<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K
                        FOR ANNUAL AND TRANSITION REPORTS
                       PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
(Mark one)
[X]               ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
                           OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1998
                                       OR
[ ]               TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                           OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to               
                               --------------    --------------

                         Commission File Number 1-11633

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

          MISSOURI                                          48-0674097
(State or other jurisdiction of                          (I.R.S. Employer
incorporation or organization)                        Identification Number)

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

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

Securities registered pursuant to Section 12(b) of the Act:

                                                    Name of each exchange
Title of each class                                  on which registered  
-------------------                                 -----------------------     
Common Stock, par value $.01 per share              New York Stock Exchange
Preferred stock purchase rights                     New York Stock Exchange

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


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 (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.         Yes   X     No
                                                      -----      ----- 
 


<PAGE>   2


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. [ ]

The aggregate market value of Registrant's common stock held by non-affiliates
based on the closing price of $75.50 on April 3, 1998 was $2,817,101,829.

The number of the Registrant's $.01 par value common stock as of April 3, 1998
was 37,312,607.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions of Registrant's Annual Report to Shareowners for the fiscal 
     year ended January 31, 1998 (the "1997 Annual Report") are incorporated
     into Part II, as described herein.

2.   Portions of Registrant's 1998 Proxy Statement for the Annual  Meeting 
     to be held on May 22, 1998, are incorporated into Part III, as described
     herein. Such proxy statement will be filed within 120 days after the end of
     the fiscal year covered by this annual report on Form 10-K.

     This report contains, and from time to time Registrant may publish,
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, 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. Registrant 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 Registrant'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; the financial
condition of the suppliers and manufacturers from whom the Registrant sources
its merchandise; changes in existing or potential duties, tariffs or quotas;
availability of suitable store locations and appropriate terms; the ability to
hire and train associates; and general economic, business and social conditions.

                                       2

<PAGE>   3

 
                            Payless ShoeSource, Inc.
                             Form 10-K Annual Report
                   For the fiscal year ended January 31, 1998

                                     PART I
 
Item 1.  Business
Item 2.  Properties
Item 3.  Legal Proceedings
Item 4.  Submission of Matters to a Vote of Security
               Holders

                                     PART II

Item 5.  Market for Registrant's Common Equity
               and Related Shareholder Matters
Item 6.  Selected Financial Data
Item 7.  Management's Discussion and Analysis of
               Financial Condition and Results of
               Operations
Item 8.  Financial Statements and Supplementary Data
Item 9.  Changes in and Disagreements With Accountants
               on Accounting and Financial Disclosure

                                    PART III

Item 10. Directors and Executive Officers of the Company
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners
               and Management
Item 13. Certain Relationships and Related Transactions

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and
               Reports on Form 8-K

         Signatures


                                       3

<PAGE>   4

                                     PART I

ITEM 1.  BUSINESS

GENERAL

Payless ShoeSource, Inc. ("Payless" or the "Company" or the "Registrant") is the
largest family footwear retailer in the United States with more than $2.5
billion in sales in 1997. The Company sold approximately 210 million pairs of
shoes in 1997, and served more than 150 million customers.

As of January 31, 1998, the Company operated 4,256 Payless ShoeSource stores in
50 states, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam,
Saipan, and Canada. Payless ShoeSource stores feature fashionable, quality
footwear for men, women and children, including athletic, casual, dress,
sandals, work boots and slippers. In addition, the Company operated 175 Parade
of Shoes stores in 14 states. Parade of Shoes offers fashionable women's
footwear and accessories at moderate prices.

DEVELOPMENTS

In March 1997, the Company purchased inventory, property, and trademarks, and
assumed leases on 186 stores from J. Baker, Inc. which it holds as the Parade of
Shoes division ("Parade"). The purchase price was equal to approximately $28
million in cash, which it funded from operating cash flows. The acquisition has
been accounted for as a purchase, and accordingly, the operating results of the
acquired stores have been included in the Company's consolidated results of
operations for the period following the purchase.

