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, 2008.

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 North American wholesale division ("wholesale division"), the Company's products are sold to shoe specialty stores, department stores and clothing retailers, primarily in the United States and Canada. The Company also has licensing agreements with third parties who sell its branded apparel, accessories and specialty footwear in the United States, as well as its footwear in Mexico and certain markets overseas. Licensing revenues are included in the Company's wholesale division. The Company's North American retail division ("retail division") consisted of 36 Company-owned retail stores in the United States and an Internet business as of June 30, 2009. Sales in retail outlets are made directly to consumers by Company employees. The Company also has foreign operations ("foreign") which include the newly acquired wholesale and retail businesses in Australia, South Africa, and Asia Pacific (see below and Note 2 of the consolidated condensed financial statements (unaudited) above), and its wholesale and retail businesses in Europe. In conjunction with the acquisitions, the Company refined its internal reporting structure and redefined its reportable segments. All prior period amounts have been restated to conform to the current presentation. The majority of the Company's operations are in the United States, and its results are primarily affected by the economic conditions and the retail environment in the United States.

On January 23, 2009, the Company acquired a 60% interest in a new subsidiary, Florsheim Australia Pty Ltd. ("Florsheim Australia"), which subsequently purchased the Florsheim wholesale and retail businesses in Australia, South Africa, and Asia Pacific. The vast majority of this business is conducted under the Florsheim name, with a small amount of business under the Stacy Adams and Nunn Bush brand names. The consolidated financial statements of Florsheim Australia for the period January 23, 2009 through June 30, 2009 have been included in the Company's financial statements since the date of acquisition. Acquisition costs of $370,000 were included in Florsheim Australia's selling and administrative expenses in the first quarter of 2009. The Company expects consolidated sales for Florsheim Australia to be between $20 and $25 million in 2009. See Note 2 for more details of the purchase transaction.

Second Quarter Highlights

Consolidated net sales in the second quarter of 2009 were $50.1 million down $2.9 million or 6% compared with last year's second quarter. Net sales in the Company's wholesale division were down 19%, and same store sales in the retail division were down 10%, both reflecting the current challenging retail environment. Net sales of the Company's foreign operations increased due to the addition of Florsheim Australia (see Note 2) this year, whose net sales were $7.7 million in the second quarter of 2009.

The Company's consolidated operating earnings for the second quarter were $2.2 million, down from $5.9 million last year. The decline reflects the decrease in operating earnings in the wholesale division which were down $3.7 million due to lower licensing revenues, lower sales volumes and to a lesser extent, lower gross margins. The lower gross margins in the wholesale division resulted from higher product costs and pricing pressures from retailers compared to the second quarter of last year. Operating earnings in the Company's retail division were down $322,000 while foreign operating earnings were up $356,000 in the current quarter.

Consolidated net earnings for the three months ended June 30, 2009 were $2.2 million as compared with last year's $4.1 million. Diluted earnings per share this quarter were $.19, down from $.34 in the same period of 2008.

Year to Date Highlights

Consolidated net sales for the first half of 2009 were $109.0 million, down $5.3 million or 5% compared with last year. In the wholesale division, net sales were down 14%, and same store sales in the retail division were down 10% compared with 2008, both due to the current challenging retail environment. Foreign sales were up $11.4 million, due to the acquisition of Florsheim Australia (see Note
2) this year, which contributed $12.1 million of sales from the acquisition date through June 30, 2009.

The Company's consolidated operating earnings for the first six months of 2009 were $5.5 million, down from $13.5 million last year. In the wholesale and retail divisions, operating earnings were down $7.2 million and $0.8 million, respectively, due to the lower sales volumes and to a lesser extent, the lower gross margins as a percent of sales this year. Operating earnings from the new Florsheim Australia business (see Note 2) was partially offset by $370,000 of one-time acquisition costs incurred by Florsheim Australia.

Consolidated net earnings for the six months ended June 30, 2009 were $4.7 million as compared with last year's $9.2 million. Diluted earnings per share to-date through June 30, 2009 were $.41, down from $.78 for the same period in 2008.

Financial Position Highlights

The Company's cash and marketable securities totaled $63.3 million at June 30, 2009 compared with $57.6 million at December 31, 2008. The Company had no outstanding debt at June 30, 2009 as compared with $1.3 million at June 30, 2008.

