UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
quarterly period ended September 30, 2010


OR


 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For the
transition period from _________________ to
_________________





Commission
file number:  1-34382





ROCKY
BRANDS, INC.


(Exact
name of registrant as specified in its charter)





Ohio
            31-1364046(State
      or Other Jurisdiction of
            (I.R.S.
      EmployerIncorporation
      or Organization)
            Identification
      No.)





39
E. Canal Street, Nelsonville, Ohio 45764


(Address
of Principal Executive Offices, Including Zip Code)





(740)
753-1951


(Registrant’s
Telephone Number, Including Area Code)





Not
Applicable


(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)





Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.  YESxNO ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes  ̈ No
 ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,” and
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):





Large
      accelerated filer  ̈
                Accelerated
      filer  ̈
                Non-accelerated
      filer  ̈
                Smaller reporting companyx(Do
      not check if a smaller reporting
company)





Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).  YES ̈NOx





As of
October 25, 2010, 7,409,537 shares of Rocky Brands, Inc. common stock, no par
value, were outstanding.





FORM
10-Q





ROCKY
BRANDS, INC.





TABLE
OF CONTENTS





PAGENUMBERPART I. FINANCIAL
      INFORMATIONItem
      1.
                          Financial
      StatementsCondensed
      Consolidated Balance SheetsSeptember
      30, 2010 and 2009 (Unaudited), and December 31, 2009
                          3Condensed
      Consolidated Statements of Operationsfor
      the Three and Nine Months Ended September 30, 2010 and 2009
      (Unaudited)
                          4Condensed
      Consolidated Statements of Cash Flowsfor
      the Nine Months Ended September 30, 2010 and 2009
    (Unaudited)
                          5Notes
      to the Interim Unaudited Condensed Consolidated Financial Statements for
      the Three-Month and Nine-Month Periods Ended September 30, 2010 and
      2009
                          6
      –16Item
      2.
                          Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                          17
      – 23Item
      3.
                          Quantitative
      and Qualitative Disclosures About Market Risk
                          24Item
      4.
                          Controls
      and Procedures
                          24PART
      II.  OTHER INFORMATIONItem
      1.
                          Legal
      Proceedings
                          25Item
      1A.
                          Risk
      Factors
                          25Item
      2.
                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                          25Item
      3.
                          Defaults
      Upon Senior Securities
                          25Item
      4.
                          Reserved
                          25Item
      5.
                          Other
      Information
                          25Item
      6.
                          Exhibits
                          25SIGNATURE
                          
                          26


2





PART
I - FINANCIAL INFORMATION


ITEM
1 - FINANCIAL STATEMENTS





ROCKY
BRANDS, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





September 30, 2010
                        
                        
                        December 31, 2009
                        
                        
                        September 30, 2009(Unaudited)
                        
                        
                        
                        
                        
                        (Unaudited)ASSETS:CURRENT
      ASSETS:Cash
      and cash equivalents
                        
                        $
                        3,965,906
                        
                        
                        $
                        1,797,093
                        
                        
                        $
                        4,002,909Trade
      receivables – net
                        
                        
                        61,261,175
                        
                        
                        
                        45,831,558
                        
                        
                        
                        58,296,661Other
      receivables
                        
                        
                        1,319,589
                        
                        
                        
                        1,476,643
                        
                        
                        
                        1,598,829Inventories
                        
                        
                        62,913,777
                        
                        
                        
                        55,420,467
                        
                        
                        
                        68,065,444Deferred
      income taxes
                        
                        
                        1,490,601
                        
                        
                        
                        1,475,695
                        
                        
                        
                        2,173,391Prepaid
      and refundable income taxes
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        247,011Prepaid
      expenses
                        
                        
                        1,494,653
                        
                        
                        
                        1,309,138
                        
                        
                        
                        1,323,115Total
      current assets
                        
                        
                        132,445,701
                        
                        
                        
                        107,310,594
                        
                        
                        
                        135,707,360FIXED
      ASSETS – net
                        
                        
                        22,114,258
                        
                        
                        
                        22,669,876
                        
                        
                        
                        23,132,489IDENTIFIED
      INTANGIBLES
                        
                        
                        30,504,785
                        
                        
                        
                        30,516,910
                        
                        
                        
                        30,627,527OTHER
      ASSETS
                        
                        
                        1,896,914
                        
                        
                        
                        2,892,683
                        
                        
                        
                        3,304,123TOTAL
      ASSETS
                        
                        $
                        186,961,658
                        
                        
                        $
                        163,390,063
                        
                        
                        $
                        192,771,499LIABILITIES
      AND SHAREHOLDERS' EQUITY:CURRENT
      LIABILITIES:Accounts
      payable
                        
                        $
                        9,449,927
                        
                        
                        $
                        6,781,534
                        
                        
                        $
                        7,683,778Current
      maturities – long term debt
                        
                        
                        508,376
                        
                        
                        
                        511,870
                        
                        
                        
                        503,841Accrued
      expenses:Salaries
      and wages
                        
                        
                        2,624,978
                        
                        
                        
                        343,345
                        
                        
                        
                        1,161,324Co-op
      advertising
                        
                        
                        63,222
                        
                        
                        
                        460,190
                        
                        
                        
                        795,147Interest
                        
                        
                        497,641
                        
                        
                        
                        471,091
                        
                        
                        
                        1,648,116Income
      taxes payable
                        
                        
                        2,280,900
                        
                        
                        
                        26,242
                        
                        
                        
                        -Taxes
      - other
                        
                        
                        490,978
                        
                        
                        
                        440,223
                        
                        
                        
                        387,817Commissions
                        
                        
                        541,389
                        
                        
                        
                        487,340
                        
                        
                        
                        341,903Current
      portion of pension funding
                        
                        
                        700,000
                        
                        
                        
                        700,000
                        
                        
                        
                        -Other
                        
                        
                        2,185,406
                        
                        
                        
                        2,764,783
                        
                        
                        
                        2,041,371Total
      current liabilities
                        
                        
                        19,342,817
                        
                        
                        
                        12,986,618
                        
                        
                        
                        14,563,297LONG
      TERM DEBT – less current maturities
                        
                        
                        52,910,608
                        
                        
                        
                        55,079,776
                        
                        
                        
                        82,940,392DEFERRED
      INCOME TAXES
                        
                        
                        9,060,211
                        
                        
                        
                        9,071,639
                        
                        
                        
                        9,558,761DEFERRED
      PENSION LIABILITY
                        
                        
                        3,735,674
                        
                        
                        
                        3,589,875
                        
                        
                        
                        3,919,603DEFERRED
      LIABILITIES
                        
                        
                        189,719
                        
                        
                        
                        184,481
                        
                        
                        
                        197,010TOTAL
      LIABILITIES
                        
                        
                        85,239,029
                        
                        
                        
                        80,912,389
                        
                        
                        
                        111,179,063COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITY:Common
      stock, no par value;25,000,000
      shares authorized; issued and outstanding September 30, 2010 - 7,409,537;
      December 31, 2009 - 5,576,465 and September 30, 2009 -
      5,547,215
                        
                        
                        68,927,984
                        
                        
                        
                        54,598,104
                        
                        
                        
                        54,387,752Accumulated
      other comprehensive loss
                        
                        
                        (2,947,290
                        )
                        
                        
                        (3,217,144
                        )
                        
                        
                        (2,982,564
                        )Retained
      earnings
                        
                        
                        35,741,935
                        
                        
                        
                        31,096,714
                        
                        
                        
                        30,187,248Total
      shareholders' equity
                        
                        
                        101,722,629
                        
                        
                        
                        82,477,674
                        
                        
                        
                        81,592,436TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                        
                        $
                        186,961,658
                        
                        
                        $
                        163,390,063
                        
                        
                        $
                        192,771,499





See notes
to the interim unaudited condensed consolidated financial
statements.


