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, 2009


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:  0-21026





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
      companyx


(Do not
check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  YES   ̈ NO
x





As of
July
29, 2009, 5,547,215
shares of Rocky Brands, Inc. common stock, no par value, were
outstanding.





FORM
10-Q





ROCKY
BRANDS, INC.





TABLE
OF CONTENTS




PAGE
                    NUMBERPART
      I.    FINANCIAL INFORMATIONItem
      1.
                  Financial
      StatementsCondensed
      Consolidated Balance Sheets
                    June
      30, 2009 and 2008 (Unaudited), and December 31, 2008
                  3Condensed
      Consolidated Statements of Operations
                    for
      the Three and Six Months Ended June 30, 2009 and 2008
      (Unaudited)
                  4Condensed
      Consolidated Statements of Cash Flows
                    for
      the Six Months Ended June 30, 2009 and 2008 (Unaudited)
                  5Notes
      to Interim Unaudited Condensed Consolidated Financial Statements for the
      Three-Month and Six-Month Periods Ended June 30, 2009 and
    2008
                  6
      –16Item
      2.
                  Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                  17
      – 23Item
      3.
                  Quantitative
      and Qualitative Disclosures About Market Risk
                  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.
                  Submission
      of Matters to a Vote of Security Holders
                  24Item
      5.
                  Other
      Information
                  25Item
      6.
                  Exhibits
                  25SIGNATURE
                  26


2


PART
I - FINANCIAL INFORMATION


ITEM
1 - FINANCIAL STATEMENTS





ROCKY
BRANDS, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





June
      30, 2009
                                
                                
                                December
      31, 2008
                                
                                
                                June
      30, 2008(Unaudited)
                                
                                
                                
                                
                                
                                (Unaudited)ASSETS:CURRENT
      ASSETS:Cash
      and cash equivalents
                                
                                $
                                2,865,461
                                
                                
                                $
                                4,311,313
                                
                                
                                $
                                3,025,144Trade
      receivables – net
                                
                                
                                44,454,476
                                
                                
                                
                                60,133,493
                                
                                
                                
                                59,245,156Other
      receivables
                                
                                
                                1,924,195
                                
                                
                                
                                1,394,235
                                
                                
                                
                                1,010,254Inventories
                                
                                
                                79,286,477
                                
                                
                                
                                70,302,174
                                
                                
                                
                                85,542,820Deferred
      income taxes
                                
                                
                                2,167,966
                                
                                
                                
                                2,167,966
                                
                                
                                
                                1,952,536Prepaid
      and refundable income taxes
                                
                                
                                2,413,523
                                
                                
                                
                                75,481
                                
                                
                                
                                729,024Prepaid
      expenses
                                
                                
                                1,983,480
                                
                                
                                
                                1,455,158
                                
                                
                                
                                2,703,446Total
      current assets
                                
                                
                                135,095,578
                                
                                
                                
                                139,839,820
                                
                                
                                
                                154,208,380FIXED
      ASSETS – net
                                
                                
                                23,777,945
                                
                                
                                
                                23,549,319
                                
                                
                                
                                24,090,519IDENTIFIED
      INTANGIBLES
                                
                                
                                30,769,248
                                
                                
                                
                                31,020,478
                                
                                
                                
                                36,207,210OTHER
      ASSETS
                                
                                
                                3,609,296
                                
                                
                                
                                2,452,501
                                
                                
                                
                                2,323,778TOTAL
      ASSETS
                                
                                $
                                193,252,067
                                
                                
                                $
                                196,862,118
                                
                                
                                $
                                216,829,887LIABILITIES
      AND SHAREHOLDERS' EQUITY:CURRENT
      LIABILITIES:Accounts
      payable
                                
                                $
                                8,504,099
                                
                                
                                $
                                9,869,948
                                
                                
                                $
                                13,238,830Current
      maturities – long term debt
                                
                                
                                495,976
                                
                                
                                
                                480,723
                                
                                
                                
                                338,314Accrued
      expenses:Salaries
      and wages
                                
                                
                                830,733
                                
                                
                                
                                480,500
                                
                                
                                
                                722,646Co-op
      advertising
                                
                                
                                522,670
                                
                                
                                
                                636,408
                                
                                
                                
                                468,922Interest
                                
                                
                                459,483
                                
                                
                                
                                451,434
                                
                                
                                
                                468,959Taxes
      – other
                                
                                
                                502,032
                                
                                
                                
                                641,670
                                
                                
                                
                                840,751Commissions
                                
                                
                                339,379
                                
                                
                                
                                387,242
                                
                                
                                
                                449,110Other
                                
                                
                                2,351,937
                                
                                
                                
                                2,306,105
                                
                                
                                
                                2,593,954Total
      current liabilities
                                
                                
                                14,006,309
                                
                                
                                
                                15,254,030
                                
                                
                                
                                19,121,486LONG
      TERM DEBT – less current maturities
                                
                                
                                87,023,125
                                
                                
                                
                                87,258,939
                                
                                
                                
                                101,042,347DEFERRED
      INCOME TAXES
                                
                                
                                9,438,921
                                
                                
                                
                                9,438,921
                                
                                
                                
                                12,951,828DEFERRED
      PENSION LIABILITY
                                
                                
                                3,860,920
                                
                                
                                
                                3,743,552
                                
                                
                                
                                969,218DEFERRED
      LIABILITIES
                                
                                
                                195,264
                                
                                
                                
                                216,920
                                
                                
                                
                                288,388TOTAL
      LIABILITIES
                                
                                
                                114,524,539
                                
                                
                                
