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 June 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.  YES x NO
 ̈





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 company x


(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 ̈ NO
x





As of
July 29, 2010, 7,406,787 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 Sheets June 30, 2010 and 2009 (Unaudited), and
      December 31, 2009
                                  3Condensed
      Consolidated Statements of Operations for the Three and Six Months Ended
      June 30, 2010 and 2009 (Unaudited)
                                  4Condensed
      Consolidated Statements of Cash Flows for the Six Months Ended June 30,
      2010 and 2009 (Unaudited)
                                  5Notes
      to the Interim Unaudited Condensed Consolidated Financial Statements for
      the Three-Month and Six-Month Periods Ended June 30, 2010 and
      2009
                                  6 –
      15Item
      2.
                                  Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                  16
      – 22Item
      3.
                                  Quantitative
      and Qualitative Disclosures About Market Risk
                                  23Item
      4.
                                  Controls
      and Procedures
                                  23PART
      II. OTHER INFORMATIONItem
      1.
                                  Legal
      Proceedings
                                  24Item
      1A.
                                  Risk
      Factors
                                  24Item
      2.
                                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                                  24Item
      3.
                                  Defaults
      Upon Senior Securities
                                  24Item
      4.
                                  Reserved
                                  24Item
      5.
                                  Other
      Information
                                  24Item
      6.
                                  Exhibits
                                  24SIGNATURE
                                  25




2





PART
I - FINANCIAL INFORMATION


ITEM
1 - FINANCIAL STATEMENTS





ROCKY
BRANDS, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





June 30, 2010
                                  
                                  
                                  December 31, 2009
                                  
                                  
                                  June 30, 2009(Unaudited)
                                  
                                  
                                  
                                  
                                  
                                  (Unaudited)ASSETS:CURRENT
      ASSETS:Cash
      and cash equivalents
                                  
                                  $
                                  3,166,143
                                  
                                  
                                  $
                                  1,797,093
                                  
                                  
                                  $
                                  2,865,461Trade
      receivables – net
                                  
                                  
                                  40,782,470
                                  
                                  
                                  
                                  45,831,558
                                  
                                  
                                  
                                  44,454,476Other
      receivables
                                  
                                  
                                  1,182,335
                                  
                                  
                                  
                                  1,476,643
                                  
                                  
                                  
                                  1,924,195Inventories
                                  
                                  
                                  61,811,667
                                  
                                  
                                  
                                  55,420,467
                                  
                                  
                                  
                                  79,286,477Deferred
      income taxes
                                  
                                  
                                  1,475,695
                                  
                                  
                                  
                                  1,475,695
                                  
                                  
                                  
                                  2,167,966Prepaid
      and refundable income taxes
                                  
                                  
                                  325,493
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2,413,523Prepaid
      expenses
                                  
                                  
                                  1,876,888
                                  
                                  
                                  
                                  1,309,138
                                  
                                  
                                  
                                  1,983,480Total
      current assets
                                  
                                  
                                  110,620,691
                                  
                                  
                                  
                                  107,310,594
                                  
                                  
                                  
                                  135,095,578FIXED
      ASSETS – net
                                  
                                  
                                  22,436,535
                                  
                                  
                                  
                                  22,669,876
                                  
                                  
                                  
                                  23,777,945IDENTIFIED
      INTANGIBLES
                                  
                                  
                                  30,512,822
                                  
                                  
                                  
                                  30,516,910
                                  
                                  
                                  
                                  30,769,248OTHER
      ASSETS
                                  
                                  
                                  2,112,475
                                  
                                  
                                  
                                  2,892,683
                                  
                                  
                                  
                                  3,609,296TOTAL
      ASSETS
                                  
                                  $
                                  165,682,523
                                  
                                  
                                  $
                                  163,390,063
                                  
                                  
                                  $
                                  193,252,067LIABILITIES
      AND SHAREHOLDERS' EQUITY:CURRENT
      LIABILITIES:Accounts
      payable
                                  
                                  $
                                  13,415,750
                                  
                                  
                                  $
                                  6,781,534
                                  
                                  
                                  $
                                  8,504,099Current
      maturities – long term debt
                                  
