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 the 53-week fiscal years consist of three 13-week fiscal quarters and one 14-week fiscal quarter. The financial results for the 53-week fiscal years and 14-week fiscal quarters will not be exactly comparable to the 52-week fiscal years and 13-week fiscal quarters. Fiscal 2009 and fiscal 2010 each include 52 weeks and fiscal 2008 included 53 weeks. The quarters ended October 3, 2009 and September 27, 2008 each consisted of the 13 weeks.

Overview

We design, develop and market men's and women's footwear and accessories. Our brands include Trotters®, SoftWalk ®, and H.S. Trask ®, and for certain of the reported periods, 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 through Chambers Belt, our wholly-owned subsidiary (n/k/a Belt Company). With the discontinuance of the Company's Tommy Bahama operations in the first quarter of fiscal 2009 and the discontinuance of Chambers operations in the third quarter of fiscal 2009, the Company has only one reportable segment consisting of Trotters, SoftWalk and H.S. Trask.

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 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 three quarters 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 exited our Chambers belt and accessories business and subsequently liquidated substantially all of its working capital.

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 three quarters 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 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 October 3, 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 of $363,000 of inventory and other write-offs and $36,000 of fixed assets and intangible impairment charges in the first quarter of fiscal 2009.

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 October 3, 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.

On July 9, 2009, Chambers sold to Tandy Brands Accessories, Inc. ("Tandy") substantially all of its assets (excluding, among other assets, accounts receivable, cash and cash equivalents) used in the operation of its private label and Wrangler brand businesses. Chambers conducted the Wrangler brand business under a License Agreement dated January 1, 2007 between Chambers and Wrangler pursuant to which Chambers had the right to sell Wrangler branded products to the mass market (the "Mass License") and a License Agreement dated January 1, 2008 between Chambers and Wrangler pursuant to which Chambers had the right to sell to the western store market (the "Western License"). Also Tandy assumed all of Chambers' obligations arising after the closing under vendor and customer purchase orders, Chambers' Maquiladora Agreement and certain leases. In partial payment of the purchase price due for the purchased assets, Tandy paid to Chambers, at the closing, approximately $3.5 million in immediately available funds, including approximately $2.6 million for inventory. As additional purchase price consideration, during the first 12 months after the closing, Tandy is obligated to pay Chambers on a monthly basis 21.5% of the net revenue that Tandy recognizes from sales during this period of Chambers former products. These generally include private label products previously sold by Chambers, Chambers trademark branded products and Wrangler branded products to the mass merchandise market. For the entire 12 month period, Tandy is obligated to pay to Chambers minimum earn-out payments that in the aggregate are not less than $2.0 million. As of October 3, 2009, the Company has received $1.1 million in Tandy earn-out payments. Chambers has collected substantially all of its accounts receivable and is in the process of settling its accounts payable.

Concurrently with the closing of the Chambers asset sale, Chambers, Tandy and Wrangler entered into an Amendment, Assignment and Assumption of License Agreement pursuant to which Chambers assigned to Tandy all of its rights and Tandy assumed all of Chambers remaining obligations (other than the remaining quarterly royalty obligations due Wrangler which continues to be Chambers' responsibility except in the case of a default on the license by Tandy) under the Mass License (which was amended

to extend through and including June 30, 2010). Also, the same parties entered into an Amendment, Assignment and Assumption of License Agreement pursuant to which Chambers assigned to Tandy all of its rights and Tandy assumed all of Chambers remaining obligations under the Western License.

For consolidated financial statement reporting purposes, commencing with the first quarter of the 2009 fiscal year (which ended April 4, 2009), we began reporting Chambers as discontinued operations. In connection with this discontinuance, we have incurred pre-tax charges of $2.5 million during the second and third quarters of fiscal 2009. Of this amount, during the second and third quarters of fiscal 2009, we recorded $822,000 of cash restructuring charges (related to severance payments and other costs associated with exiting the business) to be paid during the third and fourth quarters of fiscal 2009 and $1.7 million of non-cash restructuring charges (including write-offs of fixed assets and inventory). During the third quarter of fiscal 2009, the Company recorded a net gain on sale of $1.5 million, which included income resulting from the asset sale to Tandy of $2.0 million for the minimum earn-out payments, a $79,000 gain on sale of fixed assets, offset by a $228,000 write-off of inventory and fixed assets and $374,000 of other costs associated with exiting the business.