3





ROCKY
BRANDS, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)





Three Months Ended
                  
                  
                  Nine Months EndedSeptember 30,
                  
                  
                  September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009NET
      SALES
                  
                  $
                  74,760,244
                  
                  
                  $
                  66,572,437
                  
                  
                  $
                  186,062,284
                  
                  
                  $
                  167,825,613COST
      OF GOODS SOLD
                  
                  
                  47,575,649
                  
                  
                  
                  41,856,651
                  
                  
                  
                  121,021,756
                  
                  
                  
                  105,299,667GROSS
      MARGIN
                  
                  
                  27,184,595
                  
                  
                  
                  24,715,786
                  
                  
                  
                  65,040,528
                  
                  
                  
                  62,525,946SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                  
                  
                  19,159,541
                  
                  
                  
                  18,576,780
                  
                  
                  
                  53,347,582
                  
                  
                  
                  56,642,081INCOME
      FROM OPERATIONS
                  
                  
                  8,025,054
                  
                  
                  
                  6,139,006
                  
                  
                  
                  11,692,946
                  
                  
                  
                  5,883,865OTHER
      INCOME AND (EXPENSES):Interest
      expense, net
                  
                  
                  (955,033
                  )
                  
                  
                  (1,955,485
                  )
                  
                  
                  (4,721,176
                  )
                  
                  
                  (5,665,905
                  )Other
      - net
                  
                  
                  246,334
                  
                  
                  
                  224,442
                  
                  
                  
                  286,451
                  
                  
                  
                  257,899Total
      other - net
                  
                  
                  (708,699
                  )
                  
                  
                  (1,731,043
                  )
                  
                  
                  (4,434,725
                  )
                  
                  
                  (5,408,006
                  )INCOME  BEFORE
      INCOME TAXES
                  
                  
                  7,316,355
                  
                  
                  
                  4,407,963
                  
                  
                  
                  7,258,221
                  
                  
                  
                  475,859INCOME
      TAX EXPENSE
                  
                  
                  2,634,000
                  
                  
                  
                  1,626,518
                  
                  
                  
                  2,613,000
                  
                  
                  
                  210,518NET
      INCOME
                  
                  $
                  4,682,355
                  
                  
                  $
                  2,781,445
                  
                  
                  $
                  4,645,221
                  
                  
                  $
                  265,341NET
      INCOME PER SHAREBasic
                  
                  $
                  0.63
                  
                  
                  $
                  0.50
                  
                  
                  $
                  0.71
                  
                  
                  $
                  0.05Diluted
                  
                  $
                  0.63
                  
                  
                  $
                  0.50
                  
                  
                  $
                  0.71
                  
                  
                  $
                  0.05WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDINGBasic
                  
                  
                  7,407,409
                  
                  
                  
                  5,547,215
                  
                  
                  
                  6,522,058
                  
                  
                  
                  5,546,993Diluted
                  
                  
                  7,422,194
                  
                  
                  
                  5,547,215
                  
                  
                  
                  6,541,192
                  
                  
                  
                  5,546,993





See notes
to the interim unaudited condensed consolidated financial
statements.


4





ROCKY
BRANDS, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





Nine
      Months EndedSeptember
      30,2010
                
                
                2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                4,645,221
                
                
                $
                265,341Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                
                
                4,209,421
                
                
                
                4,772,894Deferred
      pension and other
                
                
                420,891
                
                
                
                395,792Deferred
      income taxes
                
                
                (26,334
                )
                
                
                114,415Loss
      on disposal of fixed assets
                
                
                14,038
                
                
                
                7,169Stock
      compensation expense
                
                
                129,900
                
                
                
                137,688Change
      in assets and liabilitiesReceivables
                
                
                (15,272,563
                )
                
                
                1,632,238Inventories
                
                
                (7,493,310
                )
                
                
                2,236,730Other
      current assets
                
                
                (185,515
                )
                
                
                (39,487
                )Other
      assets
                
                
                1,145,769
                
                
                
                660,878Accounts
      payable
                
                
                2,740,554
                
                
                
                (2,140,244
                )Accrued
      and other liabilities
                
                
                3,691,301
                
                
                
                1,472,318Net
      cash (used in) provided by operating activities
                
                
                (5,980,627
                )
                
                
                9,515,732CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of fixed assets
                
                
                (3,729,619
                )
                
                
                (3,997,487
                )Investment
      in trademarks and patents
                
                
                (23,118
                )
                
                
                (43,777
                )Proceeds
      from sale of fixed assets
                
                
                24,860
                
                
                
                25,058Net
      cash used in investing activities
                
                
                (3,727,877
                )
                
                
                (4,016,206
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from revolving credit facility
                
                
                196,671,708
                
                
                
                165,575,147Repayments
      of revolving credit facility
                
                
                (169,463,530
                )
                
                
                (169,512,854
                )Debt
      financing costs
                
                
                (150,000
                )
                
                
                (1,512,500
                )Repayments
      of long-term debt
                
                
                (29,380,841
                )
                
                
                (357,723
                )Issuance
      of common stock, net of issuance costs
                
                
                14,105,600
                
                
                
                -Proceeds
      from exercise of stock options
                
                
                94,380
                
                
                
                -Net
      cash provided by (used in) financing activities
                
                
                11,877,317
                
                
                
                (5,807,930
                )INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
                
                
                2,168,813
                
                
                
                (308,404
                )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                
                
                1,797,093
                
                
                
                4,311,313CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                
                $
                3,965,906
                
                
                $
                4,002,909





See notes
to the interim unaudited condensed consolidated financial
statements.


5


ROCKY
BRANDS, INC.


AND
SUBSIDIARIES





NOTES TO
THE INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE
AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009





1.
            INTERIM
      FINANCIAL REPORTING





In the
opinion of management, the accompanying interim unaudited condensed consolidated
financial statements reflect all adjustments that are necessary for a fair
presentation of the financial results.  All such adjustments reflected in
the unaudited interim condensed consolidated financial statements are considered
to be of a normal and recurring nature. The results of the operations for the
three-month and nine-month periods ended September 30, 2010 and 2009 are not
necessarily indicative of the results to be expected for the whole year. 
Accordingly, these unaudited condensed consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto contained in our Annual Report on Form 10-K for the year ended December
31, 2009.





The
components of total comprehensive income are shown below:





(Unaudited)
                    
                    
                    (Unaudited)Three Months Ended
                    
                    
                    Nine Months EndedSeptember 30,
                    
                    
                    September 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Net
      income
                    
                    $
                    4,682,355
                    
                    
                    $
                    2,781,445
                    
                    
                    $
                    4,645,221
                    
                    
                    $
                    265,341Other
      comprehensive income:Amortization
      of unrecognized transition obligation, service cost and net
      loss
                    
                    
                    89,952
                    
                    
                    
                    79,884
                    
                    
                    
                    269,854
                    
                    
                    
                    239,651Total
      comprehensive income
                    
                    $
                    4,772,307
                    
                    
                    $
                    2,861,329
                    
                    
                    $
                    4,915,075
                    
                    
                    $
                    504,992





2.
            TRADE
      RECEIVABLES





Trade
receivables are presented net of the related allowance for uncollectible
accounts of approximately $1,048,000, $1,178,000 and $1,134,000 at September 30,
2010, December 31, 2009 and September 30, 2009, respectively.  The
allowance for uncollectible accounts is calculated based on the relative age and
size of trade receivable balances.


