Rocky Brands, Inc.

Rocky Brands, Inc.
2006 Annual Report

Rocky Brands, Inc. is a leading designer, manufacturer and marketer of premium
quality footwear and apparel marketed under a portfolio of well recognized brand
names including Rocky Outdoor Gear», Georgia Boot», and Durango», and our
licensed brand Dickies».

FINANCIAL HIGHLIGHTS

2006

2005

2004
($000, except per share data)

2003

2002

Income Statement Data
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from Operations . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per diluted share . . . . . . . . . . . . . . .
Weighted average number of fully diluted shares
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . .

Balance Sheet
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . .

$263,491

$296,023

$132,249

$106,165

$88,959

41.5%
7.2%

37.6%
9.5%

29.2%
9.8%

30.9%
9.0%

26.3%
5.4%

$
$

4,819
0.86

$ 13,014
2.33
$

$
$

8,594
1.74

$
$

6,039
1.32

$ 2,843
0.62
$

5,578

5,585

4,954

4,561

4,590

$ 77,949
246,356
110,492
104,128

$ 75,387
236,134
105,373
99,093

$ 32,959
96,706
16,537
71,371

$ 38,068
86,175
18,018
58,385

$23,182
68,417
10,975
52,393

Net sales
($ millions)

$296.0

$263.5

$89.0

$106.2

$132.2

Net income per diluted share

$2.33

$1.74

$1.32

$0.62

$0.86

2002

2003

2004

2005

2006

2002

2003

2004

2005

2006

Gross margin % of net sales

30.9% 29.2%

26.3%

41.5%

37.6%

Total debt
($ millions)

$105.4

$110.5

$11.0

$18.0

$16.5

2002

2003

2004

2005

2006

2002

2003

2004

2005

2006

ROCKY BRANDS, INC.

Dear Shareholders,

While 2006 was a disappointing year for Rocky Brands, Inc. from a financial standpoint, it was also a year in
which we confronted our challenges and began implementing key initiatives aimed at improving on our recent
performance and better positioning our company for long-term sales growth and increased profitability. Specif-
ically, we realigned our sales departments in order to better capitalize on our retail relationships, introduced a new
sales management incentive program in an effort to drive increased revenue across our organization, expanded our
portfolio of brands with the addition of the licensed brands Zumfoot» and Michelin», and made the strategic
decision to reduce our payroll and marketing expenses beginning in 2007. Importantly, as we begin the new year,
our leadership positions in the work, western and hunting footwear markets are intact, our brand equity remains
strong, and our entire management team is fully committed to turning our business around and delivering increased
value to our shareholders.

Wholesale

Our wholesale revenues, which include footwear and apparel sales of our owned brands, Rocky Outdoor
Gear», Georgia Boot», and Durango», and footwear sales of our licensed brand Dickies», were $203.2 million in
fiscal 2006, versus wholesales sales of $209.9 million a year ago.

Beginning with our work segment, sales were $87.2 million in 2006, up 3.7% from sales of $84.0 million the
year before. The increase in sales was primarily driven by our Dickies business which rose 47.8% in 2006 to
$8.0 million, as we benefited from increased shelf space at Sears coupled with new distribution in national retailers
such as Mervyns and Shoe Carnival. Our Rocky branded work footwear was up slightly in 2006 offset by a decline
in our largest work footwear brand, Georgia. Looking ahead, we are excited about our 80 store test for Dickies in
Kohl’s during the second half of 2007, and based on feedback from retailers at several key tradeshows, we are
optimistic about the growth prospects for our fall Rocky work and Georgia product lines.

In 2006, sales of our western segment increased 2.0% to $41.3 million from $40.4 million the year before,
including a 31.6% gain for our Rocky branded western footwear. We are pleased with our overall performance
despite a slowdown in our women’s business which affected sales of Durango, primarily in the second half of the
year. Going forward, we are focused on leveraging our core competencies in basic footwear to gain market share of
the western segment which is much more stable than the women’s fashion business.

Our outdoor footwear business continued to struggle in 2006 as sales declined 15.7% from 2005 to
$35.5 million. After two consecutive years of warm, dry fall seasons, we experienced additional challenges in
2006 which also negatively impacted sales. These included a decline in consumer traffic at many of our core,
independent shops, increased competition from several private label brands, and a shift in retail buying patterns that
has shortened the selling season and reduced our reorder opportunities. We did end the year on a solid note, with a
fourth quarter sales increase of nearly 24.5%, and as we enter 2007 we believe inventories at retail are clean and that
the Rocky brand name continues to occupy a leading position in the traditional camouflage/waterproof hunting boot
category. That said, given the events of the past few years and the changes in the competitive landscape, we have
scaled back our expectations for this business to a more appropriate level going forward.

We also experienced some difficulties with our apparel business this past year due primarily to excess
inventory in our distribution channels and a lack of compelling product in the marketplace. Sales for 2006 were
$16.2 million compared to $18.4 million in the prior year. In an effort to reinvigorate our apparel category we have
spent the past twelve months focused on reengineering the entire product line, incorporating more technical
fabrication and design, and we believe our initial progress was reflected in our fourth quarter performance when
sales increased over 17.5% from the fourth quarter of 2005 to $3.0 million.

Our duty footwear business was on plan for the year with sales of $17.1 million, up 1.6% from sales of
$16.8 million in 2005. During 2006 we introduced our new athletically inspired footwear for U.S. Postal Service
employees and in 2007 we will begin shipping product to the Transportation Security Administration’s workforce.

LETTER TO SHAREHOLDERS

Retail

Our retail sales, which include our Lehigh retail-on-wheels business and our two Lehigh Outfitters concept
stores, increased slightly to $59.2 million in 2006 compared to $58.4 million of retail sales last year. We have now
owned this business for two years and during that time we have made key investments to upgrade our operating
platform in order to maximize our growth opportunities and improve profitability. There is still work to be done,
however we feel we are in a much better position than a year ago to capitalize on our future prospects. Importantly,
Lehigh continues to be a leader in occupational footwear, a position that was further solidified by the recent
bankruptcy protection filing from one of our biggest competitors.

Military

Last year was a frustrating one for our military footwear business. After receiving a $30.0 million third-party
contract in September 2005 to produce “Hot Weather” boots for the U.S. military, the contract was terminated in
January 2006 by the government for convenience. Despite the fact that the termination was in no way related to
Rocky’s ability to produce the specified footwear, we were clearly disappointed by the decision, particularly as we
had already invested capital in the necessary raw materials. During the remainder of the year, the U.S. military
issued no other significant footwear contracts as we believe they worked through existing inventory. As a result,
footwear sales to the military were approximately $1.1 million in 2006 versus $27.7 million in 2005. In 2007, we
will continue to solicit orders in order to better utilize our manufacturing facilities, however our primary focus
remains on building the market position of our branded business.

Conclusion

Despite some of the setbacks from this past year, we continue to be confident about the long-term prospects for our
portfolio of owned brands — Rocky Outdoor Gear», Georgia Boot», Durango»and Lehigh», each of which has a
strong tradition of providing durable, long lasting footwear for their respective target markets. Looking ahead, we
are encouraged by the introduction of new innovations and updated designs in both our footwear and apparel and
believe this will translate into improved performances in the future.

At the same time, we are optimistic about the opportunities we believe exist for our licensed footwear brand
Dickies», particularly in the broader mass market channels of distribution. Furthermore, our two newest licensed
brands, Zumfoot» and Michelin», open up new categories, including casual, dress casual, and leisure, which, when
combined, make up more than half of the $30 billion non-athletic U.S. footwear market.

As always, we are greatly indebted to our employees, customers and valued shareholders — it is through your
continued support that the success of Rocky Brands, Inc. will be possible. We move ahead more focused than ever
on successfully executing our business plan and returning our company to historical rates of sales growth and
profitability.

Sincerely,

Mike Brooks
Chairman & Chief Executive Officer

LETTER TO SHAREHOLDERS

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K

(Mark One)
¥

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

For the fiscal year ended December 31, 2006

OR

n

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

Commission File Number: 0-21026

ROCKY BRANDS, INC.

(Exact name of Registrant as specified in its charter)

Ohio
(State or other jurisdiction of
incorporation or organization)

No. 31-1364046
(I.R.S. Employer
Identification No.)

39 East Canal Street
Nelsonville, Ohio 45764
(Address of principal executive offices, including zip code)
(740) 753-1951
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which Registered

Common Shares, without par value
Preferred Stock Purchase Rights

The NASDAQ Stock Market, Inc.
The NASDAQ Stock Market, Inc

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the

Securities Act). Yes n No ¥

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of

the Act. Yes n No ¥

Indicate by checkmark 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, and (2) has been subject to the filing
requirements for at least the past 90 days. YES ¥ NO n

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. n

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-

accelerated filer (as defined in Exchange Act Rule 12b-2).
Large accelerated filer n

Accelerated filer ¥

Non-accelerated filer n

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

Act). Yes n

No ¥

The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant was

approximately $105,909,129 on June 30, 2006.

There were 5,456,163 shares of the Registrant’s Common Stock outstanding on March 9, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the 2007 Annual Meeting of Shareholders are incorporated by

reference in Part III.

ROCKY BRANDS, INC.

1

TABLE OF CONTENTS

PART I

Business

Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.

Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuers Purchases

PART II

of Equity Securities
Selected Consolidated Financial Data

Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information

Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

PART III

Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.

Principal Accounting Fees and Services

Item 15. Exhibits and Financial Statement Schedules
SIGNATURES

PART IV

Page

3
11
17
17
17
17

17
19
19
29
29
29
29
33

33
33

33
33
33

34
38

2

ROCKY BRANDS, INC.

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The
words “anticipate,” “believe,” “expect,” “estimate,” and “project” and similar words and expressions identify
forward-looking statements which speak only as of the date hereof. Investors are cautioned that such statements
involve risks and uncertainties that could cause actual results to differ materially from historical or anticipated
results due to many factors, including, but not limited to, the factors discussed in “Item 1A, Risk Factors.” The
Company undertakes no obligation to publicly update or revise any forward-looking statements.

ITEM 1. BUSINESS.

PART I

All references to “we,” “us,” “our,” “Rocky Brands,” or the “Company” in this Annual Report on Form 10-K

mean Rocky Brands, Inc. and Subsidiaries.

We are a leading designer, manufacturer and marketer of premium quality footwear marketed under a portfolio
of well recognized brand names including Rocky Outdoor Gear, Georgia Boot, Durango, Lehigh and Dickies. Our
brands have a long history of representing high quality, comfortable, functional and durable footwear and our
products are organized around four target markets: outdoor, work, duty and western. Our footwear products
incorporate varying features and are positioned across a range of suggested retail price points from $29.95 for our
value priced products to $249.95 for our premium products. In addition, as part of our strategy of outfitting
consumers from head-to-toe, we market complementary branded apparel and accessories that we believe leverage
the strength and positioning of each of our brands.

Our products are distributed through three distinct business segments: wholesale, retail and military. In our
wholesale business, we distribute our products through a wide range of distribution channels representing over
10,000 retail store locations in the U.S. and Canada. Our wholesale channels vary by product line and include
sporting goods stores, outdoor retailers, independent shoe retailers, hardware stores, catalogs, mass merchants,
uniform stores, farm store chains, specialty safety stores and other specialty retailers. Our retail business includes
direct sales of our products to consumers through our Lehigh Safety Shoes mobile and retail stores (including a fleet
of 78 trucks, supported by 40 small warehouses that include retail stores, which we refer to as mini-stores), our
Rocky outlet store and our websites. We also sell footwear under the Rocky label to the U.S. military.

In 2001, we undertook a number of strategic initiatives designed to increase our sales and improve our margins
while mitigating the seasonality and weather related risk of our outdoor product lines. These strategic initiatives
included:

(cid:129) extending our lines of footwear into additional markets with the introduction of footwear models for the

work and western markets;

(cid:129) expanding our product offerings into complementary apparel to leverage the strength of our Rocky Outdoor

Gear brand and offer our consumers a broader, head-to-toe product assortment; and

(cid:129) closing our continental U.S. manufacturing facility and sourcing a greater portion of our products from third

party facilities overseas.

Acquisition of EJ Footwear Group

In January 2005, to further support our strategic objectives, we acquired EJ Footwear Group, a leading
designer and developer of branded footwear products marketed under a collection of well recognized brands in the
work, western and outdoor markets, including Georgia Boot, Durango and Lehigh. EJ Footwear was also the
exclusive licensee of the Dickies brand for most footwear products. The acquisition was part of our strategy to
expand our portfolio of leading brands and strengthen our market position in the work and western footwear
markets, and to extend our product offerings to include brands positioned across multiple feature sets and price
points. The EJ Footwear acquisition also expanded our distribution channels and diversified our retailer base.

ROCKY BRANDS, INC.

3

We believe the EJ Footwear acquisition offers us multiple opportunities to expand and strengthen our
combined business. We intend to extend certain of these brands into additional markets, such as outdoor, work and
duty, where we believe the brand image is consistent with the target market. We also believe that the strength of each
of these brands in their respective markets will allow us to introduce complementary apparel and accessories,
similar to our head-to-toe strategy for Rocky Outdoor Gear.

Competitive Strengths

Our competitive strengths include:

(cid:129) Strong portfolio of brands. We believe the Rocky Outdoor Gear, Georgia Boot, Durango, Lehigh and
Dickies brands are well recognized and established names that have a reputation for performance, quality
and comfort in the markets they serve: outdoor, work, duty and western. We plan to continue strengthening
these brands through product innovation in existing footwear markets, by extending certain of these brands
into our other target markets and by introducing complementary apparel and accessories under our owned
brands.

(cid:129) Commitment to product innovation. We believe a critical component of our success in the marketplace has
been a result of our continued commitment to product innovation. Our consumers demand high quality,
durable products that incorporate the highest level of comfort and the most advanced technical features and
designs. We have a dedicated group of product design and development professionals, including well
recognized experts in the footwear and apparel industries, who continually interact with consumers to better
understand their needs and are committed to ensuring our products reflect the most advanced designs,
features and materials available in the marketplace.

(cid:129) Long-term retailer relationships. We believe that our long history of designing, manufacturing and
marketing premium quality, branded footwear has enabled us to develop strong relationships with our
retailers in each of our distribution channels. We reinforce these relationships by continuing to offer
innovative footwear products, by continuing to meet the individual needs of each of our retailers and by
working with our retailers to improve the visual merchandising of our products in their stores. We believe
that strengthening our relationships with retailers will allow us to increase our presence through additional
store locations and expanded shelf space, improve our market position in a consolidating retail environment
and enable us to better understand and meet the evolving needs of both our retailers and consumers.

(cid:129) Diverse product sourcing and manufacturing capabilities. We believe our strategy of utilizing both
company operated and third party facilities for the sourcing of our products offers several advantages.
Operating our own facilities significantly improves our knowledge of the entire production process, which
allows us to more efficiently source product from third parties that is of the highest quality and at the lowest
cost available. We intend to continue to source a higher proportion of our products from third party
manufacturers, which we believe will enable us to obtain high quality products at lower costs per unit.

Growth Strategy

We intend to increase our sales through the following strategies:

(cid:129) Expand into new target markets under existing brands. We believe there is significant opportunity to
extend certain of our brands into our other target markets. We intend to continue to introduce products across
varying feature sets and price points in order to meet the needs of our retailers.

(cid:129) Increase apparel offerings. We believe the long history and authentic heritage of our owned brands provide
significant opportunity to extend each of these brands into complementary apparel. We intend to continue to
increase our Rocky apparel offerings and believe that similar opportunities exist for our Georgia Boot and
Durango brands in their respective markets.

(cid:129) Cross-sell our brands to our retailers. The acquisition of EJ Footwear expanded our distribution channels
and diversified our retailer base. We believe that many retailers of our existing and acquired brands target
consumers with similar characteristics and, as a result, we believe there is significant opportunity to offer

4

ROCKY BRANDS, INC.

each of our retailers a broader assortment of footwear and apparel that target multiple markets and span a
range of feature sets and price points.

(cid:129) Expand our retail sales through Lehigh. We believe that our Lehigh mobile and retail stores offer us an
opportunity to significantly expand our direct sales of work-related footwear. We intend to grow our Lehigh
business by adding new customers, expanding the portfolio of brands we offer and increasing our footwear
and apparel offerings. In addition, over time, we plan to upgrade the locations of some of our mini-stores, as
well as expand the breadth of products sold in these stores.

(cid:129) Continue to add new retailers. We believe there is an opportunity to add additional retailers in certain of
our distribution channels. We have identified a number of large, national footwear retailers that target
consumers whom we believe identify with the Georgia Boot, Durango and Dickies brands.

(cid:129) Acquire or develop new brands. We intend to continue to acquire or develop new brands that are
complementary to our portfolio and could leverage our operational infrastructure and distribution network.

Product Lines

Our product lines consist of high quality products that target the following markets:

(cid:129) Outdoor. Our outdoor product lines consist of footwear, apparel and accessory items marketed to outdoor
enthusiasts who spend time actively engaged in activities such as hunting, fishing, camping or hiking. Our
consumers demand high quality, durable products that incorporate the highest level of comfort and the most
advanced technical features, and we are committed to ensuring our products reflect the most advanced
designs, features and materials available in the marketplace. Our outdoor product lines consist of all-season
sport/hunting footwear, apparel and accessories that are typically waterproof and insulated and are designed
to keep outdoorsmen comfortable on rugged terrain or in extreme weather conditions.

(cid:129) Work. Our work product lines consist of footwear and apparel marketed to industrial and construction
workers, as well as workers in the hospitality industry, such as restaurants or hotels. All of our work products
are specially designed to be comfortable, incorporate safety features for specific work environments or tasks
and meet applicable federal and other standards for safety. This category includes products such as safety toe
footwear for steel workers and non-slip footwear for kitchen workers.

(cid:129) Duty. Our duty product line consists of footwear products marketed to law enforcement, security personnel
and postal employees who are required to spend a majority of time at work on their feet. All of our duty
footwear styles are designed to be comfortable, flexible, lightweight, slip resistant and durable. Duty
footwear is generally designed to fit as part of a uniform and typically incorporates stylistic features, such as
black leather uppers in addition to the comfort features that are incorporated in all of our footwear products.

(cid:129) Western. Our western product line currently consists of authentic footwear products marketed to farmers
and ranchers who generally live in rural communities in North America. We also selectively market our
western footwear to consumers enamored with the western lifestyle.

Our products are marketed under four well-recognized, proprietary brands, Rocky Outdoor Gear, Georgia

Boot, Durango and Lehigh, in addition to the licensed Dickies brand.

Rocky Outdoor Gear

Rocky Outdoor Gear, established in 1979, is our premium priced line of branded footwear, apparel and
accessories. We currently design Rocky Outdoor Gear products for each of our four target markets and offer our
products at a range of suggested retail price points: $99.95 to $249.95 for our footwear products, $29.95 to $49.95
for tops and bottoms in our apparel lines and $49.95 to $199.95 for our basic and technical outerwear.

The Rocky Outdoor Gear brand originally targeted outdoor enthusiasts, particularly hunters, and has since
become the market leader in the hunting boot category. In 2002, we also extended into hunting apparel, including
jackets, pants, gloves and caps. Our Rocky Outdoor Gear products for hunters and other outdoor enthusiasts are
designed for specific weather conditions and the diverse terrains of North America. These products incorporate a

ROCKY BRANDS, INC.

5

range of technical features and designs such as Gore-Tex waterproof breathable fabric, 3M Thinsulate insulation,
nylon Cordura fabric and camouflaged uppers featuring either Mossy Oak or Realtree patterns. Rugged outsoles
made by industry leaders like Vibram are sometimes used in conjunction with our proprietary design features like
the “Rocky Ride Comfort System” to make the products durable and easy to wear.

We also produce Rocky Outdoor Gear duty footwear targeting law enforcement professionals, security
workers and postal service employees, and we believe we have established a leading market share position in this
category.