During 1997, the Company opened 158 new Payless ShoeSource stores, including
stores in Canada, Guam and Saipan, and closed 138 underperforming stores. During
1997, Parade of Shoes opened eight stores, in addition to the 186 stores
acquired, and closed 19 underperforming stores.

In January 1997, the Board of Directors of the Company authorized the repurchase
of up to $150 million of outstanding common stock of Payless in open-market
transactions. In September 1997, the Company completed this $150 million
repurchase (having purchased approximately 2.8 million shares).

In September 1997, the Board of Directors of the Company authorized the
repurchase of up to an additional $150 million of outstanding common stock in
open-market transactions, subject to market


                                       4


<PAGE>   5

conditions and receipt of a favorable ruling from the Internal Revenue Service
(IRS). The Company received the favorable IRS ruling in March 1998. The Company
expects that any purchased shares will be held in treasury for general corporate
purposes.

HISTORY

The Company was founded in Topeka, Kansas in 1956 with a strategy of selling low
cost, high quality family footwear on a self-service basis. In 1962, Volume
Distributors, as the Company was known at the time, became a public company. In
1979, the Company (then called Volume Shoe Corporation) was acquired by The May
Department Stores Company of St. Louis, Missouri. The Company changed its name
to Payless ShoeSource, Inc. in 1991. On May 4, 1996, Payless became an
independent public company incorporated in Missouri as a result of its spin-off
from The May Department Stores Company. The Company is listed for trading on the
New York Stock Exchange under the symbol "PSS."
 
PAYLESS SHOESOURCE STORES

The average size of the Company's Payless ShoeSource stores is approximately
3,400 square feet. Each store carries approximately 9,000 pairs of shoes in more
than 600 styles. Payless ShoeSource stores operate in a variety of real estate
formats, including shopping malls, central business districts, free-standing
buildings and strip centers. Of the 4,256 Payless locations open at the end of
1997, 740 incorporated a "Payless Kids" area which consists of approximately an
additional 1,000 square feet of selling space devoted to an expanded assortment
of children's shoes. The stores that include a Payless Kids area are located
throughout the country and also have wider aisles, children-friendly seating and
an entertainment center for children.
 
The Company's Payless ShoeSource stores operate in rural, suburban and urban
environments. The 10 states with the largest concentration of the Company's
Payless ShoeSource stores are identified below (along with the total number of
Payless ShoeSource stores): 


                                      5
<PAGE>   6


<TABLE>
<CAPTION>

                                                   NO. OF 
                                                   PAYLESS 
                                                   SHOESOURCE 
                  STATE                            STORES
                  -----                            ------ 
                  <S>                                 <C>
                  California                           647
                  Texas                                372
                  Florida                              272
                  New York                             271
                  Pennsylvania                         199
                  Illinois                             196
                  Ohio                                 183
                  Michigan                             154
                  New Jersey                           121
                  Washington                           106
                  Other (including 8
                     non-U.S. stores)                1,735
                                                     -----
                  Total                              4,256

</TABLE>

The Company's Payless ShoeSource stores are highly automated, each with an
electronic point of sale register and a back office computer which not only
records transactions from the register, but also serves many other store
supporting functions including price look-up, accumulation of associate hours
worked and communications with the Company's headquarters in Topeka, Kansas.
Store associates receive regular weekly communications from the Company's
headquarters describing promotional and display requirements.

The Company's Payless ShoeSource operations are directed centrally by a senior
officer and a small support staff. The retail operations organization is
subdivided into seven divisions headquartered in the cities of Atlanta,
Baltimore, Chicago, Dallas, Denver, Los Angeles and Toronto. Divisions are
directed by a vice president, two to four operations directors and a small
support staff.

Each Payless ShoeSource store has a manager and approximately five associates.
The stores are organized into districts. District managers, to whom the store
managers report, themselves report to the division offices and have full
responsibility for the stores in their district. Division offices also have loss
prevention and inventory control functions. Human resources, merchandising
support and other more general support services, are provided from the Company's
headquarters.

