Rocky Brands, Inc.

Rocky Brands, Inc.
2007 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, Durango, Lehigh and Dickies.

FINANCIAL HIGHLIGHTS

2007

2006

2005
($000, except per share data)

2004

2003

Income Statement Data
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . .
(Loss) Income from Operations . . . . . . . . . . . . .
Net (Loss) Income . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income per diluted share . . . . . . . . . .
Weighted average number of fully diluted

$275,267

$263,491

$296,023

$132,249

$106,165

39.2%
-4.8%

41.5%
7.2%

37.6%
9.5%

29.2%
9.8%

30.9%
9.0%

$ (23,105)
(4.22)
$

$ 4,819
0.86
$

$ 13,014
2.33
$

$
$

8,594
1.74

$
$

6,039
1.32

shares outstanding . . . . . . . . . . . . . . . . . . . . .

5,476

5,578

5,585

4,954

4,561

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

$ 75,404
216,725
103,545
81,725

$ 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

Net sales
($ millions)
$296.0

$263

$275

$106.2

$132.2

2003

2004

2005

2006

2007

Gross margin % of net sales

37.6%

41.5%

39.2%

30.9%

29.2%

Net income per diluted share

$1.32

$1.74

$2.33

$0.86

2007

2003

2004

2005

2006

$(4.22)

Total debt
($ millions)

$105.4

$110.5

$103.5

$18.0

$16.5

2003

2004

2005

2006

2007

2003

2004

2005

2006

2007

ROCKY BRANDS, INC.

Dear Shareholders,

2007 was a year filled with a number of challenges, both internal and external, that negatively impacted our
profitability. While we did report a modest increase in revenues for the full year driven by a double digit gain in our
retail division, this was offset by a slight downturn in our wholesale sales due to declines in our western and outdoor
footwear categories. At the same time we experienced higher production costs and operating expenses this past year
coupled with certain pricing pressures that reduced our earnings potential. We have put in place a number of
programs aimed at expanding margins and reducing expenses that we believe will allow us to improve our bottom
line performance beginning in 2008.

Wholesale

In 2007, 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 brands, Dickies», Michelin», and
Zumfoot», were $202.6 million compared to wholesale revenues of $203.2 million in the prior year.

Sales of our work category were up 7.1% to $93.5 million versus $87.3 million in 2006. Our performance in the
work category was once again driven by a strong double digit sales increase for our Dickies business as well as a
meaningful gain for our Georgia Boot brand. During 2007 we secured shelf space for Dickies at all Sears stores
nationwide and increased the brand’s door count through additional distribution with key retailers such as Academy
Sports, Big 5 Sporting Goods, Bob’s Stores and Shoe Carnival. In addition, we opened discussions with Wal-Mart
and will be testing a new line of footwear under the Genuine Dickies label at more than 100 locations beginning in
the fall of 2008. For Georgia Boot, a renewed focus on research, development and innovation translated into positive
consumer reaction to our recent product line.

Our western category, namely Durango, continued to be impacted by the slowdown in women’s fashion
product, however this was partially offset by an increase in our Rocky branded western footwear. Overall, sales
decreased to $37.6 million versus $41.3 million in 2006. During the past year we dedicated a significant amount of
resources to developing more basic footwear for the western marketplace and its consumer, and this is evidenced by
the 14.7% gain in sales for the Rocky brand. We are also bringing these core competencies to Durango as we move
to reduce our exposure to the less stable fashion portion of this business.

2007 proved to be another difficult period for our outdoor footwear as sales fell approximately 11% to
$31.5 million. In addition to a second consecutive warm, dry hunting season that further reduced industry wide
demand, we have seen a fairly dramatic increase in the number of brands available at retail, including private label
brands. In order to remain competitive, we were forced to lower price points on several of our styles, which
contributed to our gross margin decline year-over-year. Despite the recent performance of this business we are
confident that the Rocky Outdoor Gear brand continues to occupy a premium position in the minds of its target
demographic and we will look to leverage the brand’s authenticity and heritage to recapture market share in the
years ahead.

Apparel sales for 2007 rose slightly to $16.4 million from $16.2 million the year before. We were certainly
pleased to report a positive gain in this business after a down year in 2006, however we are even more excited about
the initial performance on several new products that we introduced last fall. This included innovative and
customizable systems featuring zip-in and zip-out liners that can be worn in varying temperatures and lightweight,
scent controlled garments, both of which have been well received by consumers.

Retail

Our retail division, which includes our Lehigh retail-on-wheels business and our two Lehigh Outfitters concept
stores, posted sales of $70.7 million in 2007, an increase of 19.4% over sales of $59.2 million in 2006. Early in the
year we moved quickly to capitalize on the opportunities created when one of Lehigh’s largest competitors went out
of business. In order to achieve double digit sales growth we did accelerate a number of investments in our sales and
distribution platform in 2007. While this impacted our near-term profitability, we believe over the long-term both
our sales and earnings will benefit from further establishing Lehigh as the leader in safety footwear.

LETTER TO SHAREHOLDERS

Military

After a limited number of bids in the previous year, activity started to pick up again in 2007. In July we received
a $6.4 million contract from the U.S. military to supply footwear to the National Guard over the next four years with
initial shipments beginning this past December. Early in 2008 we received another contract from the U.S. military
which will begin shipping the second quarter of 2008. Both contracts include options for an additional four year
terms. We are obviously very pleased to have received this business from the U.S. military and we look forward to
once again providing footwear to our nation’s troops around the word.

Conclusion

While 2007 did present us with a number of challenges we have reacted quickly and confronted them head on.
We continue to operate a powerful portfolio of brands each of which provides our company with compelling long-
term growth prospect. With our owned brands, Rocky Outdoor Gear, Georgia Boot, Durango, and Lehigh, we have
exceptionally strong positions in the work, outdoor, western, and safety footwear categories, while our licensed
brands, Dickies, Michelin, and Zumfoot, provide us with opportunities to develop new market leaders. We do
expect the retail environment to remain difficult in 2008 as the macro economic trends point to a further slowdown
in consumer spending here in the U.S. That said, we have been able to identify areas across our business where we
believe we can reduce costs without compromising the future potential of our brands and products, and therefore,
we are anticipating our profitability to improve beginning this coming year. Longer-term, we are confident we can
drive consistent sales and earnings growth and return greater value to our shareholders.

To close, I would like to take this opportunity to thank all of our employees for their hard work this past year, as

well as our customers, vendors, and shareholders for their continued support.

Sincerely,

Mike Brooks
Chairman & Chief Executive Officer

Certain statements contained in this annual report may constitute forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements involve a number of risks, uncertainties and other factors that could cause actual results to be
materially different, as discussed more fully in our 2007 Form 10-K included herein.

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

n

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

For the fiscal year ended December 31, 2007

OR

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

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, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check one):
Large accelerated filer n Accelerated filer ¥

Smaller reporting Company n

Non-accelerated filer n
(Do not check if a smaller reporting company)

Indicate by check mark whether
No ¥

Act). Yes n

the registrant

is a shell company (as defined in Rule 12b-2 of

the Exchange

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

$92,742,437 on June 30, 2007.

There were 5,488,413 shares of the Registrant’s Common Stock outstanding on March 3, 2008.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the 2008 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

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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 94 trucks, supported by 48 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

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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 brands of Dickies, Michelin and Zumfoot.

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 was launched in 1937 and 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. Launched in 1965, 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.

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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.

Zumfoot

Zumfoot is a high quality line of casual footwear. The license to design, develop and manufacture footwear
under the Zumfoot name was secured in 2006. The Zumfoot brand provides entrée into the casual, dress casual and
leisure footwear categories with suggested retail prices from $99.95 to $159.95.

Michelin

Michelin is a premier price point line of work footwear targeting specific industrial professions, primarily
indoor professions. The license to design, develop and manufacture footwear under the Michelin name was secured
in 2006. Suggested retail prices for the Michelin brand are from $99.95 to $159.95.

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 14 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, 2007, 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.

ROCKY BRANDS, INC.

7

(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.