                                115,912,362
                                
                                
                                
                                134,373,267COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITY:Common
      stock, no par value;25,000,000
      shares authorized; issued and outstanding June 30, 2009 - 5,547,215;
      December 31, 2008 - 5,516,898 and June 30, 2008 -
5,508,278
                                
                                
                                54,384,172
                                
                                
                                
                                54,250,064
                                
                                
                                
                                54,168,292Accumulated
      other comprehensive loss
                                
                                
                                (3,062,448
                                )
                                
                                
                                (3,222,215
                                )
                                
                                
                                (1,500,197
                                )Retained
      earnings
                                
                                
                                27,405,804
                                
                                
                                
                                29,921,907
                                
                                
                                
                                29,788,525Total
      shareholders' equity
                                
                                
                                78,727,528
                                
                                
                                
                                80,949,756
                                
                                
                                
                                82,456,620TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY
                                
                                $
                                193,252,067
                                
                                
                                $
                                196,862,118
                                
                                
                                $
                                216,829,887





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 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008NET
      SALES
                  
                  $
                  51,188,615
                  
                  
                  $
                  60,507,421
                  
                  
                  $
                  101,253,176
                  
                  
                  $
                  120,992,137COST
      OF GOODS SOLD
                  
                  
                  33,470,943
                  
                  
                  
                  36,111,328
                  
                  
                  
                  63,443,016
                  
                  
                  
                  70,646,379GROSS
      MARGIN
                  
                  
                  17,717,672
                  
                  
                  
                  24,396,093
                  
                  
                  
                  37,810,160
                  
                  
                  
                  50,345,758SELLING,
      GENERAL AND ADMINISTRATIVE EXPENSES
                  
                  
                  18,119,173
                  
                  
                  
                  20,875,459
                  
                  
                  
                  38,065,301
                  
                  
                  
                  43,936,946(LOSS)
      INCOME FROM OPERATIONS
                  
                  
                  (401,501
                  )
                  
                  
                  3,520,634
                  
                  
                  
                  (255,141
                  )
                  
                  
                  6,408,812OTHER
      INCOME AND (EXPENSES):Interest
      expense, net
                  
                  
                  (1,936,490
                  )
                  
                  
                  (2,409,515
                  )
                  
                  
                  (3,710,420
                  )
                  
                  
                  (4,816,186
                  )Other
      – net
                  
                  
                  158,023
                  
                  
                  
                  15,723
                  
                  
                  
                  33,457
                  
                  
                  
                  (2,869
                  )Total
      other – net
                  
                  
                  (1,778,467
                  )
                  
                  
                  (2,393,792
                  )
                  
                  
                  (3,676,963
                  )
                  
                  
                  (4,819,055
                  )(LOSS)
      INCOME BEFORE INCOME TAXES
                  
                  
                  (2,179,968
                  )
                  
                  
                  1,126,842
                  
                  
                  
                  (3,932,104
                  )
                  
                  
                  1,589,757INCOME
      TAX (BENEFIT) EXPENSE
                  
                  
                  (785,000
                  )
                  
                  
                  394,000
                  
                  
                  
                  (1,416,000
                  )
                  
                  
                  556,000NET
      (LOSS) INCOME
                  
                  $
                  (1,394,968
                  )
                  
                  $
                  732,842
                  
                  
                  $
                  (2,516,104
                  )
                  
                  $
                  1,033,757NET
      (LOSS) INCOME PER SHAREBasic
                  
                  $
                  (0.25
                  )
                  
                  $
                  0.13
                  
                  
                  $
                  (0.45
                  )
                  
                  $
                  0.19Diluted
                  
                  $
                  (0.25
                  )
                  
                  $
                  0.13
                  
                  
                  $
                  (0.45
                  )
                  
                  $
                  0.19WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDINGBasic
                  
                  
                  5,547,215
                  
                  
                  
                  5,508,278
                  
                  
                  
                  5,546,880
                  
                  
                  
                  5,508,058Diluted
                  
                  
                  5,547,215
                  
                  
                  
                  5,520,625
                  
                  
                  
                  5,546,880
                  
                  
                  
                  5,523,265





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
      30,2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss) income
                
                $
                (2,516,104
                )
                
                $
                1,033,757Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                
                
                3,175,594
                
                
                
                3,070,687Deferred
      compensation and other
                
                
                255,479
                
                
                
                128,493Loss
      (gain) on disposal of fixed assets
                
                
                8,468
                
                
                
                (34,478
                )Stock
      compensation expense
                
                
                134,108
                
                
                
                170,332Change
      in assets and liabilitiesReceivables
                
                
                15,149,057
                
                
                
                6,350,389Inventories
                
                
                (8,984,303
                )
                
                
                (10,139,156
                )Other
      current assets
                
                
                (2,866,364
                )
                
                
                (485,605
                )Other
      assets
                
                
                355,705
                
                
                
                (39,739
                )Accounts
      payable
                
                
                (1,392,390
                )
                
                
                1,329,118Accrued
      and other liabilities
                
                
                102,875
                
                
                
                (392,779
                )Net
      cash provided by operating activities
                
                
                3,422,125
                
                
                
                991,019CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of fixed assets
                
                
                (3,114,629
                )
                
                
                (2,347,911
                )Investment
      in trademarks and patents
                
                
                (39,610
                )
                
                
                (30,387
                )Proceeds
      from sale of fixed assets
                
                
                19,323
                
                
                
                38,910Net
      cash used in investing activities
                
                
                (3,134,916
                )
                