In 2002, we introduced Rocky Outdoor Gear work footwear designed for varying weather conditions or
difficult terrain, particularly for people who make their living outdoors such as those in lumber or forestry
occupations. These products typically include many of the proprietary features and technologies that we incorporate
in our hunting and outdoor products. Similar to our strategy for the outdoor market, we introduced rugged work
apparel in 2004, such as ranch jackets and carpenter jeans.

We have also introduced western influenced work boots for farmers and ranchers. Most of these products are
waterproof, insulated and utilize our proprietary comfort systems. We also recently introduced some men’s and
women’s casual western footwear for consumers enamored with western influenced fashion.

Georgia Boot

Georgia Boot is our moderately priced, high quality line of work footwear. Georgia Boot footwear is sold at
suggested retail price points ranging from $79.95 to $109.95. This line of products primarily targets construction
workers and those who work in industrial plants where special safety features are required for hazardous work
environments. Many of our boots incorporate steel toes or metatarsal guards to protect wearers’ feet from heavy
objects and non-slip outsoles to prevent slip related injuries in the work place. All of our boots are designed to help
prevent injury and subsequent work loss and are designed according to standards determined by the Occupational
Safety & Health Administration or other standards required by employers.

In addition, we market a line of Georgia Boot footwear to brand loyal consumers for hunting and other outdoor
activities. These products are primarily all leather boots distributed in the western and southwestern states where
hunters do not require camouflaged boots or other technical features incorporated in our Rocky Outdoor Gear.

We believe the Georgia Boot brand can be extended into moderately priced duty footwear as well as outdoor

and work apparel.

Durango

Durango is our moderately priced, high quality line of western footwear. Over its 40 year history, the brand has
developed broad appeal and earned a reputation for authenticity and quality in the western footwear market. Our
current line of products is offered at suggested retail price points ranging from $79.95 to $149.95, and we market
products designed for both work and casual wear. Our Durango line of products primarily targets farm and ranch
workers who live in the heartland where western influenced footwear and apparel is worn for work and casual wear
and, to a lesser extent, this line appeals to urban consumers enamored with western influenced fashion. Many of our
western boots marketed to farm and ranch workers are designed to be durable, including special “barn yard acid
resistant” leathers to maintain integrity of the uppers, and incorporate our proprietary “Comfort Core” system to
increase ease of wear and reduce foot fatigue. Other products in the Durango line that target casual and fashion
oriented consumers have colorful leather uppers and shafts with ornate stitch patterns and are offered for men,
women and children.

Lehigh

The Lehigh brand was launched in 1922 and is our moderately priced, high quality line of safety shoes sold at
suggested retail price points ranging from $29.95 to $149.95. Our current line of products is designed to meet
occupational safety footwear needs. Most of this footwear incorporates steel toes to protect workers and often
incorporates other safety features such as metatarsal guards or non-slip outsoles. Additionally, certain models
incorporate durability features to combat abrasive surfaces or caustic substances often found in some work places.

6

ROCKY BRANDS, INC.

With the recent shift in manufacturing jobs to service jobs in the U.S., Lehigh began marketing products for the
hospitality industry. These products have non-slip outsoles designed to reduce slips, trips and falls in kitchen
environments where floors are often tiled and greasy. Price points for this kind of footwear range from $29.95 to
$49.95.

Dickies

Dickies is a high quality, value priced line of work footwear. The Dickies brand, owned by the Williamson-
Dickie Manufacturing Co. since 1922, has a long history of providing value priced apparel in the work and casual
markets and is a leading brand name in that category.

Georgia Boot secured the license to design, develop and manufacture footwear under the Dickies name in
2003. We currently offer work products targeted at the construction trades and agricultural and hospitality workers.
Our Dickies footwear incorporates specific design features to appeal to these workers and is offered at suggested
retail price points ranging from $49.95 to $89.95. The Dickies brand is well recognized by consumers and we plan
to introduce value priced footwear in the outdoor, duty and western markets.

Sales and Distribution

Our products are distributed through three distinct business segments: wholesale, retail and military. You can
find more information regarding our three business segments in Note 15 to our consolidated financial statements.

Wholesale

In the U.S., we distribute Rocky Outdoor Gear, Georgia Boot, Durango and Dickies products through a wide
range of wholesale distribution channels. As of December 31, 2006, our products were offered for sale at over
10,000 retail locations in the U.S. and Canada.

We sell our products to wholesale accounts in the U.S. primarily through a dedicated in-house sales team who
carry our branded products exclusively, as well as independent sales representatives who carry our branded products
and other non-competing products. Our sales force for Rocky Outdoor Gear is organized around major accounts,
including Bass Pro Shops, Cabela’s, Dick’s Sporting Goods and Gander Mountain, and around our target markets:
outdoor, work, duty and western. For our Georgia Boot, Durango and Dickies brands, our sales employees are
organized around each brand and target a broad range of distribution channels. All of our sales people actively call
on their retail customer base to educate them on the quality, comfort, technical features and breadth of our product
lines and to ensure that our products are displayed effectively at retail locations.

Our wholesale distribution channels vary by market:

(cid:129) Our outdoor products are sold primarily through sporting goods stores, outdoor specialty stores, catalogs and

mass merchants.

(cid:129) Our work-related products are sold primarily through retail uniform stores, catalogs, farm store chains,
specialty safety stores, independent shoe stores and hardware stores. In addition to these retailers, we also
market Dickies work-related footwear to select large, national retailers.

(cid:129) Our duty products are sold primarily through uniform stores and catalog specialists.

(cid:129) Our western products are sold through western stores, work specialty stores, specialty farm and ranch stores

and more recently, fashion oriented footwear retailers.

Retail

We market products directly to consumers through three retail strategies: mobile and retail stores, our outlet

store and our websites.

ROCKY BRANDS, INC.

7

Mobile and Retail Stores

Lehigh markets branded work footwear, principally through mobile stores, to industrial and hospitality related
corporate customers across the U.S. We work closely with our customers to select footwear products best suited for
the specific safety needs of their work site and that meet the standards determined by the Occupational Safety &
Health Administration or other standards required by our customers. Our customers include large, national
companies such as 3M, Abbott Laboratories, Alcoa, Carnival Cruise Lines, Federal Express, IBM and Texas
Instruments.

Our seventy-eight Lehigh mobile trucks, supported by our thirty-eight small warehouses, are stocked with
work footwear, as established by the specific needs of our customers, and typically include our owned brands
augmented by branded work footwear from third parties including Dunham, Skechers and Timberland Pro. Prior to
a scheduled site visit, Lehigh sales managers consult with our corporate customers to ensure that our trucks are
appropriately stocked for their specific needs. Our trucks then perform a site visit where customer employees select
work related footwear and apparel. Our corporate customers generally purchase footwear or provide payroll
deduction plans for footwear purchases by their employees. We believe that our ability to service work sites across
the U.S. allows us to effectively compete for large, national customers who have employees located throughout the
U.S.

We also operate thirty-eight mini-stores located in our small warehouses, which are primarily situated in
industrial parks. Over time, we intend to improve some of these locations to sites that experience higher foot traffic
in order to better utilize our retail square footage and leverage our fixed costs. We also intend to expand the breadth
and depth of products sold in these mini-stores to include casual and outdoor footwear and apparel to offer a broader
range of products to our consumers. We recently began testing this concept in two stores located in Wisconsin.

Outlet Store

We operate the Rocky Outdoor Gear outlet store in Nelsonville, Ohio. Our outlet store primarily sells first
quality or discontinued products in addition to a limited amount of factory damaged goods. Related products from
other manufacturers are also sold in the store. Our outlet store allows us to showcase the breadth of our product lines
as well as to cost-effectively sell slow moving inventory. Our outlet store also provides an opportunity to interact
with consumers to better understand their needs.

Websites

We

sell our product

at www.rockyboots.com, www.georgiaboot.com,
www.lehighsafetyshoes.com, www.slipgrips.com and www.bootsunlimited.com. We believe that our internet
presence allows us to showcase the breadth and depth of our product lines in each of our target markets and
enables us to educate our consumers about the unique technical features of our products.

lines on our websites

Military

While we are focused on continuing to build our wholesale and retail business, we also actively bid on footwear
contracts with the U.S. military, which requires products to be made in the U.S. Our manufacturing facilities in
Puerto Rico, a U.S. territory, allow us to competitively bid for such contracts. In February 2005, we were awarded a
$21 million order from the U.S. military for production of infantry combat boots that was completed in 2005. We
currently have outstanding bids on which we are waiting for a response. However, there is no assurance that we will
continue to be awarded contracts by the U.S. military.

All of our footwear for the U.S. military is currently branded Rocky. We believe that many U.S. service men
and women are active outdoor enthusiasts and may be employed in many of the work and duty markets that we
target with our brands. As a result, we believe our sales to the U.S. military serve as an opportunity to reach our
target demographic with high quality branded products.

8

ROCKY BRANDS, INC.

Marketing and Advertising

We believe that our brands have a reputation for high quality, comfort, functionality and durability built
through their long history in the markets they serve. To further increase the strength and awareness of our brands, we
have developed comprehensive marketing and advertising programs to gain national exposure and expand brand
awareness for each of our brands in their target markets.

We have focused the majority of our advertising efforts on consumers. A key component of this strategy
includes advertising through targeted national and local cable programs and print publications aimed at audiences
that share the demographic profile of our typical customers. For example, we advertise in such print publications as
Outdoor Life, American Hunter and BassMaster, on targeted cable broadcasts, including NASCAR, Bass Pro
Outdoors, Knight & Hale Ultimate Hunt, North American White Tail and Mossy Oaks Hunting the Country,
appearing on such cable channels as The Outdoor Channel, The SPEED Channel, Outdoor Life Network and ESPN.
In addition, we promote our products on national radio broadcasts and through event sponsorship. We are a title
sponsor of the Professional Bull Riders, which is broadcasted on Outdoor Life Network and NBC, and provides
significant national exposure for all of our brands. We also sponsor Tony Mendes, an accomplished and well known
professional bull rider. Our print advertisements and television commercials emphasize the technical features of our
products as well as their high quality, comfort, functionality and durability.

We also support independent dealers by listing their locations in our national print advertisements. In addition
to our national advertising campaign, we have developed attractive merchandising displays and store-in-store
concept fixturing that are available to our retailers who purchase the breadth of our product lines. We also attend
numerous tradeshows, including the World Shoe Association show, the Denver International Western Retailer
Market and the Shooting, Hunting, Outdoor Exposition. Tradeshows allow us to showcase our entire product line to
retail buyers and have historically been an important source of new accounts.

Product Design and Development

We believe that product innovation is a key competitive advantage for us in each of our markets. Our goal in
product design and development is to continue to create and introduce new and innovative footwear and apparel
products that combine our standards of quality, functionality and comfort and that meet the changing needs of our
retailers and consumers. Our product design and development process is highly collaborative and is typically
initiated both internally by our development staff and externally by our retailers and suppliers, whose employees are
generally active users of our products and understand the needs of our consumers. Our product design and
development personnel, marketing personnel and sales representatives work closely together to identify oppor-
tunities for new styles, camouflage patterns, design improvements and newer, more advanced materials. We have a
dedicated group of product design and development professionals, some of whom are well recognized experts in the
footwear and apparel industries, who continually interact with consumers to better understand their needs and are
committed to ensuring our products reflect the most advanced designs, features and materials available in the
marketplace.

Manufacturing and Sourcing

We manufacture footwear in facilities that we operate in the Dominican Republic and Puerto Rico, and source
footwear, apparel and accessories from third party facilities, primarily in China. We do not have long-term contracts
with any of our third party manufacturers. Two of our third party manufacturers in China, with which we have had
relationships for over 20 years, and that have historically accounted for a significant portion of our manufacturing,
represented approximately 33% and 11%of our net sales in 2006. We believe that operating our own facilities
significantly improves our knowledge of the entire raw material sourcing and manufacturing process enabling us to
more efficiently source finished goods from third parties that are of the highest quality and at the lowest cost
available. In addition, our Puerto Rican facilities allow us to produce footwear for the U.S. military and other
commercial business that requires production by a U.S. manufacturer. Sourcing products from offshore third party
facilities generally enables us to lower our costs per unit while maintaining high product quality, as well as limits the
capital investment required to establish and maintain company operated manufacturing facilities. We expect that a
greater portion of our products will be sourced from third party facilities in the future as a result of our acquisition of

ROCKY BRANDS, INC.

9

EJ Footwear, which sourced all of its products from third parties. Because quality is an important part of our value
proposition to our retailers and consumers, we source products from manufacturers who have demonstrated the
intent and ability to maintain the high quality that has become associated with our brands.

Quality control is stressed at every stage of the manufacturing process and is monitored by trained quality
assurance personnel at each of our manufacturing facilities, including our third party factories. In addition, we
utilize a team of procurement, quality control and logistics employees in our China office to visit factories to
conduct quality control reviews of raw materials, work in process inventory and finished goods. We also utilize
quality control personnel at our finished goods distribution facilities to conduct quality control testing on incoming
sourced finished goods and raw materials and inspect random samples from our finished goods inventory from each
of our manufacturing facilities to ensure that all items meet our high quality standards.

Our products are distributed in the U.S. and Canada from our finished goods distribution facilities located near
Logan, Ohio and Waterloo, Ontario, respectively. With the acquisition of EJ Footwear, our products are also
distributed in the U.S. from a third party distribution facility in Tunkhannock, Pennsylvania. Certain of our retailers
receive shipments directly from our manufacturing sources, including all of our U.S. military sales, which are
shipped directly from our manufacturing facilities in Puerto Rico.

Suppliers

We purchase raw materials from sources worldwide. We do not have any long-term supply contracts for the
purchase of our raw materials, except for limited blanket orders on leather to protect wholesale selling prices for an
extended period of time. The principal raw materials used in the production of our products, in terms of dollar value,
are leather, Gore-Tex waterproof breathable fabric, Cordura nylon fabric and soling materials. We believe these
materials will continue to be available from our current suppliers. However, in the event these materials are not
available from our current suppliers, we believe these products, or similar products, would be available from
alternative sources.

Seasonality and Weather

Historically, we experienced significant seasonal fluctuations in our business because we derive a significant
portion of our revenues from sales of our outdoor products. Many of our outdoor products are used by consumers in
cold or wet weather. As a result, a majority of orders for these products are placed by our retailers in January through
April for delivery in July through October. In order to meet demand, we must manufacture and source outdoor
footwear year round to be in a position to ship advance orders for these products during the last two quarters of each
year. Accordingly, average inventory levels have been highest during the second and third quarters of each year and
sales have been highest in the last two quarters of each year. In addition, mild or dry weather conditions historically
have had a material adverse effect on sales of our outdoor products, particularly if they occurred in broad
geographical areas during late fall or early winter. Since our acquisition of EJ Footwear, we have experienced and
we expect that we will continue to experience less seasonality and that our business will be subject to reduced
weather risk because we now derive a higher proportion of our sales from work-related footwear products.
Generally, work, duty and western footwear is sold year round and is not subject to the same level of seasonality or
variation in weather as our outdoor product lines. However, because of seasonal fluctuations and variations in
weather conditions from year to year, there is no assurance that the results for any particular interim period will be
indicative of results for the full year or for future interim periods.

Backlog

At December 31, 2006, our backlog was $10.3 million compared to $6.6 million at December 31, 2005.
Because a substantial portion of our orders are placed by our retailers in January through April for delivery in July
through October, our backlog is lowest during the October through December period and peaks during the April
through June period. Factors other than seasonality could have a significant impact on our backlog and, therefore,
our backlog at any one point in time may not be indicative of future results. Generally, orders may be canceled by
retailers prior to shipment without penalty.

10

ROCKY BRANDS, INC.

Patents, Trademarks and Trade Names

We own numerous design and utility patents for footwear, footwear components (such as insoles and outsoles)
and outdoor apparel in the U.S. and in foreign countries including Canada, Mexico, China and Taiwan. We own U.S.
and certain foreign registrations for the trademarks used in our business, including our marks Rocky, Rocky Outdoor
Gear, Georgia Boot, Durango and Lehigh. In addition, we license trademarks, including Dickies, Gore-Tex,
Michelin and Zumfoot, in order to market our products. We have an exclusive license through December 31, 2007 to
use the Dickies brand for footwear in our target markets. Our license with Dickies may be terminated by Dickies
prior to December 31, 2007 if we do not achieve certain minimum net shipments in a particular year. While we have
an active program to protect our intellectual property by filing for patents and trademarks, we do not believe that our
overall business is materially dependent on any individual patent or trademark. We are not aware of any
infringement of our intellectual property rights or that we are infringing any intellectual property rights owned
by third parties. Moreover, we are not aware of any material conflicts concerning our trademarks or our use of
trademarks owned by others.

Competition

We operate in a very competitive environment. Product function, design, comfort, quality, technological and
material improvements, brand awareness, timeliness of product delivery and pricing are all important elements of
competition in the markets for our products. We believe that the strength of our brands, the quality of our products
and our long-term relationships with a broad range of retailers allows us to compete effectively in the footwear and
apparel markets that we serve. However, we compete with footwear and apparel companies that have greater
financial, marketing, distribution and manufacturing resources than we do. In addition, many of these competitors
have strong brand name recognition in the markets they serve.

The footwear and apparel industry is also subject to rapid changes in consumer preferences. Some of our
product lines are susceptible to changes in both technical innovation and fashion trends. Therefore, the success of
these products and styles are more dependent on our ability to anticipate and respond to changing product, material
and design innovations as well as fashion trends and consumer demands in a timely manner. Our inability or failure
to do so could adversely affect consumer acceptance of these product lines and styles and could have a material
adverse effect on our business, financial condition and results of operations.

Employees

At December 31, 2006, we had approximately 1,325 employees. Approximately 800 of our employees work in
our manufacturing facilities in the Dominican Republic and Puerto Rico. None of our employees is represented by a
union. We believe our relations with our employees are good.

Available Information

We make available free of charge on our corporate website, www.rockyboots.com, our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as
soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and
Exchange Commission.

ITEM 1A. RISK FACTORS.

Business Risks

Expanding our brands into new footwear and apparel markets may be difficult and expensive, and if we
are unable to successfully continue such expansion, our brands may be adversely affected, and we may
not achieve our planned sales growth.

Our growth strategy is founded substantially on the expansion of our brands into new footwear and apparel
markets. New products that we introduce may not be successful with consumers or one or more of our brands may
fall out of favor with consumers. If we are unable to anticipate, identify or react appropriately to changes in

ROCKY BRANDS, INC.

11

consumer preferences, we may not grow as fast as we plan to grow or our sales may decline, and our brand image
and operating performance may suffer.

Furthermore, achieving market acceptance for new products will likely require us to exert substantial product
development and marketing efforts, which could result in a material increase in our selling, general and admin-
istrative, or SG&A, expenses, and there can be no assurance that we will have the resources necessary to undertake
such efforts. Material increases in our SG&A expenses could adversely impact our results of operations and cash
flows.

We may also encounter difficulties in producing new products that we did not anticipate during the
development stage. Our development schedules for new products are difficult to predict and are subject to change
as a result of shifting priorities in response to consumer preferences and competing products. If we are not able to
efficiently manufacture newly-developed products in quantities sufficient to support retail distribution, we may not
be able to recoup our investment in the development of new products. Failure to gain market acceptance for new
products that we introduce could impede our growth, reduce our profits, adversely affect the image of our brands,
erode our competitive position and result in long term harm to our business.

A majority of our products are produced outside the U.S. where we are subject to the risks of interna-
tional commerce.

A majority of our products are produced in the Dominican Republic and China. Therefore, our business is

subject to the following risks of doing business offshore:

(cid:129) the imposition of additional United States legislation and regulations relating to imports, including quotas,

duties, taxes or other charges or restrictions;

(cid:129) foreign governmental regulation and taxation;

(cid:129) fluctuations in foreign exchange rates;

(cid:129) changes in economic conditions;

(cid:129) transportation conditions and costs in the Pacific and Caribbean;

(cid:129) changes in the political stability of these countries; and

(cid:129) changes in relationships between the United States and these countries.