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 94 Lehigh mobile trucks, supported by our 48 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 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 48 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. In 2007, we opened two stores utilizing this concept.

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 lines on our websites at www.rockyboots.com, www.georgiaboot.com, www.lehighout-
fitters.com, www.lehighsafetyshoes.com, www.slipgrips.com and www.corkygear.com. We believe that our inter-
net 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.

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 July 2007, we were awarded a
$6.4 million order to produce footwear for the U.S. military, which includes an option for four yearly renewals at
similar amounts. In January 2008, we were awarded a $5.0 million order to produce footwear for the U.S. Military,
which includes an option for four yearly renewals at similar amounts.

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ROCKY BRANDS, INC.

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.

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 30% and 12% of our net sales in 2007. 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

ROCKY BRANDS, INC.

9

available. In addition, our Puerto Rican facilities allow us to produce footwear for the U.S. military and other
commercial businesses 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 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. In 2007, we began
consolidating the distribution of our products in the U.S. to our facility in Logan, Ohio. This consolidation is
expected to improve operating efficiencies and to be completed by June 2008. 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.

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ROCKY BRANDS, INC.

Backlog

At December 31, 2007, our backlog was $14.2 million compared to $10.3 million at December 31, 2006. Our
backlog at December 31, 2007 includes $1.8 million of orders under contracts with the U.S. Military versus zero at
December 31, 2006. 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.

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,
2010 to use the Dickies brand for footwear in our target markets. Our license with Dickies may be terminated by
Dickies prior to December 31, 2010 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, 2007, we had approximately 1,600 employees. Approximately 875 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.

ROCKY BRANDS, INC.

11

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
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

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ROCKY BRANDS, INC.

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
employees has 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, 2010 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, 2010 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

ROCKY BRANDS, INC.

13

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.

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.

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 agreements 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 there under to be due and payable, which
could have a material adverse effect on our financial condition. As of December 31, 2007, we were in compliance
with certain financial restrictive covenants.

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.

14

ROCKY BRANDS, INC.

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, Columbus, 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, Columbus, 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.
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.

ROCKY BRANDS, INC.

15

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.

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. We also own, subject to a mortgage, 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

16

ROCKY BRANDS, INC.

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, 2006
June 30, 2006
September 30, 2006
December 31, 2006
March 31, 2007
June 30, 2007
September 30, 2007
December 31, 2007

High

Low

$26.50
$26.70
$22.65
$17.49
$17.11
$18.75
$19.23
$10.70

$19.00
$20.80
$ 9.73
$11.45
$10.68
$11.06
$ 8.40
$ 6.01

On March 3, 2008, the last reported sales price of our common stock on the NASDAQ National Market was

$5.29 per share. As of March 3, 2008, there were 94 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, 2007, 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, 2002, 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

$600

$500

$400

$300

$200

$100

$0

12/02

12/03

12/04

12/05

12/06

12/07

Rocky Brands, Inc.

NASDAQ Composite

S&P Footwear

* $100 invested on 12/31/02 in stock or index-including reinvestment of dividends. Fiscal year ending

December 31.

Copyright· 2008, Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.
www.researchdatagroup.com/S&P.htm

18

ROCKY BRANDS, INC.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

ROCKY BRANDS, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA

12/31/07

Five Year Financial Summary
12/31/05
(In thousands, except for per share data)

12/31/06

12/31/04

12/31/03

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

$275,267

$263,491

$296,023

$132,249

$106,165

39.2%
$ (23,105)

$
$

(4.22)
(4.22)

$

$
$

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

1.44
1.32

$

$
$

5,476
5,476

5,392
5,578

5,258
5,585

4,557
4,954

4,190
4,561

$ 75,404
$216,724
$135,318

$ 77,949
$246,356
$135,569

$ 75,387
$236,134
$119,278

$ 32,959
$ 96,706
$ 55,612

$ 38,068
$ 86,175
$ 54,210

$103,220
$ 81,766

$103,203
$104,128

$ 98,972
$ 99,093

$ 10,045
$ 71,371

$ 17,515
$ 58,385

The 2007, 2006 and 2005 financial data reflects the acquisition of the EJ Footwear group. The 2007 and 2006
financial data reflects non-cash intangible impairment charges of $23.5 million and $0.5 million, net of tax benefits,
respectively.

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, 2007, and our capital resources and liquidity as of December 31, 2007
and 2006. 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

ROCKY BRANDS, INC.

19

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.

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 94 trucks, supported by 48 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.

2007 OVERVIEW

Highlights of our 2007 financial performance include the following:

(cid:129) Net sales, led by an increase of approximately $11.5 million in retail sales, increased to $275.3 million from

$263.5 million in 2005.

(cid:129) Our gross margin decreased to $108.0 million from $109.3 million the prior year. Gross margin was 39.2%
versus 41.5% in 2006, primarily due to the decrease in gross margin on wholesale sales. The decrease
reflects a reduction in sales price per unit for competitive reasons, as well as an increase in manufacturing
costs.

(cid:129) Our operating expenses increased $30.1 million to $121.3 million from $90.4 million compared to the prior
year. This increase includes an additional non-cash intangible impairment charge of $24.9 million for 2007
relating to carrying value of goodwill.

(cid:129) Net income decreased to a loss of $23.1 million, including a $23.5 million non-cash intangible impairment
charge, net of tax benefits, compared to income of $4.8 million, including a $0.5 million non-cash intangible
impairment charge, net of tax benefits, for the prior year. Diluted earnings per common share decreased to a
loss of $4.22 per diluted share, including a $4.30 per diluted share non-cash intangible impairment charge in
2007 versus income of $.86 per diluted share, including a $.09 per diluted share non-cash intangible
impairment charge in 2006.

(cid:129) Debt (total debt minus cash, cash equivalents) was $97.0 million or 52.3% of total capitalization at
December 31, 2007 compared to $106.8 million or 49.7% of total capitalization at year-end 2006. Total debt
decreased $7.0 million to $103.5 million or 55.9% of total capitalization at December 31, 2007 compared to
$110.5 million or 51.5% of total capitalization at December 31, 2006.

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.

20

ROCKY BRANDS, INC.

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
Non-cash intangible impairment charges

(Loss) income from operations

Years Ended December 31,
2007
2005
2006

100.0% 100.0% 100.0%
60.8% 58.5% 62.4%

39.2% 41.5% 37.6%
35.0% 34.0% 28.1%
0.3% 0.0%
9.0%

-4.8%

7.2% 9.5%

Results of Operations

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Net sales. Net sales increased 4.5% to $275.3 million for 2007 compared to $263.5 million the prior year.
Wholesale sales decreased $0.6 million to $202.6 million for 2007 compared to $203.2 million for 2006. The
$7.6 million decreases in sales in our outdoor and western footwear categories were offset by an increase in sales in
our work footwear category. Retail sales were $70.7 million in 2007 compared to $59.2 million for 2006. The
$11.5 million increase in retail sales results from the growth in market share experienced as a result of the
bankruptcy of a leading competitor. Military segment sales, which occur from time to time, were $2.0 million for
2007 compared to $1.1 million in 2006. Average list prices for our footwear, apparel and accessories were similar in
2007 compared to 2006.

Gross margin. Gross margin decreased to $108.0 million or 39.2% of net sales for 2007 compared to
$109.3 million or 41.5% of net sales for the prior year. The decrease in basis points is primarily attributable to a
reduction in margin for wholesale sales offset by an increase in margin relating to the $1.2 million settlement of a
previously cancelled military contract. Wholesale gross margin for 2007 was $70.4 million, or 34.8% of net sales,
compared to $79.0 million, or 38.9% of net sales in 2006. The 410 basis point decrease reflects a decrease in sales
price per unit for competitive reasons, as well as an increase in manufacturing costs from both our company
operated facilities and third party manufacturers and an increase in sales of discontinued products at lower margins.
Retail gross margin for 2007 was $36.1 million, or 51.1% of net sales, compared to $30.2 million, or 51.0% of net
sales, in 2006. Military gross margin in 2007 was $1.4 million, or 72.9% of net sales, compared to $0.1 million, or
9.5% of net sales in 2006. The increase in basis points reflects the $1.2 million settlement of a previously cancelled
military contract

SG&A expenses. SG&A expenses were $96.4 million, or 35.0% of net sales in 2007 compared to
$89.6 million, or 34.0% of net sales for 2006. The net change primarily reflects increases in salaries and
commissions of $3.1 million, bad debt and collection expense of $1.1 million, professional fees of $0.9 million,
telecommunication expense of $0.7 million, vehicle expenses of $0.6 million, rents of $0.5 million, repairs and
maintenance of $0.6 million, show expenses of $0.4 million and freight and handling of $0.3, offset by a decrease in
benefits of $0.6 million and advertising expense of $1.5 million. SG&A expenses for 2006 include a gain on the sale
of a company-owned property of $0.7 million and pension expense of $0.4 million relating to the pension
curtailment relating to the freezing of the non-union pension plan in 2006.