6


3.
            INVENTORIES





Inventories
are comprised of the following:





September 30,
                    
                    
                    December 31,
                    
                    
                    September 30,2010
                    
                    
                    2009
                    
                    
                    2009(Unaudited)
                    
                    
                    
                    
                    
                    (Unaudited)Raw
      materials
                    
                    $
                    10,641,734
                    
                    
                    $
                    5,438,055
                    
                    
                    $
                    7,685,583Work-in-process
                    
                    
                    732,910
                    
                    
                    
                    497,914
                    
                    
                    
                    671,388Finished
      goods
                    
                    
                    51,586,413
                    
                    
                    
                    49,522,542
                    
                    
                    
                    59,764,173Reserve
      for obsolescence or lower of cost or market
                    
                    
                    (47,280
                    )
                    
                    
                    (38,044
                    )
                    
                    
                    (55,700
                    )Total
                    
                    $
                    62,913,777
                    
                    
                    $
                    55,420,467
                    
                    
                    $
                    68,065,444





4.
            SUPPLEMENTAL
      CASH FLOW INFORMATION





Supplemental
cash flow information is as follows:





(Unaudited)Nine Months EndedSeptember 30,2010
                  
                  
                  2009Interest
                  
                  $
                  3,763,729
                  
                  
                  $
                  3,921,125Federal,
      state and local income taxes, net of refunds
                  
                  $
                  385,112
                  
                  
                  $
                  269,546Fixed
      asset purchases in accounts payable
                  
                  $
                  79,373
                  
                  
                  $
                  66,816


7





5.
            PER
      SHARE INFORMATION





Basic
earnings per share (“EPS”) is computed by dividing net income applicable to
common shareholders by the weighted average number of common shares outstanding
during each period.  The diluted earnings per share computation includes
common share equivalents, when dilutive.  There are no adjustments to net
income necessary in the calculation of basic and diluted earnings per
share.





A
reconciliation of the shares used in the basic and diluted income per common
share computation for the three-month and nine-month periods ended September 30,
2010 and 2009 is as follows:





(Unaudited)
                  
                  
                  (Unaudited)Three Months Ended
                  
                  
                  Nine Months EndedSeptember 30,
                  
                  
                  September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Weighted
      average shares outstanding
                  
                  
                  7,407,409
                  
                  
                  
                  5,547,215
                  
                  
                  
                  6,522,058
                  
                  
                  
                  5,546,993Dilutive
      stock options
                  
                  
                  14,785
                  
                  
                  
                  -
                  
                  
                  
                  19,134
                  
                  
                  
                  -Dilutive
      weighted average shares outstanding
                  
                  
                  7,422,194
                  
                  
                  
                  5,547,215
                  
                  
                  
                  6,541,192
                  
                  
                  
                  5,546,993Anti-dilutive
      stock options/weighted average shares outstanding
                  
                  
                  196,000
                  
                  
                  
                  377,054
                  
                  
                  
                  210,090
                  
                  
                  
                  398,947





6.
            RECENT
      FINANCIAL ACCOUNTING STANDARDS





Recently adopted accounting standards





In June
2009, the FASB modified the accounting standard related to transfers and
servicing.  This standard, as modified, intends to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets.  This standard, as modified, must be
applied as of the beginning of each reporting entity’s first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period and for interim and annual reporting periods
thereafter.  Earlier application is prohibited.  This standard, as
modified, must be applied to transfers occurring on or after the effective
date.  The adoption of the transfers and servicing standard, as modified,
did not have a material effect on our consolidated financial
statements.





In June
2009, the FASB modified the accounting standard related to consolidation. 
This standard, as modified, intends to improve financial reporting by
enterprises involved with variable interest entities.  This standard, as
modified, addresses the effects on certain provisions  relating to the
Consolidation of Variable Interest Entities, as a result of the elimination of
the qualifying special-purpose entity concept in the accounting standard related
to  transfers and servicing, and constituent concerns about the
application of certain key provisions of this standard, including those in which
the accounting and disclosures under the standard do not always provide timely
and useful information about an enterprise’s involvement in a variable interest
entity.  This standard, as modified, is effective as of the beginning of
each reporting entity’s first annual reporting period that begins after November
15, 2009, for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. Earlier application is
prohibited.  The adoption of the consolidation standard, as modified, did
not have a material effect on our consolidated financial
statements.


8





In
January 2010, the FASB issued “Fair Value Measurements and Disclosures -
Improving Disclosures about Fair Value Measurements.”  This statement
requires some new disclosures and clarifies some existing disclosure
requirements about fair value measurement as set forth in FASB Statement “Fair
Value Measurement”.  The amendments are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements.  Those disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years.  The adoption of this pronouncement did
not have a material effect on our consolidated financial
statements.





Accounting
standards not yet adopted





In
September 2009, the FASB issued an accounting standards updated, “Revenue
Recognition – Multiple Deliverable Revenue Arrangements”.  This update
addresses how to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting and how to allocate the
consideration to each unit of accounting.  This update eliminates the use
of the residual value method for determining allocation of arrangement
consideration and allows the use of an entity's best estimate to determine the
selling price if vendor specific objective evidence and third-party evidence
cannot be determined.  This update also requires additional disclosure to
provide both qualitative and quantitative information regarding the significant
judgments made in applying this update.  In addition, for each reporting
period in the initial year of adoption, this update requires disclosure of the
amount of revenue recognized subject to the measurement requirements of this
update and the amount of revenue that would have been recognized if the related
transactions were subject to the measurement requirements prior to this
update.  This update is effective for revenue arrangements entered into or
materially modified in fiscal years beginning after June 15, 2010.  Early
adoption is permitted.  We are currently assessing the potential impact of
the adoption of these rules on our consolidated financial statement
disclosures.


9





7.
            INCOME
      TAXES





We file
income tax returns in the U.S. Federal jurisdiction and various state and
foreign jurisdictions.  We are no longer subject to U.S. Federal tax
examinations for years before 2005.  State jurisdictions that remain
subject to examination range from 2005 to 2009.  Foreign jurisdiction tax
returns that remain subject to examination range from 2002 to 2009 for Canada
and from 2004 to 2009 for Puerto Rico.  We do not believe there will be any
material changes in our unrecognized tax positions over the next 12
months.





Our
policy is to recognize interest and penalties accrued on any unrecognized tax
benefits as a component of income tax expense. As of September 30, 2010, accrued
interest or penalties were not material, and no such expenses were recognized
during the quarter.





We
provided for income taxes at an estimated effective tax rate of 37.6% for both
the three and nine-month periods ended September 30, 2010. We provided for
income taxes at an estimated effective tax rate of 36% for both the three and
nine-month periods ended September 30, 2009.





During
the three and nine-month periods ended September 30, 2010, we recognized a
decrease to income tax expense of $0.1 million related to the filing of our 2009
Federal income tax return which decreased our effective tax rates for the three
and nine-month periods ended September 30, 2010 to 36%.





During
the three and nine-month periods ended September 30, 2009, we recognized an
increase to income tax expense of $0.04 million related to the filing of our
2008 Federal income tax return which increased our effective tax rates for the
three-month and nine-month periods ended September 30, 2009 to 36.9% and 44.2%,
respectively.