RESULTS OF OPERATIONS

Wholesale Division Net Sales

Sales in the Company's wholesale division for the three- and six-month periods ended June 30, 2009 and 2008 were as follows:

Wholesale Division Net Sales
                                 Three Months Ended June 30,                             Six Months Ended June 30,
                                  2009                 2008           % Change           2009                2008           % Change
                                   (Dollars in thousands)                                 (Dollars in thousands)
North American Net Sales
Stacy Adams                  $        9,982       $       13,131           -24.0 %   $      25,436       $      31,430           -19.1 %
Nunn Bush                            14,447               16,417           -12.0 %          32,518              33,906            -4.1 %
Florsheim                            10,944               14,350           -23.7 %          23,052              29,160           -20.9 %
Total Wholesale              $       35,373       $       43,898           -19.4 %   $      81,006       $      94,496           -14.3 %
Licensing                               552                  969           -43.0 %           1,301               2,019           -35.6 %
Total Wholesale Division     $       35,925       $       44,867           -19.9 %   $      82,307       $      96,515           -14.7 %

Wholesale sales in the three and six months ended June 30, 2009 were impacted by the continued slowdown in consumer demand which began last fall and has caused retailers to reduce their inventory levels. In addition to the inventory pullback, sales in 2009 were also affected by the loss of business with retailers who have closed their doors, as well as a reduction of shipments to retailers based on credit risk. Management believes Nunn Bush sales, although down, have performed well, despite the challenging economic climate in the first half of 2009. Consumers have shifted from higher priced products toward more moderate priced goods, and Nunn Bush continues to have a strong position as a moderately priced brand in mid-tier department stores. Florsheim experienced the opposite impact of this consumer behavior, as it competes at the higher end of the pricing matrix in mid-tier department and chain stores. The Company's management believes that the decrease in the sales volume of the Stacy Adams brand was due to reduced consumer spending on fashion-oriented products this year.

Licensing revenues for the second quarter and first half of 2009 were down compared with the same periods last year. The Company's licensing revenues consist of royalties earned on the sales of Stacy Adams apparel and accessories in the United States, Florsheim specialty footwear and accessories in the United States, and Florsheim footwear in Mexico and certain overseas markets. For the second quarter and first six months of 2009, Stacy Adams licensing revenues decreased 15% and 11%, respectively, as the independent footwear and apparel retailers who distribute much of this product have struggled in the current retail environment. Florsheim licensing revenues decreased approximately $250,000 and $500,000 for the second quarter and first half of 2009, respectively compared with last year primarily due to the acquisition of Florsheim Australia this year (see Note 2).

Retail Division Net Sales

Net sales in the Company's retail division in the three months ended June 30 were $5.4 million in 2009 and $6.7 million in 2008. Retail sales for the first six months were $10.7 million in 2009 and $13.2 million last year. The Company had three fewer stores this year compared with 2008. Same store sales were down approximately 10% in both the second quarter and first six months of 2009, compared to the same periods of 2008. Stores are included in same store sales beginning in the store's 13th month of operations after its grand opening. The Company's management believes the decrease in same store sales this year was due to the current challenges facing the overall retail environment.

Foreign Net Sales

Net sales of the Company's foreign operations, which include the wholesale and retail sales of Florsheim Australia (see Note 2) and Florsheim Europe were up $7.3 million and $11.4 million in the second quarter and first six months of 2009, respectively compared with the same periods in 2008. The acquisition of Florsheim Australia contributed net sales of $7.7 million in the second quarter and $12.1 million in the first half of 2009. This was partially offset by decreased net sales in Europe which were down approximately $400,000 and $700,000 for the second quarter and first six months of 2009, respectively compared with the same periods last year.

Gross Earnings and Cost of Sales

For the second quarter, the Company's gross earnings were 37.8% of net sales compared with 37.2% of net sales in 2008. Wholesale gross earnings in the current quarter were 29.6% of net sales compared with 30.9% in the same period last year. In the retail division, gross earnings were 64.0% of net sales compared with 66.5% in the second quarter of 2008.

The Company's year to date gross earnings were 35.4% of net sales this year compared with 36.7% last year. Wholesale gross earnings for the first six months of the year were 27.9% of net sales compared with 30.7% last year. Retail gross earnings were 64.4% of net sales compared with 66.6% in the first half of last year. The quarter and year-to-date decreases in wholesale gross earnings this year reflect cost increases from the Company's overseas vendors and pricing pressures from retailers. In the retail division, the quarter and year to date declines in gross margins this year were a result of increased promotions due to the challenging retail environment in 2009.