If any of these factors were to render the conduct of business in these countries undesirable or impracticable,
we would have to manufacture or source our products elsewhere. There can be no assurance that additional sources
or products would be available to us or, if available, that these sources could be relied on to provide product at terms
favorable to us. The occurrence of any of these developments would have a material adverse effect on our business,
financial condition, results of operations and cash flows.

Our success depends on our ability to anticipate consumer trends.

Demand for our products may be adversely affected by changing consumer trends. Our future success will
depend upon our ability to anticipate and respond to changing consumer preferences and technical design or
material developments in a timely manner. The failure to adequately anticipate or respond to these changes could
have a material adverse effect on our business, financial condition, results of operations and cash flows.

Loss of services of our key personnel could adversely affect our business.

The development of our business has been, and will continue to be, highly dependent upon Mike Brooks,
Chairman and Chief Executive Officer, David Sharp, President and Chief Operating Officer, and James McDonald,
Executive Vice President, Chief Financial Officer and Treasurer. Mr. Brooks has an at-will employment agreement
with us. The employment agreement provides that in the event of termination of employment, he will receive a
severance benefit and may not compete with us for a period of one year. None of our other executive officers and key

12

ROCKY BRANDS, INC.

employees have an employment agreement with our company. The loss of the services of any of these officers could
have a material adverse effect on our business, financial condition, results of operations and cash flows.

We depend on a limited number of suppliers for key production materials, and any disruption in the sup-
ply of such materials could interrupt product manufacturing and increase product costs.

We purchase raw materials from a number of domestic and foreign sources. We do not have any long-term
supply contracts for the purchase of our raw materials, except for limited blanket orders on leather. The principal
raw materials used in the production of our footwear, in terms of dollar value, are leather, Gore-Tex waterproof
breathable fabric, Cordura nylon fabric and soling materials. Availability or change in the prices of our raw
materials could have a material adverse effect on our business, financial condition, results of operations and cash
flows.

We currently have a licensing agreement for the use of Gore-Tex waterproof breathable fabric, and any
termination of this licensing agreement could impact our sales of waterproof products.

We are currently one of the largest customers of Gore-Tex waterproof breathable fabric for use in footwear.
Our licensing agreement with W.L. Gore & Associates, Inc. may be terminated by either party upon advance written
notice to the other party by October 1 for termination effective December 31 of that same year. Although other
waterproofing techniques and materials are available, we place a high value on our Gore-Tex waterproof breathable
fabric license because Gore-Tex has high brand name recognition with our customers. The loss of our license to use
Gore-Tex waterproof breathable fabric could have a material adverse effect on our competitive position, which
could have a material adverse effect on our business, financial condition, results of operations and cash flows.

We currently have a licensing agreement for the use of the Dickies trademark, and any termination of
this licensing agreement could impact our sales and growth strategy.

We have an exclusive license through December 31, 2007 to use the Dickies brand on all footwear products,
except nursing shoes. The Dickies brand is well recognized by consumers and we plan to introduce value priced
Dickies footwear targeting additional markets, including outdoor, duty and western. Our license with Dickies may
be terminated by Dickies prior to December 31, 2007 if we do not achieve certain minimum net shipments in a
particular year. Furthermore, it is not certain whether we will be able to renew our license to use the Dickies brand
after the expiration or termination of the current license. The loss of our license to use the Dickies brand could have
a material adverse effect on our competitive position and growth strategy, which could have a material adverse
effect on our business, financial condition, results of operations and cash flows.

Our outdoor products are seasonal.

We have historically experienced significant seasonal fluctuations in our business because we derive a
significant portion of our revenues from sales of our outdoor products. Many of our outdoor products are used by
consumers in cold or wet weather. As a result, a majority of orders for these products are placed by our retailers in
January through April for delivery in July through October. In order to meet demand, we must manufacture and
source outdoor footwear year round to be in a position to ship advance orders for these products during the last two
quarters of each year. Accordingly, average inventory levels have been highest during the second and third quarters
of each year and sales have been highest in the last two quarters of each year. There is no assurance that we will have
either sufficient inventory to satisfy demand in any particular quarter or have sufficient demand to sell substantially
all of our inventory without significant markdowns.

Our outdoor products are sensitive to weather conditions.

Historically, our outdoor products have been used primarily in cold or wet weather. Mild or dry weather has in
the past and may in the future have a material adverse effect on sales of our products, particularly if mild or dry
weather conditions occur in broad geographical areas during late fall or early winter. Also, due to variations in
weather conditions from year to year, results for any single quarter or year may not be indicative of results for any
future period.

ROCKY BRANDS, INC.

13

Our business could suffer if our third party manufacturers violate labor laws or fail to conform to gener-
ally accepted ethical standards.

We require our third party manufacturers to meet our standards for working conditions and other matters
before we are willing to place business with them. As a result, we may not always obtain the lowest cost production.
Moreover, we do not control our third party manufacturers or their respective labor practices. If one of our third
party manufacturers violates generally accepted labor standards by, for example, using forced or indentured labor or
child labor, failing to pay compensation in accordance with local law, failing to operate its factories in compliance
with local safety regulations or diverging from other labor practices generally accepted as ethical, we likely would
cease dealing with that manufacturer, and we could suffer an interruption in our product supply. In addition, such a
manufacturer’s actions could result in negative publicity and may damage our reputation and the value of our brand
and discourage retail customers and consumers from buying our products.

Our future tax rates may not be as favorable as our historical tax rates.

In past years, our effective tax rate typically has been substantially below the United States federal statutory
rates. We have paid minimal income taxes on income earned by our subsidiary in Puerto Rico due to tax credits
afforded us under Section 936 of the Internal Revenue Code and local tax abatements. However, Section 936 of the
Internal Revenue Code has been repealed so that future tax credits available to us were capped in 2005 and
terminated in 2006. In addition, our local tax abatements in Puerto Rico are scheduled to expire in 2009. In 2004, we
elected to repatriate $3.0 million of earnings and accrued $157,000 of related taxes under the American Jobs
Creation Act of 2004. During 2005, the $3.0 million of previously undistributed earnings was repatriated. As a
result of the above, our effective tax rate for 2006 increased to 36.6% compared to 32.5% for 2005, as a higher
percentage of profits are taxed at U.S. tax rates. At December 31, 2006, approximately $10.1 million of
undistributed earnings remain that would become taxable upon repatriation to the United States. No income taxes
are provided for the remaining undistributed earnings.

Our future tax rate will vary depending on many factors, including the level of relative earnings and tax rates in
each jurisdiction in which we operate and the repatriation of any foreign income to the United States. We cannot
anticipate future changes in such laws. Increases in effective tax rates or changes in tax laws may have a material
adverse effect on our business, financial condition, results of operations and cash flows.

The growth of our business will be dependent upon the availability of adequate capital.

The growth of our business will depend on the availability of adequate capital, which in turn will depend in
large part on cash flow generated by our business and the availability of equity and debt financing. We cannot assure
you that our operations will generate positive cash flow or that we will be able to obtain equity or debt financing on
acceptable terms or at all. Our revolving credit facility contains provisions that restrict our ability to incur additional
indebtedness or make substantial asset sales that might otherwise be used to finance our expansion. Security
interests in substantially all of our assets, which may further limit our access to certain capital markets or lending
sources, secure our obligations under our revolving credit facility. Moreover, the actual availability of funds under
our revolving credit facility is limited to specified percentages of our eligible inventory and accounts receivable.
Accordingly, opportunities for increasing our cash on hand through sales of inventory would be partially offset by
reduced availability under our revolving credit facility. As a result, we cannot assure you that we will be able to
finance our current expansion plans.

We must comply with the restrictive covenants contained in our revolving credit facility.

Our credit facility and term loan agreement require us to comply with certain financial restrictive covenants
that impose restrictions on our operations, including our ability to incur additional indebtedness, make investments
of other restricted payments, sell or otherwise dispose of assets and engage in other activities. Any failure by us to
comply with the restrictive covenants could result in an event of default under those borrowing arrangements, in
which case the lenders could elect to declare all amounts outstanding thereunder to be due and payable, which could
have a material adverse effect on our financial condition. As of December 31, 2006, we were in compliance with
certain financial restrictive covenants; however the margin of compliance was minimal. These covenants become

14

ROCKY BRANDS, INC.

more restrictive during 2007 and, after December 2007, revert to more restrictive covenants contained in our
original agreements entered into after the acquisition of EJ Footwear. We must improve our operating results and
cash flows, or take other action, to meet the covenants in the future.

We face intense competition, including competition from companies with significantly greater resources
than ours, and if we are unable to compete effectively with these companies, our market share may
decline and our business could be harmed.

The footwear and apparel industries are intensely competitive, and we expect competition to increase in the
future. A number of our competitors have significantly greater financial, technological, engineering, manufac-
turing, marketing and distribution resources than we do, as well as greater brand awareness in the footwear market.
Our ability to succeed depends on our ability to remain competitive with respect to the quality, design, price and
timely delivery of products. Competition could materially adversely affect our business, financial condition, results
of operations and cash flows.

We currently manufacture a portion of our products and we may not be able to do so in the future at
costs that are competitive with those of competitors who source their goods.

We currently plan to retain our internal manufacturing capability in order to continue benefiting from expertise
we have gained with respect to footwear manufacturing methods conducted at our manufacturing facilities. We
continue to evaluate our manufacturing facilities and third party manufacturing alternatives in order to determine
the appropriate size and scope of our manufacturing facilities. There can be no assurance that the costs of products
that continue to be manufactured by us can remain competitive with products sourced from third parties.

We rely on distribution centers in Logan, Ohio and Tunkhannock, Pennsylvania, and if there is a natural
disaster or other serious disruption at any of these facilities, we may be unable to deliver merchandise
effectively to our retailers.

We rely on distribution centers in Logan, Ohio and Tunkhannock, Pennsylvania. Any natural disaster or other
serious disruption at any of these facilities due to fire, tornado, flood, terrorist attack or any other cause could
damage a portion of our inventory or impair our ability to use our distribution center as a docking location for
merchandise. Either of these occurrences could impair our ability to adequately supply our retailers and harm our
operating results.

We are subject to certain environmental and other regulations.

Some of our operations use substances regulated under various federal, state, local and international
environmental and pollution laws, including those relating to the storage, use, discharge, disposal and labeling
of, and human exposure to, hazardous and toxic materials. Compliance with current or future environmental laws
and regulations could restrict our ability to expand our facilities or require us to acquire additional expensive
equipment, modify our manufacturing processes or incur other significant expenses. In addition, we could incur
costs, fines and civil or criminal sanctions, third party property damage or personal injury claims or could be
required to incur substantial investigation or remediation costs, if we were to violate or become liable under any
environmental laws. Liability under environmental laws can be joint and several and without regard to comparative
fault. There can be no assurance that violations of environmental laws or regulations have not occurred in the past
and will not occur in the future as a result of our inability to obtain permits, human error, equipment failure or other
causes, and any such violations could harm our business, financial condition, results of operations and cash flows.

If our efforts to establish and protect our trademarks, patents and other intellectual property are unsuc-
cessful, the value of our brands could suffer.

We regard certain of our footwear designs as proprietary and rely on patents to protect those designs. We
believe that the ownership of patents is a significant factor in our business. Existing intellectual property laws afford
only limited protection of our proprietary rights, and it may be possible for unauthorized third parties to copy certain
of our footwear designs or to reverse engineer or otherwise obtain and use information that we regard as proprietary.

ROCKY BRANDS, INC.

15

If our patents are found to be invalid, however, to the extent they have served, or would in the future serve, as a
barrier to entry to our competitors, such invalidity could have a material adverse effect on our business, financial
condition, results of operations and cash flows.

We own U.S. registrations for a number of our trademarks, trade names and designs, including such marks as
Rocky, Rocky Outdoor Gear, Georgia Boot, Durango and Lehigh. Additional trademarks, trade names and designs
are the subject of pending federal applications for registration. We also use and have common law rights in certain
trademarks. Over time, we have increased distribution of our goods in several foreign countries. Accordingly, we
have applied for trademark registrations in a number of these countries. We intend to enforce our trademarks and
trade names against unauthorized use by third parties.

Our success depends on our ability to forecast sales.

Our investments in infrastructure and product inventory are based on sales forecasts and are necessarily made
in advance of actual sales. The markets in which we do business are highly competitive, and our business is affected
by a variety of factors, including brand awareness, changing consumer preferences, product innovations, suscep-
tibility to fashion trends, retail market conditions, weather conditions and economic and other factors. One of our
principal challenges is to improve our ability to predict these factors, in order to enable us to better match production
with demand. In addition, our growth over the years has created the need to increase the investment in infrastructure
and product inventory and to enhance our systems. To the extent sales forecasts are not achieved, costs associated
with the infrastructure and carrying costs of product inventory would represent a higher percentage of revenue,
which would adversely affect our business, financial condition, results of operations and cash flows.

Risks Related to Our Industry

Because the footwear market is sensitive to decreased consumer spending and slow economic cycles, if
general economic conditions deteriorate, many of our customers may significantly reduce their purchases
from us or may not be able to pay for our products in a timely manner.

The footwear industry has been subject to cyclical variation and decline in performance when consumer
spending decreases or softness appears in the retail market. Many factors affect the level of consumer spending in
the footwear industry, including:

(cid:129) general business conditions;

(cid:129) interest rates;

(cid:129) the availability of consumer credit;

(cid:129) weather;

(cid:129) increases in prices of nondiscretionary goods;

(cid:129) taxation; and

(cid:129) consumer confidence in future economic conditions.

Consumer purchases of discretionary items, including our products, may decline during recessionary periods
and also may decline at other times when disposable income is lower. A downturn in regional economies where we
sell products also reduces sales.

The continued shift in the marketplace from traditional independent retailers to large discount mass mer-
chandisers may result in decreased margins.

A continued shift in the marketplace from traditional independent retailers to large discount mass merchan-
disers has increased the pressure on many footwear manufacturers to sell products to these mass merchandisers at
less favorable margins. Because of competition from large discount mass merchandisers, a number of our small
retailing customers have gone out of business, and in the future more of these customers may go out of business,
which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

16

ROCKY BRANDS, INC.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

We own, subject to a mortgage, our 25,000 square foot executive offices that are located in Nelsonville, Ohio which
are utilized by all segments. Our 192,000 square foot finished goods distribution facility near Logan, Ohio is utilized by
the Wholesale segment. We own outright our 41,000 square foot outlet store and a 5,500 square foot executive office
building located in Nelsonville, Ohio, a portion of which is utilized by our Retail segment. We lease two manufacturing
facilities in Puerto Rico consisting of 44,978 square feet and 39,581 square feet which are utilized by the Wholesale and
Military segments. These leases expire in 2009. In the Dominican Republic, we lease an 82,000 square foot
manufacturing facility under a lease expiring in 2009 and lease an additional stand-alone 37,000 square foot building,
which is on a month to month basis and is utilized by our Wholesale segment. In Waterloo, Ontario, we lease a
30,300 square foot distribution facility under a lease expiring in 2012 which is utilized by our Wholesale segment.

ITEM 3. LEGAL PROCEEDINGS.

We are, from time to time, a party to litigation which arises in the normal course of our business. Although the
ultimate resolution of pending proceedings cannot be determined, in the opinion of management, the resolution of
these proceedings in the aggregate will not have a material adverse effect on our financial position, results of
operations, or liquidity.

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

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS

AND ISSUER PURCHASES OF EQUITY SECURITIES.

Market Information

Our common stock trades on the NASDAQ National Market under the symbol “RCKY.” The following table
sets forth the range of high and low sales prices for our common stock for the periods indicated, as reported by the
NASDAQ National Market:

Quarter Ended

March 31, 2005
June 30, 2005
September 30, 2005
December 31, 2005
March 31, 2006
June 30, 2006
September 30, 2006
December 31, 2006

High

Low

$36.44
$33.79
$32.25
$30.62
$26.50
$26.70
$22.65
$17.49

$25.31
$25.00
$27.50
$21.56
$19.00
$20.80
$ 9.73
$11.45

On March 9, 2007, the last reported sales price of our common stock on the NASDAQ National Market was

$11.03 per share. As of March 9, 2007, there were 100 shareholders of record of our common stock.

We presently intend to retain our earnings to finance the growth and development of our business and do not
anticipate paying any cash dividends in the foreseeable future. Future dividend policy will depend upon our earnings
and financial condition, our need for funds and other factors. Presently, our credit facility restricts the payment of
dividends on our common stock. At December 31, 2006, we had no retained earnings available for distribution.

ROCKY BRANDS, INC.

17

Performance Graph

The following performance graph compares our performance of the Company with the NASDAQ Stock
Market (U.S.) Index and the Standard & Poor’s Footwear Index, which is a published industry index. The
comparison of the cumulative total return to shareholders for each of the periods assumes that $100 was invested on
December 31, 2001, in our common stock, and in the NASDAQ Stock Market (U.S.) Index and the Standard &
Poor’s Footwear Index and that all dividends were reinvested.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Rocky Brands, Inc., The NASDAQ Composite Index
And The S & P Footwear Index

S
R
A
L
L
O
D

600

500

400

300

200

100

0
12/01

Rocky Brands, Inc.

NASDAQ Composite

S & P Footwear

12/02

12/03

12/04

12/05

12/06

* $100 invested on 12/31/01 in stock or index-including reinvestment of dividends. Fiscal year ending

December 31.

Copyright· 2007, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm

Rocky Brands, Inc.

NASDAQ Composite

S & P Footwear

12/01

12/02

12/03

12/04

12/05

12/06

100.00

100.00

100.00

90.81

68.85

82.99

388.04

516.46

422.18

279.38

101.86

112.16

115.32

127.52

126.87

166.84

167.82

197.02

18

ROCKY BRANDS, INC.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

ROCKY BRANDS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA

Income Statement Data
Net sales
Gross margin (% of sales)
Net income
Per Share
Net income
Basic
Diluted

Weighted average number of common

shares outstanding
Basic
Diluted

Balance Sheet Data
Inventories
Total assets
Working Capital
Long-term debt, less current maturities
Stockholders’ equity

12/31/06

Five Year Financial Summary
12/31/03
12/31/04
(In thousands, except for per share data)

12/31/05

12/31/02

$263,491

$296,023

$132,249

$106,165

$88,959

41.5%
4,819

37.6%

$ 13,014

$

29.2%
8,594

0.89
0.86

$
$

2.48
2.33

$
$

1.89
1.74

30.9%
6,039

26.3%

$ 2,843

1.44
1.32

$ 0.63
$ 0.62

$

$
$

$

$
$

5,392
5,578

5,258
5,585

4,557
4,954

4,190
4,561

4,500
4,590

$ 77,949
$246,356
$135,569
$103,203
$104,128

$ 75,387
$236,134
$119,278
$ 98,972
$ 99,093

$ 32,959
$ 96,706
$ 55,612
$ 10,045
$ 71,371

$ 38,068
$ 86,175
$ 54,210
$ 17,515
$ 58,385

$23,182
$68,417
$41,751
$10,488
$52,393

The 2006 and 2005 financial data reflects the acquisition of the EJ Footwear group.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS.

This Management’s Discussion and Analysis of Financial Condition and Result of Operations (“MD&A”)
describes the matters that we consider to be important to understanding the results of our operations for each of the
three years in the period ended December 31, 2006, and our capital resources and liquidity as of December 31, 2006
and 2005. Use of the terms “Rocky,” the “Company,” “we,” “us” and “our” in this discussion refer to Rocky Brands,
Inc. and its subsidiaries. Our fiscal year begins on January 1 and ends on December 31. We analyze the results of our
operations for the last three years, including the trends in the overall business followed by a discussion of our cash
flows and liquidity, our credit facility, and contractual commitments. We then provide a review of the critical
accounting judgments and estimates that we have made that we believe are most important to an understanding of
our MD&A and our consolidated financial statements. We conclude our MD&A with information on recent
accounting pronouncements which we adopted during the year, as well as those not yet adopted that are expected to
have an impact on our financial accounting practices.