10





8.
            INTANGIBLE
      ASSETS





A
schedule of intangible assets is as follows:





Gross
                    
                    
                    Accumulated
                    
                    
                    CarryingSeptember 30, 2010
    (unaudited)
                    
                    Amount
                    
                    
                    Amortization
                    
                    
                    AmountTrademarks:Wholesale
                    
                    $
                    27,243,578
                    
                    
                    $
                    -
                    
                    
                    $
                    27,243,578Retail
                    
                    
                    2,900,000
                    
                    
                    
                    -
                    
                    
                    
                    2,900,000Patents
                    
                    
                    2,412,117
                    
                    
                    
                    2,050,910
                    
                    
                    
                    361,207Customer
      relationships
                    
                    
                    1,000,000
                    
                    
                    
                    1,000,000
                    
                    
                    
                    -Total
      Identified Intangibles
                    
                    $
                    33,555,695
                    
                    
                    $
                    3,050,910
                    
                    
                    $
                    30,504,785





Gross
                    
                    
                    Accumulated
                    
                    
                    CarryingDecember 31, 2009
                    
                    Amount
                    
                    
                    Amortization
                    
                    
                    AmountTrademarks:Wholesale
                    
                    $
                    27,243,578
                    
                    
                    $
                    -
                    
                    
                    $
                    27,243,578Retail
                    
                    
                    2,900,000
                    
                    
                    
                    -
                    
                    
                    
                    2,900,000Patents
                    
                    
                    2,388,999
                    
                    
                    
                    2,015,667
                    
                    
                    
                    373,332Customer
      relationships
                    
                    
                    1,000,000
                    
                    
                    
                    1,000,000
                    
                    
                    
                    -Total
      Identified Intangibles
                    
                    $
                    33,532,577
                    
                    
                    $
                    3,015,667
                    
                    
                    $
                    30,516,910





Gross
                    
                    
                    Accumulated
                    
                    
                    CarryingSeptember 30, 2009
    (unaudited)
                    
                    Amount
                    
                    
                    Amortization
                    
                    
                    AmountTrademarks:Wholesale
                    
                    $
                    27,243,578
                    
                    
                    $
                    -
                    
                    
                    $
                    27,243,578Retail
                    
                    
                    2,900,000
                    
                    
                    
                    -
                    
                    
                    
                    2,900,000Patents
                    
                    
                    2,353,319
                    
                    
                    
                    1,919,371
                    
                    
                    
                    433,948Customer
      relationships
                    
                    
                    1,000,000
                    
                    
                    
                    950,000
                    
                    
                    
                    50,000Total
      Identified Intangibles
                    
                    $
                    33,496,897
                    
                    
                    $
                    2,869,371
                    
                    
                    $
                    30,627,526





Amortization
expense for intangible assets was $11,827 and $145,888 for the three months
ended September 30, 2010 and 2009, respectively and $35,243 and $436,729 for the
nine months ended September 30, 2010 and 2009, respectively.  The weighted
average amortization period for patents is 15 years.





Estimate
of Aggregate Amortization Expense for the years ending December
31,:





2011
                  
                  $
                  46,0082012
                  
                  
                  46,0082013
                  
                  
                  46,0082014
                  
                  
                  46,0082015
                  
                  
                  46,008


11





9.
            CAPITAL
      STOCK





On May
11, 2004, our shareholders approved the 2004 Stock Incentive Plan.  The
Plan includes 750,000 of our common shares that may be granted for stock options
and restricted stock awards.  As of September 30, 2010, we were authorized
to issue approximately 360,031 shares under our existing plans.





The Plan
generally provides for grants with the exercise price equal to fair value on the
date of grant, graduated vesting periods of up to five years, and lives not
exceeding ten years.  The following summarizes stock option transactions
from January 1, 2010 through September 30, 2010:





Shares
                              
                              
                              Weighted
                                Average
                                Exercise
                                PriceOptions
      outstanding at January 1, 2010
                              
                              
                              335,250
                              
                              
                              $
                              18.25Issued
                              
                              
                              -
                              
                              
                              
                              -Exercised
                              
                              
                              (17,000
                              )
                              
                              $
                              5.55Forfeited
                              
                              
                              (69,000
                              )
                              
                              $
                              18.81Options
      outstanding at September 30, 2010
                              
                              
                              249,250
                              
                              
                              $
                              18.96Options
      exercisable at:January
      1, 2010
                              
                              
                              335,250
                              
                              
                              $
                              18.25September
      30, 2010
                              
                              
                              249,250
                              
                              
                              $
                              18.96Unvested
      options at January 1, 2010
                              
                              
                              -Granted
                              
                              
                              -Vested
                              
                              
                              -Forfeited
                              
                              
                              -Unvested
      options at September 30, 2010
                              
                              
                              -





During
the nine-month period ended September 30, 2010, we issued 16,072 shares of
common stock to members of our Board of Directors.  We recorded
compensation expense of $122,500, which was the fair market value of the shares
on the grant date.  The shares are fully vested but cannot be sold for one
year.





In June
2009, our Board of Directors adopted a Rights Agreement, which provides for one
preferred share purchase right to be associated with each share of our
outstanding common stock.  Shareholders exercising these rights would
become entitled to purchase shares of Series B Junior Participating Cumulative
Preferred Stock.  The rights are exercisable after the time when a person
or group of persons without the approval of the Board of Directors acquire
beneficial ownership of 20 percent or more of our common stock or announce the
initiation of a tender or exchange offer which if successful would cause such
person or group to beneficially own 20 percent or more of our common
stock.  Such exercise would ultimately entitle the holders of the rights to
purchase at the exercise price, shares of common stock of the surviving
corporation or purchaser, respectively, with an aggregate market value equal to
two times the exercise price.  The person or groups effecting such 20
percent acquisition or undertaking such tender offer would not be entitled to
exercise any rights.  These rights expire during July
2012.


12





In May
2010, the Company completed a public offering of 1.8 million shares of common
stock at a price of $8.40 per share.  We received net proceeds from the
offering of $14.1 million after deducting $0.9 million in underwriting discounts
and $0.1 million in expenses. The proceeds were used to prepay amounts due under
term loans with Laminar Direct Capital L.P. and Whitebox Hedged High Yield
Partners, L.P.  After the prepayment, principal under the term loans total
$26 million in the aggregate. The term loans have an interest rate of 11.5%
payable semi-annually over the five year term of the notes.  In connection
with this transaction, $0.2 million of prepayment fees and $0.2 million of
non-cash charges related to deferred interest expense were incurred and have
been reflected as a component of interest expense.





10.
            RETIREMENT
      PLANS





We
sponsor a noncontributory defined benefit pension plan covering non-union
workers in our Ohio and Puerto Rico operations.  Benefits under the
non-union plan are based upon years of service and highest compensation levels
as defined.  On December 31, 2005, we froze the noncontributory defined
benefit pension plan for all non-U.S. territorial employees.





Net
pension cost of the Company’s plan is as follows:





(Unaudited)
                                      
                                      
                                      (Unaudited)Three Months Ended
                                      
                                      
                                      Nine Months EndedSeptember 30,
                                      
                                      
                                      September 30,2010
                                      
                                      
                                      2009
                                      
                                      
                                      2010
                                      
                                      
                                      2009Service
      cost
                                      
                                      $
                                      19,977
                                      
                                      
                                      $
                                      28,843
                                      
                                      
                                      $
                                      59,931
                                      
                                      
                                      $
                                      86,529Interest
                                      
                                      
                                      161,677
                                      
                                      
                                      
                                      151,455
                                      
                                      
                                      
                                      485,031
                                      
                                      
                                      
                                      454,363Expected
      return on assets
                                      
                                      
                                      (133,055
                                      )
                                      
                                      
                                      (121,614
                                      )
                                      
                                      
                                      (399,163
                                      )
                                      
                                      
                                      (364,841
                                      )Amortization
      of unrecognized net loss
                                      
                                      
                                      71,854
                                      
                                      
                                      
                                      61,785
                                      
                                      
                                      
                                      215,560
                                      
                                      
                                      
                                      185,357Amortization
      of unrecognized transition obligation
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -Amortization
      of unrecognized prior service cost
                                      
                                      
                                      18,098
                                      
                                      
                                      
                                      18,098
                                      
                                      
                                      
                                      54,294
                                      
                                      
                                      
                                      54,294Net
      pension cost
                                      
                                      $
                                      138,551
                                      
                                      
                                      $
                                      138,567
                                      
                                      
                                      $
                                      415,653
                                      
                                      
                                      $
                                      415,702





Our
unrecognized benefit obligations existing at the date of transition for the
non-union plan are being amortized over 21 years.  Actuarial assumptions
used in the accounting for the plan were as follows:




13




2010
                    
                    
                    2009Discount
      rate
                    
                    
                    5.91
                    %
                    
                    
                    6.00
                    %Average
      rate of increase in compensation levels
                    
                    
                    3.0
                    %
                    
                    
                    3.0
                    %Expected
      long-term rate of return on plan assets
                    
                    
                    8.0
                    %
                    
                    
                    8.0
                    %





Our
desired investment result is a long-term rate of return on assets that is at
least 8%.  The target rate of return for the plan has been based upon the
assumption that returns will approximate the long-term rates of return
experienced for each asset class in our investment policy.  Our investment
guidelines are based upon an investment horizon of greater than five years, so
that interim fluctuations should be viewed with appropriate perspective. 
Similarly, the plan’s strategic asset allocation is based on this long-term
perspective.