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. Since then, 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. On July 9, 2009, the Company and its subsidiaries together with Wells Fargo entered into a Forbearance Agreement and First Amendment to Credit and Security Agreement pursuant to which, among other things, Wells Fargo agreed, subject to certain conditions, to refrain from exercising remedies based on the specified past financial covenant defaults until July 31, 2009. On July 31, 2009, the parties entered into a First Amendment to Forbearance and Second Amendment to Credit Agreement, which, among other things and subject to certain conditions, extended the forbearance period until September 30, 2009. On September 29, 2009, the parties entered into a Second Amendment to Forbearance Agreement and Third Amendment to Credit and Security Agreement, which, among other things and subject to certain conditions, extended the forbearance period until October 16, 2009. Effective October 15, 2009, the parties entered into a Third Amendment to Forbearance Agreement and Fourth Amendment to Credit and Security Agreement, which, among other things, extended the forbearance period until October 23, 2009 with various automatic extensions that defer the maturity to November 30, 2009 provided the Company adheres to certain conditions. On November 5, 2009, the parties entered into a Fifth Amendment to Credit and Security Agreement pursuant to which, among other things, revised the borrowing base and amended certain provisions from the Third Amendment to the Forbearance Agreement and Fourth Amendment to the Credit and Security Agreement.

Results of Operations

Comparison of the Three Months Ended October 3, 2009 to the Three Months Ended
September 27, 2008

The following table sets forth selected consolidated operating results for the
three months ended October 3, 2009 and September 27, 2008, presented as a
percentage of net sales:



                                                    Three Months Ended
                                       October 3, 2009           September 27, 2008           Increase (Decrease)
                                                                     (In thousands)
Net sales                            $    5,453      100 %     $      8,028       100 %     $     (2,575 )      (32 )%
Cost of goods sold(1)                     3,536       65 %            4,567        57 %           (1,031 )      (23 )%

Gross profit                              1,917       35 %            3,461        43 %           (1,544 )      (45 )%
Operating expenses:
Selling, general and
administrative expense                    2,621       48 %            4,722        59 %           (2,101 )      (44 )%
Other (income) expense, net                  -        -  %               -         -  %               -          -  %

Total operating expenses                  2,621       48 %            4,722        59 %           (2,101 )      (44 )%

Operating loss                             (704 )    (13 )%          (1,261 )     (16 )%            (557 )      (44 )%
Interest expense, net                       306        6 %               47         1 %              259          * %

Loss before income taxes and
discontinued operations                  (1,010 )    (19 )%          (1,308 )     (16 )%            (298 )      (23 )%
Income tax expense (benefit)                  9       -  %                7        -  %                2         29 %

Loss before discontinued
operations                               (1,019 )    (19 )%          (1,315 )     (16 )%            (296 )      (23 )%
Income (loss) from discontinued
operations                                1,079       20 %             (803 )     (10 )%           1,882          * %

Net Income (loss)                    $       60        1 %     $     (2,118 )     (26 )%    $      2,178          * %

(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 third quarter of fiscal 2009 decreased 32% to $5.5 million compared to $8.0 million in net sales from continuing operations for the comparable period 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 in the current fiscal quarter.

Gross Profit from Continuing Operations

Gross profit for the third quarter of fiscal 2009 was $1.9 million compared to $3.5 million in gross profit from continuing operations for the comparable period of fiscal 2008. Gross margins were 35% and 43% for the third quarters of fiscal 2009 and fiscal 2008, respectively. The decrease in our gross margin was mostly due to several significant closeout sales during the third quarter of fiscal 2009 as we worked to generate cash flow and reduce our inventories to a level in line with our sales trends. Specifically, closeout sales accounted for $877,000 of the total $5.5 million in net sales during the third quarter of fiscal 2009. These closeout sales resulted in a gross profit of $17,000.