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<PAGE>   7

PARADE OF SHOES STORES

The Company's Parade division, which was acquired in March, 1997, from J. Baker,
Inc., of Canton, Massachusetts, emphasizes the retail sale of fashionable,
quality, primarily leather, women's shoes. The Company operates the 175 Parade
stores as a separate division supported by Payless sourcing, distribution,
information systems, real estate, human resource and financial operations.

EMPLOYEES

During 1997, the Company's average number of employees was approximately 25,000,
including approximately 14,000 full-time associates and 11,000 part-time
associates. Approximately 550 of the Company's distribution center general
warehouse associates are covered by collective bargaining agreements. Management
believes it has a good relationship with all employees.
 
The Company is led by a team of senior management executives who have an average
of 16 years of retail industry experience, including an average of eight years
with the Company.

PRODUCTS

The Company's Payless ShoeSource stores offer a broad assortment of fashionable,
quality footwear for men, women and children, including athletic, casual, dress,
sandals, work boots and slippers. Shoes are constructed with leather, canvas and
man-made materials. Styling is updated regularly in an effort to remain current
with proven fashion trends. During 1997, shoes sold at the Company's Payless
ShoeSource stores sold at an average retail price of $11.35/pair. In addition to
shoes, Payless ShoeSource stores offer accessories, including handbags, shoe
polish and hosiery.

Parade stores are self-service and feature fashionable women's dress, casual and
athletic footwear priced in the $20 to $40/pair range. Major markets include
Boston, New York City, Chicago, Philadelphia and Washington, D.C. The average
size of a Parade store is approximately 2,300 square feet. These stores operate
in a variety of real estate formats including shopping malls, central business
districts and strip centers.

The Company's merchandising effort is led by the President and three general
merchandise managers with an average of 26 years of retail experience. They
direct teams of buyers, planners and distributors that interact with agents and
factory representatives to design, select, produce, inspect and distribute
footwear and


                                       7
<PAGE>   8

accessories to Payless ShoeSource and Parade stores.

CUSTOMERS

The Company sells footwear to women, men and children of all age groups. The
Company has significant market penetration with its target customers: women
between the ages of 18 and 64. The Company believes that more than 48% of its
target customers, regardless of household income, purchased at least one pair of
shoes from the Company last year. In 1997, the Company sold more pairs of
children's shoes than any other U.S. footwear retailer.
 
COMPETITION

The Company operates in a highly competitive retail market competing primarily
with national and regional discount mass-merchandisers, as well as with other
self-service discount shoe stores and off-price outlet stores. Competition is
based on product selection, quality and availability, price, store location,
customer service and promotional activities. The Company has generally operated
profitably for many years and believes that it has market share.

SEASONALITY

The retail footwear market is characterized by four high volume seasons: Easter,
early Summer, back-to-school and Christmas. The Company must increase inventory
levels during these periods to support the increased demand for seasonal styles.
Unseasonable weather patterns may affect planned sales of seasonal products such
as sandals and boots.

PURCHASING

The Company utilizes a network of agents and factories in the United States and
14 foreign countries to obtain its products. These products are manufactured to
meet the Company's specifications and standards. The strength of the Company's
relationships with agents and factories, some dating back over 40 years, has
allowed the Company to revise its sourcing strategies to reflect changing
political and economic environments. In the past, many of the Company's agents
and factory owners have played significant roles in developing production in new
factories and in new countries without compromising production capacity or
product quality. Factories in the People's Republic of China are a source of
approximately 80% of the Company's merchandise and there can be no assurance
that a change in political climate with or in China would not have a material
adverse effect on the Company. The


                                       8

<PAGE>   9

Company does not purchase "seconds" or "overruns" and does not own any
manufacturing facilities. The Company closely integrates its merchandise
purchasing requirements with various manufacturers through its sourcing
organization which has offices in Topeka, Kansas, Taiwan, China and Brazil.
Management believes it has good relationships with the entities from which it
sources, although there can be no assurance that such relationships will remain
good or that such entities believe that such relationships are good.