                
                (2,339,388
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from revolving credit facility
                
                
                117,213,842
                
                
                
                128,927,562Repayments
      of revolving credit facility
                
                
                (117,197,776
                )
                
                
                (130,932,955
                )Repayments
      of long-term debt
                
                
                (236,627
                )
                
                
                (158,978
                )Debt
      financing costs
                
                
                (1,512,500
                )
                
                
                -Net
      cash used in financing activities
                
                
                (1,733,061
                )
                
                
                (2,164,371
                )DECREASE
      IN CASH AND CASH EQUIVALENTS
                
                
                (1,445,852
                )
                
                
                (3,512,740
                )CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                
                
                4,311,313
                
                
                
                6,537,884CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                
                $
                2,865,461
                
                
                $
                3,025,144





See notes
to the interim unaudited condensed consolidated financial
statements.


5


ROCKY
BRANDS, INC.


AND
SUBSIDIARIES





NOTES TO
THE INTERIM UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2009 AND 2008





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, 2009 and 2008 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, 2008.





We
reviewed events for inclusion in our financial statements through July 31,
2009, the date that the accompanying financial statements were
issued.  No subsequent events were identified which required
disclosure herein.





The
components of total comprehensive (loss) income are shown below:





(Unaudited)
                      
                      
                      (Unaudited)Three
      Months Ended
                      
                      
                      Six
      Months EndedJune
      30,
                      
                      
                      June
      30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Net
      (loss) income
                      
                      $
                      (1,394,968
                      )
                      
                      $
                      732,842
                      
                      
                      $
                      (2,516,104
                      )
                      
                      $
                      1,033,757Other
      comprehensive income:Amortization
      of unrecognized transition obligation, service cost and net
      loss
                      
                      
                      79,883
                      
                      
                      
                      37,853
                      
                      
                      
                      159,767
                      
                      
                      
                      77,885Total
      comprehensive (loss) income
                      
                      $
                      (1,315,085
                      )
                      
                      $
                      770,695
                      
                      
                      $
                      (2,356,337
                      )
                      
                      $
                      1,111,642





2.  TRADE
RECEIVABLES





Trade
receivables are presented net of the related allowance for uncollectible
accounts of approximately $1,793,000, $2,026,000 and $1,217,000 at June 30,
2009, December 31, 2008 and June 30, 2008, 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
      30,2009
                          
                          
                          2008
                          
                          
                          2008(Unaudited)
                          
                          
                          
                          
                          
                          (Unaudited)Raw
      materials
                          
                          $
                          9,560,424
                          
                          
                          $
                          7,311,837
                          
                          
                          $
                          9,388,532Work-in-process
                          
                          
                          673,914
                          
                          
                          
                          351,951
                          
                          
                          
                          803,294Finished
      goods
                          
                          
                          69,104,239
                          
                          
                          
                          62,676,986
                          
                          
                          
                          75,469,494Reserve
      for obsolescence or lower of cost or market
                          
                          
                          (52,100
                          )
                          
                          
                          (38,600
                          )
                          
                          
                          (118,500
                          )Total
                          
                          $
                          79,286,477
                          
                          
                          $
                          70,302,174
                          
                          
                          $
                          85,542,820





4. SUPPLEMENTAL
CASH FLOW INFORMATION





Supplemental
cash flow information, including cash paid for interest and Federal, state and
local income taxes, net of refunds, was as follows:





(Unaudited)Six
      Months EndedJune
      30,2009
                  
                  
                  2008Interest
                  
                  $
                  3,345,363
                  
                  
                  $
                  4,519,746Federal,
      state and local income taxes
                  
                  $
                  928,666
                  
                  
                  $
                  565,244Fixed
      asset purchases in accounts payable
                  
                  $
                  139,283
                  
                  
                  $
                  56,976


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,
2009 and 2008 is as follows:





(Unaudited)
                  
                  
                  (Unaudited)Three
      Months Ended
                  
                  
                  Six
      Months EndedJune
      30,
                  
                  
                  June
      30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Weighted
      average shares outstanding
                  
                  
                  5,547,215
                  
                  
                  
                  5,508,278
                  
                  
                  
                  5,546,880
                  
                  
                  
                  5,508,058Dilutive
      stock options
                  
                  
                  -
                  
                  
                  
                  12,347
                  
                  
                  
                  -
                  
                  
                  
                  15,207Dilutive
      weighted average shares outstanding
                  
                  
                  5,547,215
                  
                  
                  
                  5,520,625
                  
                  
                  
                  5,546,880
                  
                  
                  
                  5,523,265Anti-dilutive
      stock options/weighted average shares outstanding
                  
                  
                  403,534
                  
                  
                  
                  343,889
                  
                  
                  
                  403,534
                  
                  
                  
                  343,889





6. RECENT
FINANCIAL ACCOUNTING STANDARDS





In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements” (“SFAS 157”).  SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective
Date of FASB Statement No. 157” (“FSP FAS 157-2”).  FSP FAS 157-2
defers implementation of SFAS 157 for certain non-financial assets and
non-financial liabilities.  SFAS 157 is effective for financial assets
and liabilities in fiscal years beginning after November 15, 2007 and for
non-financial assets and liabilities in fiscal years beginning after March 15,
2008. We have evaluated the impact of the provisions applicable to our financial
assets and liabilities and have determined that there will not be a material
impact on our consolidated financial statements.  The aspects that
have been deferred by FSP FAS 157-2 pertaining to non-financial assets and
non-financial liabilities are effective for us beginning January 1,
2009.  The adoption of FSP FAS 157-2 in 2009 did not have a material
effect on our consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS
141R”).  SFAS 141R replaces SFAS 141, “Business
Combinations.”  The objective of SFAS 141R is to improve the
relevance, representational faithfulness and comparability of the information
that a reporting entity provides in its financial reports about a business
combination and its effects.  SFAS 141R establishes principles and
requirements for how the acquirer: a) recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed and any
non-controlling interest in the acquiree; b) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase
option; and c) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination.  SFAS 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first reporting period beginning on or after December 15, 2008. The adoption of
SFAS 141R in 2009 did not have a material effect on our consolidated financial
statements.