                                  
                                  528,434
                                  
                                  
                                  
                                  511,870
                                  
                                  
                                  
                                  495,976Accrued
      expenses:Salaries
      and wages
                                  
                                  
                                  1,080,435
                                  
                                  
                                  
                                  343,345
                                  
                                  
                                  
                                  830,733Co-op
      advertising
                                  
                                  
                                  259,779
                                  
                                  
                                  
                                  460,190
                                  
                                  
                                  
                                  522,670Interest
                                  
                                  
                                  181,502
                                  
                                  
                                  
                                  471,091
                                  
                                  
                                  
                                  459,483Income
      taxes payable
                                  
                                  
                                  -
                                  
                                  
                                  
                                  26,242
                                  
                                  
                                  
                                  -Taxes
      – other
                                  
                                  
                                  535,101
                                  
                                  
                                  
                                  440,223
                                  
                                  
                                  
                                  502,032Commissions
                                  
                                  
                                  493,086
                                  
                                  
                                  
                                  487,340
                                  
                                  
                                  
                                  339,379Current
      portion of pension funding
                                  
                                  
                                  700,000
                                  
                                  
                                  
                                  700,000
                                  
                                  
                                  
                                  -Other
                                  
                                  
                                  2,216,962
                                  
                                  
                                  
                                  2,764,783
                                  
                                  
                                  
                                  2,351,937Total
      current liabilities
                                  
                                  
                                  19,411,049
                                  
                                  
                                  
                                  12,986,618
                                  
                                  
                                  
                                  14,006,309LONG
      TERM DEBT – less current maturities
                                  
                                  
                                  36,370,863
                                  
                                  
                                  
                                  55,079,776
                                  
                                  
                                  
                                  87,023,125DEFERRED
      INCOME TAXES
                                  
                                  
                                  9,071,639
                                  
                                  
                                  
                                  9,071,639
                                  
                                  
                                  
                                  9,438,921DEFERRED
      PENSION LIABILITY
                                  
                                  
                                  3,687,075
                                  
                                  
                                  
                                  3,589,875
                                  
                                  
                                  
                                  3,860,920DEFERRED
      LIABILITIES
                                  
                                  
                                  187,973
                                  
                                  
                                  
                                  184,481
                                  
                                  
                                  
                                  195,264TOTAL
      LIABILITIES
                                  
                                  
                                  68,728,599
                                  
                                  
                                  
                                  80,912,389
                                  
                                  
                                  
                                  114,524,539COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITY:Common
      stock, no par value;25,000,000
      shares authorized; issued and outstanding June 30, 2010 - 7,406,787;
      December 31, 2009 - 5,576,465 and June 30, 2009 -
5,547,215
                                  
                                  
                                  68,931,586
                                  
                                  
                                  
                                  54,598,104
                                  
                                  
                                  
                                  54,384,172Accumulated
      other comprehensive loss
                                  
                                  
                                  (3,037,242
                                  )
                                  
                                  
                                  (3,217,144
                                  )
                                  
                                  
                                  (3,062,448
                                  )Retained
      earnings
                                  
                                  
                                  31,059,580
                                  
                                  
                                  
                                  31,096,714
                                  
                                  
                                  
                                  27,405,804Total
      shareholders' equity
                                  
                                  
                                  96,953,924
                                  
                                  
                                  
                                  82,477,674
                                  
                                  
                                  
                                  78,727,528TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                                  
                                  $
                                  165,682,523
                                  
                                  
                                  $
                                  163,390,063
                                  
                                  
                                  $
                                  193,252,067




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
                
                
                Six Months EndedJune 30,
                
                
                June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009NET
      SALES
                
                $
                55,223,054
                
                
                $
                51,188,615
                
                
                $
                111,302,040
                
                
                $
                101,253,176COST
      OF GOODS SOLD
                
                
                36,123,970
                
                
                
                33,470,943
                
                
                
                73,446,107
                
                
                
                63,443,016GROSS
      MARGIN
                
                
                19,099,084
                
                
                
                17,717,672
                
                
                
                37,855,933
                
                
                
                37,810,160SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                
                
                16,163,354
                
                
                