On a worldwide basis, approximately two-thirds of the Company's merchandise is
acquired through a network of third-party agents. Payless ShoeSource
International, the Company's Taipei, Taiwan office, arranges directly with
factories for the design, selection, production management, inspection and
distribution of approximately one-third of the shoes acquired for the Company.

Risks inherent in foreign manufacturing (i.e., manufacturing outside the United
States) include economic and political instability, transportation delays and
interruptions, restrictive actions by foreign governments, the laws and policies
of the United States affecting importation of goods, including duties, quotas
and taxes, trade and foreign tax laws and fluctuations in currency exchange
rates. While the Company has not historically experienced material adverse
effects resulting from the occurrence of these types of risks, there is no
assurance that in the future the occurrence of these risks will not result in
increased costs and delays or disruption in product deliveries that could cause
loss of revenue and damage to customer relationships and have a material adverse
effect on the Company.

China currently enjoys "most favored nation" ("MFN") status under United States
tariff laws, which provides the most favorable category of United States import
duties. China's MFN status is annually reviewed by the United States Congress.
The Company believes that extension of this status is subject to uncertainty
every year. The loss of MFN status for China would likely result in
substantially increased costs to the Company in the purchase of merchandise from
China. The Company believes, however, that its competitors in the footwear
industry would be similarly affected.

QUALITY ASSURANCE

The Company's quality assurance organization sets standards and specifications
for product manufacture, performance and appearance. It communicates those
standards and specifications through its copyrighted quality assurance manual.
The Company stands behind the quality of the shoes it sells to its customers by
permitting return of purchased merchandise with proper documentation

                                       9

<PAGE>   10

evidencing purchase.

The quality assurance organization also provides technical design support for
the Company's direct purchasing function. It is responsible for review and
approval of agent and factory technical design, for worldwide laboratory testing
of materials and components, and for performing in-factory product inspections
to ensure that materials and factory production techniques are consistent with
Company specifications. The Company locates its field inspection personnel close
to the factories and freight consolidation facilities it uses throughout the
world.

PRODUCTION MANAGEMENT

The production management organization manages an ongoing process to qualify and
approve new factories, while continually assessing existing factory service and
quality of performance. New factories must meet specified quality standards for
shoe production and minimum capacity requirements. They must also agree to the
Company's production control processes and certify that neither they nor their
suppliers use forced or child labor. Factory performance must continually
improve or the factory runs the risk of being removed from the list of approved
factories. The production management organization utilizes a unique, internally
developed production control process by which the Company is electronically
linked to the factories and agents. This process is designed to ensure on-time
deliveries of merchandise with minimum lead time and without unnecessary costs.

The Company believes that maintaining strong factory relationships, improving
key factory performance factors and improving factory profitability is critical
to long-term sourcing stability. Its manufacturing services group, based in
Asia, provides direction and leadership to key factories in the areas of overall
productivity improvement and lead time reduction.

MERCHANDISE DISTRIBUTION

The Company believes that its distribution system provides it with a competitive
advantage. The Company's merchandise distribution teams are able to track shoes
by the pair from order placement through sale to the customer by the use of
perpetual inventory, product planning and retail price management systems. These
systems are maintained by experienced information systems personnel and are
enhanced regularly to improve the product distribution process. Distribution
analysts review sales and inventory by size and style to maintain availability
of product within the Company's stores.


                                       10

<PAGE>   11

The Company operates a single 765,000 square foot distribution center in Topeka,
Kansas, capable of replenishing in-store product levels by style, color and
size. This facility, which currently handles 65 percent of the Company's
distribution center needs, operates seven days-a-week. Management believes this
facility is one of the most highly-automated and cost-efficient distribution
facilities in the footwear industry. The remaining 35 percent of the Company's
distribution center needs are handled by a third party facility in Los Angeles,
California. The Company believes its distribution center system has sufficient
capacity to support more than 5,000 stores. Stores generally receive new
merchandise at least once a week, in an effort to maintain a constant flow of
new and replenished merchandise.