Operating Expenses from Continuing Operations

Selling, general and administrative expenses, or SG&A, were $2.6 million, or 48% of net sales, for the third quarter of fiscal 2009, compared to $4.7 million, or 59% of net sales from continuing operations, for the comparable period of fiscal 2008. The decrease is primarily attributable to a $960,000 decrease in compensation and employee benefits resulting from planned headcount reductions, a $378,000 decrease in professional fees and consulting costs, a $165,000 decrease in bad debt expenses as a result of improved collection efforts and decreased spending on brand expenses, including advertising expenses of $387,000 and travel costs of $127,000.

Interest Expense from Continuing Operations

Interest expense, net for the third quarter of fiscal 2009 was $306,000 compared to $47,000 in interest expense from continuing operations for the comparable period of fiscal 2008. The increase in interest expense is attributable to amortization of debt issuance costs and fees related to the forbearance agreements with Wells Fargo as discussed in Note 9.

Income (loss) from Discontinued Operations

Earnings from discontinued operations, comprised primarily of the Chambers business, for the third quarter of fiscal 2009 was $1.1 million compared to a loss of $803,000 for the comparable period of fiscal 2008. Earnings per share from discontinued operations were $0.13 for the third quarter of fiscal 2009 compared to loss per share of $0.10 for the comparable period of fiscal 2008. The earnings from discontinued operations for the third quarter of fiscal 2009 is primarily due to $2.0 million of minimum earn-out payments resulting from the sale of Chambers, offset by non-cash write-offs of inventory and other assets of $157,000 resulting from the winding down of the Chambers businesses, $510,000 of other costs associated with exiting the Chambers business and $185,000 of royalty expenses accrued on certain Tandy sales.

Comparison of the Nine Months Ended October 3, 2009 to the Nine Months Ended
September 27, 2008

The following table sets forth selected consolidated operating results for the
nine months ended October 3, 2009 and September 27, 2008, presented as a
percentage of net sales:



                                                       Nine Months Ended
                                          October 3, 2009           September 27, 2008           Increase (Decrease)
                                                                        (In thousands)
Net sales                               $   15,505      100 %     $     23,650       100 %     $     (8,145 )      (34 )%
Cost of goods sold(1)                       11,003       71 %           13,737        58 %           (2,734 )      (20 )%

Gross profit                                 4,502       29 %            9,913        42 %           (5,411 )      (54 )%
Operating expenses:
Selling, general and administrative
expense                                      8,883       57 %           14,460        61 %           (5,577 )      (39 )%
Other (income) expense, net                  1,018        7 %           (1,500 )      (6 )%           2,518          * %

Total operating expenses                     9,901       64 %           12,960        55 %           (3,059 )      (24 )%

Operating loss                              (5,399 )    (35 )%          (3,047 )     (13 )%           2,352         77 %
Interest expense, net                          457        3 %              849         4 %             (392 )      (46 )%

Loss before income taxes and
discontinued operations                     (5,856 )    (38 )%          (3,896 )     (16 )%           1,960         50 %
Income tax expense (benefit)                    18       -  %               45        -  %              (27 )      (60 )%

Loss before discontinued operations         (5,874 )    (38 )%          (3,941 )     (17 )%           1,933         49 %
Income (loss) from discontinued
operations                                  (2,143 )    (14 )%            (616 )      (3 )%           1,527          * %

Net loss                                $   (8,017 )    (52 )%    $     (4,557 )     (19 )%    $      3,460         76 %

(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 nine months of fiscal 2009 decreased 34% to $15.5 million compared to $23.7 million in net sales from continuing operations for the comparable period of fiscal 2008. The decrease was largely a result of a challenging retail environment during the current fiscal nine month period.

Gross Profit from Continuing Operations

Gross profit for the first nine months of fiscal 2009 was $4.5 million compared to $9.9 million from continuing operations for the comparable period of fiscal 2009. Gross margins were 29% and 42% for the first nine months of fiscal 2009 and fiscal 2008, respectively. The decrease in our gross margin was mostly due to several significant closeout sales during the fiscal 2009 as we worked to generate cash flow and reduce our inventories to a level in line with our sales trends. Specifically, closeout sales accounted for $3.4 million of the total $15.5 million in net sales. These closeout sales resulted in a negative gross profit of $715,000. In addition, we recognized $300,000 of sales allowances, which reduced net sales in the second quarter of fiscal 2009 for discounts to be taken throughout the second half of fiscal 2009.

