<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q



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

                  For The Quarterly Period Ended July 31, 1999


                         Commission File Number 1-14770


                            PAYLESS SHOESOURCE, INC.
             (Exact name of registrant as specified in its charter)



           DELAWARE                                   43-1813160
(State or other jurisdiction of                    (I.R.S. Employer
incorporation or organization)                   Identification Number)



3231 SOUTHEAST SIXTH AVENUE, TOPEKA, KANSAS            66607-2207
(Address of principal executive offices)               (Zip Code)


                                 (785) 233-5171
                         (Registrant's telephone number,
                              including area code)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
                                                    YES   X    NO
                                                       -------    -------

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

                          Common Stock, $.01 par value
                     31,063,766 shares as of August 27, 1999






<PAGE>   2



                         PART 1 - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

                    PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                   (UNAUDITED)
(Dollars in millions)
<TABLE>
<CAPTION>
                                                              Jul. 31,          Aug. 1,            Jan. 30,
ASSETS                                                          1999              1998               1999
------                                                    ---------------    ---------------    ---------------

Current Assets:
<S>                                                       <C>                <C>                <C>
     Cash and cash equivalents                            $         205.3    $         135.4    $         123.5
     Merchandise inventories                                        348.2              367.8              342.1
     Current deferred income taxes                                   13.9                9.6               14.2
     Other current assets                                            19.5               12.7               16.0
                                                          ---------------    ---------------    ---------------
        Total current assets                                        586.9              525.5              495.8

Property and Equipment:
     Land                                                             7.5                6.0                6.3
     Buildings and leasehold
       improvements                                                 621.6              591.8              594.8
     Furniture, fixtures and
       equipment                                                    303.9              297.4              284.2
     Property under capital leases                                    7.6                7.5                7.6
                                                          ---------------    ---------------    ---------------
        Total property and equipment                                940.6              902.7              892.9
     Accumulated depreciation
        and amortization                                           (449.3)            (408.2)            (400.1)
                                                          ---------------    ---------------    ---------------
        Property and equipment, net                                 491.3              494.5              492.8

Deferred income taxes                                                30.7               23.1               25.8
Other assets                                                          4.4                3.5                3.5
                                                          ---------------    ---------------    ---------------

        Total Assets                                      $       1,113.3    $       1,046.6    $       1,017.9
                                                          ===============    ===============    ===============

LIABILITIES AND SHAREOWNERS' EQUITY
-----------------------------------

Current Liabilities:
     Current maturities of
        long-term debt                                    $           0.7    $           1.5    $           1.5
     Accounts payable                                                72.0               96.5               75.5
     Accrued expenses                                               137.0              120.4              117.9
                                                          ---------------    ---------------    ---------------
        Total current liabilities                                   209.7              218.4              194.9

Long-term debt                                                      126.7                5.3               72.0

Other liabilities                                                    49.0               50.5               48.2

Shareowners' Equity:
     Common stock                                                     0.3                0.4                0.3
     Additional paid-in capital                                      37.1               18.9               35.0
     Unearned restricted stock                                       (1.5)              (6.3)              (3.3)
     Retained earnings                                              692.0              759.4              670.8
                                                          ---------------    ---------------    ---------------
        Total shareowners' equity                                   727.9              772.4              702.8

        Total Liabilities and
            Shareowners' Equity                           $       1,113.3    $       1,046.6    $       1,017.9
                                                          ===============    ===============    ===============
</TABLE>

            See notes to condensed consolidated financial statements.

                                        2




<PAGE>   3





                    PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
                  CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
                                   (UNAUDITED)



(Dollars in millions, except per share)

<TABLE>
<CAPTION>
                                                      13 Weeks Ended                           26 Weeks Ended
                                            -----------------------------------     -----------------------------------
                                               Jul. 31,            Aug. 1,              Jul. 31,          Aug. 1,
                                                 1999                1998                 1999              1998
                                            ---------------     ---------------     ---------------     ---------------

<S>                                         <C>                 <C>                 <C>                 <C>
Net Retail Sales:                           $         767.6     $         723.1     $       1,456.8     $       1,404.1

Cost of sales                                         514.2               489.4               982.8               954.8