The following discussion should be read in conjunction with the “Selected Consolidated Financial Data” and
our consolidated financial statements and the notes thereto, all included elsewhere herein. The forward-looking
statements in this section and other parts of this document involve risks and uncertainties including statements
regarding our plans, objectives, goals, strategies, and financial performance. Our actual results could differ
materially from the results anticipated in these forward-looking statements as a result of factors set forth under the
caption “Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995” below. The Private
Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on
behalf of the Company.

ROCKY BRANDS, INC.

19

Our products are distributed through three distinct business segments: wholesale, retail and military. In our
wholesale business, we distribute our products through a wide range of distribution channels representing over ten-
thousand retail store locations in the U.S. and Canada. Our wholesale channels vary by product line and include
sporting goods stores, outdoor retailers, independent shoe retailers, hardware stores, catalogs, mass merchants,
uniform stores, farm store chains, specialty safety stores and other specialty retailers. Our retail business includes
direct sales of our products to consumers through our Lehigh Safety Shoes mobile and retail stores (including a fleet
of 78 trucks, supported by 40 small warehouses that include retail stores, which we refer to as mini-stores), our
Rocky outlet store and our websites. We also sell footwear under the Rocky label to the U.S. military.

2006 OVERVIEW

Highlights of our 2006 financial performance include the following:

(cid:129) Net sales, led by decreases of approximately $26.6 million in sales to the U.S. military, decreased to

$263.5 million from $296.0 million in 2005.

(cid:129) Our gross profit decreased to $109.3 million from $111.2 million the prior year. Gross profit margin was
41.5% versus 37.6% in 2005, primarily due to the decrease in sales to the U.S. military, which carry lower
gross margins than our wholesale and retail sales.

(cid:129) Net income decreased to $4.8 million compared to $13.0 million the prior year. Diluted earnings per

common share decreased to $.86 in 2006 versus $2.33 per diluted share in 2005.

(cid:129) Capital expenditures were $5.6 million in 2006 and $6.1 million in 2005. 2006 expenditures included the
renovation of an executive building to accommodate the consolidations of several operating departments to
Nelsonville, Ohio, following the EJ Footwear Group acquisition.

(cid:129) Debt (total debt minus cash, cash equivalents) was $106.8 million or 49.7% of total capitalization at
December 31, 2006 compared to $103.8 million or 50.7% of total capitalization at year-end 2005. Total debt
was $110.5 million or 51.5% of total capitalization at December 31, 2006 compared to $105.4 million or
51.5% of total capitalization at December 31, 2005. The increased debt was to fund working capital.

Net sales. Net sales and related cost of goods sold are recognized at the time products are shipped to the
customer and title transfers. Net sales are recorded net of estimated sales discounts and returns based upon specific
customer agreements and historical trends.

Cost of goods sold. Our cost of goods sold represents our costs to manufacture products in our own facilities,
including raw materials costs and all overhead expenses related to production, as well as the cost to purchase
finished products from our third party manufacturers. Cost of goods sold also includes the cost to transport these
products to our distribution centers.

SG&A expenses. Our SG&A expenses consist primarily of selling, marketing, wages and related payroll and
employee benefit costs, travel and insurance expenses, depreciation, amortization, professional fees, facility
expenses, bank charges, and warehouse and outbound freight expenses.

PERCENTAGE OF NET SALES

The following table sets forth consolidated statements of operations data as percentages of total net sales:

Net sales
Cost of goods sold

Gross margin
SG&A expense

Income from operations

Years Ended December 31,
2006
2004
2005

100.0% 100.0% 100.0%
58.5% 62.4% 70.8%

41.5% 37.6% 29.2%
34.3% 28.1% 19.4%

7.2%

9.5% 9.8%

20

ROCKY BRANDS, INC.

Results of Operations

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Net sales. Net sales decreased 11% to $263.5 million for 2006 compared to $296.0 million the prior year.
Wholesale sales decreased $6.8 million to $203.2 million for 2006 compared to $209.9 million for 2005. The
$8.9 million decreases in sales in our outdoor footwear and apparel categories, which were impacted by
unseasonably warm weather in late 2005, were partially offset by increases in sales in our work, western and
duty footwear categories. Retail sales increased $0.8 million to $59.2 million in 2006 compared to $58.4 million for
2005. Military segment sales, which occur from time to time, were $1.1 million for 2006 compared to $27.7 million
in 2005. Average list prices for our footwear, apparel and accessories were similar in 2006 compared to 2005.

Gross margin. Gross margin decreased to $109.3 million or 41.5% of net sales for 2006 compared to
$111.2 million or 37.6% of net sales for the prior year. The increase in basis points is primarily attributable to a
reduction in lower margin military sales in 2006. Wholesale gross margin for 2006 was $79.0 million, or 38.9% of
net sales, compared to $76.4 million, or 36.4% of net sales in 2005. The increase in basis points reflects an increase
mix of sales of work and western products, which carry higher gross margins than outdoor products. Retail gross
margin for 2006 was $30.2 million, or 51.0% of net sales, compared to $30.3 million, or 51.9% of net sales, in 2005.
Military gross margin in 2006 was $0.1 million, or 9.5% of net sales, compared to $4.5 million, or 16.4% of net sales
in 2005.

SG&A expenses. SG&A expenses were $90.4 million, or 34.3% of net sales in 2006 compared to
$83.2 million, or 28.1% of net sales for 2005. The net change reflects an increase in payroll and healthcare costs
of $3.0 million that includes a $0.4 million pension curtailment charge relating to freezing the non-union pension
plan, $0.4 million for the adoption of the stock compensation accounting standard, trademark impairment charge of
$0.8 million, higher advertising expenses of $0.6 million, higher trade show expenses of $0.6 million, and
additional professional fees $0.4 million. This is offset by the $0.7 million gain on the sale of a company-owned
property that was sold in March 2006.

Interest expense.

Interest expense was $11.6 million in 2006, compared to $9.3 million for the prior year. The

increase was primarily due to higher interest rates and borrowing level.

Income taxes.

Income tax expense for 2006 was $2.8 million, compared to $6.3 million in 2005. Our
effective tax rate was 36.6% for 2006, versus 32.5% for 2005. The increase in our effective tax rate in 2006 was due
primarily to the cessation of income tax incentive programs for our Lifestyle Footwear, Inc. and Subpart F tax at our
Five Star Enterprises Ltd. operations, offset by a lower effective state income tax rate.

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

Net sales. Net sales increased 124% to $296.0 million for 2005 compared to $132.2 million the prior year.
The current year results reflect our acquisition of EJ Footwear in January 2005, which contributed $163.4 million in
2005. Wholesale sales rose $100.3 million to $209.9 million for 2005 compared to $109.7 million for 2004. The
increase reflects our acquisition of EJ Footwear, which contributed $109.1 million in sales during the year. The $8.8
million decrease in Rocky Outdoor Gear branded wholesale sales was primarily impacted by a second consecutive
year of unseasonably warm and dry weather during the fall hunting season, partially offset by increases in sales of
our work and western products. Retail sales increased $54.4 million to $58.4 million in 2005 compared to
$4.0 million for 2004. The increase was due to our acquisition of EJ Footwear, specifically its Lehigh division, in
2005. Military segment sales, which occur from time to time, were $27.7 million for 2005 compared to $18.5 million
in 2004. Average list prices for our footwear, apparel and accessories were similar in 2005 compared to 2004.

Gross margin. Gross margin increased to $111.2 million or 37.6% of net sales for 2005 compared to
$38.6 million or 29.2% of net sales for the prior year. The increase in both dollars and basis points is primarily
attributable to higher sales of EJ Footwear work and western products and a higher percentage of our net sales
derived from our retail sales, which carry higher gross margins than our wholesale and military sales. Wholesale
gross margin for 2005 was $76.4 million, or 36.4% of net sales, compared to $34.7 million, or 31.7% of net sales in
2004. The increase reflects sales in 2005 of EJ Footwear products, which carry higher gross margins than Rocky
products due to a higher percentage of their sales in the work and western markets. Gross margins in the work and

ROCKY BRANDS, INC.

21

western markets are generally higher than the outdoor and duty markets. Retail gross margin for 2005 was
$30.3 million, or 51.9% of net sales, compared to $1.1 million, or 27.7% of net sales, in 2004. The increase in gross
margin reflects sales by Lehigh, which carry higher gross margins than our outlet store sales. Military gross margin
in 2005 was $4.5 million, or 16.4% of net sales, compared to $2.8 million, or 15.0% of net sales in 2004.

SG&A expenses. SG&A expenses were $83.2 million, or 28.1% of net sales in 2005 compared to
$25.6 million, or 19.4% of net sales for 2004. The increase was primarily a result of higher SG&A expenses
associated with the EJ Footwear business, particularly higher expenses associated with our Lehigh retail operations.

Interest expense.

Interest expense was $9.3 million in 2005, compared to $1.3 million for the prior year. The

increase was primarily due to interest on borrowings to finance the EJ Footwear acquisition.

Income taxes.

Income tax expense for 2005 was $6.3 million, compared to $3.5 million in 2004. Our
effective tax rate was 32.5% for 2005, versus 28.8% for 2004. The increase in our effective tax rate in 2005 was due
primarily to income from EJ Footwear, which is subject to the U.S. effective tax rate. A portion of our income is
subject to lower taxes in foreign countries.

LIQUIDITY AND CAPITAL RESOURCES

Overview

Our principal sources of liquidity have been our income from operations and borrowings under our credit
facility and other indebtedness. In January 2005, we incurred additional indebtedness to fund our acquisition of EJ
Footwear as described below.

Over the last several years our principal uses of cash have been for our acquisition of EJ Footwear as well as 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 working capital
increased to $135.6 million at December 31, 2006, compared to $119.3 million at the end of the prior year.

Our capital expenditures relate primarily to projects relating to our corporate offices, property, merchandising
fixtures, molds and equipment associated with our manufacturing operations and for information technology.
Capital expenditures were $5.6 million for 2006 and $6.1 million in 2005. Capital expenditures for 2007 are
anticipated to be approximately $6.0 million.

In conjunction with the completion of our 2005 acquisition of EJ Footwear, we entered into agreements with
GMAC Commercial Finance LLC (“GMAC”); and American Capital Financial Services, Inc., as agent, and
American Capital Strategies, Ltd., as lender (collectively, “ACAS”) for credit facilities totaling $148 million. The
credit facilities were used to fund the acquisition of EJ Footwear. Under the terms of the agreements, the interest
rates and repayment terms were: (1) a five-year $100 million revolving credit facility with an interest rate of LIBOR
plus 2.5% or prime plus 1.0%; (2) an $18 million term loan with an interest rate of LIBOR plus 3.25% or prime plus
1.75%, payable in equal quarterly installments over three years beginning in 2005; and (3) a $30 million term loan
with an interest rate of LIBOR plus 8.0%, payable in equal installments from 2008 through 2011. The total amount
available on our revolving credit facility is subject to a borrowing base calculation based on various percentages of
accounts receivable and inventory.

In June 2006, we amended our debt agreement with GMAC to include a new three-year, $15 million term loan
with an interest rate of (1) LIBOR plus 3.25% or (2) prime plus 1.75%, payable over three years beginning in
September 2006. The proceeds from the new term loan were used to pay down the $30 million ACAS term loan. In
conjunction with this repayment, we amended the terms of the ACAS term loan, including lowering the interest rate
to LIBOR plus 6.5%, adjusting the repayment schedule to reflect the lower loan balance payable in equal
installments from August 2009 to January 2011, and modifying certain restrictive loan covenants.

22

ROCKY BRANDS, INC.

The total amount available on our revolving credit facility is subject to a borrowing base calculation based on
various percentages of accounts receivable and inventory. As of December 31, 2006, we had $74.7 million in
borrowings under this facility and total capacity of $88.5 million. Our credit facilities contain certain restrictive
covenants, which among other things, require us to maintain certain minimum EBITDA and certain leverage and
fixed charge coverage ratios. At December 31, 2006, we had no retained earnings available for dividends. In
November 2006, we amended the terms of the restrictive covenants through December 2007 pertaining to minimum
EBITDA, senior and total leverage, and fixed charges. This amendment increased the interest rate on borrowings
under the ACAS agreement to LIBOR plus 8.5%.

As of December 31, 2006, we were in compliance with these restrictive covenants; however, the margin of
compliance was minimal. These covenants become more restrictive during 2007 and, after December 2007, revert
to more restrictive covenants contained in the original agreements. We must improve our operating results and cash
flows, or take other action, to meet the covenants in the future. Any failure by us to comply with the restrictive
covenants could result in an event of default under the borrowing agreements, in which case the lenders could elect
to declare all amounts outstanding hereunder to be due and payable, which could have a material adverse effect on
our financial condition.

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.

Cash Flows

Cash Flow Summary

Cash provided by (used in):

Operating activities
Investing activities
Financing activities

Net change in cash and cash equivalents

2006

2005
($ in millions)

2004

$ 0.7
(3.9)
5.3

$ 8.4
(99.4)
87.5

$ 7.6
(5.5)
0.8

$ 2.1

$ (3.5)

$ 2.9

Operating Activities. Net cash provided by operating activities totaled $0.7 million for Fiscal 2006,
compared to $8.4 million for Fiscal 2005, and $7.6 million for Fiscal 2004. Principal uses of net cash compared
to the prior year included a $2.2 million increase in accounts receivable-trade related to wholesale sales growth in
the fourth quarter, a $2.6 million increase in inventories to support anticipated sales growth in the first quarter of
2007, a $2.3 million increase in income tax receivable and a $2.9 million decrease in accounts payable during 2006.
The principal uses of net cash in 2005 included a $6.6 million increase in accounts receivable-trade and $7.8 million
increase in inventories during 2005, which was partially offset by a $1.1 million reduction in other assets and a
$2.8 million increase in accounts payable. The principal uses of net cash in 2004 included a $7.9 million increase in
accounts receivable that was partially offset by a $5.1 million reduction in inventories.

Investing Activities. Net cash used in investing activities was $3.9 million in Fiscal 2006 compared to
$99.4 million in Fiscal 2005 and $5.5 million in 2004. The principal use of cash in 2006 was capital expenditures
relating to our corporate offices, property, merchandising fixtures, molds and equipment associated with our
manufacturing operations and for information technology. The principal uses of cash in 2005 were for the
acquisition of the EJ Footwear Group ($93.1 million) and the purchase of fixed assets ($6.1 million). The principal
use of cash in 2004 was for the purchase of fixed assets.

Financing Activities. Cash provided by financing activities during 2006 was $5.3 million compared to
$87.5 million in 2005 and $0.8 million in 2004. Proceeds and repayments of the revolving credit facility reflects
daily cash disbursement and deposit activity. The Company’s financing activities during 2006 included cash
proceeds from the issuance of debt of $30.1 million and proceeds from the exercise of stock options and related tax
benefits of $0.8 million, offset by debt repayments of $25.0 million and debt financing costs of $0.6 million. The
Company’s financing activity during 2005 included cash proceeds from the issuance of debt of $96.0 million

ROCKY BRANDS, INC.

23

principally to finance the EJ Footwear acquisition and proceeds from the exercise of stock options of $1.1 million,
offset by debt repayments of $7.2 million and debt financing costs of $2.4 million. The Company’s financing
activity during 2004 included proceeds from the exercise of stock options of $2.2 million, which was offset by a
reduction in borrowings by $1.5 million.

Borrowings and External Sources of Funds

Our borrowings and external sources of funds were as follows at December 31, 2006 and 2005:

Revolving credit facility
Term loans
Real estate and other obligations

Total debt

Lesss current maturities

Net long-term debt

December 31

2006

2005

($ in millions)

$ 74.7
32.5
3.3

110.5
7.3

$ 59.6
41.3
4.5

105.4
6.4

$103.2

$ 99.0

Our real estate obligations were $3.3 million at December 31, 2006. The mortgage financing, completed in

2000, includes two of our facilities, with monthly payments of approximately $0.1 million through 2014.

We lease certain machinery, trucks, shoe centers, and manufacturing facilities under operating leases that
generally provide for renewal options. Future minimum lease payments under non-cancelable operating leases are
$2.1 million, $1.4 million, $0.8 million and $0.5 million for years 2007 through 2010, respectively, and $0.3 million
for 2011, or approximately $5.0 million in total.

We continually evaluate our external credit arrangements in light of our growth strategy and new opportunities.
We plan on exploring options to refinance our revolving credit line and term debt at more favorable interest rates in
2007.

Contractual Obligations and Commercial Commitments

The following table summarizes our contractual obligations at December 31, 2006 resulting from financial
contracts and commitments. We have not included information on our recurring purchases of materials for use in
our manufacturing operations. These amounts are generally consistent from year to year, closely reflect our levels of
production, and are not long-term in nature (less than three months).

Contractual Obligations at December 31, 2006:

Total

Less Than 1 Year

1-3 Years

3-5 Years

Over 5 Years

Payments Due by Year

Long-term debt
Minimum operating lease

commitments

Expected cash requirements for

interest(1)

Total contractual obligations

$110.5

$ 7.3

5.0

28.9

$144.4

2.1

9.9

$19.3

$ millions
$15.3

2.2

17.6

$35.1

$86.4

0.7

1.2

$88.3

$1.5

—

0.2

$1.7

(1) Assumes the following interest rates which are consistent with rates as of December 31, 2006: (1) 8.3% on the
$100 million revolving credit facility; (2) 9.0% on the $18 million three-year term loan; (3) 9.0% on the
$15 million three-year term loan; (4) 14.3% on the $15 million six-year term loan; and 8.275% on the
$3.3 million mortgage loans.

24

ROCKY BRANDS, INC.

From time to time, we enter into purchase commitments with our suppliers under customary purchase order
terms. Any significant losses implicit in these contracts would be recognized in accordance with generally accepted
accounting principles. At December 31, 2006, no such losses existed.

Our ongoing business activities continue to be subject to compliance with various laws, rules and regulations as
may be issued and enforced by various federal, state and local agencies. With respect to environmental matters,
costs are incurred pertaining to regulatory compliance. Such costs have not been, and are not anticipated to become,
material.

We are contingently liable with respect to lawsuits, taxes and various other matters that routinely arise in the
normal course of business. We do not have off-balance sheet arrangements, financings, or other relationships with
unconsolidated entities or other persons, also known as “Variable Interest Entities.” Additionally, we do not have
any related party transactions that materially affect the results of operations, cash flow or financial condition.

Inflation

Our financial performance is influenced by factors such as higher raw material costs as well as higher salaries
and employee benefits. Management attempts to minimize or offset the effects of inflation through increased selling
prices, productivity improvements, and cost reductions. We were able to mitigate the effects of inflation during
2006 due to these factors. It is anticipated that inflationary pressures during 2007 will be offset through increases in
sales and profitability, due to improved operating leverage in our business.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our
consolidated financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these 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 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 this Annual Report on Form 10-K.

Our management regularly reviews our accounting policies to make certain they are current and also provide
readers of the 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,
intangibles, 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 consolidated financial statements.

Revenue recognition

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

Accounts receivable allowances

Management maintains allowances for 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.

ROCKY BRANDS, INC.

25

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. Sales returns and allowances for sales returns were approximately 4.7% and 3.5% of sales
for 2006 and 2005, respectively.

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 at
amounts above cost through our factory outlet stores or through various discounts to customers. Should manage-
ment encounter difficulties liquidating slow moving or obsolete inventories, additional provisions may be nec-
essary. Management regularly reviews the adequacy of our inventory reserves and makes adjustments to them as
required.

Management is currently pursuing reimbursement from the U.S. military for costs associated with raw material
purchases of $1.6 million. These raw material purchases were made exclusively for production under a subcontract
for the U.S. military. Subsequent to the purchase of raw materials, the subcontract was cancelled for convenience by
the U.S. military. Management expects this matter to be resolved in 2007. No matters have occurred to indicate the
reimbursement will not be made in full.