Non-cash intangible impairment charges. As a result of our annual evaluation of intangible assets, under the
terms and provisions of Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other
Intangible Assets” (“SFAS 142”), we recognized an impairment loss on the carrying value of goodwill in the
amount of $24.9 million in 2007. Because the trading value of our shares indicated a level of equity market
capitalization below our book value at the time of the annual impairment test, there was indication that our goodwill
could be impaired. In performing the first step of the impairment test, the company valued the wholesale segment,
for which all the goodwill applied, based on the guideline company method. The companies we selected are
publicly traded wholesale competitors who manufacture shoes and apparel. While the selected companies may

ROCKY BRANDS, INC.

21

differ from the wholesale division in terms of the specific products they provide, they have similar financial risks
and operating performance and reflect current economic conditions for the footwear and apparel industry in general.
As a result of this analysis, it was determined that an indication of impairment did exist and the results of the second
step of the impairment test resulted in an impairment of $24.9 million; or $23.5 million, net of tax benefit; to our
goodwill. In 2006, we recognized an impairment loss on the carrying value of the Gates trademark in the amount of
$0.8 million.

Interest expense.

Interest expense was $11.6 million in 2007, compared to $11.6 million for the prior year.
Interest expense includes $0.8 million and $0.4 million of deferred financing costs for 2007 and 2006 respectively.
A reduction in average borrowings resulted in a decrease of $0.4 million in interest expense for 2007.

Income taxes.

Income tax benefit for the year ended December 31, 2007 was $1.4 million, compared to an
expense of $2.8 million for the same period a year ago. In 2007, we recognized a $1.3 million benefit relating to the
non-cash intangible impairment charge and a $0.3 million benefit relating to a prior year state income tax refund.

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 tax rate.

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.

22

ROCKY BRANDS, INC.

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 $135.3 million at December 31, 2007, compared to $135.6 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 $5.8 million for 2007 and $5.6 million in 2006. Capital expenditures for 2008 are
anticipated to be approximately $5.0 million.

In conjunction with the completion of our 2005 acquisition of EJ Footwear, we entered into agreements with
GMAC Commercial Finance (“GMAC”), and with 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 GMAC with an interest
rate of LIBOR plus 2.5% or prime plus 1.0% at our option (weighted average of 8.31% at December 31, 2006);
(2) an $18 million term loan with GMAC with an interest rate of LIBOR plus 3.25% or prime plus 1.75% at our
option (weighted average of 9% at December 31, 2006), payable in equal quarterly installments over three years
beginning in 2005; and (3) a $30 million term loan with ACAS 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.

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%.

In May 2007, we entered into a Note Purchase Agreement, totaling $40 million, with Laminar Direct Capital
L.P., Whitebox Hedged High Yield Partners, L.P. and GPC LIX L.L.C., and issued notes to them for $20 million,
$17.5 million and $2.5 million, respectively, at an interest rate of 11.5% payable semi-annually over the five year
term of the notes. Principal repayment is due at maturity in May 2012. The proceeds from these notes were used to
pay down the GMAC Commercial Finance (“GMAC”) term loans which totaled approximately $17.5 million and
the $15 million American Capital Strategies, LTD (“ACAS”) term loan. The balance of the proceeds, net of debt
acquisition costs of approximately $1.5 million, was used to reduce the outstanding balance on the revolving credit
facility. The Note Purchase Agreement is secured by a security interest in our assets and is subordinate to the
security interest under the GMAC line of credit.

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, 2007, we had $60.6 million in
borrowings under this facility and total capacity of $84.8 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, 2007, we had no retained earnings available for dividends. As of
December 31, 2007, we were in compliance with these restrictive covenants.

We believe that our existing credit facilities coupled with cash generated from operations will provide
sufficient liquidity to fund our operations for at least the next twelve months. Our continued liquidity, however, is

ROCKY BRANDS, INC.

23

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

2007

2006
($ in millions)

2005

$16.5
(5.7)
(8.0)

$ 0.7
(3.9)
5.3

$ 8.4
(99.4)
87.5

$ 2.8

$ 2.1

$ (3.5)

Operating Activities. Net cash provided by operating activities totaled $16.5 million for Fiscal 2007,
compared to $0.7 million for Fiscal 2006, and $8.4 million for Fiscal 2005. The principal sources of net cash in 2007
included decreases of $2.5 million in inventory and $2.9 million in income taxes receivable combined with
increases of $2.1 million in accounts payable and $1.7 million in accrued and other liabilities The principal uses of
net cash in 2006 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.

Investing Activities. Net cash used in investing activities was $5.7 million in Fiscal 2007 compared to
$3.9 million in Fiscal 2006 and $99.4 million in 2005. The principal use of cash in 2007 was for the purchase of
molds and equipment associated with our manufacturing operations and for information technology software and
system upgrades. 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).

Financing Activities. Cash used by financing activities during 2007 was $8.0 million compared to cash
provided by financing activities of $5.3 million in 2006 and $87.5 million in 2005. Proceeds and repayments of the
revolving credit facility reflect daily cash disbursement and deposit activity. The Company’s financing activities
during 2007 included cash proceeds from the issuance of debt of $40 million and proceeds from the exercise of
stock options and related tax benefits of $0.4 million and repayments on long term debt of $32.8 million. 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 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.

24

ROCKY BRANDS, INC.

Borrowings and External Sources of Funds

Our borrowings and external sources of funds were as follows at December 31, 2007 and 2006:

Revolving credit facility
Term loans
Real estate and other obligations

Total debt
Less current maturities

Net long-term debt

December 31

2007

2006

($ in millions)

$ 60.5
40.0
3.0

103.5
0.3

$ 74.7
32.5
3.3

110.5
7.3

$103.2

$103.2

Our real estate obligations were $3.0 million at December 31, 2007. 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
$2.8 million, $2.0 million, $1.4 million and $0.7 million for years 2008 through 2011, respectively, and $0.1 million
for 2012, or approximately $7.0 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
2008.

Contractual Obligations and Commercial Commitments

The following table summarizes our contractual obligations at December 31, 2007 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, 2007:

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

$103.5

$ 0.3

7.0

34.2

$144.7

2.8

9.9

$13.0

$ millions
$61.3

3.4

17.1

$81.8

$40.8

0.8

7.1

$48.7

$1.1

—

0.1

$1.2

(1) Assumes the following interest rates which are consistent with rates as of December 31, 2007: (1) 8.2% on the
$100 million revolving credit facility; (2) 11.5% on the $40 million five-year term loan; and (3) 8.275% on the
$3.0 million mortgage loans.

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, 2007, 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,

ROCKY BRANDS, INC.

25

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
2007 due to these factors. It is anticipated that inflationary pressures during 2008 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.

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

26

ROCKY BRANDS, INC.

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 5.2% and 4.7% of sales
for 2007 and 2006, 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.

As of December 31, 2006, management was 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. In March 2007, we received a partial settlement and finalized
the ultimate settlement of the contract in June 2007. As a result of this settlement and other third-party sales, the
value of the raw material inventory was realized.

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.

We perform such testing of goodwill and other indefinite-lived intangible assets in the fourth quarter of each
year or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting
unit below its carrying amount. We compare the fair value of the reporting units to the carrying value of the
reporting units for goodwill impairment testing. Fair value is determined using the discounted cash flow and
guideline company methods.