INDUSTRY SEGMENTS

The retail footwear industry can be divided into high, moderate and value-priced
segment. The high priced segment is controlled by department stores. The
moderate priced segment, which includes specialty shoe chains, mass
merchandisers, and junior department stores, has no single dominant competitor.
The value-priced segment is dominated by the Company and national discount
mass-merchandisers.

Based on industry data, the United States footwear market is estimated to be $34
billion/year comprising one billion pairs of footwear, and has remained
relatively constant in each respect over the past several years. Industry data
suggests that the quality offered in the value-priced segment has improved
significantly over the last 15 years which appears to be the primary cause of
the near doubling of this segment's share of the market.

The Company considers itself part of the value-priced segment of the footwear
industry. In 1996, the Company's sales accounted for approximately 7 percent of
the total sales of the estimated $34 billion United States footwear market; this
percentage has grown consistently over the past four decades.

TRADEMARKS

The Company owns certain trademarks which it uses in its business and which it
regards as valuable assets. These trademarks include Payless(R), Payless
ShoeSource(R), Payless Kids(R), and Parade of Shoes(R). The Company owns all 
rights to the yellow and orange logo used in its Payless ShoeSource signs and
advertising. In the United States, the Company has registered over 100 key
marks and owns over 50 common law marks under which it markets private label
merchandise in its Payless ShoeSource stores. In addition, the Company owns

                                       11

<PAGE>   12

over 30 registered and common law marks under which it markets private label
merchandise in its Parade stores. All of the Company's registered trademarks may
be renewed indefinitely.
 
MARKETING

The Company's marketing efforts are multi-dimensional, including nationally
broadcast television advertising, local market radio and newspaper inserts in
support of major promotional periods. In addition to media support, the Company
utilizes in-store promotional materials, including posters, signs and point of
sale items. Also, the Company advertises its business through promotional funds,
media funds, merchants' associations and similar efforts offered by various
landlords from whom the Company leases its stores.

The Company's marketing staff is augmented by a full-service advertising concern
that provides creative services, media purchase and consumer research.

ENVIRONMENT

Compliance with federal, state and local statutes, rules, ordinance, laws and
other provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, has not had, and is not expected to have, a material effect on
capital expenditures, earnings or the competitive position of the Company.
 
DIRECTORS OF THE COMPANY

Listed below are the names and present principal occupations or, if retired,
most recent present occupations of the Company's Directors:

         NAME                             PRINCIPAL OCCUPATION
         ----                             --------------------
  
Steven J. Douglass         Chairman of the Board and Chief Executive Officer of 
                           the Company
Richard A. Jolosky         President of the Company
Daniel Boggan Jr.          Chief Operating Officer of the National
                           Collegiate Athletic Association,
Howard R. Fricke           Chairman of the Board and Chief Executive Officer of 
                           The Security Benefit Group of Companies
                           (life and other insurance)
Thomas A. Hays             Retired, formerly Deputy Chairman of The May 
                           Department Stores Company
Mylle B. Mangum            Senior Vice President - Carlson Wagonlit
                           Travel


                                       12

<PAGE>   13


Michael E. Murphy          Retired, Formerly Vice Chairman and Chief 
                           Administrative Officer of Sara Lee Corporation (food
                           and consumer products)
Robert L. Stark            Retired, Formerly Executive Vice President Hallmark 
                           Cards, Inc.

EXECUTIVE OFFICERS OF THE COMPANY

Listed below are the names and ages of the executive officers of the Company and
offices held by them with the Company.