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. Other assumptions include discount rates, royalty rates, cost of capital, and
market multiples. Based upon our review, none of our intangibles were impaired as of December 31, 2006 with the
exception of the Gates trademark.

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 and discount rates. These assumptions are
reviewed annually. See Note 10, “Retirement Plans,” to the consolidated financial statements for information on our
plan and the assumptions used.

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 September 30 each year. The funded status of our plan and reconciliation of accrued pension cost is
determined annually as of December 31. Actual results would be different using other assumptions. On
December 31, 2005 we froze the noncontributory defined benefit pension plan for all non-U.S. territorial
employees. As a result of freezing the plan, we recognized a charge of approximately $0.4 million in the first
quarter of 2006 for previously unrecognized service costs. Future adverse changes in market conditions or poor
operating results of underlying plan assets could result in losses or an additional accrual.

26

ROCKY BRANDS, INC.

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. At
December 31, 2006, approximately $10.1 million of undistributed earnings remains that would become taxable
upon repatriation to the United States.

RECENTLY ISSUED FINANCIAL ACCOUNTING PRONOUNCEMENTS

In February 2006, the Financial Accounting Standards Board (“FASB”) issued a FASB Staff Position (“FSP”),
“Classification of Options and Similar Instruments Issued as Employee Compensation that Allow for Cash
Settlement upon the Occurrence of a Contingent Event” (“FSP FAS 123(R)-4”). FSP FAS 123(R)-4 amends
SFAS No. 123(R) and addresses the classification of stock options and similar instruments issued as employee
compensation. Instruments having contingent cash settlement features are properly classified as equity if the cash
settlement feature can be exercised only upon the occurrence of a contingent event that is outside the employee’s
control, and it is not probable that the event will occur. If the contingent event becomes probable, the instrument
shall be accounted for as a liability. FSP FAS 123(R)-4 was adopted by us in the first quarter of 2006. The adoption
of FSP FAS 123(R)-4 did not have a material impact on the Company’s consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes —
an Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income
Taxes”. An uncertain tax position will be recognized if it is determined that it is more likely than not to be sustained
upon examination. The tax position is measured at the largest amount of benefit that is greater than fifty percent
likely of being realized upon ultimate settlement. The cumulative effect of applying the provisions of this
Interpretation is to be reported as a separate adjustment to the opening balance of retained earnings in the year
of adoption. This statement is effective for fiscal years beginning after December 15, 2006. We have not determined
the effects of adopting FIN 48.

In June 2006, the FASB ratified the Emerging Issues Task Force (“EITF”) position EITF 06-3, “How Taxes
Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement
(that is Gross versus Net Presentation)” (“EITF 06-3”), that addresses disclosure requirements for taxes assessed by
a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction
between a seller and a customer, and may include, but is not limited to, sales, use, value-added, and some excise
taxes. EITF 06-3 requires disclosure of the method of accounting for the applicable assessed taxes, and the amount
of assessed taxes that are included in revenues if they are accounted for under the gross method. The provisions of
EITF 06-3 are effective for interim and annual reporting periods beginning after December 15, 2006, with earlier
application permitted. We currently report sales net of sales tax. We do not anticipate the adoption of EITF 06-3 will
have a material impact on our financial statements.

In September 2006, the FASB issued a Statement of Accounting Standards (“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. SFAS 157 does
not require any new fair value measurements, rather it applies under existing accounting pronouncements that
require or permit fair value measurements. The provisions of SFAS 157 are effective for fiscal years beginning after
November 15, 2007. We are currently evaluating the impact of adopting SFAS 157 on our financial statements.

Also in September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefits
Pension and Other Postretirement Plans, an Amendment of FASB Statements 87, 88, 106, and 132(R)”
(“SFAS 158”). SFAS 158, requires an employer to recognize in its statement of financial position the funded
status of its defined benefit plans and to recognize as a component of other comprehensive income, net of tax, any
unrecognized transition obligations and assets, the actuarial gains and losses and prior service costs and credits that
arise during the period. The recognition provisions of Statement No. 158 are to be applied prospectively and are

ROCKY BRANDS, INC.

27

effective for fiscal years ending after December 15, 2006. In addition, Statement No. 158 requires a fiscal year end
measurement of plan assets and benefit obligations, eliminating the use of earlier measurement dates currently
permissible. However, the new measurement date requirement will not be effective until fiscal years ended after
December 15, 2008. We utilize a measurement date of September 30th and will be required to change to
December 31st. The adoption of Statement No. 158 as of December 31, 2006 resulted in a write-down of our
pension asset by $1.6 million, increased accumulated other comprehensive loss by $1.0 million, and decreased
deferred income tax liabilities by $0.6 million.

In September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects
of Prior Year Misstatements When Quantifying Misstatements in the Current Year Financial Statements”
(“SAB 108”). SAB 108 addresses diversity in practice when quantifying the effect of an error on financial
statements. It provides guidance on the consideration of the effects of prior year misstatements in quantifying
misstatements in current year financial statements. Our adoption of SAB 108, effective December 31, 2006, did not
have a material impact on our financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value. The standard also establishes presentation
and disclosure requirements designed to facilitate comparison between entities that choose different measurement
attributes for similar types of assets and liabilities. SFAS 159 is effective for annual periods in fiscal years beginning
after November 15, 2007. If the fair value option is elected, the effect of the first remeasurement to fair value is
reported as a cumulative effect adjustment to the opening balance of retained earnings. In the event we elect the fair
value option promulgated by this standard, the valuations of certain assets and liabilities may be impacted. The
statement is applied prospectively upon adoption.

SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES REFORM ACT OF 1995

This Management’s Discussion and Analysis of Financial Conditions and Results of Operations contains
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, 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, 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 involve risk and uncertainties
including, without limitations, dependence on sales forecasts, changes in consumer demand, seasonality, impact of
weather, competition, reliance on suppliers, changing retail trends, economic changes, as well as other factors set
forth under the caption “Item 1A, Risk Factors” in this Annual Report on Form 10-K and other factors detailed from
time to time in our filings with the Securities and Exchange Commission. Although we believe that the assumptions
underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be
inaccurate. Therefore, there can be no assurance that the forward-looking statements included herein 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.

We assume no obligation to update any forward-looking statements.

28

ROCKY BRANDS, INC.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Our primary market risk results from fluctuations in interest rates. We are also exposed to changes in the price
of commodities used in its manufacturing operations. However, commodity price risk related to the Company’s
current commodities is not material as price changes in commodities can generally be passed along to the customer.
We do not hold any material market risk sensitive instruments for trading purposes.

The following two items are market rate sensitive for interest rates for the Company: (1) long-term debt
consisting of a credit facility (as described below) with a balance at December 31, 2006 of $74.7 million, and
(2) term loans (as described below) with balances at December 31, 2006 totaling $32.5 million.

On January 6, 2005, we entered into credit facilities with GMAC and ACAS totaling $148 million to fund the
acquisition of EJ Footwear Group. The agreements included a $100 million revolving credit facility and term loans
totaling $48 million with maturities between 2009 and 2012. Under the terms of the agreement, the interest rates and
repayment terms were: (1) a five year $100 million revolving credit facility with an interest rate of LIBOR plus
2.5% or prime plus 1.0%; (2) a $18 million term loan with an interest rate of LIBOR plus 3.25% or prime plus 1.75%
and payable in equal quarterly installments over three years beginning in 2005; and (3) a $30 million term loan with
an interest rate of LIBOR plus 8.0% payable in equal installments from 2008 through 2011. In June 2006, we
amended our debt agreement with GMAC to include a new three-year, $15 million term loan with an interest rate of
LIBOR plus 3.25% or prime plus 1.75%, payable over three years beginning in September 2006. The proceeds from
the new term loan were used to pay down a portion of the $30 million ACAS term loan. In conjunction with this
repayment, we amended the terms of the ACAS term loan, including lowering the interest rate to LIBOR plus 6.5%,
adjusting the repayment schedule to reflect the lower loan balance payable in equal installments from August 2009
to January 2011. In November 2006, we entered into an amendment our term loan agreement with ACAS that
increased the interest rate to LIBOR plus 8.5%.

We do not have any interest rate management agreements as of December 31, 2006.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our consolidated balance sheets as of December 31, 2006 and 2005 and the related consolidated statements of
income, shareholders’ equity, and cash flows for the years ended December 31, 2006, 2005, and 2004, together with
the report of the independent registered public accounting firm thereon appear on pages F-1 through F-28 hereof
and are incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, our management carried out an evaluation, with the
participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange
Act of 1934, as amended). Based upon that evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were effective as of the end of the period covered by this
report. It should be noted that the design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions, regardless of how remote.

Changes in Internal Control over Financial Reporting

As part of our evaluation of the effectiveness of internal controls over financial reporting described below, we
made certain improvements to our internal controls. However, there were no changes in our internal controls over

ROCKY BRANDS, INC.

29

financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the
supervision and with the participation of our principal executive officer and principal financial officer, our
management conducted an evaluation of the effectiveness of our internal control over financial reporting based on
the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based upon that evaluation under the framework in Internal Control — Integrated
Framework, our management concluded that our internal control over financial reporting was effective as of
December 31, 2006. Our assessment of the effectiveness of our internal control over financial reporting as of
December 31, 2006 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm,
as stated in their report, which is included in this Item 9.

30

ROCKY BRANDS, INC.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Rocky Brands, Inc.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal
Control Over Financial Reporting, that Rocky Brands, Inc. and subsidiaries (the “Company”) maintained effective
internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Com-
mission. The Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is
to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, evaluating management’s
assessment, testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons performing similar functions, and
effected by the company’s board of directors, management, and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over
financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established
in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

ROCKY BRANDS, INC.

31

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated financial statements as of and for the year ended December 31, 2006 of the
Company and our report dated March 14, 2007 expressed an unqualified opinion on those consolidated financial
statements and included an explanatory paragraph that as discussed in Note 12 to the consolidated financial
statements, effective January 1, 2006, the Company changed the manner in which it accounts for share-based
compensation; in addition, as discussed in Note 10, the Company changed the manner in which it records the funded
status of its defined benefit pension effective December 31, 2006.

Columbus, Ohio
March 14, 2007

32

ROCKY BRANDS, INC.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The information required by this item is included in the Company’s Proxy Statement for the 2007 Annual
Meeting of Shareholders (the “Proxy Statement”) to be held on May 15, 2007, to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, and is
incorporated herein by reference.

We have adopted a Code of Business Conduct and Ethics that applies to our directors, officers and all
employees. The Code of Business Conduct and Ethics is posted on our website at www.rockyboots.com. The Code
of Business Conduct and Ethics may be obtained free of charge by writing to Rocky Brands, Inc., Attn: Chief
Financial Officer, 39 East Canal Street, Nelsonville, Ohio 45764.

ITEM 11. EXECUTIVE COMPENSATION.

The information required by this item is included in the Company’s Proxy Statement, and is incorporated

herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

AND RELATED SHAREHOLDER MATTERS.

The information required by this item is included in the Company’s Proxy Statement, and is incorporated

herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR

INDEPENDENCE.

The information required by this item is included in the Company’s Proxy Statement, and is incorporated

herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

The information required by this item is included in the Company’s Proxy Statement, and is incorporated

herein by reference.

ROCKY BRANDS, INC.

33

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:

(1) The following Financial Statements are included in this Annual Report on Form 10-K on the pages

indicated below:

Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2006 and 2005
Consolidated Statements of Income for the years ended December 31, 2006, 2005, and 2004
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2006,

2005, and 2004

Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005, and

2004

Notes to Consolidated Financial Statements for the years ended December 31, 2006, 2005,

and 2004

F-1
F-2 — F-3
F-4

F-5

F-6

F-7 — F-25

(2) The following financial statement schedule for the years ended December 31, 2006, 2005, and 2004 is
included in this Annual Report on Form 10-K and should be read in conjunction with the Consolidated
Financial Statements contained in the Annual Report.

Schedule II — Consolidated Valuation and Qualifying Accounts. Report of Independent Registered Public

Accounting Firm on Financial Statement Schedule.

Schedules not listed above are omitted because of the absence of the conditions under which they are required

or because the required information is included in the Consolidated Financial Statements or the notes thereto.

(3) Exhibits:

Exhibit
Number

Description

3.1*
3.2*
3.3

4.1

4.2

4.3
10.1

10.2

10.3

10.4

10.5

10.6

34

Second Amended and Restated Articles of Incorporation of the Company.
Amendment to Company’s Second Amended and Restated Articles of Incorporation of the Company.
Amended and Restated Code of Regulations of the Company (incorporated by reference to Exhibit 3.2 to
the Registration Statement on Form S-1, registration number 33-56118 (the ‘‘Registration Statement”).
Form of Stock Certificate for the Company (incorporated by reference to Exhibit 4.1 to the Registration
Statement).
Articles Fourth, Fifth, Sixth, Seventh, Eighth, Eleventh, Twelfth, and Thirteenth of the Company’s
Amended and Restated Articles of Incorporation (see Exhibit 3.1).
Articles I and II of the Company’s Code of Regulations (see Exhibit 3.3).
Form of Employment Agreement, dated July 1, 1995, for executive officers (incorporated by reference to
Exhibit 10.1 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 1995 (the
‘‘1995 Form 10-K”)).
Information concerning Employment Agreements substantially similar to Exhibit 10.1 (incorporated by
reference to Exhibit 10.2 to the 1995 Form 10-K).
Deferred Compensation Agreement, dated May 1, 1984, between Rocky Shoes & Boots Co. and Mike
Brooks (incorporated by reference to Exhibit 10.3 to the Registration Statement).
Information concerning Deferred Compensation Agreements substantially similar to Exhibit 10.3
(incorporated by reference to Exhibit 10.4 to the Registration Statement).
Form of Company’s amended 1992 Stock Option Plan (incorporated by reference to Exhibit 10.5 to the
1995 Form 10-K).
Form of Stock Option Agreement (incorporated by reference to Exhibit 10.6 to the Registration
Statement).

ROCKY BRANDS, INC.

Exhibit
Number

10.7

10.8
10.9

10.10

10.11

10.12

10.13

10.14

10.15

10.16

10.17

10.18

10.19

10.20

10.21

10.22

10.23

10.24

Description

Indemnification Agreement, dated December 21, 1992, between the Company and Mike Brooks
(incorporated by reference to Exhibit 10.10 to the Registration Statement).
Information concerning Indemnification Agreements substantially similar to Exhibit 10.7.
Amended and Restated Lease Agreement, dated March 1, 2002, between Rocky Shoes & Boots Co. and
William Brooks Real Estate Company regarding Nelsonville factory (incorporated by reference to
Exhibit 10.11 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,
2002).
Company’s Amended and Restated 1995 Stock Option Plan (incorporated by reference to Exhibit 4(a) to
the Registration Statement on Form S-8, registration number 333-67357).
Form of Stock Option Agreement under the 1995 Stock Option Plan (incorporated by reference to
Exhibit 10.28 to the 1995 Form 10-K).
Form of Employment Agreement, dated September 7, 1995, for executive officers (incorporated by
reference to Exhibit 10.5 to the September 30, 1995 Form 10-Q).
Information covering Employment Agreements substantially similar to Exhibit 10.23 (incorporated by
reference to Exhibit 10.5 to the September 30, 1995 Form 10-Q).
Lease Contract dated December 16, 1999, between Lifestyle Footwear, Inc. and The Puerto Rico
Industrial Development Company (incorporated by reference to Exhibit 10.14 to the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
Promissory Note, dated December 30, 1999, in favor of General Electric Capital Business Asset Funding
Corporation in the amount of $1,050,000 (incorporated by reference to Exhibit 10.1 to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000 (the ‘‘June 30, 2000 Form 10-Q”)).
Promissory Note, dated December 30, 1999, in favor of General Electric Capital Business Asset Funding
Corporation in the amount of $1,500,000 (incorporated by reference to Exhibit 10.2 to the June 30, 2000
Form 10-Q).
Promissory Note, dated December 30, 1999, in favor of General Electric Capital Business Asset Funding
Corporation in the amount of $3,750,000 (incorporated by reference to Exhibit 10.3 to the June 30, 2000
Form 10-Q).
Company’s Second Amended and Restated 1995 Stock Option Plan (incorporated by reference to the
Company’s Definitive Proxy Statement for the 2002 Annual Meeting of Shareholders held on May 15,
2002, filed on April 15, 2002).
Company’s 2004 Stock Incentive Plan (incorporated by reference to the Company’s Definitive Proxy
Statement for the 2004 Annual Meeting of Shareholders, held on May 11, 2004, filed on April 6, 2004).
Renewal of Lease Contract, dated June 24, 2004, between Five Star Enterprises Ltd. and the Dominican
Republic Corporation for Industrial Development (incorporated by reference to Exhibit 10.20 to the
Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004).
Second Amendment to Lease Agreement, dated as of July 26, 2004, between Rocky Shoes & Boots, Inc.
and the William Brooks Real Estate Company (incorporated by reference to Exhibit 10.1 to the
Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004).
Form of Option Award Agreement under the Company’s 2004 Stock Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Current Report on Form 8-K dated January 3, 2005, filed with the
Securities and Exchange Commission on January 7, 2005).
Form of Restricted Stock Award Agreement relating to the Retainer Shares issued under the Company’s
2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K
dated January 3, 2005, filed with the Securities and Exchange Commission on January 7, 2005).
Loan and Security Agreement, dated as of January 6, 2005, by and among Rocky Shoes & Boots, Inc.,
Lifestyle Footwear, Inc., EJ Footwear LLC, HM Lehigh Safety Shoe Co. LLC, Georgia Boot LLC,
Durango Boot Company LLC, Northlake Boot Company LLC, Lehigh Safety Shoe Co. LLC, Georgia
Boot Properties LLC, and Lehigh Safety Shoe Properties LLC, as Borrowers, and GMAC Commercial
Finance LLC, as Agent and as Lender (incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K dated January 6, 2005, filed with the Securities and Exchange Commission on January 12,
2005).

ROCKY BRANDS, INC.