Selling, general and
    administrative
    expenses                                          168.2               154.2               329.7               309.1

Interest (income)
    expense, net                                       (0.2)               (2.5)                0.2                (4.7)
                                            ---------------     ---------------     ---------------      --------------

Earnings before income
    taxes                                              85.4                82.0               144.1               144.9

Provision for income
    taxes                                              34.1                32.7                57.5                57.8
                                            ---------------     ---------------     ---------------     ---------------

Net Earnings                                $          51.3     $          49.3     $          86.6     $          87.1
                                            ===============     ===============     ===============     ===============


Diluted Earnings
    per Share                               $          1.61     $          1.33     $          2.70     $          2.33
                                            ===============     ===============     ===============     ===============

Basic Earnings
  per Share                                 $          1.62     $          1.35     $          2.71     $          2.36
                                            ===============     ===============     ===============     ===============

Diluted Weighted Average
  Shares Outstanding                                   31.9                37.0                32.1                37.4
                                            ===============     ===============     ===============     ===============

Basic Weighted Average
  Shares Outstanding                                   31.6                36.5                31.9                36.9
                                            ===============     ===============     ===============     ===============
</TABLE>






            See notes to condensed consolidated financial statements.




                                        3


<PAGE>   4



                    PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
(Dollars in millions)                                                                  26 Weeks Ended
                                                                            ------------------------------------
                                                                                Jul. 31,             Aug. 1,
                                                                                  1999                 1998
                                                                            ---------------      ---------------
<S>                                                                         <C>                 <C>
Operating Activities:
   Net earnings                                                             $          86.6     $           87.1
   Adjustments for noncash items
   included in net earnings:
       Depreciation and amortization                                                   48.3                 46.3
       Amortization of unearned
         restricted stock                                                               1.9                  1.3
       Deferred income taxes                                                           (4.6)                 4.1
   Merchandise inventories                                                             (6.1)               (43.2)
   Other current assets                                                                (3.5)                (1.3)
   Accounts payable                                                                    (3.5)                32.7
   Accrued expenses                                                                    19.1                  7.5
   Other assets and liabilities, net                                                    0.0                 (4.2)
                                                                            ---------------     ----------------


Total Operating Activities                                                            138.2                130.3
                                                                            ---------------     ----------------


Investing Activities:
   Capital expenditures                                                               (47.6)               (56.0)
   Disposition of property and equipment                                                0.8                  1.7
                                                                            ---------------     ----------------


Total Investing Activities                                                            (46.8)               (54.3)
                                                                            ---------------     ----------------

Financing Activities:
   Issuance of long-term debt                                                          55.0                  0.0
   Repayment of long-term debt                                                         (1.1)                (1.2)
   Purchases of common stock                                                          (65.0)              (150.0)
   Issuances of common stock                                                            1.5                  0.6
                                                                            ---------------     ----------------


Total Financing Activities                                                             (9.6)              (150.6)
                                                                            ---------------     ----------------


Increase (Decrease) in Cash
   and Cash Equivalents                                                                81.8                (74.6)
Cash and Cash Equivalents,
   Beginning of Year                                                                  123.5                210.0
                                                                            ---------------     ----------------
Cash and Cash Equivalents,
  End of Period                                                             $         205.3     $          135.4
                                                                            ===============     ================


Cash paid during the period:
   Interest                                                                 $           2.8     $            0.5
   Income Taxes                                                                        44.4                 45.1
</TABLE>


            See notes to condensed consolidated financial statements.

                                        4


<PAGE>   5



                    PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION
Payless ShoeSource, Inc., a Missouri corporation ("Payless") and its
subsidiaries were reorganized into a Delaware holding company structure
effective June 1, 1998 through a merger (the "Merger") with Payless Merger
Corp., a Missouri corporation, which was an indirect wholly-owned subsidiary of
Payless and a wholly-owned subsidiary of the Payless ShoeSource, Inc., a
Delaware corporation ("Company"). The Company formerly was a wholly-owned
subsidiary of Payless immediately prior to the merger. Each of the Company and
Payless Merger Corp. were organized in connection with the Merger. Pursuant to
the Merger, Payless became an indirect wholly-owned subsidiary of the Company
and is the principal operating subsidiary of the Company. The transaction was
accounted for as a reorganization of entities under common control (similar to a
pooling of interest). As a result, immediately following the effective time the
Company and its subsidiaries had the same consolidated net worth as Payless and
its subsidiaries had immediately prior to the Merger.