      NAME                AGE                       POSITION AND TITLE
      ----                ---                       ------------------ 

Steven J. Douglass         48               Chairman of the Board and Chief 
                                            Executive Officer
Richard A. Jolosky         63               President and Director of the 
                                            Company
Duane L. Cantrell          42               Executive Vice President-Retail 
                                            Operations

Bryan P. Collins           44               Senior Vice President and Division 
                                            Director for Parade of Shoes
Stephen Farley             43               Senior Vice President-Marketing
Gerald F. Kelly, Jr.       50               Senior Vice President-Logistics/
                                            Information Services
Harris Mustafa             44               Senior Vice President-Merchandise 
                                            Distribution
Jed L. Norden              47               Senior Vice President-Human 
                                            Resources
JoAnn Ogee                 43               Senior Vice President, General
                                            Merchandise Manager-Women's
Ullrich E. Porzig          52               Senior Vice President and Chief 
                                            Financial Officer
William J. Rainey          51               Senior Vice President, General 
                                            Counsel and Secretary
Thomas L. Rinehart         43               Senior Vice President and General 
                                            Merchandise Manager-Men's
Gary M. Stone              49               Senior Vice President-Store 
                                            Development
Larry M. Strecker          39               Senior Vice President of the 
                                            Company and Managing Director of 
                                            Payless ShoeSource International

                                       13

<PAGE>   14

Michael S. Wilkes          44               Senior Vice President and General 
                                            Merchandise Manager-Children's

STEVEN J. DOUGLASS has served as Chairman of the Board, Chief Executive Officer
and Director of the Company since May, 1996, the date on which the Company's
shares were distributed in a spin-off by The May Department Stores Company to
its shareowners. Mr. Douglass has been Chairman and Chief Executive Officer of
the Company since April, 1995. He joined the Company in 1993 and served as
Senior Vice President-Director of Retail Operations from 1993 to January, 1995
and as Executive Vice President-Director of Retail Operations from January, 1995
to April, 1995. Prior to his association with the Company, Mr. Douglass held
several positions at divisions of The May Department Stores Company since 1976,
serving as Chairman of May Company, Ohio (1990-1993) and Senior Vice President
and Chief Financial Officer of J.W. Robinsons (1986-1990). Mr. Douglass is also
a director of Security Benefit Group of Companies. Mr. Douglass has served as a
Director of the Company since April 30, 1996.

RICHARD A. JOLOSKY has served as President of the Company since January, 1996.
He initially joined the Company in September, 1982, serving as Executive Vice
President-Merchandising (1982-1984) and then as President (1985-1988). Prior to
rejoining the Company in 1996, Mr. Jolosky was President and Chief Executive
Officer of Silverman Jewelry Company (1995-1996), and Chief Executive Officer of
the Richard Allen Company (1992-1995). Mr. Jolosky is a director of Stage
Stores, Inc. Mr. Jolosky has served as a Director of the Company since April 30,
1996.

DUANE L. CANTRELL has served as Executive Vice President-Retail Operations since
April, 1997 and as Senior Vice President-Retail Operations (1995-1997). He was
the Company's Senior Vice President-Merchandise Distribution and Planning
(1992-1995) and Senior Vice President-Merchandise Distribution (1990-1992). Mr.
Cantrell has been employed by the Company since 1978.

BRYAN P. COLLINS has served as Senior Vice President and Division Director for
Parade of Shoes since December, 1996. Prior to that he was Senior Vice President
and General Merchandise Manager-Women's since January, 1994. He also served the
Company as Senior Vice President-General Merchandise Manager-Women's
Seasonal/Leisure (October, 1991- January, 1994). Mr. Collins has been employed
by the Company since 1991 and was previously employed by the Company
(1975-1985).


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<PAGE>   15

STEPHEN FARLEY has served as Senior Vice President-Marketing since July, 1994.
Prior to that he was Vice President-Marketing (1993-1994) and Vice
President-Advertising (1992-1993). Prior to joining the Company, Mr. Farley was
employed by Earl Palmer Brown as Executive Vice President of Client Services
(1989-1992).