11.
            SEGMENT
      INFORMATION





We have
identified three reportable segments:  Wholesale, Retail and
Military.  Wholesale includes sales of footwear and accessories to several
classifications of retailers, including sporting goods stores, outdoor specialty
stores, mail order catalogs, independent retailers, mass merchants, retail
uniform stores, and specialty safety shoe stores.  Retail includes all
sales from our stores and all sales in our Lehigh division, which includes sales
via shoemobiles to individual customers.  Military includes sales to the
U.S. Military.  The following is a summary of segment results for the
Wholesale, Retail, and Military segments.





(Unaudited)
                      
                      
                      (Unaudited)Three Months Ended
                      
                      
                      Nine Months EndedSeptember 30,
                      
                      
                      September 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009NET
      SALES:Wholesale
                      
                      $
                      59,396,157
                      
                      
                      $
                      54,455,334
                      
                      
                      $
                      135,805,817
                      
                      
                      $
                      128,388,832Retail
                      
                      
                      11,112,373
                      
                      
                      
                      11,477,763
                      
                      
                      
                      35,044,935
                      
                      
                      
                      37,537,253Military
                      
                      
                      4,251,714
                      
                      
                      
                      639,340
                      
                      
                      
                      15,211,532
                      
                      
                      
                      1,899,528Total
      Net Sales
                      
                      $
                      74,760,244
                      
                      
                      $
                      66,572,437
                      
                      
                      $
                      186,062,284
                      
                      
                      $
                      167,825,613GROSS
      MARGIN:Wholesale
                      
                      $
                      21,425,840
                      
                      
                      $
                      19,453,302
                      
                      
                      $
                      47,083,808
                      
                      
                      $
                      44,611,073Retail
                      
                      
                      5,102,592
                      
                      
                      
                      5,235,573
                      
                      
                      
                      15,875,230
                      
                      
                      
                      17,831,763Military
                      
                      
                      656,163
                      
                      
                      
                      26,911
                      
                      
                      
                      2,081,490
                      
                      
                      
                      83,110Total
      Gross Margin
                      
                      $
                      27,184,595
                      
                      
                      $
                      24,715,786
                      
                      
                      $
                      65,040,528
                      
                      
                      $
                      62,525,946





Segment
asset information is not prepared or used to assess segment
performance.


14





12.
            LONG-TERM
      DEBT





In March
2009, we amended the terms of our revolving credit facility with GMAC Commercial
Finance (“GMAC”) which was set to expire on January 5, 2010.  The size of
the facility was reduced to $85 million from $100 million and the maturity date
was extended to April 30, 2012.  The interest rates for the term of this
amendment were LIBOR plus 3.75% or prime plus 2.25%, at our option.  The
financing costs associated with this amendment totaled approximately $1.5
million.





In May
2010, we amended the terms of our revolving credit facility with GMAC to advance
$15 million to the Company under the existing revolving portion of its credit
facility to prepay amounts due under term loans with Laminar Direct Capital L.P.
and Whitebox Hedged High Yield Partners, L.P.  After the prepayment,
principal under the term loans total $11 million in the aggregate. The term
loans had an interest rate of 11.5% payable semi-annually over the five year
term of the notes. Principal repayment was due at maturity in May 2012. The
interest rate for the revolving portion of the Company’s credit facility was
LIBOR plus 3.75%.  In connection with this transaction, $0.2 million of
prepayment fees and $0.2 million of non-cash charges related to deferred
interest expense were incurred and have been reflected as a component of
interest expense.





Our
credit facilities contain certain restrictive covenants, which require us to
maintain a minimum fixed charge coverage ratio and limit the annual amount of
capital expenditures.  As of September 30, 2010, we were in compliance with
these restrictive covenants.





On
October 20, 2010, we entered into a new financing agreement with PNC bank
(“PNC”) to replace the existing revolving credit facility with GMAC.  In
addition, the new financing agreement with PNC was used to repay the remaining
balance of approximately $11 million under the term loans and the remaining
balance of $2.0 million under mortgage loans. The term of the new credit
facility is five years and the initial interest rate is generally LIBOR plus
1.75%.  In connection with this transaction, we expect to incur additional
interest expense of $1.3 million in the fourth quarter comprised of $0.3 million
of prepayment fees and $1.0 million of non-cash charges related to deferred
finance fees.





13.
            FINANCIAL
      INSTRUMENTS





The fair
values of cash, accounts receivable, other receivables and accounts payable
approximated their carrying values because of the short-term nature of these
instruments.  Accounts receivable consists primarily of amounts due from
our customers, net of allowances.  Other receivables consist primarily of
amounts due from employees (sales persons’ advances in excess of commissions
earned and employee travel advances); other customer receivables, net of
allowances; and expected insurance recoveries.  The carrying amount of the
mortgages and other short-term financing obligations also approximates fair
value, as they are comparable to the available financing in the marketplace
during the year.





The
carrying amount of our long-term debt as of September 30, 2010 not measured on
recurring basis and subject to fair value reporting is $53.4 million. 
Subsequent to September 30, 2010, the long-term debt was extinguished at its
carrying amount plus extinguishment costs of $0.3 million.  See Note 12 for
a full description of this transaction


15





14.
            RESTRUCTURING





During
the fourth quarter of 2009, we initiated a comprehensive series of actions to
reduce the operating cost structure and increase the operating efficiency of
both our wholesale and retail divisions.   These actions involved the
relocation of our wholesale division’s customer care function from Franklin, TN
to Nelsonville, OH; and the closing of underperforming mini-stores and trucks in
our retail division.  These charges were composed of severance and employee
benefits related costs, transition costs, and facility exit costs, which
includes facility shut down and lease contract termination costs.





The
schedule below summarizes the charges included in the accompanying consolidated
financial statements for the first nine months of 2010 for our wholesale and
retail divisions:




(Unaudited)Liability
                            
                            
                            
                            
                            
                            
                            
                            
                            LiabilityBeginning
                            
                            
                            
                            
                            
                            
                            
                            
                            EndingBalance
                            
                            
                            (Unaudited)
                            
                            
                            (Unaudited)
                            
                            
                            Balance12/31/2009
                            
                            
                            Expense
                            
                            
                            Payments
                            
                            
                            9/30/2010WholesaleSeverance
      and employee benefits
                            
                            $
                            148,080
                            
                            
                            $
                            -
                            
                            
                            $
                            148,080
                            
                            
                            $
                            -Transition
      costs
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -Facility
      exit costs
                            
                            
                            31,475
                            
                            
                            
                            -
                            
                            
                            
                            31,475
                            
                            
                            
                            -Total
      Wholesale
                            
                            $
                            179,555
                            
                            
                            $
                            -
                            
                            
                            $
                            179,555
                            
                            
                            $
                            -RetailSeverance
      and employee benefits
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -Transition
      costs
                            
                            
                            36,091
                            
                            
                            
                            -
                            
                            
                            
                            36,091
                            
                            
                            
                            -Facility
      exit costs
                            
                            
                            160,717
                            
                            
                            
                            -
                            
                            
                            
                            153,429
                            
                            
                            
                            7,288Total
      Retail
                            
                            $
                            196,808
                            
                            
                            $
                            -
                            
                            
                            $
                            189,520
                            
                            
                            $
                            7,288Total
                            
                            $
                            376,363
                            
                            
                            $
                            -
                            
                            
                            $
                            369,075
                            
                            
                            $
                            7,288




The
liability ending balance at December 31, 2009 and September 30, 2010 is included
in our condensed consolidated balance sheet under other accrued
expenses.