35

Exhibit
Number

10.25

10.26

10.27

10.28

10.29

10.30

10.31

Description

Note Purchase Agreement, dated as of January 6, 2005, by and among Rocky Shoes & Boots, Inc.,
Lifestyle Footwear, Inc., EJ Footwear LLC, HM Lehigh Safety Shoe Co. LLC, Georgia Boot LLC,
Georgia Boot Properties LLC, Durango Boot Company LLC, Northlake Boot Company LLC, Lehigh
Safety Shoe Co. LLC, and Lehigh Safety Shoe Properties LLC, as Loan Parties, American Capital
Financial Services, Inc., as Agent, and American Capital Strategies, Ltd., as Purchaser (incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K dated January 6, 2005, filed with the
Securities and Exchange Commission on January 12, 2005).
Amendment No. 1 to Loan and Security Agreement and Consent, dated as of January 19, 2005, by and
among Rocky Shoes & Boots, Inc., Lifestyle Footwear, Inc., EJ Footwear LLC, HM Lehigh Safety Shoe
Co. LLC, Georgia Boot LLC, Durango Boot Company LLC, Northlake Boot Company LLC, Lehigh
Safety Shoe Co. LLC, Georgia Boot Properties LLC, and Lehigh Safety Shoe Properties LLC, as
Borrowers, GMAC Commercial Finance LLC, as administrative agent and sole lead arranger for the
Lenders, Bank of America, N.A., as syndication agent and Royal Bank of Scotland PLC, as
documentation agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K
dated January 19, 2005, filed with the Securities and Exchange Commission on January 21, 2005).
Executive Employment Agreement, dated as of December 1, 2004, between Georgia Boot LLC and
Thomas R. Morrison (incorporated by reference to Exhibit 10(a) to the Company’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2005).
Amendment No. 2 to Loan and Security Agreement and Consent, dated as of September 12, 2005, by and
among Rocky Shoes & Boots, Inc., Lifestyle Footwear, Inc., EJ Footwear LLC, HM Lehigh Safety Shoe
Co. LLC, Georgia Boot LLC, Durango Boot Company LLC, Northlake Boot Company LLC, Lehigh
Safety Shoe Co. LLC, Georgia Boot Properties LLC, and Lehigh Safety Shoe Properties LLC, as
Borrowers, GMAC Commercial Finance LLC, as administrative agent and sole lead arranger for the
Lenders, and Bank of America, N.A., as syndication agent (incorporated by reference to Exhibit 10(a) to
the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).
Amendment No. 3 to Loan and Security Agreement, dated as of June 28, 2006 , by and among Rocky
Brands, Inc., Lifestyle Footwear, Inc., EJ Footwear LLC, HM Lehigh Safety Shoe Co. LLC, Georgia Boot
LLC, Durango Boot Company LLC, Northlake Boot Company LLC, Lehigh Safety Shoe Co. LLC,
Georgia Boot Properties LLC, and Lehigh Safety Shoe Properties LLC, as Borrowers, and GMAC
Commercial Finance LLC, as administrative agent and sole lead arranger for the Lenders (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated June 28, 2006, filed with
the Securities and Exchange Commission on July 5, 2006).
First Amendment to Note Purchase Agreement, dated as of January 28, 2006, by and among Rocky
Brands, Inc., Lifestyle Footwear, Inc., EJ Footwear LLC, HM Lehigh Safety Shoe Co. LLC, Georgia Boot
LLC, Durango Boot Company LLC, Northlake Boot Company LLC, Lehigh Safety Shoe Co. LLC,
Georgia Boot Properties LLC, and Lehigh Safety Shoe Properties LLC, as the Loan Parties, the purchasers
party thereto (each a ‘‘Purchaser” and collectively, the ‘‘Purchaser”), and American Capital Financial
Services, Inc., as administrative and collateral agent for the Purchasers (incorporated by reference to
Exhibit 10.2 to the Company’s Current Report on Form 8-K dated June 28, 2006, filed with the Securities
and Exchange Commission on July 5, 2006).
Amendment No. 4 to Loan and Security Agreement and Waiver, dated as of November 8, 2006 , by and
among Rocky Brands, Inc., Lifestyle Footwear, Inc., EJ Footwear LLC, HM Lehigh Safety Shoe Co. LLC,
Georgia Boot LLC, Durango Boot Company LLC, Northlake Boot Company LLC, Lehigh Safety Shoe
Co. LLC, Georgia Boot Properties LLC, and Lehigh Safety Shoe Properties LLC, as Borrowers, and
GMAC Commercial Finance LLC, as administrative agent and sole lead arranger for the Lenders
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated
November 8, 2006, filed with the Securities and Exchange Commission on November 13, 2006).

36

ROCKY BRANDS, INC.

Exhibit
Number

10.32

10.33

10.34

10.35

21*
23*
24*
31.1*
31.2*
32**
99.1*
99.2*

Description

Second Amendment to Note Purchase Agreement and Waiver, dated as of November 8, 2006, by and
among Rocky Brands, Inc., Lifestyle Footwear, Inc., EJ Footwear LLC, HM Lehigh Safety Shoe Co. LLC,
Georgia Boot LLC, Durango Boot Company LLC, Northlake Boot Company LLC, Lehigh Safety Shoe
Co. LLC, Georgia Boot Properties LLC, and Lehigh Safety Shoe Properties LLC, as the Loan Parties, the
purchasers party thereto (each a ‘‘Purchaser” and collectively, the ‘‘Purchaser”), and American Capital
Financial Services, Inc., as administrative and collateral agent for the Purchasers (incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K dated November 8, 2006, filed
with the Securities and Exchange Commission on November 13, 2006).
Description of the Material Terms of Rocky Brands, Inc.’s Bonus Plan for the Fiscal Year Ending
December 31, 2007 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K dated December 15, 2006, filed with the Securities and Exchange Commission on December 21,
2006).
Schedule of Outside Director Fees as of January 1, 2007 (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K dated December 15, 2006, filed with the Securities and
Exchange Commission on December 21, 2006).
Schedule of Named Executive Officer Base Salaries as of January 1, 2007 (incorporated by reference to
Exhibit 10.3 to the Company’s Current Report on Form 8-K dated December 15, 2006, filed with the
Securities and Exchange Commission on December 21, 2006).
Subsidiaries of the Company.
Consent of Independent Registered Public Accounting Firm.
Powers of Attorney.
Rule 13a-14(a) Certification of Principal Executive Officer.
Rule 13a-14(a) Certification of Principal Financial Officer.
Section 1350 Certification of Principal Executive Officer and Principal Financial Officer.
Report of Independent Registered Public Accounting Firm.
Financial Statement Schedule.

* Filed with this Annual Report on Form 10-K.
** Furnished with this Annual Report on Form 10-K.

The Registrant agrees to furnish to the Commission upon its request copies of any omitted schedules or

exhibits to any Exhibit filed herewith.

ROCKY BRANDS, INC.

37

Pursuant to the requirements of Section 13 or 15(d) 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.

SIGNATURES

ROCKY BRANDS, INC.

By: /s/

James E. McDonald

James E. McDonald,
Executive Vice President and Chief Financial Officer

Date: March 15, 2007

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the

following persons on behalf of the Registrant and in the capacities indicated on the dates indicated.

Signature

Title

Date

/s/ Mike Brooks
Mike Brooks

James E. McDonald

/s/
James E. McDonald

*CURTIS A. LOVELAND
Curtis A. Loveland

*J. PATRICK CAMPBELL
J. Patrick Campbell

*GLENN E. CORLETT
Glenn E. Corlett

*MICHAEL L. FINN
Michael L. Finn

*G. COURTNEY HANING
G. Courtney Haning

*HARLEY E. ROUDA
Harley E. Rouda

*JAMES L. STEWART
James L. Stewart

Chairman, Chief Executive Officer and
Director (Principal Executive Officer)

March 15, 2007

Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting
Officer)

March 15, 2007

Secretary and Director

March 15, 2007

Director

March 15, 2007

Director

March 15, 2007

Director

March 15, 2007

Director

March 15, 2007

Director

March 15, 2007

Director

March 15, 2007

*By: /s/ Mike Brooks

Mike Brooks, Attorney-in-Fact

38

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2006 and 2005
Consolidated Statements of Income for the Years Ended December 31, 2006, 2005 and 2004
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2006, 2005

and 2004

Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004
Notes to Consolidated Financial Statements

F-1
F-2 — F-3
F-4

F-5
F-6
F-7 — F-25

ROCKY BRANDS, INC.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Rocky Brands, Inc.:

We have audited the accompanying consolidated balance sheets of Rocky Brands, Inc. and subsidiaries (the
“Company”) as of December 31, 2006 and 2005, and the related consolidated statements of income, shareholders’
equity, and cash flows for each of the three years in the period ended December 31, 2006. These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial
position of Rocky Brands, Inc. and subsidiaries at December 31, 2006 and 2005, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of America.

As discussed in Note 12 to the consolidated financial statements, effective January 1, 2006, the Company
changed the manner in which it accounts for share-based compensation. In addition, as discussed in Note 10, the
Company changed the manner in which it records the funded status of its defined benefit pension effective
December 31, 2006.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the effectiveness of the Company’s internal control over financial reporting as of December 31,
2006, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2007 expressed an
unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over
financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial
reporting.

Columbus, Ohio
March 14, 2007

ROCKY BRANDS, INC.

F-1

ROCKY BRANDS, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

CURRENT ASSETS:

Cash and cash equivalents

Trade receivables — net

Other receivables

Inventories

Deferred income taxes

Income tax receivable

Prepaid expenses

Total current assets

FIXED ASSETS — net

PENSION ASSET

IDENTIFIED INTANGIBLES

GOODWILL

OTHER ASSETS

TOTAL ASSETS

December 31,

2006

2005

$ 3,731,253

$ 1,608,680

65,259,580

61,746,865

1,159,444

2,455,885

77,948,976

75,386,732

3,902,775

3,632,808

1,581,303

133,783

1,346,820

1,497,411

157,216,139

144,176,176

24,349,674

24,342,250

13,564

2,117,352

37,105,291

38,320,828

24,874,368

23,963,637

2,796,776

3,214,131

$246,355,812

$236,134,374

See notes to consolidated financial statements.

F-2

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

CURRENT LIABILITIES:

Accounts payable

Current maturities — long term debt

Accrued expenses:

Salaries and wages

Co-op advertising

Interest

Taxes — other

Commissions

Other

Total current liabilities

LONG TERM DEBT-less current maturities

DEFERRED LIABILITIES:

Deferred income taxes

Other deferred liabilities

TOTAL LIABILITIES

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY:

December 31,

2006

2005

$ 10,162,291

$ 12,721,214

7,288,474

6,400,416

178,235

452,272

338,281

552,782

649,636

1,531,336

936,438

724,159

603,435

669,306

2,025,079

1,312,203

21,647,050

24,898,507

103,203,107

98,972,190

17,009,025

12,567,208

368,580

603,347

142,227,762

137,041,252

Preferred stock, Series A, no par value, $.06 stated value; none outstanding

Common stock, no par value; 25,000,000 shares authorized; outstanding;

2006 — 5,417,198 and 2005 — 5,351,023; and additional paid-in capital

53,238,841

52,030,013

Accumulated other comprehensive loss

Retained earnings

Total shareholders’ equity

(993,182)

—

51,882,391

47,063,109

104,128,050

99,093,122

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$246,355,812

$236,134,374

See notes to consolidated financial statements.

ROCKY BRANDS, INC.

F-3

ROCKY BRANDS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

NET SALES

COST OF GOODS SOLD

GROSS MARGIN

Years Ended December 31,
2005

2004

2006

$263,491,380

$296,022,614

$132,248,963

154,173,994

184,793,488

93,606,600

109,317,386

111,229,126

38,642,363

SELLING, GENERAL AND ADMINISTRATIVE

EXPENSES

90,386,072

83,164,758

25,617,944

INCOME FROM OPERATIONS

18,931,314

28,064,368

13,024,419

OTHER INCOME AND (EXPENSES):

Interest expense

Other — net

Total other — net

(11,567,842)

(9,256,867)

(1,328,575)

242,059

464,385

374,548

(11,325,783)

(8,792,482)

(954,027)

INCOME BEFORE INCOME TAXES

7,605,531

19,271,886

12,070,392

INCOME TAX EXPENSE

NET INCOME

NET INCOME PER SHARE

Basic

Diluted

WEIGHTED AVERAGE NUMBER OF COMMON

SHARES OUTSTANDING

Basic

Diluted

2,786,249

6,258,047

3,476,000

$ 4,819,282

$ 13,013,839

$ 8,594,392

$

$

0.89

0.86

$

$

2.48

2.33

$

$

1.89

1.74

5,392,390

5,257,530

4,557,283

5,578,176

5,584,771

4,953,529

See notes to consolidated financial statements

F-4

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

BALANCE — December 31, 2003
Year Ended December 31, 2004
Net income
Minimum pension liability, net of

tax benefit of $356,501

Comprehensive income
Stock issued and options exercised
including related tax benefits

Common Stock and
Additional Paid-In Capital

Shares
Outstanding

Amount

Accumulated
Other
Comprehensive
Loss

Retained
Earnings

Total
Shareholders’
Equity

4,360,400

$34,880,199

$(1,950,400) $25,454,878

$ 58,384,677

872,814

8,594,392

8,594,392

872,814

9,467,206

3,518,914

334,270

3,518,915

BALANCE — December 31, 2004

4,694,670

38,399,114

(1,077,586)

34,049,270

71,370,798

Year Ended December 31, 2005
Net income
Minimum pension liability, net of

tax benefit of $387,649

Comprehensive income
Treasury stock purchased and

retired

Stock issued and options exercised
including related tax benefits

1,077,586

13,013,839

13,013,839

1,077,586

14,091,425

11,573,838

2,057,061

484,261

11,573,838

172,092

2,057,061

BALANCE — December 31, 2005

5,351,023

52,030,013

— 47,063,109

99,093,122

Year Ended December 31, 2006
Net income

Comprehensive income
Adoption of FAS 158, net of tax

benefit of $583,298

Stock compensation expense
Stock issued and options exercised
including related tax benefits

(993,182)

391,674

66,175

817,154

4,819,282

4,819,282

4,819,282

(993,182)
391,674

817,154

BALANCE — December 31, 2006

5,417,198

$53,238,841

$ (993,182) $51,882,391

$104,128,050

See notes to consolidated financial statements.

ROCKY BRANDS, INC.

F-5

ROCKY BRANDS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided

by operating activities:
Depreciation and amortization
Deferred income taxes
Tax benefit related to stock options
Deferred compensation and pension
(Gain) loss on disposal of fixed assets
Stock compensation expense
Intangible impairment charge
Write off of deferred financing costs for repayment

Change in assets and liabilities (net of effect from

acquisition in 2005):
Receivables
Inventories
Income tax receivable
Other current assets
Other assets
Accounts payable
Accrued and other liabilities

Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets
Proceeds from sales of fixed assets
Acquisition of business
Investment in trademarks and patents

2006

2005

2004

$

4,819,282

$ 13,013,839

$

8,594,392

5,270,307
345,350
—
292,541
(557,938)
391,674
762,000
382,144

(2,216,274)
(2,562,244)
(2,285,988)
(83,850)
645,211
(2,931,106)
(1,580,592)

690,517

(5,626,803)
1,853,336
—
(120,606)

4,929,554
1,134,840
774,183
526,855
3,947
192,368

3,407,790
1,316,065
1,205,300
49,530
2,220
66,885

—

—

(6,563,373)
(7,787,064)
917,711
(164,492)
1,116,169
2,797,873
(2,427,247)

8,465,163

(6,052,483)
40,757
(93,097,923)
(328,522)

(7,934,739)
5,109,063
(2,264,531)
456,620
(1,333,747)
1,557,084
(2,628,448)

7,603,484

(5,466,041)
—
—
—

(5,466,041)

Net cash used in investing activities

(3,894,073)

(99,438,171)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facility
Repayments of revolving credit facility
Proceeds from long-term debt
Repayments of long-term debt
Debt financing costs
Proceeds from exercise of stock options
Tax benefit related to stock options

Net cash provided by financing activities
INCREASE (DECREASE) IN CASH AND CASH

EQUIVALENTS

CASH AND CASH EQUIVALENTS:

BEGINNING OF PERIOD
END OF PERIOD

See notes to consolidated financial statements

269,565,766
(254,437,280)
15,000,000
(25,009,511)
(610,000)
411,604
405,550

340,366,601
(292,338,539)
48,000,000
(7,192,020)
(2,405,723)
1,090,510
—

127,659,452
(129,141,816)
—
—
—
2,246,730
—

5,326,129

87,520,829

764,366

2,122,573

(3,452,179)

2,901,809

1,608,680
3,731,253

5,060,859
1,608,680

2,159,050
5,060,859

$

$

$

F-6

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation — The accompanying consolidated financial statements include the accounts of
Rocky Brands, Inc. (“Rocky.”) and its wholly-owned subsidiaries, Lifestyle Footwear, Inc. (“Lifestyle”), Five Star
Enterprises Ltd. (“Five Star”), Rocky Canada, Inc. (“Rocky Canada”), Rocky Brands Wholesale LLC and Rocky
Brands Retail LLC, collectively referred to as the “Company.” All intercompany transactions have been eliminated.

Business Activity — We are a leading designer, manufacturer and marketer of premium quality footwear
marketed under a portfolio of well recognized brand names including Rocky Outdoor Gear, Georgia Boot, Durango,
Lehigh and Dickies. Our brands have a long history of representing high quality, comfortable, functional and
durable footwear and our products are organized around four target markets: outdoor, work, duty and western. In
addition, as part of our strategy of outfitting consumers from head-to-toe, we market complementary branded
apparel and accessories that we believe leverage the strength and positioning of each of our brands.

Our products are distributed through three distinct business segments: wholesale, retail and military. In our
wholesale business, we distribute our products through a wide range of distribution channels representing over ten
thousand retail store locations in the U.S. and Canada. Our wholesale channels vary by product line and include
sporting goods stores, outdoor retailers, independent shoe retailers, hardware stores, catalogs, mass merchants,
uniform stores, farm store chains, specialty safety stores and other specialty retailers. Our retail business includes
direct sales of our products to consumers through our Lehigh mobile and retail stores (including a fleet of seventy-
eight trucks, supported by thirty-eight small warehouses that include retail stores, which we refer to as mini-stores),
our Rocky outlet store and our websites. We also sell footwear under the Rocky label to the U.S. military.

We did not have any single customer account for more than 10% of consolidated net sales in 2006 and 2005. In
2004 we had one customer, which represented sales of military footwear under a subcontracting agreement, which
accounted for 14% of consolidated net sales.

Estimates — The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.

Cash and Cash Equivalents — We consider all highly liquid investments purchased with original maturities
of three months or less to be cash equivalents. Our cash and cash equivalents are primarily held in four banks.

Trade Receivables — Trade receivables are presented net of the related allowance for uncollectible accounts
of approximately $838,000 and $985,000 at December 31, 2006 and 2005, respectively. The allowance for
uncollectible accounts is calculated based on the relative age and size of trade receivable balances.

Concentration of Credit Risk — We have significant transactions with a large number of customers. No
customer represented 10% of total accounts receivable — trade balance as of December 31, 2006 and 2005. Our
exposure to credit risk is impacted by the economic climate affecting the retail shoe industry. We manage this risk
by performing ongoing credit evaluations of our customers and maintain reserves for potential uncollectible
accounts.

Supplier and Labor Concentrations — We purchase raw materials from a number of domestic and foreign
sources. We currently buy the majority of our waterproof fabric, a component used in a significant portion of our
shoes and boots, from one supplier (GORE-TEX»). We have had a relationship with this supplier for over 20 years
and have no reason to believe that such relationship will not continue.

ROCKY BRANDS, INC.

F-7

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We produce a portion of our shoes and boots in our Dominican Republic operation. We are not aware of any

governmental or economic restrictions that would alter its current operations.

We source a significant portion of our footwear, apparel and gloves from manufacturers in the Far East,
primarily China. We are not aware of any governmental or economic restrictions that would alter its current
sourcing operations.

Inventories — Inventories are valued at the lower of cost, determined on a first-in, first-out (FIFO) basis, or
market. Reserves are established for inventories when the net realizable value (NRV) is deemed to be less than its
cost based on our periodic estimates of NRV.

Fixed Assets — The Company records fixed assets at historical cost and generally utilizes the straight-line
method of computing depreciation for financial reporting purposes over the estimated useful lives of the assets as
follows:

Building and improvements
Machinery and equipment
Furniture and fixtures
Lasts, dies, and patterns

Years

5-40
3-8
3-8
3

For income tax purposes, the Company generally computes depreciation utilizing accelerated methods.

Goodwill and Trademarks — Goodwill and trademarks are considered indefinite lived assets and are not

amortized. All goodwill relates to our Wholesale segment.

Advertising — We expense advertising costs as incurred. Advertising expense was approximately $8,252,000,

$7,851,000, and $2,265,000 for 2006, 2005 and 2004, respectively.

Revenue Recognition — Revenue and related cost of goods sold are recognized at the time products are
shipped to the customer and title transfers. Revenue is recorded net of estimated sales discounts and returns based
upon specific customer agreements and historical trends.

Shipping and Handling Costs — In accordance with the Emerging Issues Tax Force (“EITF”) No. 00-10
“Accounting For Shipping and Handling Fees And Costs,” all shipping and handling costs billed to customers have
been included in net sales. Shipping and handling costs are included in selling, general and administrative costs and
totaled approximately $6,518,000, $6,433,000 and $1,789,000 in 2006, 2005 and 2004, respectively. Our gross
profit may not be comparable to other entities whose shipping and handling is a component of cost of sales.