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 Decem-
ber 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 a higher accrual.

ROCKY BRANDS, INC.

27

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, 2007, approximately $10.4 million of undistributed earnings remains that would become taxable
upon repatriation to the United States.

RECENTLY ISSUED FINANCIAL ACCOUNTING PRONOUNCEMENTS

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”), which 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 report sales, net of sales tax remittance. The adoption of EITF 06-3 on January 1, 2007
did not have a material effect on our 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 adopted the
provisions of FIN 48 on January 1, 2007. We did not have any unrecognized tax benefits and there was no effect on
our financial condition or results of operations as a result of implementing FIN 48.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157
defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. This standard only applies when other standards require or
permit the fair value measurement of assets and liabilities. It does not increase the use of fair value measurement.
SFAS 157 is effective for financial assets and liabilities in fiscal years beginning after November 15, 2007 and for
non-financial assets and liabilities in fiscal years beginning after March 15, 2008. We do not expect the provisions of
the statement that apply to financial assets and liabilities to have an effect on our consolidated financial statements.
We are currently in the process of evaluating the impact of the provisions applicable to non-financial assets and
liabilities.

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 were effective for fiscal years ending after December 15, 2006. 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 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

28

ROCKY BRANDS, INC.

measurement date requirement will not be effective until fiscal years ending after December 15, 2008. We utilize a
measurement date of September 30th and will be required to change that measurement date to December 31st.

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. We are currently evaluating the impact of adopting SFAS 159 on our financial statements.
We do not anticipate the adoption of SFAS 159 will have a material impact on our financial statements.

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

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

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.

ROCKY BRANDS, INC.

29

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 item is 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, 2007 of $60.6 million.

In conjunction with the completion of our 2005 acquisition of EJ Footwear, we entered into agreements with
GMAC, and with American Capital Financial Services, Inc., as agent, and ACAS, as lender, 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
GMAC with an interest rate of LIBOR plus 2.5% or prime plus 1.0% at our option (weighted average of 8.31% at
December 31, 2006); (2) an $18 million term loan with GMAC with an interest rate of LIBOR plus 3.25% or prime
plus 1.75% at our option (weighted average of 9% at December 31, 2006), payable in equal quarterly installments
over three years beginning in 2005; and (3) a $30 million term loan with ACAS 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 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, and modifying certain restrictive loan covenants.

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%.

In May 2007, we entered into a Note Purchase Agreement, totaling $40 million, with Laminar Direct Capital
L.P., Whitebox Hedged High Yield Partners, L.P. and GPC LIX L.L.C., and issued notes to them for $20 million,
$17.5 million and $2.5 million, respectively, at an interest rate of 11.5% payable semi-annually over the five year
term of the notes. Principal repayment is due at maturity in May 2012. The proceeds from these notes were used to
pay down the GMAC Commercial Finance (“GMAC”) term loans which totaled approximately $17.5 million and
the $15 million American Capital Strategies, LTD (“ACAS”) term loan. The balance of the proceeds, net of debt
acquisition costs of approximately $1.5 million, was used to reduce the outstanding balance on the revolving credit
facility. The Note Purchase Agreement is secured by a security interest in our assets and is subordinate to the
security interest under the GMAC line of credit.

We do not have any interest rate management agreements as of December 31, 2007.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our consolidated balance sheets as of December 31, 2007 and 2006 and the related consolidated statements of
income, shareholders’ equity, and cash flows for the years ended December 31, 2007, 2006, and 2005, together with
the report of the independent registered public accounting firm thereon appear on pages F-1 through F-30 hereof
and are incorporated herein by reference.

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

FINANCIAL DISCLOSURE.

As previously reported in our Current Report on Form 8-K, filed on August 6, 2007, on August 1, 2007, the Audit
Committee of the Board of Directors dismissed Deloitte & Touche LLP (“Deloitte”) as our independent registered public
accounting firm. Deloitte’s reports on our consolidated financial statements for the fiscal years ended December 31,

30

ROCKY BRANDS, INC.

2006, and December 31, 2005, did not contain any adverse opinion or disclaimer opinion, nor were they qualified or
modified as to uncertainty, audit scope, or accounting principles, except that the 2006 report included an explanatory
paragraph relating to our adoption of Financial Accounting Standard No. 123R, Share-Based Payment, and Financial
Accounting Standard No. 158, Employers’ Accounting for Defined Benefits Pension and Other Postretirement Plans.

Also on August 1, 2007, the Audit Committee approved the engagement of Schneider Downs & Co., Inc. to
serve as our independent registered public accounting firm for the fiscal year ending December 31, 2007. The
decision to appoint Schneider Downs & Co., Inc. as our independent registered public accounting firm was made by
the Audit Committee and was the result of a competitive review process involving several accounting firms.

During our fiscal years ended December 31, 2006, and December 31, 2005, and through August 1, 2007, there
were no disagreements with Deloitte on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure (within the meaning of Item 304(a)(1)(iv) of Regulation S-K) which, if
not resolved to Deloitte’s satisfaction, would have caused Deloitte to make reference thereto in its report on our
consolidated financial statements for such years.

In addition, no reportable events (as defined by Item 304(a)(1)(v) of Regulation S-K) occurred during our

fiscal years ended December 31, 2006, and December 31, 2005, or through August 1, 2007.

During our fiscal years ended December 31, 2006, and December 31, 2005, and through August 1, 2007,
neither we nor anyone on our behalf consulted with Schneider Downs & Co., Inc. regarding any of the matters or
events set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.

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
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, 2007. Schneider Downs & Co., Inc., our independent registered public accounting firm has issued an
attestation report on the effectiveness of our internal controls over financial reporting which is included below.

ROCKY BRANDS, INC.

31

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited Rocky Brands Inc.’s (the “Company”) internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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 included in the accompanying Management’s Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on 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 of
internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.

A company’s internal control over financial reporting is a process designed 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 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 the risk that
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, Rocky Brands, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheet and the related consolidated statements of operations, shareholders’
equity, and cash flows of the Company, and our report dated March 5, 2008 expressed an unqualified opinion.

/s/ Schneider Downs & Co., Inc.
Columbus, Ohio
March 5, 2008

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 under the captions “ELECTION OF DIRECTORS” and
“INFORMATION CONCERNING THE DIRECTORS, EXECUTIVE OFFICERS, AND PRINCIPAL SHARE-
HOLDERS — EXECUTIVE OFFICERS” and “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE” in the Company’s Proxy Statement for the 2008 Annual Meeting of Shareholders (the “Proxy
Statement”) to be held on May 27, 2008, to be filed with the Securities and Exchange Commission pursuant to
Regulation 14A promulgated under the Securities Exchange Act of 1934, 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 under the captions “INFORMATION CONCERNING THE
DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL SHAREHOLDERS” and “COMPENSATION COM-
MITTEE INTERLOCKS AND INSIDER PARTICIPATION” in the Company’s Proxy Statement, and is incor-
porated 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 under the caption “INFORMATION CONCERNING THE
DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL SHAREHOLDERS — OWNERSHIP OF COMMON
STOCK BY MANAGEMENT,” “- OWNERSHIP OF COMMON STOCK BY PRINCIPAL SHAREHOLDERS,”
and “EQUITY COMPENSATION PLAN INFORMATION,” in the Company’s Proxy Statement, and is incorpo-
rated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR

INDEPENDENCE.

The information required by this item is included under the caption “INFORMATION CONCERNING THE
DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL SHAREHOLDERS — COMPENSATION COM-
MITTEE INTERLOCKS AND INSIDER PARTICIPATION/RELATED PARTY TRANSACTIONS” 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 under the caption “REPORT OF THE AUDIT COMMIT-
TEE OF THE BOARD OF DIRECTORS” 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:

Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Operations for the years ended December 31, 2007, 2006, and

F-1 — F-2
F-3 — F-4

2005

Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2007,

2006, and 2005

Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006, and

2005

Notes to Consolidated Financial Statements for the years ended December 31, 2007, 2006,

and 2005

F-5

F-6

F-7

F-8 — F-28

(2) The following financial statement schedule for the years ended December 31, 2007, 2006, and 2005 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. Reports of Independent Registered Public

Accounting Firms 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

34

Second Amended and Restated Articles of Incorporation of the Company (incorporated by reference to
Exhibit 3.1 to the Company’s Annual Report of Form 10-K for the fiscal year ended December 31, 2006).
Amendment to Company’s Second Amended and Restated Articles of Incorporation of the Company
(incorporated by reference to Exhibit 3.2 to the Company’s Annual Report of Form 10-K for the fiscal
year ended December 31, 2006).
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).