8





In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS
160”).   The objective of SFAS 160 is to improve the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements by establishing certain
accounting and reporting standards that address:  the ownership
interests in subsidiaries held by parties other than the parent; the amount of
net income attributable to the parent and non-controlling interest; changes in
the parent’s ownership interest; and any retained non-controlling equity
investment in a deconsolidated subsidiary.  SFAS 160 is effective for
fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008. The adoption of SFAS 160 in 2009 did not have a
material effect on our consolidated financial statements.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of FASB No. 133” (“SFAS
161”).  SFAS 161 intends to improve financial reporting about
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity’s financial
position, financial performance and cash flows.  SFAS 161 also
requires disclosure about an entity’s strategy and objectives for using
derivatives, the fair values of derivative instruments and their related gains
and losses.  SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008. The
statement encourages, but does not require, comparative disclosures for earlier
periods at initial adoption.  The adoption of SFAS 161R in 2009 did
not have a material effect on our consolidated financial
statements.





In
December 2008, the FASB issued FASB Staff Position FAS 132(R)-1,
“Employer's Disclosures about Postretirement Benefit Plan Assets” ("FSP FAS
132(R)-1").  FSP FAS 132(R)-1 requires enhanced disclosures about plan
assets currently required by SFAS No. 132, as revised, Employer's Disclosures
about Pensions and Other Postretirement Benefits. FSP FAS 132(R)-1 requires more
detailed disclosures about employers' plan assets, including employers'
investment strategies, major categories of plan assets, concentrations of risk
within plan assets, and valuation techniques used to measure the fair value of
plan assets. FSP FAS 132(R)-1 is effective for fiscal years ending after
December 15, 2009, and early adoption is permitted.  We are currently
assessing the potential impact of the adoption of FSP FAS 132(R)-1 on our
consolidated financial statement disclosures.





In April
2009, the FASB issued FASB Staff Position FAS-157-4, “Determining Whether a
Market Is Not Active and a Transaction Is Not Distressed” (“FSP FAS
157-4”).  FSP FAS 157-4 provides guidelines for making fair value
measurements more consistent with the principles presented in SFAS
157.  FSP FAS 157-4 provides additional authoritative guidance in
determining whether a market is active or inactive and whether a transaction is
distressed.  FSP FAS 157-4 is applicable to all assets and liabilities
(i.e. financial and nonfinancial) and will require enhanced
disclosures.  FSP FAS 157-4 is required to be adopted no later than
the periods ending after June 15, 2009.  The adoption of FSP FAS 157-4
in 2009 did not have a material effect on our consolidated financial
statements.




9





In April
2009, the FASB issued FASB Staff Position FAS 115-2 and FAS 124-2, “Recognition
and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2”) and
(“FSP FAS 124-2”).  FSP FAS 115-2 and FSP FAS 124-2 provide additional
guidance to provide greater clarity about the credit and noncredit component of
an other-than-temporary impairment event and to improve presentation and
disclosure of other-than-temporary impairments in the financial
statements.  FSP FAS 115-2 and FSP FAS 124-2 are required to be
adopted no later than the periods ending after June 15, 2009.  The
adoption of FSP FAS 115-2 and FSP FAS 124-2 in 2009 did not have a material
effect on our consolidated financial statements.





In April
2009, the FASB issued FASB Staff Position FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1”) and
(“APB 28-1”).  FSP FAS 107-1 amends FASB Statement No. 107,
“Disclosures about Fair Value of Financial Instruments”, to require disclosures
about fair value of financial instruments in interim as well as in annual
financial statements and amends APB Opinion No. 28 “Interim Financial
Reporting”, to require those disclosures in interim financial
statements.    FSP FAS 107-1 and APB 28-1 are required to be
adopted no later than the periods ending after June 15, 2009.  The
adoption of FSP FAS 107-1 in 2009 did not have a material effect on our
consolidated financial statements.





In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
160”).  The objective of SFAS 165 is to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to be
issued.  In particular, SFAS 165 sets forth the period after the
balance sheet date during which management of a reporting entity should evaluate
events or transactions that may occur for potential recognition or disclosure in
the financial statements; the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements; and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet
date.  SFAS 165 is effective for interim or annual financial periods
ending after June 15, 2009.    The adoption of SFAS 165 in
2009 did not have a material effect on our consolidated financial
statements.





In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets an Amendment of FASB Statement No. 140” (“SFAS 166”).  SFAS 166
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.  SFAS 166 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.  SFAS 166 must be applied to transfers occurring on or
after the effective date.  We are currently assessing the potential
impact of the adoption of SFAS 166 on our consolidated financial statement
disclosures.