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 June 30, 2009 and 2008 were approximately $2.0 million and $1.9 million, respectively. For the six months ended June 30, 2009 and 2008, distribution costs were $4.0 million and $3.9 million, 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 three and six months ended June 30, 2009, selling and administrative costs increased $2.9 million and $4.5 million, respectively as compared with the same periods in the prior year primarily due to the addition of Florsheim Australia (see Note 2).

Wholesale selling and administrative costs were relatively flat for the three and six months ended June 30, 2009 compared with the same periods last year, up approximately $200,000 and $100,000, respectively. In the retail division, selling and administrative costs for the second quarter and first half of 2009 were down $700,000 and $1.1 million, respectively compared with 2008. In the wholesale division, increased pension and stock option expense were more than offset by lower salesmens'commissions and employee costs in both the quarter and first six months of 2009. The quarter and year to date decreases in retail selling and administrative expenses were due to three fewer stores this year as compared with last year. As a percent of sales, wholesale selling and administrative expenses in the second quarter were 25.7% in 2009 and 20.2% in 2008. For the first six months, wholesale selling and administrative expenses as a percent of sales were 23.1% in 2009 and 19.7% in 2008. As a percent of sales, retail selling and administrative expenses for the second quarter were 66.5% in 2009 and 63.8% in 2008. For the first six months, retail selling and administrative expenses as a percent of sales were 68.2% in 2009 and 63.7% in 2008. In both the wholesale and retail divisions, the increases this year in selling and administrative expenses as a percent of sales mainly resulted from the impact of lower sales volume in the current year, as many of the Company's selling and administrative costs are fixed in nature.

Other

Other income during the quarter ended June 30 was $893,000 in 2009 and $1,000 in 2008. For the six months ended June 30, other income was $799,000 in 2009 and $8,000 in 2008. The increases for the quarter and six months ended June 30, 2009 were due primarily to foreign exchange gains on an intercompany loan.

The Company's effective tax rate in the second quarter of 2009 was 31.8% compared with 36.1% in the second quarter of 2008. The effective tax rate for the first six months of 2009 was 33.8% compared with 36.5% for 2008. The decreases this year were due to a higher portion of municipal bond income relative to total earnings in 2009 and a lower foreign effective tax rate associated with the earnings at Florsheim Australia.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of liquidity is its cash and short-term marketable securities. During the first six months of 2009, the Company generated $20.8 million in cash from operating activities compared with $12.1 million in the same period one year ago. This increase was primarily due to a larger decrease in inventory balances in the first half of 2009 compared to the same period of 2008, partially offset by lower net earnings in 2009 compared to 2008. The Company lowered its inventory levels in 2009 as many major retailers reduced their inventory exposure in reaction to the slowdown in consumer demand. The Company used approximately $9.3 million of cash for the Florsheim Australia acquisition (see Note 2). Capital expenditures were $590,000 in the first half of 2009 as compared with $1.8 million for the same period of 2008. Throughout 2008, the Company was remodeling its domestic retail stores. Those projects were complete by the end of 2008. The Company expects annual capital expenditures for 2009 to be between $1 million and $2 million.

The Company paid cash dividends of $3.2 million and $2.5 million during the six months ended June 30, 2009 and 2008, respectively. On April 27, 2009, the Company's Board of Directors increased the quarterly dividend rate from $.14 to $.15 per share. This represents an increase of 7% in the quarterly dividend rate. The impact of this will be to increase cash dividends paid annually by approximately $450,000.

The Company continues to repurchase its common stock under its share repurchase program when the Company believes market conditions are favorable. To date in 2009, the Company has repurchased 108,985 shares at a total cost of $2.4 million. The Company currently has 1,394,597 shares available under its previously announced buyback program. See Part II, Item 2, "Unregistered Sales of Equity Securities and Use of Proceeds" below for more information.

As of June 30, 2009, the Company had a total of $50 million available under its borrowing facility, of which there were no outstanding borrowings at June 30, 2009. The facility includes one financial covenant that specifies a minimum level of net worth. The Company was in compliance with the covenant at June 30, 2009. The facility expired on April 30, 2009 and was renewed through April 30, 2010.

On August 4, 2009, the Company made a $1 million contribution to its defined benefit pension plan.

The Company will continue to evaluate the best uses for its free cash, including continued 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 2009.