GERALD F. KELLY, JR. has served as Senior Vice President-Logistics/Information
Services since February, 1996. Prior to that he was Senior Vice
President-Information Services and Chief Financial Officer (1990-1996) and
Senior Vice President-Information Services (1986-1990).

HARRIS MUSTAFA has served as Senior Vice President-Merchandise Distribution
since May, 1995. Prior to that he was Vice President-Financial
Planning/Purchasing (1990-1995). Mr. Mustafa has been employed by the Company
since 1987.

JED L. NORDEN has served as Senior Vice President-Human Resources since July,
1985.

JOANN OGEE has served as Senior Vice President and General Merchandise
Manager-Women's since May, 1997. Ms. Ogee served as Vice President and General
Merchandise Manager, Intimate Apparel, Accessories, Footwear, Menswear and
Children's for Charming Shoppes, Inc. from October, 1993 to May, 1997. She also
worked as Senior Merchandiser for Victoria's Secret from June, 1990 to October,
1993 and held several leadership positions during her fifteen years with Macy's.
 
ULLRICH E. PORZIG has served as Senior Vice President and Chief Financial
Officer since February, 1996. Between 1993 and 1996, Mr. Porzig was Senior Vice
President-Chief Financial Officer and Treasurer of Petro Stopping Centers L.P.
From 1982 to 1993 he was employed by The May Department Stores Company in
various capacities including Senior Vice President-Chief Financial Officer of
Payless ShoeSource from 1986 to 1988 and Senior Vice President-Finance and Chief
Financial Officer of Foley's (1988-1993).

WILLIAM J. RAINEY has served as Senior Vice President, General Counsel and
Secretary since April, 1996. Prior to joining the Company, Mr. Rainey served as
Executive Vice President, General Counsel and Secretary of Fourth Financial
Corporation (1994-1996) and Vice President, General Counsel of Cabot Corporation
(1991-1993).

THOMAS L. RINEHART has served as Senior Vice President and General Merchandise
Manager-Men's since December, 1992. Before joining the Company, he was employed
by the Custom Shop, Inc. as President and


                                       15

<PAGE>   16

Chief Operating Officer (1992) and by Club International, Inc. as President and
Chief Executive Officer (1991-1992).

GARY M. STONE has served as Senior Vice President-Store Development since
February, 1997. Prior to joining the Company, Mr. Stone was employed by Pepsi
Co., Inc. as Senior Vice President and General Manager, Restaurant Services
(1995-1997) and Vice President, Asset Development, Pizza Hut (1990-1995).

LARRY M. STRECKER has served as Senior Vice President of the Company and
Managing Director of Payless ShoeSource International since April, 1996. Prior
to that, he was Vice President of Worldwide Sourcing (1993-1996). Before joining
the Company, Mr. Strecker was employed by Frito-Lay, Inc. as Director of Service
and Distribution (1991-1993).

MICHAEL S. WILKES has served as Senior Vice President and General Merchandise
Manager-Children's since January, 1994. Prior to that he was Senior Vice
President-General Merchandise Manager-Women's Dress/Casual (1990-1994). Mr.
Wilkes has been employed by the Company since 1986.

ITEM 2.  PROPERTIES

The Company leases substantially all of its stores. The leases typically have a
primary term of 5 or 10 years, with one or two five-year renewal options. During
1998, approximately 654 of the Company's leases, including 176 leases which are
currently month-to-month tenancies, are due to expire. Leases usually require
payment of base rent, applicable real estate taxes, common area expenses and, in
some cases, percentage rent based on the stores' sales volume. Its Payless
ShoeSource stores average approximately 3,400 square feet; its Parade stores
average approximately 2,300 square feet. The Company owns and operates a 305,000
square foot central office building and a 765,000 square foot distribution
facility both of which are located in Topeka, Kansas.

ITEM 3.  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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the 13
weeks ended January 31, 1998.