                18,119,173
                
                
                
                34,188,041
                
                
                
                38,065,301INCOME
      (LOSS) FROM OPERATIONS
                
                
                2,935,730
                
                
                
                (401,501
                )
                
                
                3,667,892
                
                
                
                (255,141
                )OTHER
      INCOME AND (EXPENSES):Interest
      expense, net
                
                
                (2,121,552
                )
                
                
                (1,936,490
                )
                
                
                (3,766,143
                )
                
                
                (3,710,420
                )Other
      – net
                
                
                3,432
                
                
                
                158,023
                
                
                
                40,117
                
                
                
                33,457Total
      other - net
                
                
                (2,118,120
                )
                
                
                (1,778,467
                )
                
                
                (3,726,026
                )
                
                
                (3,676,963
                )INCOME
      (LOSS) BEFORE INCOME TAXES
                
                
                817,610
                
                
                
                (2,179,968
                )
                
                
                (58,134
                )
                
                
                (3,932,104
                )INCOME
      TAX EXPENSE (BENEFIT)
                
                
                294,000
                
                
                
                (785,000
                )
                
                
                (21,000
                )
                
                
                (1,416,000
                )NET
      INCOME (LOSS)
                
                $
                523,610
                
                
                $
                (1,394,968
                )
                
                $
                (37,134
                )
                
                $
                (2,516,104
                )NET
      INCOME (LOSS) PER SHAREBasic
                
                $
                0.08
                
                
                $
                (0.25
                )
                
                $
                (0.01
                )
                
                $
                (0.45
                )Diluted
                
                $
                0.08
                
                
                $
                (0.25
                )
                
                $
                (0.01
                )
                
                $
                (0.45
                )WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDINGBasic
                
                
                6,535,812
                
                
                
                5,547,215
                
                
                
                6,072,045
                
                
                
                5,546,880Diluted
                
                
                6,557,289
                
                
                
                5,547,215
                
                
                
                6,072,045
                
                
                
                5,546,880





See notes
to the interim unaudited condensed consolidated financial
statements.


4


ROCKY
BRANDS, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





Six Months EndedJune
      30,2010
                
                
                2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                
                $
                (37,134
                )
                
                $
                (2,516,104
                )Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                
                
                2,808,696
                
                
                
                3,175,594Deferred
      pension and other
                
                
                280,594
                
                
                
                255,479Loss
      on disposal of fixed assets
                
                
                15,100
                
                
                
                8,468Stock
      compensation expense
                
                
                129,900
                
                
                
                134,108Change
      in assets and liabilitiesReceivables
                
                
                5,343,396
                
                
                
                15,149,057Inventories
                
                
                (6,391,200
                )
                
                
                (8,984,303
                )Other
      current assets
                
                
                (893,243
                )
                
                
                (2,866,364
                )Other
      assets
                
                
                930,208
                
                
                
                355,705Accounts
      payable
                
                
                6,635,696
                
                
                
                (1,392,390
                )Accrued
      and other liabilities
                
                
                (226,349
                )
                
                
                102,875Net
      cash provided by operating activities
                
                
                8,595,664
                
                
                
                3,422,125CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of fixed assets
                
                
                (2,589,880
                )
                
                
                (3,114,629
                )Investment
      in trademarks and patents
                
                
                (19,327
                )
                
                
                (39,610
                )Proceeds
      from sale of fixed assets
                
                
                21,360
                
                
                
                19,323Net
      cash used in investing activities
                
                
                (2,587,847
                )
                
                
                (3,134,916
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from revolving credit facility
                
                
                126,138,795
                
                
                
                117,213,842Repayments
      of revolving credit facility
                
                
                (115,579,265
                )
                
                
                (117,197,776
                )Debt
      financing costs
                
                
                (150,000
                )
                
                
                (1,512,500
                )Repayments
      of long-term debt
                
                
                (29,251,879
                )
                
                
                (236,627
                )Issuance
      of common stock, net of issuance costs
                
                
                14,123,612
                
                
                
                -Proceeds
      from exercise of stock options
                
                
                79,970
                
                
                
                -Net
      cash used in financing activities
                
                
                (4,638,767
                )
                