10





In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“SFAS 167”).  SFAS 167 intends to improve financial reporting
by enterprises involved with variable interest entities.  SFAS 167
addresses the effects on certain provisions of FASB Interpretation No. 46
(revised December 2003), Consolidation of Variable Interest Entities, as a
result of the elimination of the qualifying special-purpose entity concept in
FASB Statement No. 166, Accounting for Transfers of Financial Assets; and
constituent concerns about the application of certain key provisions of
Interpretation 46(R), including those in which the  accounting and
disclosures under the Interpretation do not always provide timely and useful
information about an enterprise’s involvement in a variable interest
entity.  SFAS 167 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.  We are currently assessing the potential impact of the
adoption of SFAS 167 on our consolidated financial statement
disclosures.





In June
2009, the FASB issued SFAS no. 168, “The FASB Accounting Standards CodificationTM
(“Codification”) and the Hierarchy of Generally Accepted Accounting Principles,
a replacement of FASB Statement No. 162” (“SFAS 168”).  The
Codification will become the source of authoritative U.S. generally accepted
accounting principles (GAAP) recognized by the FASB to be applied by
nongovernmental entities.  Rules and interpretive releases of the
Securities and Exchange Commission (SEC) under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants.  On
the effective date of SFAS 168, the Codification will supersede all
then-existing non-SEC accounting and reporting standards.  All other
non-grandfathered non-SEC accounting literature not included in the Codification
will become non-authoritative.  SFAS 168 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009.  Since it is not intended to change or alter existing U.S. GAAP,
the Codification is not expected to have any impact on our financial condition
or results of operations.




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, 2009, accrued
interest or penalties were not material, and no such expenses were recognized
during the quarter.





We
provided for income taxes at estimated effective tax rates of 36% and 35% for
the three-month and six-month periods ended June 30, 2009 and 2008,
respectively.


11





8. INTANGIBLE
ASSETS





A
schedule of intangible assets is as follows:




Gross
                    
                    
                    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
                    
                    
                    $
                    30,769,248Gross
                    
                    
                    Accumulated
                    
                    
                    CarryingDecember 31, 2008
                    
                    Amount
                    
                    
                    Amortization
                    
                    
                    AmountTrademarks:Wholesale
                    
                    $
                    27,243,578
                    
                    
                    $
                    -
                    
                    
                    $
                    27,243,578Retail
                    
                    
                    2,900,000
                    
                    
                    
                    -
                    
                    
                    
                    2,900,000Patents
                    
                    
                    2,309,541
                    
                    
                    
                    1,632,641
                    
                    
                    
                    676,900Customer
      relationships
                    
                    
                    1,000,000
                    
                    
                    
                    800,000
                    
                    
                    
                    200,000Total
      Identified Intangibles
                    
                    $
                    33,453,119
                    
                    
                    $
                    2,432,641
                    
                    
                    $
                    31,020,478Gross
                    
                    
                    Accumulated
                    
                    
                    CarryingJune 30, 2008 (unaudited)
                    
                    Amount
                    
                    
                    Amortization
                    
                    
                    AmountTrademarks:Wholesale
                    
                    $
                    28,278,595
                    
                    
                    $
                    129,377
                    
                    
                    $
                    28,149,218Retail
                    
                    
                    6,900,000
                    
                    
                    
                    -
                    
                    
                    
                    6,900,000Patents
                    
                    
                    2,300,438
                    
                    
                    
                    1,442,446
                    
                    
                    
                    857,992Customer
      relationships
                    
                    
                    1,000,000
                    
                    
                    
                    700,000
                    
                    
                    
                    300,000Total
      Identified Intangibles
                    
                    $
                    38,479,033
                    
                    
                    $
                    2,271,823
                    
                    
                    $
                    36,207,210


Amortization
expense for intangible assets was $145,570 and $166,507 for the three months
ended June 30, 2009 and 2008, respectively and $290,841 and $332,867 for the six
months ended June 30, 2009 and 2008, respectively.  The weighted
average amortization period for patents is six years and for customer
relationships is five years.





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





2010
                  
                  $
                  43,1902011
                  
                  
                  41,8092012
                  
                  
                  41,8092013
                  
                  
                  41,8092014
                  
                  
                  41,809





12




In the
fourth quarter of 2008 we recognized impairment losses on the carrying values of
the Lehigh and Gates trademarks in the amounts of $4.0 million and $0.9 million,
respectively.  We estimated fair value based on projections of the
future cash flows for each of the trademarks.  We then compared the
carrying value for each trademark to its estimated fair value.  Since
the fair value of the trademark was less than its carrying value we recognized
the reductions in fair value as non-cash intangible impairment charges in our
2008 operating expenses. These charges are reflected in operating expenses under
the caption, “Non-cash intangible impairment charges.”  The Lehigh
trademark is reported under our Retail segment.  The Gates trademark
is reported under our Wholesale segment.





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,
2009, we were authorized to issue approximately 376,103 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, 2009 through June 30, 2009:





Shares
                      
                      
                      Weighted
                        Average
                        Exercise
                        PriceOptions
      outstanding at January 1, 2009
                      
                      
                      435,801
                      
                      
                      $
                      15.88Issued
                      
                      
                      -
                      
                      
                      
                      -Exercised
                      
                      
                      -
                      
                      
                      
                      -Forfeited
                      
                      
                      (56,301
                      )
                      
                      $
                      7.53Options
      outstanding at June 30, 2009
                      
                      
                      379,500
                      
                      
                      $
                      17.12Options
      exercisable at:January
      1, 2009
                      
                      
                      412,051
                      
                      
                      $
                      15.80June
      30, 2009
                      
                      
                      372,000
                      
                      
                      $
                      17.17Unvested
      options at January 1, 2009
                      
                      
                      23,750
                      
                      
                      $
                      17.27Granted
                      
                      
                      -
                      
                      
                      
                      -Vested
                      
                      
                      (8,750
                      )
                      
                      $
                      22.87Forfeited
                      
                      
                      (7,500
                      )
                      
                      $
                      13.61Unvested
      options at June 30, 2009
                      
                      
                      7,500
                      
                      
                      $
                      14.40





During
the six-month period ended June 30, 2009, we issued 30,317 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.