ROCKY BRANDS, INC.

Exhibit
Number

10.5

10.6

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

Description

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).
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).

ROCKY BRANDS, INC.

35

Exhibit
Number

10.24

10.25

10.26

10.27

10.28

10.29

10.30

Description

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).
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).

36

ROCKY BRANDS, INC.

Exhibit
Number

10.31

10.32

10.33

10.34

10.35

10.36

10.37

10.38

10.39

16

21

23.1*
23.2*

Description

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).
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, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K dated December 14, 2007, filed with the Securities and Exchange Commission on December 20,
2007).
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).
Amendment No. 5 to Loan and Security Agreement and Waiver, dated as of January 1, 2007, by and
among Rocky Brands, Inc., Lifestyle Footwear, Inc., Rocky Brands Wholesale LLC, and Rocky Brands
Retail 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 Quarterly Report on
Form 10-Q for the quarter ended March 31, 2006).
Note Purchase Agreement, dated as of May 25, 2007, by and among Rocky Brands, Inc., Lifestyle
Footwear, Inc., Rocky Brands Wholesale LLC, and Rocky Brands Retail LLC, as the Loan Parties, the
purchasers party thereto (each a “Purchaser” and collectively, the “Purchasers”), and Laminar Direct
Capital L.P., as collateral agent for the Purchasers (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report of Form 8-K dated May 25, 2007, filed with the Securities and Exchange
Commission on May 30, 2007).
Amended and Restated Loan and Security Agreement, dated as of May 25, 2007, by and among Rocky
Brands, Inc., Lifestyle Footwear, Inc., Rocky Brands Wholesale LLC, and Rocky Brands Retail LLC, as
Borrowers, the financial institutions party thereto (each a “Lender” and collectively, the “Lenders”), and
GMAC Commercial Finance LLC, as administrative agent and sole lead arranger for the Lenders
(incorporated by reference to Exhibit 10.2 to the Company’s Current Report of Form 8-K dated May 25,
2007, filed with the Securities and Exchange Commission on May 30, 2007).
Employment Agreement, dated July 20, 2007, between Rocky Brands, Inc. and Thomas R. Morrison
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report of Form 8-K dated July 20,
2007, filed with the Securities and Exchange Commission on July 26, 2007).
Letter of Deloitte & Touche LLP to the Securities and Exchange Commission (incorporated by reference
to Exhibit 16.1 to the Company’s Current Report of Form 8-K dated August 1, 2007, filed with the
Securities and Exchange Commission on August 6, 2007).
Subsidiaries of the Company (incorporated by reference to Exhibit 21 to the Company’s Annual Report of
Form 10-K for the fiscal year ended December 31, 2006).
Independent Registered Public Accounting Firm’s Consent of Schneider Downs & Co., Inc.
Independent Registered Public Accounting Firm’s Consent of Deloitte & Touche LLP.

ROCKY BRANDS, INC.

37

Exhibit
Number

24*
31.1*
31.2*
32**
99.1*
99.2*
99.3*

Description

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.
Independent Registered Public Accounting Firm’s Report of Schneider Downs & Co., Inc. on Schedules.
Independent Registered Public Accounting Firm’s Report of Deloitte & Touche LLP on Schedules.
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.

38

ROCKY BRANDS, INC.

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 6, 2008

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

*By: /s/ Mike Brooks

Mike Brooks, Attorney-in-Fact

ROCKY BRANDS, INC.

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

March 6, 2008

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

March 6, 2008

Secretary and Director

March 6, 2008

Director

March 6, 2008

Director

March 6, 2008

Director

March 6, 2008

Director

March 6, 2008

Director

March 6, 2008

Director

March 6, 2008

39

ROCKY BRANDS, INC.
AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2007 and 2006
Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2007, 2006

and 2005

Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements

F-1 — F-2
F-3 — F-4
F-5

F-6
F-7
F-8 — F-28

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 sheet of Rocky Brands, Inc. and subsidiaries (the
“Company”) as of December 31, 2007, and the related consolidated statements of operations, shareholders’ equity
and cash flows for the year then ended. 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 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 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Rocky Brands, Inc. and subsidiaries as of December 31, 2007, and the results of their
operations and their cash flows for the year then ended in conformity with accounting principles generally accepted
in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company’s internal control over financial reporting as of December 31, 2007, based on the
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Orga-
nizations of the Treadway Commission (COSO) and our report dated March 5, 2008 expressed an unqualified
opinion.

/s/ Schneider Downs & Co., Inc.
Columbus, Ohio
March 5, 2008

ROCKY BRANDS, INC.

F-1

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 sheet of Rocky Brands, Inc. and subsidiaries (the
“Company”) as of December 31, 2006, and the related consolidated statements of operations, shareholders’ equity,
and cash flows for each of the two 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 the results of their operations and their
cash flows for each of the two 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 1, 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

F-2

ROCKY BRANDS, INC.

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,

2007

2006

$ 6,537,884

$ 3,731,253

65,931,092

65,259,580

674,707

1,159,444

75,403,664

77,948,976

1,952,536

719,945

2,226,920

3,902,775

3,632,808

1,581,303

153,446,748

157,216,139

24,484,050

24,349,674

—

13,564

36,509,690

37,105,291

—

24,874,368

2,284,039

2,796,776

$216,724,527

$246,355,812

See notes to consolidated financial statements

ROCKY BRANDS, INC.

F-3

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

Pension liability

Other deferred liabilities

TOTAL LIABILITIES

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS’ EQUITY:

December 31,

2007

2006

$ 11,908,902

$ 10,162,291

324,648

7,288,474

751,134

840,818

487,446

516,038

717,564

178,235

452,272

338,281

552,782

649,636

2,624,121

2,025,079

18,170,671

21,647,050

103,220,384

103,203,107

13,247,953

17,009,025

125,724

235,204

—

368,580

134,999,936

142,227,762

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

—

—

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

2007 — 5,488,293 and 2006 — 5,417,198; and additional paid-in capital

53,997,960

53,238,841

Accumulated other comprehensive loss

Retained earnings

Total shareholders’ equity

(1,051,232)

(993,182)

28,777,863

51,882,391

81,724,591

104,128,050

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$216,724,527

$246,355,812

See notes to consolidated financial statements.

F-4

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

NET SALES

COST OF GOODS SOLD

GROSS MARGIN

OPERATING EXPENSES

Years Ended December 31,
2006

2005

2007

$275,266,811

$263,491,380

$296,022,614

167,272,735

154,173,994

184,793,488

107,994,076

109,317,386

111,229,126

SELLING, GENERALAND ADMINISTRATIVE

EXPENSES

96,409,467

89,624,072

83,164,758

NON-CASH INTANGIBLE IMPAIRMENT CHARGES

24,874,368

762,000

—

Total operating expenses

121,283,835

90,386,072

83,164,758

(LOSS) INCOME FROM OPERATIONS

(13,289,759)

18,931,314

28,064,368

OTHER INCOME AND (EXPENSES):

Interest expense

Other — net

Total other — net

(11,643,870)

(11,567,842)

(9,256,867)

389,519

242,059

464,385

(11,254,351)

(11,325,783)

(8,792,482)

(LOSS) INCOME BEFORE INCOME TAXES

(24,544,110)

7,605,531

19,271,886

INCOME TAX (BENEFIT) EXPENSE

(1,439,582)

2,786,249

6,258,047

NET (LOSS) INCOME

$ (23,104,528)

$ 4,819,282

$ 13,013,839

NET (LOSS) INCOME PER SHARE

Basic

Diluted

WEIGHTED AVERAGE NUMBER OF COMMON

SHARES OUTSTANDING

Basic

Diluted

$

$

(4.22)

(4.22)

$

$

0.89

0.86

$

$

2.48

2.33

5,476,281

5,392,390

5,257,530

5,476,281

5,578,176

5,584,771

ROCKY BRANDS, INC.

