FIRST AMENDMENT TO FORBEARANCE AGREEMENT AND SECOND AMENDMENT TO CREDIT AND SECURITY AGREEMENT

Exhibit 10.1

FIRST AMENDMENT TO FORBEARANCE AGREEMENT

AND SECOND AMENDMENT TO CREDIT AND SECURITY AGREEMENT

THIS FIRST AMENDMENT TO FORBEARANCE AGREEMENT AND SECOND AMENDMENT TO CREDIT AND SECURITY AGREEMENT (the “ Amendment ”), dated July     , 2009, is entered into by and among PHOENIX FOOTWEAR GROUP, INC., a Delaware corporation (“ Phoenix Footwear ”), PENOBSCOT SHOE COMPANY, a Maine corporation (“ Penobscot ”), H.S. TRASK & CO., a Montana corporation (“ Trask ”), CHAMBERS BELT COMPANY, a Delaware corporation (“ Chambers ”), and PHOENIX DELAWARE ACQUISITION, INC., a Delaware corporation (“ Phoenix Acquisition ”, and together with Phoenix Footwear, Penobscot, Trask and Chambers, each individually, a “ Company ,” and collectively, the “ Companies ”), and WELLS FARGO BANK, NATIONAL ASSOCIATION (“ Wells Fargo ”), acting through its Wells Fargo Business Credit operating division.

RECITALS

A. Companies and Wells Fargo are parties to a Credit and Security Agreement dated as of June 10, 2008 (as amended by that certain Forbearance Agreement and First Amendment to Credit and Security Agreement, dated as of July 7, 2009 (“ Forbearance Agreement ”), and as further amended from time to time, the “ Credit Agreement ”). Capitalized terms used in these recitals have the meanings given to them in the Credit Agreement unless otherwise specified.

B. Companies and Wells Fargo desire to amend the Forbearance Agreement and the other Loan Documents as set forth in this Amendment

NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows:

1. Amendments to Forbearance Agreement .

1.1 Section 1 of the Forbearance Agreement is hereby amended by replacing the date “July 31, 2009” with the date “September 30, 2009” where it occurs in such section.

1.2 Section 4 of the Forbearance Agreement is hereby deleted in its entirety and replaced with the following:

“4. Financial Covenants During the Forbearance Period . Commencing June 7, 2009, and continuing through (and including) September 19, 2009, Companies shall comply with the following financial covenants (collectively, the “ Financial Tests ”):

4.1 Minimum Net Sales . Companies, on a consolidated basis, shall achieve, for each period set forth below, Net Sales, determined as of the following test dates, of not less than the amount set forth for each such period:

4.2 Minimum Net Cash Flow . Companies shall achieve, for each period set forth below, Net Cash Flow, determined as of the following test dates, of not less than the amount set forth for each such period (numbers appearing between “< >“ are negative):

For purposes of this Section 4, (i) “Net Sales” means the Companies’ gross sales, on a consolidated basis, less applicable returns, discounts and allowances, and (ii) “Net Cash Flow” means total cash receipts received by Companies less total disbursements of the Companies, on a consolidated basis; provided , that in order to calculate the Companies’ Net Cash Flow, amounts received by Companies from the sale of Chambers’ assets referred to in Section 3.1 of this Amendment shall not be included in such calculation.”

1.3 Section 8 of the Forbearance Agreement is hereby deleted in its entirety and replaced with the following:

“8. Covenants; Conditions Subsequent . During the Forbearance Period, Companies shall comply with the following covenants, unless Wells Fargo shall consent otherwise in an Authenticated Record delivered to the applicable Company.

8.1. Companies shall cause Focus Management Group or such other third party management services reasonably acceptable to Wells Fargo to provide support to Companies, including, but not necessarily limited to, (i) monitoring the Companies’ performance in relation to the Companies’ 13-week cash flow budget; (ii) assisting with the preparation of a weekly cash budget reports; (iii) participating with the Companies in the weekly telephone calls with Wells Fargo required by this Amendment; and (iv) providing cash planning support to Companies;

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8.2 Notwithstanding anything to the contrary contained in the Credit Agreement, Companies shall deliver detailed agings of Companies’ accounts receivable as of July 31, 2009, August 15, 2009, August 31, 2009, September 15, 2009 and September 20, 2009, within three (3) days after each such reporting date; and

8.3 On or before September 30, 2009, Companies shall pay to Wells Fargo in immediately available funds an amount sufficient to repay the Indebtedness in full.

Companies’ failure to timely comply with the items described in the foregoing Sections 8.1, 8.2 and 8.3 shall constitute an immediate Event of Default with no applicable cure period.”

2. Amendments to Credit Agreement .

2.1 Section 1.1 of the Credit Agreement . Section 1.1(a) of the Credit Agreement is hereby deleted in its entirety and replaced with the following:

“(a) Line of Credit and Limitations on Borrowing . Wells Fargo shall make Advances to Companies under the Line of Credit that, together with the L/C Amount, shall not at any time exceed in the aggregate the lesser of (i) the Maximum Line Amount (as in effect from time to time as described below), or (ii) the Borrowing Base limitations described in Section 1.2. Within these limits, Companies may periodically borrow, prepay in whole or in part, and reborrow. Wells Fargo has no obligation to make an Advance during a Default Period or at any time Wells Fargo believes that an Advance would result in an Event of Default. As of the Second Amendment Effective Date, the “Maximum Line Amount” shall initially be $9,000,000. The Maximum Line Amount shall be automatically decreased to $7,000,000 from and after September 1, 2009.”

2.2 Section 1.10(a) of the Credit Agreement . Section 1.10(a) of the Credit Agreement is hereby amended by deleting the amount “$1,000,000” and replacing it with “$750,000” where it appears in such section.

2.3 Exhibit A to the Credit Agreement . Exhibit A to the Credit Agreement is hereby amended as follows:

(a) The following definitions are hereby added to Exhibit A to the Credit Agreement in the appropriate alphabetical position:

“Second Amendment Effective Date” means July 29, 2009.

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(b) The following definitions are hereby deleted in their entirety and replaced with the following:

“Forbearance Agreement” means that certain Forbearance Agreement and First Amendment to Credit and Security Agreement, among the Companies and Wells Fargo, dated as of July 7, 2009, as amended by that certain First Amendment to Forbearance Agreement and Second Am