For purposes of these Notes to Condensed Consolidated Financial Statements, the
"Registrant", or the "Company" refers to Payless ShoeSource, Inc., a Delaware
corporation, and its subsidiaries, unless the context otherwise requires.

NOTE 2. INTERIM RESULTS. The unaudited Condensed Consolidated Financial
Statements of the Company have been prepared in accordance with the instructions
to Form 10-Q of the United States Securities and Exchange Commission and should
be read in conjunction with the Notes to Consolidated Financial Statements
(pages 22-26) in the Company's 1998 Annual Report. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
the unaudited Condensed Consolidated Financial statements are fairly presented
and all adjustments (consisting only of normal recurring adjustments) necessary
for a fair statement of the results for the interim periods have been included;
however, certain items are included in these statements based upon estimates for
the entire year. The results for the quarter and six month period ended July 31,
1999, are not necessarily indicative of the results that may be expected for the
fiscal year ending January 29, 2000.

NOTE 3. INVENTORIES.  Merchandise inventories are valued by the retail
method and are stated at the lower of cost, determined using the first-
in, first-out (FIFO) basis, or market.

NOTE 4. LONG-TERM DEBT. In June, the Company completed a $55 million financing
through a private placement of unsecured notes issued by a wholly owned
subsidiary in five and ten year maturities. The financing consists of an
aggregate of $20 million of senior notes maturing in June 2004 at 7.34%, $15
million of senior notes maturing in June 2009 at 7.67%, with payments of
principal beginning in June 2003, and $20 million of senior notes maturing in
June 2009 at 7.78%.

                                        5


<PAGE>   6



NOTE 5. EARNINGS PER SHARE. Basic earnings per share is computed by dividing net
earnings by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings per share include the effect of conversions
of stock options.

NOTE 6.  RECLASSIFICATIONS.  Certain reclassifications have been made to
prior year balances to conform with the current year presentation.


NOTE 7. FOREIGN CURRENCY TRANSLATION. Local currencies are the functional
currencies for all subsidiaries. Accordingly, assets and liabilities of foreign
subsidiaries are translated at the rate of exchange at the balance sheet date.
Income and expense items of these subsidiaries are translated at average rates
of exchange. The foreign currency translation was immaterial for the second
quarter of 1999 and 1998.


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

The following discussion summarizes the significant factors affecting operating
results for the quarters ended July 31, 1999 (1999) and August 1, 1998 (1998).
This discussion and analysis should be read in conjunction with the unaudited
Condensed Consolidated Financial Statements and Notes to the Condensed
Consolidated Financial Statements included in this Form 10-Q.

REVIEW OF OPERATIONS

NET EARNINGS
Net earnings totaled $51.3 million in the second quarter of 1999, up 4.1% from
$49.3 million in the second quarter of 1998. For the first six months of 1999
net earnings were $86.6 million compared with $87.1 million in the 1998 period,
a 0.5% decrease.

The following table presents the components of costs and expenses, as a percent
of net retail sales, for the second quarter and first six months of 1999 and
1998.

                                                       First
                                  Second Quarter     Six Months
                                  --------------    -------------
                                   1999   1998       1999   1998
                                  ------ -------    ------ ------

  Cost of sales                    67.0%  67.7%      67.5%  68.0%

  Selling, general and
    administrative expenses        21.9   21.3       22.6   22.0

  Interest (income)/expense, net    (.0)   (.3)        .0    (.3)
                                    ----  -----      ----   -----

  Earnings before income taxes     11.1%  11.3%       9.9%  10.3%
                                   ====   ====       ====   ====

  Effective income tax rate        39.9%  39.9%      39.9%  39.9%
                                   ====   ====       ====   ====

  Net Earnings                      6.7%   6.8%       5.9%   6.2%
                                   ====   ====       ====   ====