F-5

ROCKY BRANDS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

BALANCE — December 31, 2004
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

Common Stock and
Additional Paid-in Capital

Shares
Outstanding

Amount

Accumulated
Other
Comprehensive
Loss

Retained
Earnings

Total
Shareholders’
Equity

4,694,670

$38,399,114

$(1,077,586) $ 34,049,270

$ 71,370,798

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

YEAR ENDED DECEMBER 31,

2007
Net loss
Pension expense, net of tax benefit

of $32,682

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

(58,050)

(23,104,528)

(23,104,528)

(58,050)

(23,162,578)
382,057

377,062

7,595

382,057

63,500

377,062

BALANCE — December 31, 2007

5,488,293

$53,997,960

$(1,051,232) $ 28,777,863

$ 81,724,591

See notes to consolidated financial statements.

F-6

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income
Adjustments to reconcile net (loss) 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

2007

2006

2005

$ (23,104,528) $

4,819,282

$ 13,013,839

5,761,976
(1,778,154)
—
(84,821)
43,632
340,479
24,874,368
811,582

(186,775)
2,545,312
2,912,863
(645,616)
1,164,845
2,062,628
1,740,839

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)

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

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

16,458,630

690,517

8,465,163

(5,842,107)
250,002
—
(68,295)

(5,626,803)
1,853,336

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

(120,606)

Net cash used in investing activities

(5,660,400)

(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

273,823,538
(287,973,509)
40,000,000
(32,796,578)
(1,463,690)
372,275
46,365

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
—

Net cash (used in) provided by financing activities

(7,991,599)

5,326,129

87,520,829

INCREASE (DECREASE) IN CASH AND CASH

EQUIVALENTS

CASH AND CASH EQUIVALENTS:

BEGINNING OF PERIOD
END OF PERIOD

2,806,631

2,122,573

(3,452,179)

3,731,253
6,537,884

$

1,608,680
3,731,253

$

5,060,859
1,608,680

$

See notes to consolidated financial statements

ROCKY BRANDS, INC.

F-7

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

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 inter-company 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 94 trucks,
supported by 48 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 2007, 2006 or

2005.

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.
Balances may exceed federally insured limits.

Trade Receivables — Trade receivables are presented net of the related allowance for uncollectible accounts
of approximately $974,000 and $838,000 at December 31, 2007 and 2006, 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 trade receivables — net as of December 31, 2007 and 2006. 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 (W.L. Gore & Associates, Inc.). We have had a relationship with this supplier for
over 20 years and have no reason to believe that such relationship will not continue.

F-8

ROCKY BRANDS, INC.

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 and in out Puerto Rico
operation. We are not aware of any governmental or economic restrictions that would alter these 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 our 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:

Buildings 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.

We perform such testing of goodwill and other indefinite-lived intangible assets in the fourth quarter of each
year or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting
unit below its carrying amount. We compare the fair value of the reporting units to the carrying value of the
reporting units for goodwill impairment testing. Fair value is determined using the discounted cash flow and
guideline company methods.

Advertising — We expense advertising costs as incurred. Advertising expense was approximately $6,709,000,

$8,252,000, and $7,851,000 for 2007, 2006 and 2005, 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 associated with those billed to customers and included in
selling, general and administrative costs totaled approximately $7,173,000, $6,518,000 and $6,433,000 in 2007,
2006 and 2005, respectively. Our gross profit may not be comparable to other entities whose shipping and handling
is a component of cost of sales.

ROCKY BRANDS, INC.

F-9

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Per Share Information — Basic net (loss) 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,
2006

2007

2005

5,476,281
—

5,392,390
185,786

5,257,530
327,241

Diluted — weighted average shares outstanding

5,476,281

5,578,176

5,584,771

Anti-Diluted securities — stock options

472,551

251,669

125,000

Asset Impairments — Annually, or more frequently if events or circumstances change, a determination is
made by management, in accordance with 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 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 (Loss) Income — Comprehensive income (loss) includes changes in equity that result from
transactions and economic events from non-owner sources. Comprehensive income is composed of two subsets —
net (loss) income and other comprehensive (loss) income.

Recently Adopted Financial Accounting Standards — 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”),
which 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 report sales, net of
sales tax remittance. The adoption of EITF 06-3 on January 1, 2007 did not have a material effect on our 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 adopted the
provisions of FIN 48 on January 1, 2007. We did not have any unrecognized tax benefits and there was no effect on
our financial condition or results of operations as a result of implementing FIN 48.

F-10

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157
defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and
expands disclosures about fair value measurements. This standard only applies when other standards require or
permit the fair value measurement of assets and liabilities. It does not increase the use of fair value measurement.
SFAS 157 is effective for financial assets and liabilities in fiscal years beginning after November 15, 2007 and for
non-financial assets and liabilities in fiscal years beginning after March 15, 2008. We do not expect the provisions of
the statement that apply to financial assets and liabilities to have an effect on our consolidated financial statements.
We are currently in the process of evaluating the impact of the provisions applicable to non-financial assets and
liabilities.

In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement
No. 157” (“FSP FAS 157-2”). FSP FAS 157-2 defers the effective date provision of SFAS 157. As a result of the
issuance of FSP FAS 157-2, the provisions of SFAS 157 are effective for fiscal years beginning after November 15,
2008. We are currently evaluating the impact of adopting SFAS 157 on our financial statements.

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 SFAS 158 were effective for fiscal years ending after December 15, 2006. The adoption of
SFAS 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 mil-
lion. In addition, SFAS 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 ending after December 15, 2008. We utilize a measurement date
of September 30th and will be required to change that measurement date to December 31st.

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 re-measurement 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. We are currently evaluating the impact of adopting SFAS 159 on
our financial statements. We do not anticipate the adoption of SFAS 159 will have a material impact on our financial
statements.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”). SFAS 141R
replaces SFAS 141, “Business Combinations.” The objective of SFAS 141R is to improve the relevance, repre-
sentational faithfulness and comparability of the information that a reporting entity provides in its financial reports
about a business combination and its effects. SFAS 141 establishes principles and requirements for how the
acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities
assumed and any non-controlling interest in the acquiree; b) recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase option; and c) determines what information to disclose to
enable users of the financial statements to evaluate the nature and financial effects of the business combination.
SFAS 141 applies prospectively to business combinations for which the acquisition date is on of after the beginning

ROCKY BRANDS, INC.

F-11

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of the first annual reporting period beginning on or after December 15, 2008. Early adoption of SFAS 141 is
prohibited. We do not anticipate the adoption of SFAS 141 will have a material impact on our financial statements.

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

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.

We 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 was
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

F-12

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

December 31,

2007

2006

$ 6,086,118
144,171
69,301,375
(128,000)

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

$75,403,664

$77,948,976

Included in raw materials, at December 31, 2006, is $1.6 million of purchases associated with the U.S. military.
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.
During 2007, we reached a settlement agreement with the U.S. military for this contract. As a result of this
settlement and other third-party sales, the value of the raw material inventory was realized. In addition, the
settlement provided for a reimbursement of expenses incurred in prior periods. This reimbursement is recognized as
a reduction of cost of goods sold of approximately $1.2 million in 2007’s operating results.

4.

IDENTIFIED INTANGIBLE ASSETS

A schedule of identified intangible assets is as follows:

December 31, 2007

Trademarks
Wholesale
Retail

Patents
Customer Relationships

Total Intangibles

December 31, 2006

Trademarks
Wholesale
Retail

Patents
Customer Relationships

Total Intangibles

Gross
Amount

Accumulated
Amortization

Carrying
Amount

$28,272,514
6,900,000
2,276,132
1,000,000

$

86,251
—
1,252,705
600,000

$28,186,263
6,900,000
1,023,427
400,000

$38,448,646

$1,938,956

$36,509,690

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

Amortization expense related to fixed-lived intangible assets was approximately $664,000, $574,000 and
$569,000 in 2007, 2006 and 2005, respectively. Such amortization expense will be approximately $662,000 per year
from 2008 to 2009, and $122,000 for 2010 and $121,000 for 2011.