Operating Expenses from Continuing Operations

Selling, general and administrative expenses, or SG&A, were $8.9 million, or 57% of net sales, for the first nine months of fiscal 2009, compared to $14.5 million, or 61% of net sales from continuing operations, for the comparable period of fiscal 2008. The decrease is primarily attributable to a $2.2 million decrease in compensation and employee benefits resulting from planned headcount reductions, a $1.5 million decrease in professional fees and consulting costs, a $559,000 decrease in bad debt expenses as a result of improved collection efforts and decreased spending on brand expenses, including advertising expenses of $652,000 and travel costs of $451,000.

"Other expense (income), net" was $1.0 million in net expense for the first nine months of fiscal 2009, which was comprised of the severance charges related to our reorganization in the first quarter of fiscal 2009. These charges do not include the severances specifically related to discontinued operations. "Other (income) expense, net" was $1.5 million in net income for the first nine months of fiscal 2008. This income was 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 nine months of fiscal 2009 was $457,000 compared to $849,000 for the comparable prior year period. Debt issuance costs previously capitalized of $124,000 were written off in the second quarter of fiscal 2009 as a result of the modification of the revolving credit facility with Wells Fargo as discussed in Note 9. Also included was $306,000 in the third quarter of fiscal 2009 for amortization of debt issuance costs and fees related to the forbearance agreements with Wells Fargo as discussed in Note 9. Debt issuance costs previously capitalized of $622,000 were written off during the second quarter of fiscal 2008. These capitalized costs were related to our previous credit facility with M&T, which was replaced by Wells Fargo during the second quarter of fiscal 2008. The remaining decrease in interest expense was due to a lower debt balance during the first nine months of fiscal 2009 compared to the comparable period of fiscal 2008.

Income (loss) from Discontinued Operations

Loss from discontinued operations, comprised of the Chambers and Tommy Bahama businesses, for the first nine months of fiscal 2009 was $2.1 million and 616,000 for the comparable period of fiscal 2008. Loss per share from discontinued operations was $0.26 for the first nine months of fiscal 2009 and compared to $0.08 loss per share from discontinued operations for the first nine months of fiscal 2008. The loss from discontinued operations for the first nine months of fiscal 2009 is primarily due to a combined gross profit of $2.0 million from Chambers and Tommy Bahama, the $2.0 million minimum earn-out payments resulting from the sale of Chambers, and the $79,000 gain on sale of Chambers fixed assets, offset by non-cash write-offs of inventory and other assets of $2.1 million and cash expenses of $393,000 resulting from the winding down of the Chambers and Tommy Bahama businesses, $1.9 million of combined other operating costs, $663,000 of royalty expenses accrued on certain Tandy sales, $734,000 in severance costs, and $401,000 of interest expense.

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 exiting the Chambers accessories business. Following the completion of the Chambers asset sale on July 9, 2009, we have monetized substantially all of the Chambers accounts receivable and accessories assets. Additionally, we will be collecting monthly earn-out payments from Tandy Brands which are to be no less than $2.0 million under the terms of the purchase and sale agreement, which as discussed below, we are required to apply the proceeds from these payments to the reduction in our revolving line of credit debt. For the first three months after closing, we have received $1.1 million in Tandy earn-out payments.

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 third quarter of fiscal 2009 of $2.8 million reflects current assets of $12.2 million (including current assets of discontinued operations) in excess of current liabilities of $9.4 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 $18.8 million as a result of the discontinuance of Chambers and Tommy Bahama businesses and 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 October 3, 2009, compared to 1.5 at January 3, 2009.

Despite our positive working capital position, during fiscal 2009 we have managed our cash accounts on a day-to-day basis and deferred payments on certain trade payables and contractual obligations beyond the otherwise applicable . . .