                                        6


<PAGE>   7



NET RETAIL SALES
Net retail sales represent the sales of stores operating during the period.
Same-store sales represent sales of stores open during comparable periods.
During the second quarter of 1999 total sales increased 6.2% over the second
quarter of 1998, consisting of a 7.0% increase in unit volume and a 0.8%
decrease in average selling prices. For the first six months of 1999 total sales
increased 3.8% over the same period in 1998, consisting of a 4.9% increase in
unit volume and a 1.1% decrease in average selling prices.
Sales percent increases (decreases) are as follows:


                                        Second Quarter       First Six Months
                                        --------------       ----------------
                                        1999      1998       1999       1998
                                        ----      ----       ----       ----

        Net Retail Sales                 6.2%      0.9%       3.8%       3.1%

        Same-Store Sales                 2.6%     (1.5%)      0.3%       0.8%

COST OF SALES
Cost of sales includes cost of merchandise sold, buying and occupancy costs.
Cost of sales was $514.2 million in the second quarter of 1999, up 5.1% from
$489.4 million in the second quarter of 1998. For the first six months of 1999,
cost of sales was $982.8 million, a 2.9% increase from $954.8 million in the
1998 period.

For the second quarter and first six months, cost of sales, as a percent of net
retail sales, declined 0.7 percent to 67.0 percent and 0.5 percent to 67.5
percent, respectively. Gross margin improvement in the second quarter and the
first six months of the year was primarily due to continued improvements in our
merchandising margins driven by lower product costs and adjustments to our
merchandising mix.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $168.2 million in the second
quarter of 1999, up 9.1% from $154.2 million in the second quarter of 1998. For
the first six months of 1999, selling, general and administrative expenses were
$329.7 million compared with $309.1 million in the 1998 period, a 6.7% increase.

As a percent of net retail sales, selling, general and administrative expenses
were 21.9 percent during the second quarter of 1999 compared with 21.3 percent
in the second quarter of 1998. For the first six months of 1999, selling,
general and administrative expenses as a percent of net retail sales were 22.6
percent in 1999 compared with 22.0 percent in 1998.

The increase during the second quarter and the first six months of 1999 was
attributed to an increase in stores payroll due to higher hourly wage rates and
the increased store count.

CASH FLOW
Cash flow from operations during the six months ended July 31, 1999, was $138.2
million. This figure represented 9.5 percent of net retail sales during the
first six months of 1999 compared with 9.3 percent during the first six months
of 1998. Internally generated funds are expected to continue being the most
important component of the Company's capital resources and are expected to fund
capital expansion. Sources and (uses) of cash flows are summarized below:

                                        7


<PAGE>   8



CAPITAL EXPENDITURES
Capital expenditures during the first six months of 1999 totaled $47.6 million
with an additional $66.4 million estimated to be incurred during the remainder
of fiscal year 1999. The Company anticipates that cash flow from operations and
the Company's existing credit facility should be sufficient to finance projected
capital expenditures.

FINANCING ACTIVITIES
In the second quarter of 1999, the Company acquired 0.6 million shares of its
common stock for an aggregate price of $31.3 million. For the first six months
of the year, the Company has acquired 1.3 million shares for an aggregate price
of $65.0 million.

In June 1999, the Company completed a $55 million dollar financing through a
private placement of unsecured notes issued by a wholly-owned subsidiary in five
and ten year maturities. Payments on $15 million of the ten year notes begins in
June 2003. Proceeds from the financing are intended to be used for general
corporate purposes including the funding of a portion of the company's stock
repurchase program.

AVAILABLE CREDIT
The Company has in place a $200 million unsecured revolving credit facility with
a bank syndication group. While no amounts had been drawn against the agreement
at July 31, 1999, the balance available to the Company was reduced by $11.4
million outstanding under a letter of credit.

FINANCIAL CONDITION RATIOS
A summary of key financial information for the periods indicated is as follows:

                                Jul. 31,           Aug. 1,           Jan. 30,
                                  1999              1998               1999
                                --------           -------           --------
Current Ratio                       2.8              2.4                2.5
Debt-Capitalization Ratio*         14.9%             0.9%               9.5%
Fixed Charge Coverage**             3.9x             3.9x               4.1x

    *     Debt-to-capitalization has been computed by dividing total debt,
          which includes current and long-term capital lease obligations, by
          capitalization, which includes current and long-term capital lease
          obligations, non-current deferred income taxes and equity.  The
          debt-to-capitalization ratio, including the present value of
          future minimum rental payments under operating leases as debt and
          capitalization, would be 57.0%, 52.5% and 56.8% respectively, for
          the periods referred to above.