13





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 the common
stock.  Such exercise would ultimately entitle the holders of the
rights to purchase st 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.





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
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Service
      cost
                    
                    $
                    28,843
                    
                    
                    $
                    26,963
                    
                    
                    $
                    57,686
                    
                    
                    $
                    53,926Interest
                    
                    
                    151,454
                    
                    
                    
                    143,061
                    
                    
                    
                    302,908
                    
                    
                    
                    286,123Expected
      return on assets
                    
                    
                    (121,613
                    )
                    
                    
                    (171,313
                    )
                    
                    
                    (243,227
                    )
                    
                    
                    (342,626
                    )Amortization
      of unrecognized net gain or loss
                    
                    
                    61,786
                    
                    
                    
                    17,116
                    
                    
                    
                    123,572
                    
                    
                    
                    34,442Amortization
      of unrecognized transition obligation
                    
                    
                    -
                    
                    
                    
                    897
                    
                    
                    
                    -
                    
                    
                    
                    2,242Amortization
      of unrecognized prior service cost
                    
                    
                    18,098
                    
                    
                    
                    19,840
                    
                    
                    
                    36,196
                    
                    
                    
                    41,201Net
      pension cost
                    
                    $
                    138,568
                    
                    
                    $
                    36,564
                    
                    
                    $
                    277,135
                    
                    
                    $
                    75,308








14


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:





2009
                                    
                                    
                                    2008Discount
      rate
                                    
                                    6.00%
                                    
                                    
                                    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
      30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008NET
      SALES:Wholesale
                  
                  $
                  37,903,590
                  
                  
                  $
                  42,481,533
                  
                  
                  $
                  73,933,498
                  
                  
                  $
                  82,217,860Retail
                  
                  
                  12,347,196
                  
                  
                  
                  16,216,348
                  
                  
                  
                  26,059,490
                  
                  
                  
                  35,122,280Military
                  
                  
                  937,829
                  
                  
                  
                  1,809,540
                  
                  
                  
                  1,260,188
                  
                  
                  
                  3,651,997Total
      Net Sales
                  
                  $
                  51,188,615
                  
                  
                  $
                  60,507,421
                  
                  
                  $
                  101,253,176
                  
                  
                  $
                  120,992,137GROSS
      MARGIN:Wholesale
                  
                  $
                  11,853,483
                  
                  
                  $
                  15,684,979
                  
                  
                  $
                  25,157,771
                  
                  
                  $
                  31,959,443Retail
                  
                  
                  5,829,704
                  
                  
                  
                  8,555,574
                  
                  
                  
                  12,596,190
                  
                  
                  
                  18,047,146Military
                  
                  
                  34,485
                  
                  
                  
                  155,540
                  
                  
                  
                  56,199
                  
                  
                  
                  339,169Total
      Gross Margin
                  
                  $
                  17,717,672
                  
                  
                  $
                  24,396,093
                  
                  
                  $
                  37,810,160
                  
                  
                  $
                  50,345,758





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


15


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.





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, 2009, we were in compliance with
these restrictive covenants.





13. FINANCIAL
INSTRUMENTS





In 2008,
we adopted the provisions of SFAS 157, “Fair Value Measurements” (“SFAS 157”)
related to our financial assets and liabilities.  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:





June 30, 2009Carrying
                  
                  
                  FairAmount
                  
                  
                  ValueDebtLong-term
      debt and current maturities
                  
                  $
                  87,519,101
                  
                  
                  $
                  82,146,164





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





14. RECLASSIFICATIONS





Certain
amounts in the June 30, 2008 consolidated financial statements have been
reclassified to conform to the current period’s presentation.


16




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





RESULTS
OF OPERATIONS





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





Three
      Months Ended
                                  
                                  
                                  Six
      Months EndedJune
      30,
                                  
                                  
                                  June
      30,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2009
                                  
                                  
                                  2008Net
      Sales
                                  
                                  
                                  100.0
                                  %
                                  
                                  
                                  100.0
                                  %
                                  
                                  
                                  100.0
                                  %
                                  
                                  
                                  100.0
                                  %Cost
      Of Goods Sold
                                  
                                  
                                  65.4
                                  %
                                  
                                  
                                  59.7
                                  %
                                  
                                  
                                  62.7
                                  %
                                  
                                  
                                  58.4
                                  %Gross
      Margin
                                  
                                  
                                  34.6
                                  %
                                  
                                  
                                  40.3
                                  %
                                  
                                  
                                  37.3
                                  %
                                  
                                  
                                  41.6
                                  %Selling,
      General andAdministrative
      Expenses
                                  
                                  
                                  35.4
                                  %
                                  
                                  
                                  34.5
                                  %
                                  
                                  
                                  37.6
                                  %
                                  
                                  
                                  36.3
                                  %Income
      From Operations
                                  
                                  
                                  -0.8
                                  %
                                  
                                  
                                  5.8
                                  %
                                  
                                  
                                  -0.3
                                  %
                                  
                                  
                                  5.3
                                  %





Three
Months Ended June 30, 2009 Compared to Three Months Ended June 30,
2008





Net sales.  Net
sales for the three months ended June 30, 2009 were $51.2 million compared to
$60.5 million for the same period in 2008.  Wholesale sales for the
three months ended June 30, 2009 were $37.9 million compared to $42.5 million
for the same period in 2008.  The $4.6 million decrease in wholesale
sales was the result of decreased sales in the majority of our footwear
categories and apparel.  Retail sales for the three months ended June
30, 2009 were $12.3 million compared to $16.2 million for the same period in
2008.  The $3.9 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, 2009, were $0.9 million, compared to $1.8 million in the
same period in 2008.  Shipments in 2009 were under the $6.4 million
contract issued in July 2007.