                
                (1,733,061
                )INCREASE
      (DECREASE) IN CASH AND CASH EQUIVALENTS
                
                
                1,369,050
                
                
                
                (1,445,852
                )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                
                
                1,797,093
                
                
                
                4,311,313CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                
                $
                3,166,143
                
                
                $
                2,865,461





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
SIX-MONTH PERIOD ENDED JUNE 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 six-month periods ended June 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 (loss) are shown below:





(Unaudited)
                    
                    
                    (Unaudited)Three Months Ended
                    
                    
                    Six Months EndedJune
      30,
                    
                    
                    June
      30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Net
      income (loss)
                    
                    $
                    523,610
                    
                    
                    $
                    (1,394,968
                    )
                    
                    $
                    (37,134
                    )
                    
                    $
                    (2,516,104
                    )Other
      comprehensive income:Amortization
      of unrecognized transition obligation, service cost and net
      loss
                    
                    
                    89,951
                    
                    
                    
                    79,883
                    
                    
                    
                    179,902
                    
                    
                    
                    159,767Total
      comprehensive income (loss)
                    
                    $
                    613,561
                    
                    
                    $
                    (1,315,085
                    )
                    
                    $
                    142,768
                    
                    
                    $
                    (2,356,337
                    )





2.
            TRADE
      RECEIVABLES





Trade
receivables are presented net of the related allowance for uncollectible
accounts of approximately $951,000, $1,178,000 and $1,793,000 at June 30, 2010,
December 31, 2009 and June 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:





June 30,
                  
                  
                  December 31,
                  
                  
                  June 30,2010
                  
                  
                  2009
                  
                  
                  2009(Unaudited)
                  
                  
                  
                  
                  
                  (Unaudited)Raw
      materials
                  
                  $
                  10,987,932
                  
                  
                  $
                  5,438,055
                  
                  
                  $
                  9,560,424Work-in-process
                  
                  
                  581,874
                  
                  
                  
                  497,914
                  
                  
                  
                  673,914Finished
      goods
                  
                  
                  50,288,419
                  
                  
                  
                  49,522,542
                  
                  
                  
                  69,104,239Reserve
      for obsolescence or lower of cost or market
                  
                  
                  (46,558
                  )
                  
                  
                  (38,044
                  )
                  
                  
                  (52,100
                  )Total
                  
                  $
                  61,811,667
                  
                  
                  $
                  55,420,467
                  
                  
                  $
                  79,286,477





4.
            SUPPLEMENTAL
      CASH FLOW INFORMATION





Supplemental
cash flow information is as follows:





(Unaudited)Six Months EndedJune 30,2010
                  
                  
                  2009Interest
                  
                  $
                  3,282,283
                  
                  
                  $
                  3,345,363Federal,
      state and local income taxes, net of refunds
                  
                  $
                  331,181
                  
                  
                  $
                  928,666Fixed
      asset purchases in accounts payable
                  
                  $
                  150,054
                  
                  
                  $
                  139,283




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 six-month periods ended June 30, 2010
and 2009 is as follows:





(Unaudited)
                  
                  
                  (Unaudited)Three Months Ended
                  
                  
                  Six Months EndedJune 30,
                  
                  
                  June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Weighted
      average shares outstanding
                  
                  
                  6,535,812
                  
                  
                  
                  5,547,215
                  
                  
                  
                  6,072,045
                  
                  
                  
                  5,546,880Dilutive
      stock options
                  
                  
                  21,477
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Dilutive
      weighted average shares outstanding
                  
                  
                  6,557,289
                  
                  
                  
                  5,547,215
                  
                  
                  
                  6,072,045
                  
                  
                  
                  5,546,880Anti-dilutive
      stock options/weighted average shares outstanding
                  
                  
                  201,896
                  
                  
                  
                  403,534
                  
                  
                  
                  217,251
                  
                  
                  
                  403,534





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 Emerging Issues Task Force (“EITF”) issued “Revenue Arrangements with Multiple
Deliverables.”  This issue 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 issue 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 issue also requires additional disclosure to provide
both qualitative and quantitative information regarding the significant
judgments made in applying this issue.  In addition, for each
reporting period in the initial year of adoption, this issue requires disclosure
of the amount of revenue recognized subject to the measurement requirements of
this issue and the amount of revenue that would have been recognized if the
related transactions were subject to the measurement requirements of Issue
00-21.  This issue 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.