    **    Fixed charge coverage, which is presented for the trailing 52
          weeks in each period ended above, is defined as earnings before
          income taxes, gross interest expense, and the interest component
          of rent expense, divided by gross interest expense and the
          interest component of rent expense. All costs and expenses of the
          Company relating to special retention costs and the special non-
          recurring charge associated with the spin-off are included in the
          above calculation. Excluding these costs, the fixed charge
          coverage would be 4.0x, 4.0x, and 4.2x respectively, for the
          periods referred to above.


                                        8


<PAGE>   9



STORE ACTIVITY
At the end of the second quarter of 1999, the Company operated 4,413 Payless
ShoeSource stores in 50 states, Canada, the District of Columbia, Guam, Saipan,
Puerto Rico and the U.S. Virgin Islands and 214 Parade of Shoes stores. The
following table presents the change in store count for the second quarter and
first half of 1999 and 1998.

  PAYLESS SHOESOURCE                                 First
                                  Second Quarter   Six Months
                                  --------------   -----------
                                    1999   1998    1999   1998
                                    ----   ----    ----   ----

  Beginning of quarter/year        4,387  4,269   4,357  4,256
  Stores opened                       63     60     127    107
  Stores closed                      (37)   (36)    (71)   (70)
                                   -----  -----   -----  -----

  Ending store count               4,413  4,293   4,413  4,293
                                   =====  =====   =====  =====


  PARADE OF SHOES                                    First
                                  Second Quarter   Six Months
                                  --------------   -----------
                                    1999   1998    1999   1998
                                    ----   ----    ----   ----

  Beginning of quarter/year          215    191     213    175
  Stores opened                        0     22       3     41
  Stores closed                       (1)    (2)     (2)    (5)
                                   -----  -----   -----  -----

  Ending store count                 214    211     214    211
                                   =====  =====   =====  =====



E-COMMERCE
On May 27, 1999 the Company launched its online store, Payless.com (sm). The
store's Internet address is http://www.payless.com. The online store offers
customers another way to take advantage of the value, quality, and selection
offered through the Company's Payless ShoeSource stores, with the added
convenience of online shopping.

SHOPKO

Effective July 23, 1999, the Company entered into an agreement with ShopKo
Stores, Inc. ("ShopKo") under which Payless will operate the shoe departments in
the ShopKo stores. Payless expects to begin operating the shoe departments in 13
ShopKo stores in late 1999, and expects to begin operating the shoe departments
in all ShopKo stores by the fall of 2000. The shoe departments will offer the
same footwear and accessories available in other Payless ShoeSource stores. The
Company estimates that the Payless ShoeSource shoe department will produce
approximately 50% of the revenue of a typical Payless ShoeSource store.


PARADE OF SHOES UPDATE

In light of the performance of Parade of Shoes during the first six months of
1999, the Company now plans to add approximately ten new Parade of Shoes stores
by the end of the fiscal year and anticipates adding another 50 stores in fiscal
year 2000.

                                        9


<PAGE>   10



YEAR 2000 READINESS DISCLOSURE

Many existing computer programs were designed and developed without regard for
the implications of Year 2000 and beyond. If not corrected, these computer
applications could fail or create erroneous results before or at the Year 2000.
For the Company, this could disrupt product purchasing and distribution, store
operations, finance and other support areas, and affect the Company's ability to
timely deliver product to stores, thereby causing potential lost sales
opportunities and additional expenses.

The Company's State of Readiness. The Company created a Year 2000 Steering
Committee comprised of various senior management members and a Year 2000 Project
Management Office. This group is responsible for planning and monitoring the
Company's overall Year 2000 program and for reporting on a regular basis to the
Company's Board of Directors.