ROCKY BRANDS, INC.

F-13

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2005, our consolidated balance
sheet included $24.0 million of goodwill. 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.

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.

We perform such testing of goodwill and other indefinite-lived intangible assets in the fourth quarter of each
year or as events occur or circumstances change that would more likely than not reduce the fair value of a reporting
unit below its carrying amount. We compare the fair value of the reporting units to the carrying value of the
reporting units for goodwill impairment testing. Fair value, for the testing of goodwill, is determined using the
discounted cash flow and guideline company methods. Fair value, for the testing, of other indefinite-lived intangible
assets is determined using the relief from royalty method.

We evaluated our indefinite lived trademarks under the terms and provisions of 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, in the
fourth quarter of 2006 we recognized an impairment loss on the carrying value of the Gates trademark in the amount
of $0.8 million. This charge is reflected in operating expenses under the caption, “Non-cash intangible impairment
charges.” 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.

We evaluated our goodwill under the terms and provisions of SFAS 142. As a result of this evaluation, in the
fourth quarter of 2007 we recognized an impairment loss on the entire carrying value of our goodwill in the amount
of $24.9 million. This evaluation indicated that the entire amount of goodwill was impaired, principally due to
weakness in the calculated enterprise value in comparison to the carrying value. This charge is reflected in operating
expenses under the caption, “Non-cash intangible impairment charges.” Because the trading value of our shares
indicated a level of equity market capitalization below our book value at the time of the annual impairment test,
there was indication that our goodwill could be impaired. In performing the first step of the impairment test, the
company valued the wholesale segment, for which all the goodwill applied, based on the guideline company
method. The companies we selected are publicly traded wholesale competitors who manufacture shoes and apparel.
While the selected companies may differ from the wholesale division in terms of the specific products they provide,
they have similar financial risks and operating performance and reflect current economic conditions for the
footwear and apparel industry in general. As a result of this analysis, it was determined that an indication of

F-14

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

impairment did exist and the results of the second step of the impairment test resulted in an impairment of
$24.9 million; or $23.5 million, net of tax benefit; to our goodwill.

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

Total
Less — accumulated depreciation

Net Fixed Assets

December 31,

2007

2006

$1,954,971
329,068

$1,983,951
812,825

$2,284,039

$2,796,776

December 31,

2007

2006

$

671,035
17,134,830
26,326,475
3,312,564
12,038,090
315,686

$

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

59,798,680
(35,314,630)

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

$ 24,484,050

$ 24,349,674

We incurred approximately $5,098,000, $4,696,000 and $4,361,000 in depreciation expense for 2007, 2006

and 2005, 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,

2007

2006

$ 60,558,687
40,000,000
2,986,345

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

103,545,032
324,648

110,491,581
7,288,474

$103,220,384

$103,203,107

ROCKY BRANDS, INC.

F-15

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In conjunction with the completion of our 2005 acquisition of EJ Footwear, we entered into agreements with
GMAC Commercial Finance (“GMAC”) and with 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 GMAC 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 GMAC 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 ACAS 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.

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%.

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, 2007, we had $60.6 million in
borrowings under this facility and total capacity of $84.8 million.

In May 2007, we entered into a Note Purchase Agreement, totaling $40 million, with Laminar Direct Capital
L.P., Whitebox Hedged High Yield Partners, L.P. and GPC LIX L.L.C., and issued notes to them for $20 million,
$17.5 million and $2.5 million, respectively, at an interest rate of 11.5% payable semi-annually over the five year
term of the notes. Principal repayment is due at maturity in May 2012. The proceeds from these notes were used to
pay down the GMAC Commercial Finance (“GMAC”) term loans which totaled approximately $17.5 million and
the $15 million American Capital Strategies, LTD (“ACAS”) term loan. The balance of the proceeds, net of debt
acquisition costs of approximately $1.5 million, was used to reduce the outstanding balance on the revolving credit
facility. The Note Purchase Agreement is secured by a security interest in our assets and is subordinate to the
security interest under the GMAC line of credit.

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, 2007, we had no
retained earnings available for the payment of dividends. As of December 31, 2007, we were in compliance with
these restrictive covenants.

At December 31, 2007, the carrying amount of the revolving credit facility and term loans approximates fair
value as these are variable and fixed rate-based borrowings, respectively. The carry amount of the mortgages also
approximates fair value, as this was the available financing in the marketplace during the year.

F-16

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

2008
2009
2010
2011
2012
Thereafter

Total

$

324,648
352,556
60,941,550
415,773
40,451,514
1,058,991

$103,545,032

As of December 31, 2007, our real estate obligations incur interest at a rate of 8.275%.

8. OPERATING LEASES

We lease certain machinery, trucks, and facilities under operating leases that generally provide for renewal
options. We incurred approximately $3,613,000, $3,208,000 and $3,349,000 in rent expense under operating lease
arrangements for 2007, 2006 and 2005, respectively.

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

December 31:

2008
2009
2010
2011
2012

Total

$2,826,000
1,989,000
1,397,000
685,000
117,000

$7,014,000

ROCKY BRANDS, INC.

F-17

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

9.

INCOME TAXES

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)

Current
Deferred

Total Foreign

Years Ended December 31,
2006

2007

2005

$

194,685
(1,415,442)

$1,669,144
1,180,717

$3,994,381
1,087,396

(1,220,757)

2,849,861

5,081,777

59,522
(355,883)

506,794
(835,267)

(296,361)

(328,473)

84,365
(6,829)

77,536

264,861
—

264,861
—

844,857
47,444

892,301

283,969
—

283,969
—

Total

$(1,439,582)

$2,786,249

$6,258,047

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 (benefit) 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 Dominican Republic

operations

Goodwill impairment
State and local income taxes
Other — net

Total

F-18

Years Ended December 31,
2006

2007

2005

$(8,589,116)

$2,668,345

$6,745,160

—

—

(560,000)

(563,920)
—

(639,347)
883,952

(610,771)
—

563,920
7,374,919
(248,867)
23,482

—
—
(117,031)
(9,670)

—
—
579,993
103,665

$(1,439,582)

$2,786,249

$6,258,047

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Deferred income taxes recorded in the consolidated balance sheets at December 31, 2007 and 2006

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,

2007

2006

$ 1,749,026
440,964
211,645
657,412

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

3,059,047
(502,292)

2,997,896
(402,958)

2,556,755

2,594,938

(768,979)
(12,798,257)
(18,293)
112,628
(379,271)

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

(13,852,172)
$(11,295,417)

(15,701,188)
$(13,106,250)

$ 1,952,536
(13,247,953)

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

$(11,295,417)

$(13,106,250)

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

which $502,292 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 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, 2007, we had approximately $10,363,000 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

ROCKY BRANDS, INC.

F-19

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 $3,041,000 and $586,000, respectively.

We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an
Interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. We did not have any unrecognized tax
benefits and there was no effect on our financial condition or results of operations as a result of implementing
FIN 48.

We file income tax returns in the U.S. Federal jurisdiction and various state and foreign jurisdictions. An
examination of our 2004 Federal income tax return resulted in an immaterial adjustment. The examination of the
2003 Federal income tax return resulted in no changes. We are no longer subject to U.S. Federal tax examinations
for years before 2003. State jurisdictions that remain subject to examination range from 2003 to 2006. Foreign
jurisdiction (Canada and Puerto Rico) tax returns that remain subject to examination range from 2001 to 2006. We
do not believe there will be any material changes in our unrecognized tax positions over the next 12 months.

Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of
income tax expense. As of the date of adoption of FIN 48, accrued interest or penalties were not material, and no
such expenses were recognized during the year.

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 $400,000 in
the first quarter of 2006.

F-20

ROCKY BRANDS, INC.