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 2004 to 2008. Foreign jurisdiction tax returns that remain subject to
examination range from 2002 to 2008 for Canada and from 2004 to 2008 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 June 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 36% for the three-month and six-month periods ended June 30, 2010 and
2009.




9




8.
            INTANGIBLE
      ASSETS




A
schedule of intangible assets is as follows:


Gross
                              
                              
                              Accumulated
                              
                              
                              CarryingJune 30, 2010 (unaudited)
                              
                              Amount
                              
                              
                              Amortization
                              
                              
                              AmountTrademarks:Wholesale
                              
                              $
                              27,243,578
                              
                              
                              $
                              -
                              
                              
                              $
                              27,243,578Retail
                              
                              
                              2,900,000
                              
                              
                              
                              -
                              
                              
                              
                              2,900,000Patents
                              
                              
                              2,408,326
                              
                              
                              
                              2,039,083
                              
                              
                              
                              369,243Customer
      relationships
                              
                              
                              1,000,000
                              
                              
                              
                              1,000,000
                              
                              
                              
                              -Total
      Identified Intangibles
                              
                              $
                              33,551,904
                              
                              
                              $
                              3,039,083
                              
                              
                              $
                              30,512,821Gross
                              
                              
                              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
                              
                              
                              $
                              30,516,910Gross
                              
                              
                              Accumulated
                              
                              
                              CarryingJune 30, 2009 (unaudited)
                              
                              Amount
                              
                              
                              Amortization
                              
                              
                              AmountTrademarks:Wholesale
                              
                              $
                              27,243,578
                              
                              
                              $
                              -
                              
                              
                              $
                              27,243,578Retail
                              
                              
                              2,900,000
                              
                              
                              
                              -
                              
                              
                              
                              2,900,000Patents
                              
                              
                              2,349,152
                              
                              
                              
                              1,823,482
                              
                              
                              
                              525,670Customer
      relationships
                              
                              
                              1,000,000
                              
                              
                              
                              900,000
                              
                              
                              
                              100,000Total
      Identified Intangibles
                              
                              $
                              33,492,730
                              
                              
                              $
                              2,723,482
                              
                              
                              $
                              30,769,248





Amortization
expense for intangible assets was $11,764 and $145,570 for the three months
ended June 30, 2010 and 2009, respectively and $23,416 and $290,841 for the six
months ended June 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
                  
                  $
                  45,7552012
                  
                  
                  45,7552013
                  
                  
                  45,7552014
                  
                  
                  45,7552015
                  
                  
                  45,755




10




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 June 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 June 30, 2010:





Shares
                            
                            
                            Weighted
                              Average
                              Exercise
                              PriceOptions
      outstanding at January 1, 2010
                            
                            
                            335,250
                            
                            
                            $
                            18.25Issued
                            
                            
                            -
                            
                            
                            
                            -Exercised
                            
                            
                            (14,250
                            )
                            
                            $
                            5.61Forfeited
                            
                            
                            (69,000
                            )
                            
                            $
                            18.81Options
      outstanding at June 30, 2010
                            
                            
                            252,000
                            
                            
                            $
                            18.81Options
      exercisable at:January
      1, 2010
                            
                            
                            335,250
                            
                            
                            $
                            18.25June
      30, 2010
                            
                            
                            252,000
                            
                            
                            $
                            18.81Unvested
      options at January 1, 2010
                            
                            
                            -Granted
                            
                            
                            -Vested
                            
                            
                            -Forfeited
                            
                            
                            -Unvested
      options at June 30, 2010
                            
                            
                            -





During
the six-month period ended June 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.


