018      17 %          (750 )    (8 )%           1,768         * %

Total operating expenses                         4,800      79 %         4,288      45 %              512        12 %

Operating loss                                  (2,733 )   (45 )%         (351 )    (4 )%           2,382         * %
Interest expense                                    16      -  %           111       1 %              (95 )     (86 )%

Loss before income taxes and discontinued
operations                                      (2,749 )   (45 )%         (462 )    (5 )%           2,287         * %
Income tax (benefit) expense                       (28 )    -  %            17      -  %               45         * %

Loss before discontinued operations             (2,721 )   (45 )%         (479 )    (5 )%           2,242         * %
(Loss) earnings from discontinued
operations                                        (241 )    (4 )%          199       2 %              440         * %

Net loss                                     $  (2,962 )   (49 )%   $     (280 )    (3 )%   $       2,682         * %

(1) All costs incurred to bring finished products to our warehouse are included in cost of goods sold. These items include shipping and handling costs, agent and broker fees, letter of credit fees, customs duty, inspection costs, inbound freight and internal transfer costs. Costs associated with our own distribution and warehousing are recorded in selling, general and administrative expenses. Our gross margins may not be comparable to others in the industry as some entities may record and classify these costs differently.

* Greater than 100%

Net Sales from Continuing Operations

Net sales for the first quarter of fiscal 2009 decreased 35% to $6.1 million compared to $9.4 million in net sales from continuing operations for the first quarter of fiscal 2008. The decrease was largely a result of a challenging retail environment and planned reductions in inventories on the part of our retailing partners the current fiscal quarter.

Gross Profit from Continuing Operations

Gross profit for the first quarter of fiscal 2009 decreased to $2.1 million compared to $3.9 million from continuing operations for the comparable prior year period. Gross margins were 34% and 42% for the first three months of fiscal 2009 and fiscal 2008, respectively. The decrease in our gross margin was due to several significant closeout sales as we worked to maintain our inventories in line with our sales reductions.

Operating Expenses from Continuing Operations

Selling, general and administrative expenses, or SG&A, were $3.8 million, or 62% of net sales, for the first quarter of fiscal 2009 compared to $5.0 million, or 53% of net sales, for the first quarter of fiscal 2008. The decrease in SG&A expenses in the first quarter of fiscal 2009 is primarily attributable to savings of $650,000 related to headcount reductions and bonuses, a $260,000 decrease in audit and tax fees, a $100,000 decrease in bad debt expenses and decreased spending on consulting costs and brand expenses, including travel costs of $75,000. Since most of these headcount reductions occurred during the middle of the quarter, the Company expects to realize further savings in subsequent quarters.

"Other expense (income), net" was $1.0 million in net expense for the first quarter of fiscal 2009, compared to $750,000 in net income for the first quarter of fiscal 2008. The fiscal 2009 expense is related to severance charges in connection with our reorganization. These charges do not include the severances specifically related to discontinued operations. The fiscal 2008 income consisted primarily of $750,000 received from Tactical Holdings, Inc. in accordance with the Transition Services Agreement we entered into, providing ongoing administrative and other services for continuing to support the operations of the Altama business subsequent to our sale of the business in fiscal 2007.

Interest Expense from Continuing Operations

Interest expense from continuing operations for the first quarter of fiscal 2009 was $16,000 compared to $111,000 for the first quarter of fiscal 2008. Interest expense from continuing operations for the first quarter of fiscal 2009 was lower than the first quarter of fiscal 2008 due to a lower debt balance in the first quarter of fiscal 2009.

(Loss) Earnings from Discontinued Operations

Loss from discontinued operations for the first quarter of fiscal 2009 was $241,000. Earnings from discontinued operations for the first quarter of fiscal 2008 were $199,000. Loss per share from discontinued operations was $0.03 for the first quarter of fiscal 2009 and earnings per share was $0.02 for the first quarter of fiscal 2008. Loss (earnings) from discontinued operations is related to the Tommy Bahama and Chambers businesses.

Liquidity and Capital Resources

Our current primary liquidity requirements include debt service, working capital needs and capital expenditures. We have historically met these liquidity needs with cash flows from operations (including revenue and trade credit) and borrowings under our term loans and revolving credit facility.

Since fiscal 2007, we have actively reduced our debt through asset sales and reducing and restructuring of our operations. During fiscal 2009, we have accelerated this process by exiting the Tommy Bahama business (which is closed including the collection of accounts receivable and remaining product sales to Tommy Bahama Group) and seeking to exit the Chambers accessories business. Following the completion of the Chambers' asset sale to Tandy Brands, we plan to monetize the Chambers' accounts receivable and remaining accessories assets.

Our working capital varies from time to time as a result of the seasonal requirements of our brands, which have historically been heightened during the first and third quarters, the timing of factory shipments, the need to increase inventories and support an in-stock position in anticipation of customers' orders, and the timing of accounts receivable collections.

Working capital at the end of the first quarter of fiscal 2009 of $6.8 million reflects current assets of $28.7 million (including current assets of discontinued operations) in excess of current liabilities of $21.9 million (including current liabilities of discontinued operations), compared to approximately $9.7 million of working capital at the end of fiscal 2008. Current assets decreased $2.3 million as a result of seasonal product sales and aggressive inventory management. Our current ratio, the relationship of current assets to current liabilities (including current assets and current liabilities of discontinued operations), was 1.3 at April 4, 2009, compared to 1.5 at January 3, 2009.