The Company's Year 2000 program encompasses both information systems and non-
information technology within the Company as well as investigation of the
readiness of the Company's significant business partners. The Company engaged an
international consulting firm to evaluate and assist in the monitoring of its
Year 2000 program. The outside consulting firm provides periodic updates on the
Company's progress to the Company's Board of Directors.

Internally Engineered Systems. With assistance from another international
consulting firm, the Company has evaluated and continues to evaluate the extent
to which modifications to its internally engineered computer systems will be
necessary to accommodate the Year 2000 and is modifying its internally
engineered computer systems to enable continued processing of data into and
beyond the Year 2000. This phase of the Company's Year 2000 program is nearing
completion. The consulting firm has completed its work and the Company
anticipates completing remediation and testing of its internally engineered
computer systems using internal resources by the end of the third quarter of
fiscal 1999.

Purchased Systems. The Company inventoried the types of purchased hardware and
software systems used within the enterprise and has obtained, where feasible,
contractual warranties from system vendors that their products are or will be
Year 2000 compliant. This phase of the Company's Year 2000 program is complete.
The Company requires Year 2000 contractual warranties from all vendors of new
software and hardware. In addition, the Company is testing all significant newly
purchased computer hardware and software systems in an effort to ensure their
Year 2000 compliance.

Business Partners. The Company has communicated with most of its suppliers,
banks and other business partners or vendors seeking assurances they will be
Year 2000 compliant. Although no method exists for achieving certainty that any
business' significant partners will function without disruption in the Year
2000, the Company's goal is to obtain as much detailed information as possible
about its significant partners' Year 2000 plans and to identify those companies
which appear to pose a significant risk of failure to perform their obligations
to the Company as a result of the Year 2000.

The Company has compiled detailed information regarding all of its significant
business partners. The Company is planning, where appropriate, to review such
significant partners throughout 1999 to confirm their level of preparedness for
the Year 2000 and to make adjustments where necessary to avoid utilization of
those partners who present an unacceptable level of risk.



                                       10


<PAGE>   11



The Company currently is not dependent on any single source for any products or
services. In the event a significant supplier, bank or other business partner or
vendor is unable to provide products or services to the Company due to a Year
2000 failure, the Company believes it has adequate alternate sources for such
products or services. There can be no guarantee, however, that similar or
identical products or services would be available on the same terms and
conditions or that the Company would not experience some adverse effects as a
result of switching to such alternate sources.

Embedded Systems. The Company has inventoried non-computer equipment (non-
information technology) throughout the enterprise to determine whether it is
date sensitive. Where appropriate, the Company will seek contractual protections
or make contingency plans in an effort to minimize any adverse effect on any
such equipment due to the Year 2000. The Company has fully tested such critical
non-computer equipment.

Costs to Address the Year 2000. Spending for modifications is being expensed as
incurred and is not expected to have a material impact on the Company's results
of operations or cash flows.

The cost of the Company's Year 2000 program is being funded with cash flows from
operations. The Company's total Year 2000 expenditures (including external and
internal expenditures) are estimated to be in the range of $8-10 million. While
the foregoing estimate does include internal costs, the Company does not
separately track all of the internal costs incurred by it for the Year 2000
program. Such costs are principally the related payroll costs for the Company's
Year 2000 Program Management Office and other internal resources who are also
contributing their efforts to the Year 2000 program. The largest single Year
2000 expenditure to date has been consulting fees incurred in the context of the
remediation of the Company's internally engineered computer systems as discussed
above.

To date, the Company has expended approximately 95 percent of its estimated
total Year 2000 expenditures, although the percentage expended cannot
necessarily be taken as an indication of the Company's degree of completion of
its Year 2000 program.

Risk Analysis. Like most large business enterprises, the Company is dependent
upon its own internal computer technology and relies upon timely performance by
its business partners. As noted above, a large-scale Year 2000 failure could
impair the Company's ability to timely deliver product to stores, resulting in
potential lost sales opportunities and additional expenses. Neither the precise
magnitude of such lost sales opportunities and additional expenses nor the exact
costs of carrying out contingency plans has yet been ascertained by the Company.