11


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. Principal
repayment is due at maturity in May 2012.  The transaction is expected
to generate approximately $1.6 million in interest savings
annually.  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
                  
                  
                  Six Months EndedJune 30,
                  
                  
                  June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Service
      cost
                  
                  $
                  19,977
                  
                  
                  $
                  28,843
                  
                  
                  $
                  39,954
                  
                  
                  $
                  57,686Interest
                  
                  
                  161,677
                  
                  
                  
                  151,454
                  
                  
                  
                  323,354
                  
                  
                  
                  302,908Expected
      return on assets
                  
                  
                  (133,054
                  )
                  
                  
                  (121,613
                  )
                  
                  
                  (266,108
                  )
                  
                  
                  (243,227
                  )Amortization
      of unrecognized net gain or loss
                  
                  
                  71,853
                  
                  
                  
                  61,786
                  
                  
                  
                  143,706
                  
                  
                  
                  123,572Amortization
      of unrecognized transition obligation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Amortization
      of unrecognized prior service cost
                  
                  
                  18,098
                  
                  
                  
                  18,098
                  
                  
                  
                  36,196
                  
                  
                  
                  36,196Net
      pension cost
                  
                  $
                  138,551
                  
                  
                  $
                  138,568
                  
                  
                  $
                  277,102
                  
                  
                  $
                  277,135





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:


12





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
                    
                    
                    Six Months EndedJune 30,
                    
                    
                    June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009NET
      SALES:Wholesale
                    
                    $
                    38,504,796
                    
                    
                    $
                    37,903,590
                    
                    
                    $
                    76,409,660
                    
                    
                    $
                    73,933,498Retail
                    
                    
                    11,006,622
                    
                    
                    
                    12,347,196
                    
                    
                    
                    23,932,562
                    
                    
                    
                    26,059,490Military
                    
                    
                    5,711,636
                    
                    
                    
                    937,829
                    
                    
                    
                    10,959,818
                    
                    
                    
                    1,260,188Total
      Net Sales
                    
                    $
                    55,223,054
                    
                    
                    $
                    51,188,615
                    
                    
                    $
                    111,302,040
                    
                    
                    $
                    101,253,176GROSS
      MARGIN:Wholesale
                    
                    $
                    13,479,972
                    
                    
                    $
                    11,853,483
                    
                    
                    $
                    25,657,968
                    
                    
                    $
                    25,157,771Retail
                    
                    
                    4,869,379
                    
                    
                    
                    5,829,704
                    
                    
                    
                    10,772,638
                    
                    
                    
                    12,596,190Military
                    
                    
                    749,733
                    
                    
                    
                    34,485
                    
                    
                    
                    1,425,327
                    
                    
                    
                    56,199Total
      Gross Margin
                    
                    $
                    19,099,084
                    
                    
                    $
                    17,717,672
                    
                    
                    $
                    37,855,933
                    
                    
                    $
                    37,810,160





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


13


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 are 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 Commercial
Finance (“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 have an interest rate of 11.5% payable
semi-annually over the five year term of the notes. Principal repayment is due
at maturity in May 2012. The interest rate for the revolving portion of the
Company’s credit facility is currently LIBOR plus 3.75%. The transaction is
expected to generate approximately $1.1 million in interest savings annually
based on the current LIBOR rate.  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 June 30, 2010, we were in compliance with
these restrictive covenants.





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 and fair value of our long-term debt not measured on a recurring
basis subject to fair value reporting is as follows:





(Unaudited)June30,2010Carrying
                        
                        
                        FairAmount
                        
                        
                        ValueDebtLong-term
      debt andcurrent maturities
                        
                        $
                        36,899,297
                        
                        
                        $
                        36,385,099





We
estimated the fair value of debt using market quotations and calculations based
on market rates.


14


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 half of 2010 for our wholesale and retail
divisions:





(Unaudited)Liability
                                
                                
                                
                                
                                
                                
                                
                                
                                LiabilityBeginning
                                
                                
                                
                                
                                
                                
                                
                                
                                EndingBalance
                                
                                
                                (Unaudited)
                                
                                
                                (Unaudited)
                                
                                
                                Balance12/31/2009
                                
                                
                                Expense
                                
                                
                                Payments
                                
                                
                                6/30/2010WholesaleSeverance
      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
                                
                                
                                
                                -
                                
                                
                                
                                147,367
                                
                                
                                
                                13,350Total
      Retail
                                
                                $
                                196,808
                                
                                
                                $
                                -
                                
                                
                                $
                                183,458
                                
                                
                                $
                                13,350Total
                                
                                $
                                376,363
                                
                                
                                $
                                -
                                
                                
                                $
                                363,013
                                
                                
                                $
                                13,350





The
liability ending balance at December 31, 2009 and June 30, 2010 is included in
our Consolidated Balance Sheet under Accrued Expenses.