Gross
margin.  Gross margin for the three months ended June 30, 2009
was $17.7 million, or 34.6% of net sales, compared to $24.4 million, or 40.3% of
net sales, in the same period last year.  Wholesale gross margin for
the three months ended June 30, 2009 was $11.9 million, or 31.3% of net sales,
compared to $15.7 million, or 36.9% of net sales, in the same period last
year.  The 560 basis point decrease is the result of additional sales
of closeouts at reduced gross margins, an increase in manufacturing costs, and a
decrease in sales price per unit for competitive reasons.  Retail
gross margin for the three months ended June 30, 2009 was $5.8 million, or 47.2%
of net sales, compared to $8.6 million, or 52.8% of net sales, for the same
period in 2008.  The 560 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,
2009 was less than $0.1 million, or 3.7% of net sales, compared to $0.2 million,
or 8.6% of net sales, for the same period in 2008.


17


SG&A
expenses.  SG&A expenses were $18.1 million, or 35.4% of
net sales, for the three months ended June 30, 2009, compared to $20.9 million,
or 34.4% of net sales for the same period in 2008.  The net change
primarily reflects decreases in compensation and benefits expenses of $1.6
million, shipping expenses of $0.6 million, Lehigh mobile store expenses of $0.3
million, and travel expenses of $0.2 million, partially offset by a $0.4 million
increase in bad debt expense.





Interest
expense.  Interest expense was $1.9 million in the three months
ended June 30, 2009, compared to $2.4 million for the same period in the prior
year.  The decrease of $0.5 million resulted from a reduction in
average borrowings combined with lower interest rates compared to the same
period last year.





Income
taxes.  Income tax benefit for the three months ended June 30,
2009 was $0.8 million, compared to income tax expense of $0.4 million for the
same period a year ago.  We provided for income taxes at effective tax
rates of 36%, our 2008 actual rate, and 35% for the three months ended June 30,
2009 and 2008, respectively.





Six
Months Ended June 30, 2009 Compared to Six Months Ended June 30,
2008





Net sales.  Net
sales for the six months ended June 30, 2009 were $101.3 million compared to
$121.0 million for the same period in 2008.  Wholesale sales for the
six months ended June 30, 2009 were $73.9 million compared to $82.2 million for
the same period in 2008.  The $8.3 million decrease in wholesale sales
is the result of decreased sales in the majority of our footwear categories and
apparel.  Retail sales for the six months ended June 30, 2009 were
$26.1 million compared to $35.1 million for the same period in
2008.  The $9.1 million decrease in retail sales results 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 to help lower
costs.   Military segment sales for the six months ended June 30,
2009, were $1.3 million, compared to $3.7 million in the same period in
2008.  Shipments in 2009 were under the $6.4 million contract issued
in July 2007.





Gross
margin.  Gross margin for the six months ended June 30, 2009
was $37.8 million, or 37.3% of net sales, compared to $50.3 million, or 41.6% of
net sales, in the same period last year.  Wholesale gross margin for
the six months ended June 30, 2009 was $25.2 million, or 34.0% of net sales,
compared to $32.0 million, or 38.9% of net sales, in the same period last
year.  The 490 basis point decrease is the result of additional sales
of closeouts at reduced gross margins, an increase in manufacturing costs, and a
decrease in sales price per unit for competitive reasons.  Retail
gross margin for the six months ended June 30, 2009 was $12.6 million, or 48.3%
of net sales, compared to $18.0 million, or 51.4% of net sales, for the same
period in 2008.  The 310 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,
2009 was $0.1 million, or 4.5% of net sales, compared to $0.3 million or 9.3% of
net sales for the same period in 2009.





SG&A
expenses.  SG&A expenses were $38.1 million, or 37.6% of
net sales, for the six months ended June 30, 2009, compared to $43.9 million, or
36.3% of net sales for the same period in 2008.  The net change
primarily results from decreases in compensation and benefits expenses
of  $3.0 million, shipping expenses of $0.9, advertising expense of
$0.6, Lehigh mobile store expenses of $0.5, travel expense of $0.4, and
professional and consulting fees of $0.4 million, partially offset by a $0.6
million increase in bad debt expense.


18


Interest
expense.  Interest expense was $3.7 million in the six months
ended June 30, 2009, compared to $4.8 million for the same period in the prior
year.  The decrease of $1.1 million resulted from a reduction in
average borrowings combined with lower interest rates compared to the same
period last year.





Income
taxes.  Income tax benefit for the six months ended June 30,
2009 was $1.4 million, compared to a benefit of $0.6 million for the same period
a year ago.  We provided for income taxes at effective tax rates of
36%, our 2008 actual rate, and 35% for the six months ended June 30, 2009 and
2008, respectively.