16





ITEM
2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





RESULTS
OF OPERATIONS





The
following table sets forth, for the periods indicated, information derived from
our Interim Unaudited Condensed Consolidated Financial Statements, expressed as
a percentage of net sales.  The discussion that follows the table should be
read in conjunction with our Interim Unaudited Condensed Consolidated Financial
Statements.





Three
      Months Ended
                  
                  
                  Nine
      Months EndedSeptember
      30,
                  
                  
                  September
      30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Net
      Sales
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %Cost
      Of Goods Sold
                  
                  
                  63.6
                  %
                  
                  
                  62.9
                  %
                  
                  
                  65.0
                  %
                  
                  
                  62.7
                  %Gross
      Margin
                  
                  
                  36.4
                  %
                  
                  
                  37.1
                  %
                  
                  
                  35.0
                  %
                  
                  
                  37.3
                  %Selling,
      General and Administrative Expenses
                  
                  
                  25.6
                  %
                  
                  
                  27.9
                  %
                  
                  
                  28.7
                  %
                  
                  
                  33.8
                  %Income
      From Operations
                  
                  
                  10.8
                  %
                  
                  
                  9.2
                  %
                  
                  
                  6.3
                  %
                  
                  
                  3.5
                  %





Three
Months Ended September 30, 2010 Compared to Three Months Ended September 30,
2009





Net sales.Net sales
for the three months ended September 30, 2010 were $74.8 million compared to
$66.6 million for the same period in 2009.  Wholesale sales for the three
months ended September 30, 2010 were $59.4 million compared to $54.5 million for
the same period in 2009.  The $4.9 million increase in wholesale sales was
the result of increased sales in our work footwear, duty footwear and apparel
categories, partially offset by decreases in our outdoor footwear
category.  Retail sales for the three months ended September 30, 2010 were
$11.1 million compared to $11.5 million for the same period in 2009. 
Military segment sales for the three months ended September 30, 2010, were $4.3
million, compared to $0.6 million in the same period in 2009.  Shipments in
2010 were under the $29.0 million contract, issued in July 2009.





Gross margin.Gross
margin for the three months ended September 30, 2010 was $27.2 million, or 36.4%
of net sales, compared to $24.7 million, or 37.1% of net sales, in the same
period last year.  Wholesale gross margin for the three months ended
September 30, 2010 was $21.4 million, or 36.1% of net sales, compared to $19.5
million, or 35.7% of net sales, in the same period last year.  Retail gross
margin for the three months ended September 30, 2010 was $5.1 million, or 45.9%
of net sales, compared to $5.2 million, or 45.6% of net sales, for the same
period in 2009.  Military gross margin for the three months ended September
30, 2010 was $0.7 million, or 15.4% of net sales, compared to less than $0.1
million, or 4.2% of net sales, for the same period in 2009.  The shipments
in 2010 under the $29.0 million contract have a higher gross margin than
shipments under previous contracts.


17





SG&A expenses.SG&A expenses were $19.2 million, or 25.6% of net sales, for the
three months ended September 30, 2010, compared to $18.6 million, or 27.9% of
net sales for the same period in 2009.  The increase primarily reflects
increases in incentive accruals of $1.2 million and freight expenses of $0.2
million, partially offset by decreases in compensation and benefits of $0.3
million, bad debt expense of $0.1 million and Lehigh store expenses of $0.2
million.





Interest expense.Interest expense was $1.0 million in the three months ended September 30,
2010, compared to $2.0 million for the same period in the prior year.  The
decrease of $1.0 million resulted from a reduction in average borrowings
compared to the same period last year.





Income taxes.Income
tax expense for the three months ended September 30, 2010 was $2.6 million,
compared to $1.6 million for the same period a year ago.  We provided for
income taxes at estimated effective tax rates of 37.6% and 36% for the
three-months ended September 30, 2010 and 2009, respectively.  During the
three-month period ended September 30, 2010, we recognized a decrease to income
tax expense of $0.1 million related to the filing of our 2009 Federal income tax
return which decreased our effective tax rate to 36%.  During the
three-month period ended September 30, 2009, we recognized an increase to income
tax expense of $0.04 million related to the filing of our 2008 Federal income
tax return which increased our effective tax rate to 36.9%.





Nine
Months Ended September 30, 2010 Compared to Nine Months Ended September 30,
2009





Net sales.Net sales
for the nine months ended September 30, 2010 were $186.1 million compared to
$167.8 million for the same period in 2009.  Wholesale sales for the nine
months ended September 30, 2010 were $135.8 million compared to $128.4 million
for the same period in 2009.  The $7.4 million increase in wholesale sales
was primarily the result of increased sales in our work footwear category.
Retail sales for the nine months ended September 30, 2010 were $35.1 million
compared to $37.5 million for the same period in 2009.  The $2.4 million
decrease in retail sales resulted from plant closings and layoffs in the
manufacturing sector as the current economic conditions have impacted a
significant portion of our retail customer base.  In addition, retail sales
were negatively impacted by our ongoing transition to more internet driven
transactions and the decision to remove a portion of our Lehigh mobile stores
from operations which resulted in reductions in SG&A expenses. 
Military segment sales for the nine months ended September 30, 2010, were $15.2
million, compared to $1.9 million in the same period in 2009.  Shipments in
2010 were under the $29.0 million contract, issued in July 2009.





Gross margin.Gross
margin for the nine months ended September 30, 2010 was $65.0 million, or 35.0%
of net sales, compared to $62.5 million, or 37.3% of net sales, in the same
period last year.  Wholesale gross margin for the nine months ended
September 30, 2010 was $47.1 million, or 34.7% of net sales, compared to $44.6
million, or 34.7% of net sales, in the same period last year.  Retail gross
margin for the nine months ended September 30, 2010 was $15.9 million, or 45.3%
of net sales, compared to $17.8 million, or 47.5% of net sales, for the same
period in 2009.  The 220 basis point decrease reflects reduced sales via
our mobile stores, which carry the highest gross margin in our retail
business.  Military gross margin for the nine months ended September 30,
2010 was $2.1 million, or 13.7% of net sales, compared to $0.1 million or 4.4%
of net sales for the same period in 2009.  The shipments in 2010 under the
$29.0 million contract have a higher gross margin than shipments under previous
contracts.





SG&A expenses.SG&A expenses were $53.3 million, or 28.7% of net sales, for the nine
months ended September 30, 2010, compared to $56.6 million, or 33.8% of net
sales for the same period in 2009.  The decrease primarily reflects
decreases in compensation and benefits of $2.2 million, bad debt expense of $0.8
million, advertising of $0.4 million and Lehigh store expenses of $0.7 million,
partially offset by increases in incentive accruals of $1.2
million.


18





Interest expense.Interest expense was $4.7 million in the nine months ended September 30,
2010, compared to $5.7 million for the same period in the prior year.  The
decrease of $1.0 million resulted from a reduction in average borrowings
compared to the same period last year partially offset by fees of $0.9 million
associated with the early repayment of a portion of the company’s term
loans.