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, 2007 and
2006 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
Change in discount rate
Curtailment decrease
Actuarial (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

Funded status:
(Under) 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

Total

Amounts recognized in the consolidated financial statements:
Pension asset
Accumulated other comprehensive loss, net of tax effect of $32,682 for

2007 and $583,298 for 2006

Net amount recognized

Accumulated benefit obligation

December 31,

2007

2006

$9,120,807
105,197
558,025
—
—
352,028
(326,154)

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

$9,809,903

$ 9,120,807

$9,134,371
875,962
(326,154)

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

$9,684,179

$ 9,134,371

$

$ (125,724)
—
—
—

13,564
—
—
—

$ (125,724)

$

13,564

$

5,381
581,649
1,080,181

$

16,143
673,178
887,159

$1,667,211

$ 1,576,480

$ (125,724)

$

13,564

(58,050)

(993,182)

$ (183,774)

$ (979,618)

$9,782,316

$ 9,094,414

ROCKY BRANDS, INC.

F-21

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Of the amounts in accumulated other comprehensive income as of December 31, 2007, we expect the

following to be recognized as net pension cost in 2008:

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:

$ 5,381
84,561
5,273

$95,215

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,
2006

2007

2005

$ 105,197
558,025
(716,956)
—
10,762
91,529

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

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

$ 48,557

$ 133,521

$ 606,513

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,
2007
2006

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

Our pension plan’s asset allocations at September 30, 2007 and 2006 by asset category are:

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

Total

December 31,
2007
2006

7.8% 9.3%
75.4% 72.4%
12.8% 14.4%
4.0% 3.9%

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

F-22

ROCKY BRANDS, INC.

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:

2008
2009
2010
2011
2012
Thereafter

Total

$ 337,000
339,000
349,000
355,000
363,000
2,875,000

$4,618,000

We do not anticipate making any contributions to the pension plan in 2008.

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 2007, $1.1 million in
2006 and $0.5 million in 2005.

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.

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, 2007 and 2006, respectively.

In November 1997, our Board of Directors adopted a Rights Agreement, which provided 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 were exercisable after the time when a person or group of persons without the approval of the Board of
Directors acquired beneficial ownership of 20 percent or more of our common stock or announced the initiation of a
tender or exchange offer which if successful would cause such person or group to beneficially own 20 percent or
more of the common stock. Such exercise would ultimately entitle the holders of the rights to purchase 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 would not be entitled to exercise any rights. These rights expired during November
2007.

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

ROCKY BRANDS, INC.

F-23

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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. 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 year ended December 31,
2005.

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

based method for all awards, net of tax

Pro forma net income

Earnings per share:

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

Year Ended
December 31, 2005

$13,013,839

1,488,928

$11,524,911

$
$
$
$

2.48
2.19
2.33
2.06

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
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, 2007, the Company is authorized to issue 426,405 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.

F-24

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following summarizes stock option transactions from January 1, 2005 through December 31, 2007:

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

Outstanding at December 31, 2006

Issued
Exercised
Forfeited

Outstanding at December 31, 2007

Options exercisable at December 31:

2007

536,176
15,000
(63,500)
(15,125)

472,551

$14.33
$14.40
$ 5.86
$17.40

$15.37

420,801

$14.97

Unvested options at December 31, 2007

51,750

$18.55

Fair value of options granted during the year:

2007

2006

2005

$ 7.82

$ 8.24

$11.99

3.9

3.6

5.6

3.4

3.1

5.9

$2,810,998

$2,665,860

$ 145,138

$ 160,306

$ 160,306

$

—

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:

2007

2006

2005

Dividend yields
Expected volatility
Risk-free interest rates
Expected life

0%
0%
0%
51% 50% 51%
4.76% 4.55% 4.13%
6

6

4

During the years ended December 31, 2007, 2006 and 2005, a total of 63,500, 62,675 and 182,699 options were
exercised with an intrinsic value of approximately zero, $0.7 million and $3.6 million, respectively. During the
years ended December 31, 2007, 2006 and 2005, a total of 15,000, 15,000 and 199,000 options were issued with a
fair value of approximately zero, $0.1 million and $2.4 million, respectively. During the year ended December 31,
2007, a total of 15,125 options were forfeited with a fair value of approximately $0.1 million. A total of 56,000,
207,312 and 193,562 options vested during the years ended December 31, 2007, 2006 and 2005 with a fair value of

ROCKY BRANDS, INC.

F-25

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

zero, $1.6 million and $1.2 million, respectively. At December 31, 2007, a total of 51,750 options were unvested
with a fair value of zero. 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, 2007 are expected to vest. For the twelve-month period ended December 31,
2007, our compensation expense related to stock option grants was approximately $338,629.

In 2005 we issued 3,000 shares to certain executives and recorded compensation expense of $85,860 which

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

13. SUPPLEMENTAL CASH FLOW INFORMATION

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

income taxes was as follows:

Years Ended December 31,
2006

2007

2005

Interest paid

$10,009,485

$10,919,865

$ 8,312,707

Federal, state and local income taxes paid (refunds) —

net

Stock issued for EJ Footwear Group acquisition

Capitalized interest

Fixed asset purchases in accounts payable

$ (2,641,227)

$ 4,365,744

$ 3,138,517

$

$

$

— $

— $11,573,838

14,561

56,166

$

$

43,830

372,183

$

$

19,625

—

14. 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 94 trucks, supported by 48
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, 2007, we have three contracts
totaling approximately $12.3 million to produce goods for the U.S. military. These are annual contracts which
contain options for yearly renewal over periods ranging from one to four years. Our military sales fluctuate from
year to year.

F-26

ROCKY BRANDS, INC.

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

NET SALES:
Wholesale
Retail
Military

Total Net Sales

GROSS MARGIN:

Wholesale
Retail
Military

Years Ended December 31,
2006

2007

2005

$202,594,947
70,714,315
1,957,549

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

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

$275,266,811

$263,491,380

$296,022,614

$ 70,443,168
36,123,123

1,427,785(a)

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

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

Total Gross Margin

$107,994,076

$109,317,386

$111,229,126

(a) Gross margin for 2007 includes a $1.2 million settlement of a previously cancelled military contract.

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

2007

% of
Sales

2006

% of
Sales

2005

$160,415,927
31,457,005
37,636,995
17,794,005
1,957,549
16,385,664
9,619,666

58.3% $142,076,453
35,451,267
11.4%
41,261,105
13.7%
17,078,111
6.5%
1,088,865
0.7%
16,151,170
6.0%
10,384,409
3.5%

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

% of
Sales

47.4%
14.2%
13.7%
5.7%
9.3%
6.2%
3.5%

$275,266,811

100% $263,491,380

100% $296,022,614

100%

Net sales to foreign countries, primarily Canada, represented approximately 2.6% in 2007, 2.1% of net sales in

2006, and 2.7% of net sales in 2005.

ROCKY BRANDS, INC.

F-27

ROCKY BRANDS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

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

2007 and 2006:

2007
Net sales
Gross margin
Net income (loss)
Net income (loss) per common share:

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Total Year

$61,657,024 $58,797,664
23,926,454
26,080,686
(1,387,207)
765,905

$275,266,811
$82,308,547 $ 72,503,576
107,994,076
28,708,412
29,278,524
(23,632,471)a) (23,104,528)
1,149,245

Basic
Diluted

$
$

0.14 $
0.14 $

(0.25) $
(0.25) $

0.21 $
0.21 $

(4.31) $
(4.31) $

(4.22)
(4.22)

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

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

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

(77,875)(b)

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

Basic
Diluted

$
$

0.17 $
0.16 $

(0.04) $
(0.04) $

0.78 $
0.76 $

(0.01) $
(0.01) $

0.89
0.86

No cash dividends were paid during 2007 or 2006.

(a) Includes an impairment loss of approximately $23,544,000 or $4.29 per share, net of tax benefits.
(b) Includes an impairment loss of approximately $483,000 or $.09 per share, net of tax benefits.

F-28

ROCKY BRANDS, INC.

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

Independent Registered Public Accounting Firm
Schneider Downs & Co., Inc.
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
Retired 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