Per Share Information — Basic net income per common share is computed based on the weighted average
number of common shares outstanding during the period. Diluted net income per common share is computed
similarly but includes the dilutive effect of stock options. A reconciliation of the shares used in the basic and diluted
income per share computations is as follows:

Basic — weighted average shares outstanding
Dilutive securities — stock options

Years Ended December 31,
2005

2006

2004

5,392,390
185,786

5,257,530
327,241

4,557,283
396,246

Diluted — weighted average shares outstanding

5,578,176

5,584,771

4,953,529

Anti-Diluted securities — stock options

251,669

125,000

84,000

F-8

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Asset Impairments — Annually, or more frequently if events or circumstances change, a determination is
made by management, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for Impairment or Disposal of Long-Lived Assets,” to ascertain whether property and equipment and
certain finite-lived intangibles have been impaired based on the sum of expected future undiscounted cash flows
from operating activities. If the estimated net cash flows are less than the carrying amount of such assets, we will
recognize an impairment loss in an amount necessary to write down the assets to fair value as determined from
expected future discounted cash flows.

In accordance with SFAS No. 142, “Goodwill and Other Intangibles,” we test intangible assets with indefinite

lives and goodwill for impairment annually or when conditions indicate impairment may have occurred.

Comprehensive Income — Comprehensive income includes changes in equity that result from transactions
and economic events from non-owner sources. Comprehensive income is composed of two subsets — net income
and other comprehensive income (loss).

Recently Adopted Financial Accounting Standards — In February 2006, the Financial Accounting Standards
Board (“FASB”) issued a FASB Staff Position (“FSP”), “Classification of Options and Similar Instruments Issued
as Employee Compensation that Allow for Cash Settlement upon the Occurrence of a Contingent Event” (“FSP
FAS 123(R)-4”). FSP FAS 123(R)-4 amends SFAS No. 123(R) and addresses the classification of stock options and
similar instruments issued as employee compensation. Instruments having contingent cash settlement features are
properly classified as equity if the cash settlement feature can be exercised only upon the occurrence of a contingent
event that is outside the employee’s control, and it is not probable that the event will occur. If the contingent event
becomes probable, the instrument shall be accounted for as a liability. FSP FAS 123(R)-4 was adopted by us in the
first quarter of 2006. The adoption of FSP FAS 123(R)-4 did not have a material impact on the Company’s
consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes —
an Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income
Taxes”. An uncertain tax position will be recognized if it is determined that it is more likely than not to be sustained
upon examination. The tax position is measured at the largest amount of benefit that is greater than fifty percent
likely of being realized upon ultimate settlement. The cumulative effect of applying the provisions of this
Interpretation is to be reported as a separate adjustment to the opening balance of retained earnings in the year
of adoption. This statement is effective for fiscal years beginning after December 15, 2006. We have not determined
the effects of adopting FIN 48.

In June 2006, the FASB ratified the Emerging Issues Task Force (“EITF”) position EITF 06-3, “How Taxes
Collected from Customers and Remitted to Governmental Authorities Should be Presented in the Income Statement
(that is Gross versus Net Presentation)” (“EITF 06-3”), that addresses disclosure requirements for taxes assessed by
a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction
between a seller and a customer, and may include, but is not limited to, sales, use, value-added, and some excise
taxes. EITF 06-3 requires disclosure of the method of accounting for the applicable assessed taxes, and the amount
of assessed taxes that are included in revenues if they are accounted for under the gross method. The provisions of
EITF 06-3 are effective for interim and annual reporting periods beginning after December 15, 2006, with earlier
application permitted. We currently report sales net of sales tax. We do not anticipate the adoption of EITF 06-3 will
have a material impact on our financial statements.

In September 2006, the FASB issued a Statement of Accounting Standards (“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. SFAS 157 does

ROCKY BRANDS, INC.

F-9

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

not require any new fair value measurements, rather it applies under existing accounting pronouncements that
require or permit fair value measurements. The provisions of SFAS 157 are effective for fiscal years beginning after
November 15, 2007. We are currently evaluating the impact of adopting SFAS 157 on our financial statements.

Also in September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefits
Pension and Other Postretirement Plans, an Amendment of FASB Statements 87, 88, 106, and 132(R)”
(“SFAS 158”). SFAS 158, requires an employer to recognize in its statement of financial position the funded
status of its defined benefit plans and to recognize as a component of other comprehensive income, net of tax, any
unrecognized transition obligations and assets, the actuarial gains and losses and prior service costs and credits that
arise during the period. The recognition provisions of Statement No. 158 are to be applied prospectively and are
effective for fiscal years ending after December 15, 2006. In addition, Statement No. 158 requires a fiscal year end
measurement of plan assets and benefit obligations, eliminating the use of earlier measurement dates currently
permissible. However, the new measurement date requirement will not be effective until fiscal years ended after
December 15, 2008. We utilize a measurement date of September 30th and will be required to change to
December 31st. The adoption of Statement No. 158 as of December 31, 2006 resulted in a write-down of our
pension asset by $1.6 million, increased accumulated other comprehensive loss by $1.0 million, and decreased
deferred income tax liabilities by $0.6 million.

In September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects
of Prior Year Misstatements When Quantifying Misstatements in the Current Year Financial Statements” (“SAB
108”), SAB 108 addresses diversity in practice when quantifying the effect of an error on financial statements. It
provides guidance on the consideration of the effects of prior year misstatements in quantifying misstatements in
current year financial statements. Our adoption of SAB 108, effective December 31, 2006, did not have a material
impact on our financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities, including an amendment of statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value. The standard also establishes presentation
and disclosure requirements designed to facilitate comparison between entities that choose different measurement
attributes for similar types of assets and liabilities. SFAS 159 is effective for annual periods in fiscal years beginning
after November 15, 2007. If the fair value option is elected, the effect of the first remeasurement to fair value is
reported as a cumulative effect adjustment to the opening balance of retained earnings. In the event we elect the fair
value option promulgated by this standard, the valuations of certain assets and liabilities may be impacted. The
statement is applied prospectively upon adoption.

2. ACQUISITIONS

EJ Footwear Group

On January 6, 2005, we completed the purchase of 100% of the issued and outstanding voting limited interests

of the EJ Footwear Group from SILLC Holdings LLC.

The EJ Footwear Group was acquired to expand the Company’s branded product lines, principally occupa-
tional products, and provide new channels for our existing product lines. The aggregate purchase price for the
interests of EJ Footwear Group, including closing date working capital adjustments, was approximately $93.1 mil-
lion in cash plus 484,261 shares of our common stock valued at $11,573,838. Common stock value was based on the
average closing share price during the three days preceding and three days subsequent to the date of the acquisition
agreement.

F-10

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

We have allocated the purchase price to the tangible and intangible assets and liabilities acquired based upon
the fair values and income tax basis. Goodwill resulting from the transaction is not tax deductible. The purchase
price has been allocated as follows:

Purchase price allocation:
Cash
Common shares — 484,261 shares
Transaction costs

Allocated to:
Current assets
Fixed assets and other assets
Identified intangibles
Goodwill
Liabilities
Deferred taxes

$ 91,298,435
11,573,838
1,799,488

$104,671,761

$ 64,727,065
2,781,379
36,000,000
22,405,776
(11,307,184)
(9,935,275)

$104,671,761

The following unaudited pro-forma information for the year ended December 31, 2004 presents results as if the

acquisition occurred on January 1, 2004:

Net sales
Net income
Earning per share:

Basic
Diluted

3.

INVENTORIES

Inventories are comprised of the following:

Raw materials
Work-in-process
Finished goods
Reserve for obsolescence or lower of cost or market

Total

$279,051,000
12,782,000

$
$

2.54
2.35

December 31,

2006

2005

$ 6,564,731
249,644
71,518,898
(384,297)

$ 7,833,780
583,963
67,453,668
(484,679)

$77,948,976

$75,386,732

ROCKY BRANDS, INC.

F-11

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

4.

IDENTIFIED INTANGIBLE ASSETS

A schedule of identified intangible assets is as follows:

December 31, 2006

Trademarks (not subject to amortization):

Wholesale
Retail

Patents
Customer Relationships

Total Intangibles

December 31, 2005

Trademarks (not subject to amortization):

Wholesale
Retail

Patents
Customer Relationships

Total Intangibles

Gross
Amount

Accumulated
Amortization

Carrying
Amount

$28,241,370
6,900,000
2,238,981
1,000,000

$ 875,060
400,000

$28,241,370
6,900,000
1,363,921
600,000

$38,380,351

$1,275,060

$37,105,291

Gross
Amount

Accumulated
Amortization

Carrying
Amount

$28,933,009
6,900,000
2,188,736
1,000,000

$500,917
200,000

$28,933,009
6,900,000
1,687,819
800,000

$39,021,745

$700,917

$38,320,828

Amortization expense related to fixed-lived intangible assets was approximately $574,000, $569,000 and
$26,200 in 2006, 2005 and 2004, respectively. Such amortization expense will be approximately $662,000 per year
from 2007 to 2009, and $122,000 for 2010 and $121,000 for 2011.

The weighted average lives of patents and customer relationships acquired in the EJ Footwear Group

acquisition is 5 years.

In the fourth quarter of 2005, we adjusted trademarks by $8,800,000 and goodwill by $3,343,094 to record the

final valuation of intangible assets.

All goodwill is reported under our Wholesale segment. As of December 31, 2004, our consolidated balance
sheet included $1.6 million of goodwill. In 2005, we recorded $22.4 million of goodwill associated with the
acquisition of EJ Footwear Group. In the second quarter of 2006, a net operating loss carry forward recorded in the
purchase of EJ Footwear Group as a deferred tax asset was reduced by $0.9 million and goodwill was increased by
$0.9 million as a result of the finalization of the income tax basis of net operating losses of the EJ Footwear Group
prior to the purchase.

In the fourth quarter of 2006, we evaluated our indefinite lived trademarks under the terms and provisions of
SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 requires that we compare the fair
value of an intangible asset with its carrying amount. As a result of this evaluation, we recognized an impairment
loss on the carrying value of the Gates trademark in the amount of $762,000. This charge is reflected in selling,
general and administrative expenses. Based on the results of this evaluation, we determined the Gates trademark
should be characterized as a definite lived asset that will be amortized over a useful life of twelve years. The Gates
trademark is reported under our Wholesale segment.

F-12

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5. OTHER ASSETS

Other assets consist of the following:

Deferred financing costs
Other

Total

6. FIXED ASSETS

Fixed assets are comprised of the following:

Land
Building
Machinery and equipment
Furniture and fixtures
Lasts, dies and patterns
Construction work-in-progress

Total
Less — accumulated depreciation

Net Fixed Assets

December 31,

2006

2005

$1,983,951
812,825

$2,417,342
796,789

$2,796,776

$3,214,131

December 31,

2006

2005

$

671,035
16,745,419
24,881,320
4,282,040
13,282,224
79,685

$

871,839
16,545,606
26,596,383
4,051,134
11,955,304
943,445

59,941,723
(35,592,049)

60,963,711
(36,621,461)

$ 24,349,674

$ 24,342,250

We incurred approximately $4,696,000, $4,361,000 and $3,382,000 in depreciation expense for 2006, 2005

and 2004, respectively.

7. LONG-TERM DEBT

Long-term debt is comprised of the following:

Bank — revolving credit facility
Term loans
Real estate obligations

Total
Less — current maturities

Net long-term debt

December 31,

2006

2005

$ 74,708,658
32,473,810
3,309,113

$ 59,580,171
41,300,000
4,492,435

110,491,581
7,288,474

105,372,606
6,400,416

$103,203,107

$ 98,972,190

In conjunction with the completion of our acquisition of EJ Footwear, we entered into agreements with GMAC
Commercial Finance (“GMAC”); and American Capital Financial Services, Inc., as agent, and American Capital
Strategies, Ltd., as lender (collectively, “ACAS”) for credit facilities totaling $148 million. The credit facilities were
used to fund the acquisition of EJ Footwear. Under the terms of the agreements, the interest rates and repayment

ROCKY BRANDS, INC.

F-13

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

terms were: (1) a five-year $100 million revolving credit facility with an interest rate of LIBOR plus 2.5% or prime
plus 1.0% at our option (a weighted average of 8.31% at December 31, 2006); (2) an $18 million term loan with an
interest rate of LIBOR plus 3.25% or prime plus 1.75% at our option (a weighted average of 9.0% at December 31,
2006) , payable in equal quarterly installments over three years beginning in 2005; and (3) a $30 million term loan
with an interest rate of LIBOR plus 8.0%, payable in equal installments from 2008 through 2011. The total amount
available on our revolving credit facility is subject to a borrowing base calculation based on various percentages of
accounts receivable and inventory.

In June 2006, we amended our debt agreement with GMAC to include a new three-year, $15 million term loan
with an interest rate of (1) LIBOR plus 3.25% or (2) prime plus 1.75% at our option (a weighted average of 9.0% at
December 31, 2006), payable over three years beginning in September 2006. The proceeds from the new term loan
were used to pay down the $30 million ACAS term loan. In conjunction with this repayment, we amended the terms
of the ACAS term loan, including lowering the interest rate to LIBOR plus 6.5% (14.3% as of December 31, 2006),
adjusting the repayment schedule to reflect the lower loan balance payable in equal installments from August 2009
to January 2011, and modifying certain restrictive loan covenants.

The total amount available on our revolving credit facility is subject to a borrowing base calculation based on
various percentages of accounts receivable and inventory. As of December 31, 2006, we had $74.7 million in
borrowings under this facility and total capacity of $88.5 million.

Our credit facilities contain certain restrictive covenants, which among other things, require us to maintain a
certain minimum EBITDA and certain leverage and fixed charge coverage ratios. At December 31, 2006, we had no
retained earnings available for the payment of dividends. In November 2006, we amended the terms of the
restrictive covenants through December 2007 pertaining to minimum EBITDA, senior and total leverage, and fixed
charges. This amendment increased the interest rate on borrowings under the ACAS agreement to LIBOR plus
8.5%.

As of December 31, 2006, we were in compliance with these restrictive covenants; however the margin of
compliance was minimal. These covenants become more restrictive during 2007 and, after December 2007, revert
to more restrictive covenants contained in the original agreements. We must improve our operating results and cash
flows, or take other action, to meet the covenants in the future. Any failure by us to comply with the restrictive
covenants could result in an event of default under the borrowing agreements, in which case the lenders could elect
to declare all amounts outstanding thereunder to be due and payable, which could have a material adverse effect on
our financial condition.

At December 31, 2006, the carrying amount of the revolving credit facility and term loans approximates fair
value as these are variable rate-based borrowings. The carry amount of the mortgages also approximates fair value,
as this was the available financing in the marketplace during the year.

Long-term debt maturities are as follows for the years ended December 31:

2007
2008
2009
2010
2011
Thereafter

Total

$ 7,288,474
7,314,173
8,013,985
85,091,520
1,249,107
1,534,322

$110,491,581

As of December 31, 2006, our real estate obligations incur interest at a rate of 8.275%.

F-14

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8. OPERATING LEASES

We lease certain machinery, trucks, and facilities under operating leases that generally provide for renewal
options. We incurred approximately $3,208,000, $3,349,000 and $918,000 in rent expense under operating lease
arrangements for 2006, 2005 and 2004, respectively.

Included in total rent expense above are payments of $60,000 for 2004 for our former Ohio manufacturing and
clearance center facility leased from an entity in which the owners are also shareholders of the Company. We
purchased the facility in January 2005 and relocated our factory outlet store in Nelsonville, Ohio to this location.

Future minimum lease payments under non-cancelable operating leases are as follows for the years ended

December 31:

2007
2008
2009
2010
2011

Total

9.

INCOME TAXES

$2,089,000
1,382,000
841,000
454,000
273,000

$5,039,000

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,”
which requires an asset and liability approach to financial accounting and reporting for income taxes. Accordingly,
deferred income taxes have been provided for the temporary differences between the financial reporting and the
income tax basis of the Company’s assets and liabilities by applying enacted statutory tax rates applicable to future
years to the basis differences.

Federal:

Current
Deferred

Total Federal

State & local:
Current
Deferred

Total State & local

Foreign (current)

Total

Years Ended December 31,
2005

2004

2006

$1,669,144
1,180,717

$3,994,381
1,087,396

$1,836,232
1,173,870

2,849,861

5,081,777

3,010,102

506,794
(835,267)

(328,473)
264,861

844,857
47,444

892,301
283,969

146,858
142,195

289,053
176,845

$2,786,249

$6,258,047

$3,476,000

ROCKY BRANDS, INC.

F-15

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A reconciliation of recorded Federal income tax expense (benefit) to the expected expense (benefit) computed

by applying the applicable Federal statutory rate for all periods to income before income taxes follows:

Expected expense at statutory rate
Increase (decrease) in income taxes resulting from:
Exempt income from operations in Puerto Rico
Exempt income from Dominican Republic operations due

to tax holiday

Subpart F income from Dominican Republic operations
Tax on repatriated earnings from Dominaican Republic

operations

State and local income taxes
Other — net

Total

Years Ended December 31,
2005

2004

2006

$2,668,345

$6,745,160

$4,224,637

—

(560,000)

(560,000)

(639,347)
883,952

(610,771)
—

(580,009)
—

—
(117,031)
(9,670)

—
579,993
103,665

157,000
187,884
46,488

$2,786,249

$6,258,047

$3,476,000

Deferred income taxes recorded in the consolidated balance sheets at December 31, 2006 and 2005 consist of

the following:

Deferred tax assets:

Asset valuation allowances and accrued expenses
Inventories
State and local income taxes
Net operating losses

Total deferred tax assets

Valuation allowances

Total deferred tax assets

Deferred tax liabilities:

Fixed assets
Intangible assets

Other assets

Pension and deferred compensation
Tollgate tax on Lifestyle earnings

Total deferred tax liabilities

Net deferred tax liability

Deferred income taxes — current
Deferred income taxes — non-current

December 31,

2006

2005

$ 1,378,597
524,288
585,524
509,487

$ 2,165,517
965,006
956,779
1,810,740

2,997,896
(402,958)

5,898,042
(314,332)

2,594,938

5,583,710

(812,882)
(14,438,017)
(149,712)
78,694
(379,271)

(1,295,038)
(15,377,356)
(189,333)
(776,137)
(379,271)

(15,701,188)

(18,017,135)

$(13,106,250)

$(12,433,425)

$ 3,902,775
(17,009,025)

133,783
$
(12,567,208)

$(13,106,250)

$(12,433,425)

F-16

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A valuation allowance related to certain state and local income tax net operating losses was established, of

which $314,332 relates to the acquisition of the EJ Footwear Group.

In 2006, approximately $2,200,000 of our accumulated earnings in Five Star became subject to income taxes
under Subpart F of the Internal Revenue Code resulting in an income tax provision of $883,952. Also, in 2006, our
U.S. income tax exemption for income from operations in Puerto Rico expired.

A provision of the American Jobs Creation Act of 2004 (the “AJCA”) created a temporary incentive for
U.S. corporations to repatriate undistributed income earned abroad by providing an 85% dividends received
deduction for certain dividends from non-U.S. subsidiaries. During 2004, we recorded a provision of $157,000 for
the US taxes on the anticipated repatriation of $3,000,000 of accumulated undistributed earnings of Five Star
pursuant to the repatriation provisions of the AJCA. During 2005, we repatriated $3,000,000 of accumulated
earnings in accordance with our plan.

We have provided Puerto Rico tollgate taxes on approximately $3,684,000 of accumulated undistributed
earnings of Lifestyle prior to the fiscal year ended June 30, 1994, that would be payable if such earnings were
repatriated to the United States. In 2001, we received abatement for Puerto Rico tollgate taxes on all earnings
subsequent to June 30, 1994, thus no other provision for tollgate tax has been made on earnings after that date. If we
repatriate the earnings from Lifestyle, approximately $379,000 of tollgate tax would be due.