Liquidity
and Capital Resources





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





Over the
last several years our principal uses of cash have been for working capital and
capital expenditures to support our growth.  Our working capital
consists primarily of trade receivables and inventory, offset by accounts
payable and accrued expenses.  Our working capital fluctuates
throughout the year as a result of our seasonal business cycle and business
expansion and is generally lowest in the months of January through March of each
year and highest during the months of May through October of each
year.  We typically utilize our revolving credit facility to fund our
seasonal working capital requirements.  As a result, balances on our
revolving credit facility will fluctuate significantly throughout the
year.  Our capital expenditures relate primarily to projects relating
to our property, merchandising fixtures, molds and equipment associated with our
manufacturing operations, retail sales fleet and for information
technology.  Capital expenditures were $3.1 million for the first six
months of 2009, compared to $2.3 million for the same period in 2008. Capital
expenditures for all of 2009 are anticipated to be approximately $4.0
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.





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, 2009, we had $44.8 million in borrowings
under this facility and total capacity of $60.8 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, 2009, we were in compliance with these
restrictive covenants.





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.


19


Operating
Activities.  Cash provided by operating activities totaled $3.4
million for the six months ended June 30, 2009, compared to $1.0 million in the
same period of 2008.  Cash provided by operating activities for the
six months ended June 30, 2009 was primarily impacted by a reduction in accounts
receivable which was partially offset by the seasonal buildup of
inventory.  Cash provided by operating activities for the six months
ended June 30, 2008 was primarily impacted by the buildup of inventory to
support our retail sales growth, the buildup of raw materials required to
fulfill our military contracts offset by the reduction of trade receivables and
accounts payable.





Investing
Activities.  Cash used in investing activities was $3.1 million
for the six months ended June 30, 2009, compared to $2.3 million in the same
period of 2008.  Cash used in investing activities in 2009 reflects an
investment in property, plant and equipment of $3.1 million.  Our 2009
expenditures primarily relate to investments in our inventory fulfillment
operations, investments in molds and equipment associated with our manufacturing
operations and for information technology.  Our  2008
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, 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.  Cash used in
financing activities for the six months ended June 30, 2008 was $2.2 million and
reflects a decrease in net borrowings under the revolving credit facility of
$2.0 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, 2008.





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.


20


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 doubtful 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.  Management also records estimates for customer returns and
discounts offered to customers.  Should a greater proportion of
customers return goods and take advantage of discounts than estimated by us,
additional allowances may be required.





Sales
returns and allowances





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





Inventories





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





Intangible
assets





Intangible
assets, including goodwill, trademarks and patents are reviewed for impairment
annually, and more frequently, if necessary.  In performing the review
of recoverability, we estimate future cash flows expected to result from the use
of the asset and our eventual disposition. The estimates of future cash flows,
based on reasonable and supportable assumptions and projections, require
management's subjective judgments. The time periods for estimating future cash
flows is often lengthy, which increases the sensitivity to assumptions made.
Depending on the assumptions and estimates used, the estimated future cash flows
projected in the evaluation of long-lived assets can vary within a wide range of
outcomes. We consider the likelihood of possible outcomes in determining the
best estimate of future cash flows.  A significant assumption of
estimated cash flows from trademarks is future sales of branded
products.  Other assumptions include discount rates, royalty rates,
cost of capital, and market multiples.  An impairment charge may be
recorded if the expected future cash flows decline.


21


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, 2009. 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.








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, 2008, 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, 2008.





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,
2009, 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, 2008.





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





None





ITEM
3 - DEFAULTS UPON SENIOR SECURITIES





None





ITEM
4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS







The
2009 Annual Meeting of Shareholders was held on May 18, 2009, and the following
proposal was acted upon:






Proposal
1:      The election of Class I Directors of the
Company, to serve until the 2011 Annual Meeting of Shareholders or until their
successors are elected and qualified.




Number of Shares VotedFOR
                                  
                                  
                                  WITHHOLD
                                    AUTHORITY
                                  
                                  
                                  TOTALMike
      Brooks
                                  
                                  
                                  4,452,599
                                  
                                  
                                  
                                  144,787
                                  
                                  
                                  
                                  4,597,386Glen
      E. Corlett
                                  
                                  
                                  4,470.133
                                  
                                  
                                  
                                  127,253
                                  
                                  
                                  
                                  4,597,386Harley
      E Rouda, Jr.
                                  
                                  
                                  4,418,931
                                  
                                  
                                  
                                  178,456
                                  
                                  
                                  
                                  4,597,386James
      L. Stewart
                                  
                                  
                                  4,451,899
                                  
                                  
                                  
                                  145,487
                                  
                                  
                                  
                                  4,597,386





The
following individuals continue to serve as Class II Directors of the
Company:


J.
Patrick Campbell, Michael L. Finn, G. Courtney Haning and Curtis A
Loveland.





Proposal
2:      To ratify the selection of Schneider Downs
& Co., Inc. as the Company’s independent registered public accounting firm
for the fiscal year ending December 31, 2009.





Number
      of Shares VotedFOR
                                                
                                                AGAINST
                                                
                                                
                                                ABSTAINED
                                                
                                                
                                                TOTAL4,527,277
                                                
                                                
                                                30,977
                                                
                                                
                                                
                                                39,139
                                                
                                                
                                                
                                                4,597,387


24


ITEM
5 - OTHER INFORMATION





None





ITEM
6 - EXHIBITS





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


_____________________


*           Filed
with this report.


+           Furnished
with this report.


25


SIGNATURE





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




Rocky
      Brands, Inc.Date:
      July 31, 2009
                    /s/
      James E. McDonaldJames
      E. McDonald, Executive Vice President andChief
      Financial
Officer*





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


26