15


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
                      
                      
                      Six Months EndedJune 30,
                      
                      
                      June 30,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Net
      Sales
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %Cost
      Of Goods Sold
                      
                      
                      65.4
                      %
                      
                      
                      65.4
                      %
                      
                      
                      66.0
                      %
                      
                      
                      62.7
                      %Gross
      Margin
                      
                      
                      34.6
                      %
                      
                      
                      34.6
                      %
                      
                      
                      34.0
                      %
                      
                      
                      37.3
                      %Selling,
      General and Administrative Expenses
                      
                      
                      29.3
                      %
                      
                      
                      35.4
                      %
                      
                      
                      30.7
                      %
                      
                      
                      37.6
                      %Income
      From Operations
                      
                      
                      5.3
                      %
                      
                      
                      -0.8
                      %
                      
                      
                      3.3
                      %
                      
                      
                      -0.3
                      %





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





Net sales.  Net
sales for the three months ended June 30, 2010 were $55.2 million compared to
$51.2 million for the same period in 2009.  Wholesale sales for the
three months ended June 30, 2010 were $38.5 million compared to $37.9 million
for the same period in 2009.  The $0.6 million increase in wholesale
sales was the result of increased sales in our work footwear
category.  Retail sales for the three months ended June 30, 2010 were
$11.0 million compared to $12.3 million for the same period in
2009.  The $1.3 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 three
months ended June 30, 2010, were $5.7 million, compared to $0.9 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 three months ended June 30, 2010
was $19.1 million, or 34.6% of net sales, compared to $17.7 million, or 34.6% of
net sales, in the same period last year.  Wholesale gross margin for
the three months ended June 30, 2010 was $13.5 million, or 35.0% of net sales,
compared to $11.9 million, or 31.3% of net sales, in the same period last
year.  The 370 basis point increase is primarily the result of a
decrease in manufacturing costs.  Retail gross margin for the three
months ended June 30, 2010 was $4.9 million, or 44.2% of net sales, compared to
$5.8 million, or 47.2% of net sales, for the same period in 2009.  The
300 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 three months ended June 30, 2010 was $0.7 million, or 13.1% of
net sales, compared to less than $0.1 million, or 3.7% of net sales, for the
same period in 2009.


16


SG&A
expenses.  SG&A expenses were $16.2 million, or 29.3% of
net sales, for the three months ended June 30, 2010, compared to $18.1 million,
or 35.4% of net sales for the same period in 2009.  The net change
primarily reflects decreases in compensation and benefits of $0.6 million,
advertising of $0.4 million, bad debt expense of $0.3 million and Lehigh store
expenses of $0.2 million.





Interest
expense.  Interest expense was $2.1 million in the three months
ended June 30, 2010, compared to $1.9 million for the same period in the prior
year.  The increase of $0.2 million resulted from fees of $0.9 million
associated with the early repayment of a portion of the company’s term loans,
partially offset by a reduction in average borrowings compared to the same
period last year.





Income
taxes.  Income tax expense for the three months ended June 30,
2010 was $0.3 million, compared to a benefit of $0.8 million for the same period
a year ago.  We provided for income taxes at effective tax rates of
36%.