As of December 31, 2006, we had approximately $10,134,000 of undistributed earnings from non-U.S. sub-
sidiaries that are intended to be permanently reinvested in non-U.S. operations. Because these earnings are
considered permanently reinvested, no U.S. tax provision has been accrued related to the repatriation of these
earnings. If the Five Star and Rocky Canada undistributed earnings were distributed to the Company in the form of
dividends, the related taxes on such distributions would be approximately $2,939,000 and $608,000, respectively.

10. RETIREMENT PLANS

We sponsor a noncontributory defined benefit pension plan covering our non-union workers in our Ohio and
Puerto Rico operations. Benefits under the non-union plan are based upon years of service and highest compen-
sation levels as defined. We contribute to the plan the minimum amount required by regulation. On December 31,
2005 we froze the noncontributory defined benefit pension plan for all non-U.S. territorial employees. As a result of
freezing the plan, we recognized a charge for previously unrecognized service costs of approximately $0.4 million
in the first quarter of 2006.

ROCKY BRANDS, INC.

F-17

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The funded status of the Company’s plan and reconciliation of accrued pension cost at December 31, 2006 and
2005 are presented below (information with respect to benefit obligations and plan assets are as of September 30):

Change in benefit obligation:
Projected benefit obligation at beginning of the year
Service cost
Interest cost
Actuarial (gain)/loss
Curtailment decrease
Exchange (gain)/loss
Benefits paid

Projected benefit obligation at end of year

Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Benefits paid

Fair value of plan assets at end of year

December 31,

2006

2005

$10,037,478
292,093
519,969
(515,010)
(1,344,895)
506,830
(375,658)

$ 9,629,031
523,863
529,059
183,868
—
(449,366)
(378,977)

$ 9,120,807

$10,037,478

$10,157,529
(647,500)
(375,658)

$ 8,709,031
1,827,475
(378,977)

$ 9,134,371

$10,157,529

Funded status:
Overfunded
Remaining unrecognized benefit obligation existing at transition
Unrecognized prior service costs due to plan amendments
Unrecognized net loss

Total

Amounts in accumulated other comprehensive income that have not

yet been recognized as net pension cost:

Remaining unrecognized benefit obligation existing at transition
Unrecognized prior service costs due to plan amendments
Unrecognized net loss

$

$

$

13,564
—
—
—

$

120,051
801,176
1,155,358
40,767

13,564

$ 2,117,352

$

16,143
673,178
887,159

—
—
—

—

Total

$ 1,576,480

$

Amounts recognized in the consolidated financial statements:
Pension asset
Accumulated other comprehensive loss, net of tax effect of $583,298

Net amount recognized

Accumulated benefit obligation

$

13,564
(993,182)

$ (2,117,352)
—

$ (979,618)

$ (2,117,352)

$ 9,094,414

$ 9,141,359

F-18

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Of the amounts in accumulated other comprehensive income as of December 31, 2006, we expect the

following to be recognized as net pension cost in 2007:

Remaining unrecognized benefit obligation existing at transition
Unrecognized prior service costs due to plan amendments
Unrecognized net loss

Total

Net pension cost of our plan is as follows:

$ 10,762
124,425
—

$135,187

Service cost
Interest cost
Expected return on assets
Amortization of unrecognized net loss
Amortization of unrecognized transition obligation
Amortization of unrecognized prior service cost

Net periodic pension cost

Years Ended December 31,
2005

2006

2004

$ 292,093
519,969
(791,557)
—
12,149
100,867

$ 523,863
529,059
(683,722)
85,614
16,306
135,393

$ 512,317
646,052
(684,297)
141,642
16,306
135,393

$ 133,521

$ 606,513

$ 767,413

Our unrecognized benefit obligation existing at the date of transition for the plan is being amortized over

21 years. Actuarial assumptions used in the accounting for the plan was as follows:

Discount rate
Average rate increase in compensation levels
Expected long-term rate of return on plan assets

December 31,
2006
2005

6.00% 5.75%
3.00% 3.00%
8.00% 8.00%

Our pension plan’s asset allocations at September 30, 2006 and 2005 by asset category are:

Rocky common stock
Other equity securities
Mutual funds — bonds
Cash and cash equivalents

Total

December 31,
2006
2005

9.3% 20.1%
72.4% 63.9%
14.4% 12.6%
3.9% 3.4%

100.0% 100.0%

Our investment objectives are to: (1) maintain the purchasing power of the current assets and all future
contributions; (2) maximize return within reasonable and prudent levels of risk; (3) maintain an appropriate asset
allocation policy (approximately 80% equity securities and 20% debt securities) that is compatible with the
actuarial assumptions, while still having the potential to produce positive returns; and (4) control costs of
administering the plan and managing the investments.

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 plans have been based upon the assumption that returns will approximate the long-term rates of return

ROCKY BRANDS, INC.

F-19

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 Plans’ strategic asset allocation is based on this long-term perspective

The expected benefit payments for pensions are as follows for the years ended December 31:

2007
2008
2009
2010
2011
Thereafter

Total

$ 329,000
339,000
340,000
350,000
357,000
2,863,000

$4,578,000

We do not anticipate making any contributions to the pension plan in 2007.

We sponsored a non-contributory defined benefit plan for certain union employees. The plan was frozen in
September 2001 and terminated March 2004. The settlement of the plan resulted in a gain of $63,228 in 2004.

We also sponsor a 401(k) savings plan for substantially all of our employees. We provide a contribution of 3%
of applicable salary to the plan for all employees with greater than six months of service. Additionally, we match
eligible employee contributions at a rate of 0.25%, per one percent of applicable salary contributed to the plan by the
employee. This matching contribution will be made by us up to a maximum of 1% of the employee’s applicable
salary for all qualified employees. Our contributions to the 401(k) plan were $1.1 million in 2006, $0.5 million in
2005 and none in 2004.

11. COMMITMENTS AND CONTINGENCIES

We are, from time to time, a party to litigation which arises in the normal course of its business. Although the
ultimate resolution of pending proceedings cannot be determined, in the opinion of management, the resolution of
such proceedings in the aggregate will not have a material adverse effect on our financial position, results of
operations, or liquidity.

Management is currently pursuing reimbursement from the U.S. military for costs associated with raw material
purchases of $1.6 million. These raw material purchases were made exclusively for production under a subcontract
for the U.S. military. Subsequent to the purchase of raw materials, the subcontract was cancelled for convenience by
the U.S. military. Management expects this matter to be resolved in 2007. No matters have occurred to indicate the
reimbursement will not be made in full.

12. CAPITAL STOCK AND STOCK BASED COMPENSATION

The Company has authorized 250,000 shares of voting preferred stock without par value. No shares are issued
or outstanding. Also, the Company has authorized 250,000 shares of non-voting preferred stock without par value.
Of these, 125,000 shares have been designated Series A non-voting convertible preferred stock with a stated value
of $.06 per share, of which no shares are issued or outstanding at December 31, 2006 and 2005, respectively.

In November 1997, 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 may be exercised after the time when a person or group of persons without the approval of the Board of

F-20

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 may ultimately entitle the holders of the rights to purchase for $80 per
right, our common stock having a market value of $160. The person or groups effecting such 20 percent acquisition
or undertaking such tender offer will not be entitled to exercise any rights. These rights expire November 2007
unless earlier redeemed by us under circumstances permitted by the Rights Agreement.

During 2006, the shareholders voted to increase our authorized shares from 10,000,000 to 25,000,000.

On January 1, 2006, we adopted the provisions of SFAS No. 123(R), “Share-Based Payment”
(“SFAS 123(R)”), which requires that companies measure and recognize compensation expense at an amount
equal to the fair value of share-based payments granted under compensation arrangements. Prior to January 1, 2006,
the Company accounted for its stock-based compensation plans under the recognition and measurement principles
of Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees,” and related
interpretations, and recognized no compensation expense for stock option grants because all options granted had an
exercise price equal to the market value of the underlying common stock on the date of grant.

We adopted SFAS 123(R) using the “modified prospective” method, which results in no restatement of prior
period amounts. Under this method, the provisions of SFAS 123(R) apply to all awards granted or modified after the
date of adoption. In addition, compensation expense must be recognized for any unvested stock option awards
outstanding as of the date of adoption on a straight-line basis over the remaining vesting period. We calculate the
fair value of options using a Black-Scholes option pricing model. For the twelve-month period ended December 31,
2006, our compensation expense related to stock option grants was approximately $391,674. The per share impact
of adoption of SFAS 123(R) was $0.07 for both basic and diluted earnings per share. As of December 31, 2006, there
was a total of $290,315 of unrecognized compensation expense related to unvested stock option awards that will be
recognized as an expense as the awards vest over the next four years. For companies that adopt SFAS 123(R) using
the “modified prospective” method, disclosure of pro forma information for periods prior to adoption must continue
to be presented. The following table sets forth the effect on net income and earnings per share as if SFAS 123
“Accounting for Stock-Based Compensation” had been applied to the years ended December 31, 2005 and 2004.

Net income as reported
Deduct: Stock based employee compensation expense determined under

Years Ended December 31,

2005

2004

$13,013,839

$8,594,392

fair value based method for all awards, net of tax

1,488,928

1,003,446

Pro forma net income

Earnings per share:

Basic — as reported
Basic — pro forma
Diluted — as reported
Diluted — pro forma

$11,524,911

$7,590,946

$
$
$
$

2.48
2.19
2.33
2.06

$
$
$
$

1.89
1.67
1.74
1.53

The pro forma amounts may not be representative of the effects on reported net income for future years.

On October 11, 1995, we adopted the 1995 Stock Option Plan which provides for the issuance of options to
purchase up to 400,000 common shares. In May 1998, we adopted the Amended and Restated 1995 Stock Option
Plan which provides for the issuance of options to purchase up to an additional 500,000 common shares. In addition
in May 2002, our shareholders approved the issuance of a total of 400,000 additional common shares of our stock

ROCKY BRANDS, INC.

F-21

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

under the 1995 Stock Option Plan. All employees, officers, directors, consultants and advisors providing services to
us are eligible to receive options under the Plans. On May 11, 2004 our shareholders approved the 2004 Stock
Incentive Plan. The 2004 Stock Incentive Plan includes 750,000 of our common shares that may be granted for stock
options and restricted stock awards. As of December 31, 2006, the Company is authorized to issue 449,000 options
under the 2004 Stock Incentive Plan; no options can be granted under the amended and restated 1995 Stock Option
Plan.

The plans generally provide for grants with the exercise price equal to fair value on the date of grant, graduated
vesting periods of up to 5 years, and lives not exceeding 10 years. The following summarizes stock option
transactions from January 1, 2004 through December 31, 2006:

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Actual Term

Aggregate
Intrinsic
Value

Outstanding at December 31, 2005

Issued
Exercised
Forfeited

Outstanding at December 31, 2006

Options exercisable at December 31:

Number of
Options

658,851
15,000
(62,675)
(75,000)

536,176

$14.49
$13.61
$ 6.57
$22.39

$14.33

2006

443,426

$13.39

Unvested options at December 31, 2006

92,750

$18.81

Fair value of options granted during the year:

2006
2005
2004

$ 8.24
$11.99
$ 8.97

3.9

3.6

5.6

$2,810,998

$2,665,860

$ 145,138

In determining the estimated fair value of each option granted on the date of grant we use the Black-Scholes

option-pricing model with the following weighted-average assumptions used for grants:

2006

2005

2004

Dividend yields
Expected volatility
Risk-free interest rates
Expected life

0%
50%

0%
0%
51%
51%
4.55% 4.13% 3.28%
4

4

6

During the years ended December 31, 2006, 2005 and 2004, a total of 62,675, 182,699 and 330,700 options
were exercised with an intrinsic value of approximately $0.7 million, $3.6 million and $5.0 million, respectively.
During the years ended December 31, 2006, 2005 and 2004, a total of 15,000, 199,000 and 175,000 options were
issued with a fair value of approximately $0.1 million, $2.4 million and $1.6 million, respectively. During the year
ended December 31, 2006, a total of 75,000 options were forfeited with a fair value of approximately $0.7 million.
A total of 207,312, 193,562 and 234,626 options vested during the years ended December 31, 2006, 2005 and 2004,
with a fair value of $1.6 million, $1.2 million and $0.8 million, respectively. At December 31, 2006, a total of 92,750
options were unvested with a fair value of $0.8 million. At December 31, 2005, a total of 285,062 options were
unvested with a fair value of $2.7 million. All unvested options as of December 31, 2006 are expected to vest.

F-22

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In 2005, we issued 3,000 restricted common shares to certain executives and recorded compensation expenses

of $85,860, which was fair market value on date of grant. The shares vested on January 1, 2006.

13. CLOSURE OF MANUFACTURING OPERATIONS

In September 2001, the Board of Directors approved a restructuring plan to consolidate and realign the
Company’s footwear manufacturing operations. Under this plan, the Company moved the footwear manufacturing
operations at its Nelsonville, Ohio factory to the Company’s factory in Puerto Rico. The restructuring plan was
completed in the fourth quarter of 2001.

In 2004, we made the final payments under the plan and recorded a gain of $63,228.

14. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information including other cash paid for interest and Federal, state and local income

taxes was as follows:

Interest paid

$10,919,865

$ 8,312,707

$1,317,991

Federal, state and local income taxes paid — net of

refunds

$ 4,365,744

$ 3,138,517

$5,126,694

Years Ended December 31,
2005

2006

2004

Stock issued for EJ Footwear Group acquisition

Capitalized interest

Fixed asset purchases in accounts payable

$

$

$

— $11,573,838

43,830

372,183

$

$

19,625

— $

$

$

—

—

—

15. SEGMENT INFORMATION

Operating Segments — We operate our business through three business segments: wholesale, retail and

military.

Wholesale.

In our wholesale segment, our products are offered in over ten thousand retail locations
representing a wide range of distribution channels in the U.S. and Canada. These distribution channels vary by
product line and target market and include sporting goods stores, outdoor retailers, independent shoe retailers,
hardware stores, catalogs, mass merchants, uniform stores, farm store chains, specialty safety stores and other
specialty retailers.

Retail.

In our retail segment, we sell our products directly to consumers through our Lehigh mobile and retail
stores, our Rocky outlet store and our websites. Our Lehigh operations include a fleet of 78 trucks, supported by
40 small warehouses that include retail stores, which we refer to as mini-stores. Through our outlet store, we
generally sell first quality or discontinued products in addition to a limited amount of factory damaged goods, which
typically carry lower gross margins. Prior to our acquisition of the EJ Footwear Group and its Lehigh division, our
retail segment represented only a small portion of our business.

Military. While we are focused on continuing to build our wholesale and retail business, we also actively bid,
from time to time, on footwear contracts with the U.S. military. As of December 31, 2006, we do not have any
contracts to produce goods for the U.S. military. As a result, our military sales fluctuate from year to year.

The following is a summary of segment results for the Wholesale, Retail, and Military segments.

ROCKY BRANDS, INC.

F-23

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NET SALES:
Wholesale
Retail
Military

Total Net Sales

GROSS MARGIN:

Wholesale
Retail
Military

Years Ended December 31,
2005

2004

2006

$203,195,421
59,207,094
1,088,865

$209,947,672
58,423,840
27,651,102

$109,689,040
4,017,359
18,542,564

$263,491,380

$296,022,614

$132,248,963

$ 79,033,568
30,180,144
103,674

$ 76,374,412
30,323,950
4,530,764

$ 34,738,851
1,114,364
2,789,148

Total Gross Margin

$109,317,386

$111,229,126

$ 38,642,363

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

Product Group Information — The following is supplemental information on net sales by product group:

Work footwear
Outdoor footwear
Western footwear
Duty footwear
Military footwear
Apparel
Other

2006

% of
Sales

2005

% of
Sales

2004

$142,076,453
35,451,267
41,261,105
17,078,111
1,088,865
16,151,170
10,384,409

53.9% $140,426,831
13.5% 42,039,534
15.7% 40,433,142
6.5% 16,803,095
0.4% 27,651,102
6.1% 18,446,792
3.9% 10,222,118

47.4% $ 13,438,818
49,020,109
14.2%
8,897,666
13.7%
18,501,811
5.7%
18,542,564
9.3%
18,477,727
6.2%
5,370,268
3.5%

% of
Sales

10.2%
37.1%
6.7%
14.0%
14.0%
14.0%
4.1%

$263,491,380

100% $296,022,614

100% $132,248,963

100%

Net sales to foreign countries, primarily Canada, represented approximately 2.1% in 2006, 2.7% of net sales in

2005, and 2.1% of net sales in 2004.

F-24

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the unaudited quarterly results of operations for the years ended December 31,

2006 and 2005:

2006
Net sales
Gross margin
Net income (loss)
Net income (loss) per common

share:
Basic
Diluted

2005
Net sales
Gross margin
Net income
Net income per common share:

Basic
Diluted

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Total Year

$57,525,164 $57,297,505
24,073,292
24,915,957
(215,625)
893,230

$78,114,725 $70,553,986
32,116,190
28,211,947
4,219,552

(77,875)*

$263,491,380
109,317,386
4,819,282

$
$

0.17 $
0.16 $

(0.04) $
(0.04) $

0.78 $
0.76 $

(0.01) $
(0.01) $

0.89
0.86

$61,498,084 $65,519,637
25,723,239
24,207,872
2,804,895
1,094,454

$94,087,786 $74,917,107
27,224,538
34,073,477
2,606,054
6,508,436

$296,022,614
111,229,126
13,013,839

$
$

0.21 $
0.20 $

0.53 $
0.50 $

1.23 $
1.15 $

0.49
0.46

$
$

2.48
2.33

No cash dividends were paid during 2006 or 2005.

* The fourth quarter of 2006 includes an impairment loss of approximately $483,000 or $.09 per share, net of tax.

ROCKY BRANDS, INC.

F-25

Corporate Offices
39 East Canal Street
Nelsonville, Ohio 45764
(740) 753-1951

Independent Registered Public Accounting Firm
Deloitte & Touche LLP
Columbus, Ohio

Legal Counsel
Porter, Wright, Morris & Arthur LLP
Columbus, Ohio

Transfer Agent and Registrar
Communications regarding changes of address,
transfer of shares, and lost certificates should be
directed to the company’s stock transfer and
registrar:

Computershare Investor Services LLC
P.O. Box 2388
Chicago, Illinois 60690-2388
(888) 294-8217
web.queries@computershare.com

Stock Listing
NASDAQ Stock Market
Symbol: RCKY

Form 10-K
Copies of the signatures, exhibit index and exhibits
contained therein as filed with the Securities and
Exchange Commission are available without charge
upon written request to:

James E. McDonald
Executive Vice President, Chief Financial
Officer and Treasurer
Rocky Brands, Inc.
39 East Canal Street
Nelsonville, Ohio 45764

Investor Information
Corporate and investor information is available on
the company’s website at
www.rockybrands.com

BOARD OF DIRECTORS

Mike Brooks
Chairman of the Board and Chief
Executive Officer

J. Patrick Campbell
President and Chief Operating Officer
Grantham Education Corporation

Glenn E. Corlett
Dean and Philip J. Gardner, Jr.
Leadership Professor of the College of
Business at Ohio University

Michael L. Finn
President, Central Power Systems, and
President, Chesapeake Realty Company

G. Courtney Haning
Chairman, President and Chief Executive
Officer, Peoples National Bank

Curtis A. Loveland
Secretary
Partner, Porter, Wright, Morris & Arthur
LLP

Harley E. Rouda, Jr.
Chief Executive Officer, Real Living, Inc.

James L. Stewart
Proprietor
Rising Wolf Ranch, Inc.

OFFICERS

Mike Brooks
Chairman of the Board and Chief
Executive Officer

David Sharp
President and Chief Operating Officer

James E. McDonald
Executive Vice President, Chief Financial
Officer and Treasurer

ROCKY BRANDS, INC.

Rocky Brands, Inc.
39 East Canal Street
Nelsonville, Ohio 45764
www.rockybrands.com