Despite our working capital position, during the first quarter of fiscal 2009 as our seasonal demand for product increased, we needed to manage our cash accounts on a day-to-day basis and defer payments on some trade payables and contractual obligations beyond the otherwise applicable terms, including payables to certain vendors that supply us with products and services. As a result, certain vendors placed us on credit hold and required payments of past due amounts as well as advance cash payments before shipping products. During May 2009, we reduced a number of our past due trade payables with liquidity resulting from the collection of proceeds from our sale to the Tommy Bahama Group of our remaining Tommy Bahama products. We anticipate that the seasonal increase in sales during the second quarter of fiscal 2009 and the resulting increase in our revolving line of credit borrowing availability will lessen our need to defer the payment of trade payables. However, we can provide no assurance of this and continued or additional deferrals of such payments could have a material adverse effect on our business, including our operations, revenue and financial condition.

During the first week of May 2009, we collected approximately $2.1 million from the remaining Tommy Bahama product sales. We used these proceeds together with collections of other accounts receivable to pay down the outstanding debt to our bank under our revolving line of credit to $7.9 million as of May 16, 2009 from $13.1 million as of April 4, 2009. As of May 16, 2008, following the pay-down of a number of our past due payables, we had available borrowing capacity under our revolving line of credit, net of outstanding letters of credit and reserves, of $308,000. We expect this figure will increase as our borrowing base grows due to product sales during the current selling season. We are also working with our bank to reduce reserves it has imposed against our borrowing base to reflect the borrowing base that now exist in our restructured business operations. Further, we are in the process of purchasing credit insurance for certain accounts receivable that have been excluded from our borrowing base. These receivables range between approximately $500,000 and $750,000 from time to time. There is no assurance, however, that we will be able to reduce these reserves and as a result increase our borrowing availability.

We anticipate that the closing of the Chambers transaction and subsequent collection of the related accounts receivable and the Chambers earn-out payments will result in aggregate net proceeds in excess of our outstanding bank debt and past-due payables. Until the closing of the Chambers sale, and even with increased borrowing availability which we are seeking from the bank, we expect to continue to manage our cash accounts on a day-to-day basis. Following the closing of the Chambers transaction and after we substantially reduce the amount outstanding on our revolving line of credit, we plan to seek a replacement line of credit to support to our seasonal business needs that may exist from time to time and to repay our current revolving credit facility in its entirety. There is no assurance, however, that we will be able to obtain such a facility on acceptable terms and covenants or when and if we will be able to repay our current facility in full.

Bank Credit Agreement

Our primary source of liquidity and capital resources has historically been from financing activities. In June 2008, we and our subsidiaries entered into a Credit and Security Agreement with Wells Fargo for a three year revolving line of credit and letters of credit collateralized by all of our assets and those of our subsidiaries. Under the facility we can borrow up to $17.0 million (subject to a borrowing base which includes eligible receivables and eligible inventory less availability reserves set by our bank), which, subject to the satisfaction of certain conditions, may be increased to $20.0 million. The credit facility also includes a $7.5 million letter of credit sub facility. The borrowings under the revolving line of credit bear interest at prime rate minus .25% or the applicable 30, 90, 180-day LIBOR plus 2.4%, subject to certain minimums. At May 16, 2009, the effective borrowing rate under the credit facility was 6.0%. All payments on accounts receivable go directly to the lender as a reduction of the debt.

The Wells Fargo credit facility includes various financial and other covenants with which we have to comply in order to maintain borrowing availability and avoid penalties, including an annual capital expenditure limitation and a minimum quarterly net income requirement. Other covenants include, but are not limited to, covenants limiting or restricting the Company's ability to incur indebtedness, incur liens, enter into mergers or consolidations, dispose of assets, make investments, pay dividends, enter into transactions with affiliates, or prepay certain indebtedness. The credit and security agreement also contains customary events of default including, but not limited to, payment defaults, covenant defaults, cross-defaults to other indebtedness, material judgment defaults, inaccuracy of representations and warranties, bankruptcy and insolvency events, defects in Wells Fargo's security interest, change in control events, material adverse change and certain officers being convicted of felonies.

We have been in continuing default under our Wells Fargo Credit facility since September 27, 2008 by failing to meet the financial covenant for income before income taxes. As a result of the existing default under the credit facility, Wells Fargo has increased the interest rate by 3.0% over the rate otherwise applicable, all future advances are at Well Fargo's discretion and all of the Company's indebtedness under the Credit and Security Agreement may be accelerated by Wells Fargo.

We have been in continuing discussions with Wells Fargo regarding our restructuring activities in an effort to obtain a waiver of the past financial covenant default and amend future financial covenants. Wells Fargo is continuing to evaluate our restructuring activities and projected cash flows and has provided no assurance that it will provide a waiver or amend our agreement or otherwise continue our relationship. Accordingly, there can be no assurance when, or if, an amendment or waiver will be provided. We do not expect that we will meet these financial covenants as of the end of the second quarter of fiscal 2009 or thereafter unless these financial covenants are amended.

Going Concern

We have incurred net losses for the last two fiscal years and have been in continuing default on our existing credit facility since September 29, 2008. As a result, as more fully described in Note 1 of the Notes to Condensed Consolidated Financial Statements, our independent registered public accounting firm included an explanatory paragraph in their report on our fiscal 2008 financial statements related to the uncertainty of our ability to continue as a going concern. Because of our current defaults, our lender can demand immediate repayment of its debt and foreclose on our assets. This raises substantial doubt about our ability to continue as a going concern.

Based upon current and anticipated levels of operations (including continuing revenue and normal trade credit), anticipated increased and continued borrowing availability, assuming that the Chambers asset sale transaction closes by July 1, 2009 and there is no intervening acceleration of our bank debt, we believe we have sufficient liquidity from our cash flow from operations, and availability under our revolving line of credit, to meet our debt service requirements and other projected cash needs for the next twelve months.