Income taxes.Income
tax expense for the nine months ended September 30, 2010 was $2.6 million,
compared to $0.2 million for the same period a year ago.  We provided for
income taxes at estimated effective tax rates of 37.6% and 36% for the
nine-months ended September 30, 2010 and 2009, respectively.  During the
nine-month period ended September 30, 2010, we recognized a decrease to income
tax expense of $0.1 million related to the filing of our 2009 Federal income tax
return which decreased our effective tax rate to 36%.  During the
nine-month period ended September 30, 2009, we recognized an increase to income
tax expense of $0.04 million related to the filing of our 2008 Federal income
tax return which increased our effective tax rate to 44.2%.





Liquidity
and Capital Resources





Our
principal sources of liquidity have been our income from operations, borrowings
under our credit facility and other indebtedness.





Over the
last several years our principal uses of cash have been for working capital and
capital expenditures to support our growth.  Our working capital consists
primarily of trade receivables and inventory, offset by accounts payable and
accrued expenses.  Our working capital fluctuates throughout the year as a
result of our seasonal business cycle and business expansion and is generally
lowest in the months of January through March of each year and highest during
the months of May through October of each year.  We typically utilize our
revolving credit facility to fund our seasonal working capital
requirements.  As a result, balances on our revolving credit facility will
fluctuate significantly throughout the year.  Our capital expenditures
relate primarily to projects relating to our property, merchandising fixtures,
molds and equipment associated with our manufacturing operations, retail sales
fleet and for information technology.  Capital expenditures were $3.7
million for the first nine months of 2010, compared to $4.0 million for the same
period in 2009. Capital expenditures for all of 2010 are anticipated to be
approximately $4.5 million.





In March
2009, we amended the terms of our revolving credit facility with GMAC Commercial
Finance (“GMAC”) which was set to expire on January 5, 2010.  The size of
the facility was reduced to $85 million from $100 million and the maturity date
was extended to April 30, 2012.  The interest rates for the term of this
amendment were LIBOR plus 3.75% or prime plus 2.25%, at our option.  The
financing costs associated with this amendment totaled approximately $1.5
million.





In May
2010, we amended the terms of our revolving credit facility with GMAC to advance
$15 million to the Company under the existing revolving portion of its credit
facility to prepay amounts due under term loans with Laminar Direct Capital L.P.
and Whitebox Hedged High Yield Partners, L.P.  After the prepayment,
principal under the term loans total $11 million in the aggregate. The term
loans had an interest rate of 11.5% payable semi-annually over the five year
term of the notes. Principal repayment was due at maturity in May 2012. The
interest rate for the revolving portion of the Company’s credit facility was
LIBOR plus 3.75%.  In connection with this transaction, $0.2 million of
prepayment fees and $0.2 million of non-cash charges related to deferred
interest expense were incurred and have been reflected as a component of
interest expense.


19





On
October 20, 2010, we entered into a new financing agreement with PNC bank
(“PNC”) to replace the existing revolving credit facility with GMAC.  In
addition, the new financing agreement with PNC was used to repay the remaining
balance of approximately $11 million under the term loans and the remaining
balance of $2.0 million under mortgage loans. The term of the new credit
facility is five years and the initial interest rate is generally LIBOR plus
1.75%.  In connection with this transaction, we expect to incur additional
interest expense of $1.3 million in the fourth quarter comprised of $0.3 million
of prepayment fees and $1.0 million of non-cash charges related to deferred
finance fees.





The total
amount available under our revolving credit facility is subject to a borrowing
base calculation based on various percentages of accounts receivable and
inventory.  As of September 30, 2010, we had $40.3 million in borrowings
under this facility and total capacity of $69.6 million.  Our credit
facilities contain certain restrictive covenants, which require us to maintain a
minimum fixed charge coverage ratio and limit the annual amount of capital
expenditures.  As of September 30, 2010, we were in compliance with these
restrictive covenants.





We
believe that our new credit facilities coupled with cash generated from
operations will provide sufficient liquidity to fund our operations for at least
the next twelve months.  Our continued liquidity, however, is contingent
upon future operating performance, cash flows and our ability to meet financial
covenants under our credit facilities.





In May
2010, the Company completed a public offering of 1.8 million shares of common
stock at a price of $8.40 per share.  We received net proceeds from the
offering of $14.1 million after deducting $0.9 million in underwriting discounts
and $0.1 million in expenses. The proceeds were used to prepay amounts due under
term loans with Laminar Direct Capital L.P. and Whitebox Hedged High Yield
Partners, L.P.  In connection with this transaction, $0.2 million of
prepayment fees and $0.2 million of non-cash charges related to deferred
interest expense were incurred and have been reflected as a component of
interest expense.





Operating Activities.Cash used in operating activities totaled $6.0 million for the nine
months ended September 30, 2010, compared to cash provided by operating
activities of $9.5 million in the same period of 2009.  Cash used in
operating activities for the nine months ended September 30, 2010 was primarily
impacted by a seasonal increase in accounts receivable and inventory partially
offset by an increase in accounts payable.  Cash provided by operating
activities for the nine months ended September 30, 2009 was primarily impacted
by a reduction in accounts receivable and inventory, which was the result of
lower than normal sales during the period and unusually higher inventory levels
at the end of 2008.





Investing Activities.Cash used in investing activities was $3.7 million for the nine months
ended September 30, 2010, compared to $4.0 million in the same period of
2009.  Cash used in investing activities reflects an investment in
property, plant and equipment of $3.7 million in 2010 and $4.0 million in 2009.
Our 2010 and 2009 expenditures primarily relate to investments in molds and
equipment associated with our manufacturing operations and for information
technology.





Financing Activities.Cash provided by financing activities for the nine months ended September
30, 2010 was $11.9 million and reflects $14.1 million of proceeds from the
aforementioned issuance of common stock, an increase in net borrowings under the
revolving credit facility of $27.2 million and repayments on long-term debt of
$29.4 million. Cash used in financing activities for the nine months ended
September 30, 2009 was $5.8 million and reflects a decrease in net borrowings
under the revolving credit facility of $3.9 million, debt financing costs
associated with the amendment of our credit facility with GMAC of $1.5 million
and repayments of long-term debt of $0.4 million.


20





Inflation





We cannot
determine the precise effects of inflation; however, inflation continues to have
an influence on the cost of materials, salaries, and employee benefits.  We
attempt to offset the effects of inflation through increased selling prices,
productivity improvements, and reduction of costs.





Critical
Accounting Policies and Estimates





“Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
discusses our interim condensed consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States of America.  The preparation of these interim condensed
consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the interim
condensed consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period.  A summary of our significant
accounting policies is included in the Notes to Consolidated Financial
Statements included in the Annual Report on Form 10-K for the year ended
December 31, 2009.





Our
management regularly reviews our accounting policies to make certain they are
current and also to provide readers of the interim condensed consolidated
financial statements with useful and reliable information about our operating
results and financial condition.  These include, but are not limited to,
matters related to accounts receivable, inventories, pension benefits and income
taxes.  Implementation of these accounting policies includes estimates and
judgments by management based on historical experience and other factors
believed to be reasonable.  This may include judgments about the carrying
value of assets and liabilities based on considerations that are not readily
apparent from other sources.  Actual results may differ from these
estimates under different assumptions or conditions.





Our
management believes the following critical accounting policies are most
important to the portrayal of our financial condition and results of operations
and require more significant judgments and estimates in the preparation of our
interim condensed consolidated financial statements.