Six
Months Ended June 30, 2010 Compared to Six Months Ended June 30,
2009





Net sales.  Net
sales for the six months ended June 30, 2010 were $111.3 million compared to
$101.3 million for the same period in 2009.  Wholesale sales for the
six months ended June 30, 2010 were $76.4 million compared to $73.9 million for
the same period in 2009.  The $2.5 million increase in wholesale sales
was the result of increased sales in our work footwear
category.  Retail sales for the six months ended June 30, 2010 were
$23.9 million compared to $26.1 million for the same period in
2009.  The $2.2 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 six
months ended June 30, 2010, were $11.0 million, compared to $1.3 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 six months ended June 30, 2010
was $37.9 million, or 34.0% of net sales, compared to $37.8 million, or 37.3% of
net sales, in the same period last year.  Wholesale gross margin for
the six months ended June 30, 2010 was $25.7 million, or 33.6% of net sales,
compared to $25.2 million, or 34.0% of net sales, in the same period last
year.  Retail gross margin for the six months ended June 30, 2010 was
$10.8 million, or 45.0% of net sales, compared to $12.6 million, or 48.3% of net
sales, for the same period in 2009.  The 330 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 six
months ended June 30, 2010 was $1.4 million, or 13.0% of net sales, compared to
$0.1 million or 4.5% of net sales for the same period in 2009.





SG&A
expenses.  SG&A expenses were $34.2 million, or 30.7% of
net sales, for the six months ended June 30, 2010, compared to $38.1 million, or
37.6% of net sales for the same period in 2009.  The net change
primarily reflects decreases in compensation and benefits of $1.8 million, bad
debt expense of $0.6 million, advertising of $0.5 million and Lehigh store
expenses of $0.3 million.


17


Interest
expense.  Interest expense was $3.8 million in the six months
ended June 30, 2010, compared to $3.7 million for the same period in the prior
year.  The increase of $0.1 million resulted from fees of $0.9 million
associated with the early repayment of a portion of the company’s term loans,
partially offset by a reduction in average borrowings compared to the same
period last year.





Income
taxes.  Income tax benefit for the six months ended June 30,
2010 was less than $0.1 million, compared to a benefit of $1.4 million for the
same period a year ago.  We provided for income taxes at effective tax
rates of 36%.





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 $2.6 million for the first six
months of 2010, compared to $3.1 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 financing costs associated
with this amendment totaled approximately $1.5 million.  The interest
rates for the term of this amendment are LIBOR plus 3.75% or prime plus 2.25%,
at our option.





In May
2010, we amended the terms of our revolving credit facility with GMAC Commercial
Finance (“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.  The term loans have an interest rate of 11.5% payable
semi-annually over the five year term of the notes. Principal repayment is due
at maturity in May 2012. The interest rate for the revolving portion of the
Company’s credit facility is currently LIBOR plus 3.75%. The transaction is
expected to generate approximately $1.1 million in interest savings annually
based on the current LIBOR rate.  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.





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 June 30, 2010, we had $23.6 million in borrowings
under this facility and total capacity of $51.4 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 June 30, 2010, we were in compliance with these
restrictive covenants.


18


We
believe that our existing 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.   The term loans have an interest rate of
11.5% payable semi-annually over the five year term of the notes. Principal
repayment is due at maturity in May 2012.  The transaction is expected
to generate approximately $1.6 million in interest savings
annually.  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 provided by operating activities totaled $8.6
million for the six months ended June 30, 2010, compared to $3.4 million in the
same period of 2009.  Cash provided by operating activities for the
six months ended June 30, 2010 was primarily impacted by a reduction in accounts
receivable and an increase in accounts payable partially offset by an increase
in inventory.  Cash provided by operating activities for the six
months ended June 30, 2009 was primarily impacted by a reduction in accounts
receivable, partially offset by an increase in inventory.





Investing
Activities.  Cash used in investing activities was $2.6 million
for the six months ended June 30, 2010, compared to $3.1 million in the same
period of 2009.  Cash used in investing activities reflects an
investment in property, plant and equipment of $2.6 million in 2010 and $3.1
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 used in financing activities for the six
months ended June 30, 2010 was $4.6 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 $10.5 million and repayments
on long-term debt of $29.3 million. Cash used in financing activities for the
six months ended June 30, 2009 was $1.7 million and reflects debt financing
costs associated with the amendment of our credit facility with GMAC of $1.5
million and repayments on long-term debt of $0.2 million.





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.


19


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.





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.


20




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 June 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.





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.


21


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.


22


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 June 30,
2010, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.


23


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.


24


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:     
      August 3, 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.


25