The Company's Year 2000 program seeks to identify and minimize this risk and
includes testing of its internally engineered systems and purchased hardware and
software, to ensure, to the extent feasible, all such systems will function
before and after the Year 2000. The Company is continually refining its
understanding of the risk the Year 2000 poses to its significant business
partners based upon information obtained through its surveys and interviews.
That refinement will continue throughout 1999.

Contingency Plans. Following its risk analysis as described above, the Company's
Year 2000 program includes a contingency planning phase in which appropriate
plans will be made to attempt to minimize disruption to the Company's operations
in the event of a Year 2000 failure.



                                       11


<PAGE>   12



The Company is formulating plans to handle a variety of failure scenarios,
including failures of its internal systems, as well as failures of significant
business partners. The level of planning required is a function of the risks
ascertained through the Company's investigative efforts. The Company anticipates
contingency planning across the enterprise will be completed by the end of the
third quarter of 1999.

While no assurances can be given, because of the Company's extensive efforts to
formulate and carry-out an effective Year 2000 program, the Company believes its
program will be completed on a timely basis and should effectively minimize
disruption to the Company's operations due to the Year 2000.

FORWARD-LOOKING STATEMENTS
This report contains, and from time to time, the Company may publish, forward-
looking statements relating to such matters as anticipated financial
performance, business prospects, e-commerce initiatives, technological
developments, new products, future store openings, possible strategic
alternatives and similar matters. Also, statements including the words
"expects," "anticipates," "intends," "plans," "believes," "seeks," or variations
of such words and similar expressions are forwarding-looking statements.

The Company notes that a variety of factors could cause its actual results and
experience to differ materially from the anticipated results or other
expectations expressed in its forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of the Company's business include, but are not limited to, the
following: changes in consumer spending patterns; changes in consumer
preferences and overall economic conditions; the impact of competition and
pricing; changes in weather patterns; successful implementations of new
technologies; Year 2000 matters as discussed herein; the financial condition of
the suppliers and manufacturers from whom the Company sources its merchandise;
changes in existing or potential duties, tariffs or quotas; changes in
relationships between the United States and foreign countries, economic and
political instability in foreign countries or restrictive actions by the
governments of foreign countries in which suppliers and manufacturers from whom
the Company sources are located; changes in trade and foreign tax laws;
fluctuations in currency exchange rates; availability of suitable store
locations on acceptable terms; the ability to achieve expected advantages of
operating shoe departments in specialty discount stores, the ability to hire and
train associates; and general economic, business and social conditions.

All subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these cautionary statements. The Company does not undertake any
obligation to release publicly any revisions to such forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.




                                       12

<PAGE>   13




PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

There are no material pending legal proceedings, to which the Company or any of
its subsidiaries is a party or of which any of their property is the subject.
The Company and its subsidiaries are parties to ordinary private litigation
incidental to their business.



ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits:

<TABLE>
<CAPTION>
     Number           Description
     -------          ------------

<S>                   <C>
     10.1             Payless ShoeSource, Inc. Executive Incentive Compensation Plan,
                      as amended*

     10.2             Executive Incentive Compensation Plan For Annual Awards For
                      Merchandising and Retail Operations Functions, effective May 28,
                      1999*

     11.1             Computation of Net Earnings Per Share*

     27               Financial Data Schedule*
</TABLE>




* Filed herewith


 (b)  Reports on Form 8-K

      NONE




















                                       13



<PAGE>   14



                                   SIGNATURES

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

                                       PAYLESS SHOESOURCE, INC.

Date: 9/9/99                             /s/ Steven J. Douglass
      ---------                         ---------------------------------
                                                Steven J. Douglass
                                                   Chairman and
                                              Chief Executive Officer



Date: 9/9/99                             /s/ Ullrich E. Porzig
      ---------                         ---------------------------------
                                                 Ullrich E. Porzig
                                            Senior Vice President and
                                              Chief Financial Officer











                                       14
<PAGE>   15
                                  Exhibit Index





Number            Description
------            -----------

10.1              Payless ShoeSource, Inc. Executive Incentive Compensation
                  Plan, as amended

10.2              Executive Incentive Compensation Plan For Annual Awards For
                  Merchandising and Retail Operations Functions, effective
                  May 28, 1999

11.1              Computation of Net Earnings Per Share

27                Financial Data Schedule