Revenue
recognition





Revenue
principally consists of sales to customers, and, to a lesser extent, license
fees. Revenue is recognized when the risk and title passes to the customer,
while license fees are recognized when earned.  Customer sales are recorded
net of allowances for estimated returns, trade promotions and other discounts,
which are recognized as a deduction from sales at the time of sale.





Accounts
receivable allowances





Management
maintains allowances for uncollectible accounts for estimated losses resulting
from the inability of our customers to make required payments.  If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.  The allowance for uncollectible accounts is calculated based on
the relative age and size of trade receivable balances.


21





Sales
returns and allowances





We record
a reduction to gross sales based on estimated customer returns and
allowances.  These reductions are influenced by historical experience,
based on customer returns and allowances.  The actual amount of sales
returns and allowances realized may differ from our estimates.  If we
determine that sales returns or allowances should be either increased or
decreased, then the adjustment would be made to net sales in the period in which
such a determination is made.





Inventories





Management
identifies slow moving or obsolete inventories and estimates appropriate loss
provisions related to these inventories.  Historically, these loss
provisions have not been significant as the vast majority of our inventories are
considered saleable, and we have been able to liquidate slow moving or obsolete
inventories through our factory outlet stores or through various discounts to
customers.  Should management encounter difficulties liquidating slow
moving or obsolete inventories, additional provisions may be necessary. 
Management regularly reviews the adequacy of our inventory reserves and makes
adjustments to them as required.





Intangible
assets





Intangible
assets, including goodwill, trademarks and patents are reviewed for impairment
annually, and more frequently, if necessary.  We perform such testing of
goodwill and indefinite-lived intangible assets in the fourth quarter of each
year or as events occur or circumstances change that would more likely than not
reduce the fair value of the asset below its carrying amount.





In
assessing whether indefinite-lived intangible assets are impaired, we must make
certain estimates and assumptions regarding future cash flows, long-term growth
rates of our business, operating margins, weighted average cost of capital and
other factors such as discount rates, royalty rates, cost of capital, and market
multiples to determine the fair value of our assets.  These estimates and
assumptions require management’s judgment, and changes to these estimates and
assumptions could materially affect the determination of fair value and/or
impairment for each of our other indefinite-lived intangible assets. 
Future events could cause us to conclude that indications of intangible asset
impairment exist.  Impairment may result from, among other things,
deterioration in the performance of our business, adverse market conditions,
adverse changes in applicable laws and regulations, competition, or the sale or
disposition of a reporting segment.  Any resulting impairment loss could
have a material adverse impact on our financial condition and results of
operations.





Pension
benefits





Accounting
for pensions involves estimating the cost of benefits to be provided well into
the future and attributing that cost over the time period each employee
works.  To accomplish this, extensive use is made of assumptions about
inflation, investment returns, mortality, turnover, medical costs and discount
rates.  These assumptions are reviewed annually.





Pension
expenses are determined by actuaries using assumptions concerning the discount
rate, expected return on plan assets and rate of compensation increase.  An
actuarial analysis of benefit obligations and plan assets is determined as of
December 31 each year.





The
funded status of our plans and reconciliation of accrued pension cost is
determined annually as of December 31.  Further discussion of our pension
plan and related assumptions is included in Note 10, “Retirement Plans,” to the
unaudited condensed consolidated financial statements for the quarterly period
ended September 30, 2010. Actual results would be different using other
assumptions.  Management records an accrual for pension costs associated
with our sponsored non-contributory defined benefit pension plan covering our
non-union workers.  Future adverse changes in market conditions or poor
operating results of underlying plan assets could result in losses or a higher
accrual.  At December 31, 2005, we froze the non-contributory defined
benefit pension plan for all non-U.S. territorial employees.


22





Income
taxes





Management
has recorded a valuation allowance to reduce its deferred tax assets for a
portion of state and local income tax net operating losses that it believes may
not be realized.  We have considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for a
valuation allowance; however, in the event we were to determine that we would
not be able to realize all or part of our net deferred tax assets in the future,
an adjustment to the deferred tax assets would be charged to income in the
period such determination was made.





SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.





Except
for the historical information contained herein, the matters discussed in this
Quarterly Report on Form 10-Q include certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby.   Those
statements include, but may not be limited to, all statements regarding our and
management’s intent, belief, and expectations, such as statements concerning our
future profitability and our operating and growth strategy.  Words such as
“believe,” “anticipate,” “expect,” “will,” “may,” “should,” “intend,” “plan,”
“estimate,” “predict,” “potential,” “continue,” “likely” and similar expressions
are intended to identify forward-looking statements.  Investors are
cautioned that all forward-looking statements contained in this Quarterly Report
on Form 10-Q and in other statements we make involve risks and uncertainties
including, without limitation, the factors set forth under the caption “Risk
Factors” included in our Annual Report on Form 10-K for the year ended December
31, 2009, and other factors detailed from time to time in our other filings with
the Securities and Exchange Commission.  One or more of these factors have
affected, and in the future could affect our businesses and financial results
and could cause actual results to differ materially from plans and
projections.  Although we believe that the assumptions underlying the
forward-looking statements contained herein are reasonable, there can be no
assurance that any of 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 us
or any other person that our objectives and plans will be achieved.  All
forward-looking statements made in this Quarterly Report on Form 10-Q are based
on information presently available to our management.  We assume no
obligation to update any forward-looking statements.


23


ITEM
3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





There
have been no material changes since December 31, 2009.





ITEM
4 – CONTROLS AND PROCEDURES





Disclosure Controls and
Procedures.  Disclosure controls and procedures are controls and
other procedures that are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms.  Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information we are required to
disclose in the reports that we file or submit under the Exchange Act is
accumulated and communicated to our management as appropriate to allow timely
decisions regarding required disclosure.





As of the
end of the period covered by this report, our management, with the participation
of our chief executive officer and chief financial officer, carried out an
evaluation of the effectiveness of our disclosure controls and procedures
pursuant to Rule 13a-15 promulgated under the Exchange Act.  Based upon
this evaluation, our chief executive officer and our chief financial officer
concluded that our disclosure controls and procedures were (1) designed to
ensure that material information relating to our Company is accumulated and made
known to our management, including our chief executive officer and chief
financial officer, in a timely manner, particularly during the period in which
this report was being prepared, and (2) effective, in that they provide
reasonable assurance that information we are required to disclose in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and
forms.





Management
believes, however, that a controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the controls
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a Company have
been detected.





Internal Controls. 
There has been no change in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act)
during our fiscal quarter ended September 30, 2010, that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.


24


PART
II — OTHER INFORMATION





ITEM
1 - LEGAL PROCEEDINGS





None





ITEM
1A - RISK FACTORS





There
have been no material changes to our risk factors as disclosed in Item 1A.
“Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2009.





ITEM
2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





None





ITEM
3 - DEFAULTS UPON SENIOR SECURITIES





None





ITEM
4 - RESERVED





ITEM
5 - OTHER INFORMATION





None





ITEM
6 - EXHIBITS





EXHIBIT
                    
                    EXHIBITNUMBER
                    
                    DESCRIPTION31
      (a)*
                    
                    Certification
      pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the Chief
      Executive Officer.31
      (b)*
                    
                    Certification
      pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a) of the Chief
      Financial Officer.32
      (a)+
                    
                    Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002, of the Chief Executive
      Officer.32
      (b)+
                    
                    Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002, of the Chief Financial
      Officer.





*
            Filed
      with this report.


+
            Furnished
      with this report.


25


SIGNATURE





Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.





Rocky
      Brands, Inc.Date:    October
      28, 2010
                /s/ James E. McDonaldJames
      E. McDonald, Executive Vice President andChief
      Financial Officer*





*
            In
      his capacity as Executive Vice President and Chief Financial Officer, Mr.
      McDonald is duly authorized to sign this report on behalf of the
      Registrant.


26