## To Our Shareholders, 

We are pleased with our performance in 2002, which included an 82% increase in earnings per share despite a 13.9% decline in net sales. These results particularly benefited from the manufacturing realignment completed in the fourth quarter of 2001, more focused product lines, increased product sourcing, disciplined inventory management, and solid first year sales of ROCKY® branded clothing and accessories. We entered 2003 on a stronger basis than a year ago, following a strong fourth quarter that included record quarterly earnings and increased demand for ROCKY products. 

Net sales were $89.0 million for 2002 compared with $103.3 million the prior year. Quarterly sales comparisons with 2001 were a challenge throughout the year. This was principally due to our customers’ higher than planned inventory levels at the end of 2001 and continued weakness in the national economy. Orders for the first six months of 2002 were below the comparable period in 2001, especially for rugged outdoor footwear. They improved during the second half of the year as evidenced by the 16.4% increase in branded product sales for the fourth quarter. 

Sales in the occupational category achieved solid growth in 2002 and rose to 33% of the company’s net sales. The company introduced additional work styles in 2002 that were well received by customers. These sales are less susceptible to weather conditions and occur throughout the year. We introduced western work boots in January, 2003. This line of footwear expands our occupational category and extends the ROCKY brand to additional customers. It is the company’s most exciting addition to its occupational category in several years. Our occupational category is not a me-too-line of footwear; it now includes the distinctive qualities that are hallmarks of the ROCKY brand. 

The ROCKY brand is an integral part of the company’s growth strategy. Our introduction of branded clothing and accessories in the first quarter of 2002 extended the brand beyond footwear to offer a complete “head-to-toe” ROCKY look. ROCKY Gear offers our customers, especially hunters and outdoorsmen, a distinctive appearance. It includes several styles of lined and unlined parkas, jackets, pants, bib overalls, fleece apparel and socks. We plan to continue leveraging our strong brand to increase our position in select markets. 

During the first quarter of 2002 we also launched the ROCKY Kids line of children's footwear. It includes several popular styles of ROCKY footwear in children’s sizes that appeal to individual and family lifestyles. ROCKY Kids, which was previously licensed, complements the company's leading position in the rugged outdoor footwear market and is sold through existing sales channels. 

Another important element of our strategy is to enhance utilization of our manufacturing capabilities. This is helping us become a more efficient company and a leaner, more aggressive competitor. The changes we made in 2001 provided measurable benefits this past year. At year-end 2002, our products were nearly evenly divided between sourced manufacturing and production from our own facilities. We evaluate our manufacturing needs on a regular basis. 

The most visible measure of progress this past year was the company’s gross margin measured as a percentage of net sales. It improved from 22.5% of 2001 net sales to 26.3% in 2002. We are focused on ways to continue to improve the company’s gross margin through production decisions based on the comparative benefits of our factories and sourced manufacturing. 