                                       16

<PAGE>   17

 
                                     PART II

ITEM 5.  MARKET FOR COMPANY'S COMMON EQUITY AND RELATED SHAREOWNER MATTERS

There were approximately 60,000 shareowners of the Company's common stock as of
January 31, 1998. The information set forth under the headings "Common Stock and
Market Prices" and "Shareowner Information - Common Stock" in the Company's 1997
Annual Report is incorporated herein by reference pursuant to General
Instruction G(2).

ITEM 6.  SELECTED FINANCIAL DATA

The information set forth under the heading "Summary of Selected Historical
Financial Information" of the Company's 1997 Annual Report is incorporated
herein by reference pursuant to General Instruction G(2).

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The information set forth under the heading "Management's Discussion and
Analysis" of the Company's 1997 Annual Report is incorporated herein by
reference pursuant to General Instruction G(2).

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Statement of Earnings for the fiscal years 1995, 1996 and 1997, the
Consolidated Balance Sheet as of January 31, 1998 and February 1, 1997, the
Consolidated Statement of Cash Flows for fiscal years 1995, 1996, 1997 and the
Consolidated Statement of Shareowners' Equity, the Financial Statements, "Notes
to Consolidated Financial Statements" and "Report of Independent Public
Accountants" of the Company's 1997 Annual Report to Shareowners are incorporated
herein by reference pursuant to General Instruction G(2).


                                       17

<PAGE>   18


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

None.


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
 

a) Directors - The information set forth in the Company's definitive proxy
statement to be filed in connection with its Annual Meeting to be held on May
22, 1998 under the captions "Election of Directors - Directors and Nominees for
Directors" and "Other Matters - Section 16 Filing" is incorporated herein by
reference pursuant to General Instruction G(3).

b) Executive Officers - Information regarding the Executive Officers of the
Company is as set forth in Item 1 of this report under the caption "Executive
Officers of the Company."

ITEM 11. EXECUTIVE COMPENSATION

The information set forth in the Company's definitive proxy statement to be
filed in connection with its Annual Meeting to be held on May 22, 1998 under the
captions "Election of Directors - The Payless Board and Committees of the
Payless Board -- Compensation of Directors," "Compensation Committee Interlocks
and Insider Participation," "Compensation and Nominating Committee Report --
Bonus Opportunities (discussion in third and fourth paragraphs relating to long
term awards) and "Executive Compensation" is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information set forth in the Company's definitive proxy statement to be
filed in connection with its Annual Meeting to be held on May 22, 1998 under the
caption "Election of Directors" is incorporated herein by reference pursuant to
General Instruction G(3).

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

                                       18

<PAGE>   19

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K

(a)  Documents filed as part of this report:

     (1)   Financial Statements.  The following financial          
           statements are incorporated herein by reference to the 
           Company's 1997 Annual Report to Shareowners:
<TABLE>
<CAPTION>
 
                                                                 Page in
                                                               Annual Report
                                                               -------------
           <S>                                                 <C>
           Financial Statements-
            Consolidated Statement of Earnings for
               the three fiscal years ended
               January 31, 1998                                    16     
            Consolidated Statement of Shareowners'             
                Equity for the three fiscal years              
                ended January 31, 1998                             16
            Consolidated Balance Sheet -                       
                January 31, 1998 and February 1, 1997              17
            Consolidated Statement of Cash Flows               
                for the three fiscal years ended               
                January 31, 1998                                   18
                                                               
            Notes to Consolidated Financial Statements            19-24
            Report of Independent Public Accountants               25
</TABLE>
                                                      

     (2)   Exhibits.
 
Number                                Description
------                                -----------

2.1            Distribution Agreement, dated as of April 2, 1996, between The 
               May Department Stores Company and the Registrant.(1)

3.1            Amended and Restated Articles of Incorporation of the 
               Registrant.(2)

3.2            Amended and Restated Bylaws of the Registrant.*

4.1            Rights Agreement, dated as of April 2, 1996, between the 
               Registrant and The Bank of New York, as Rights Agent.(1)

10.1           Tax Sharing Agreement, dated April 2, 1996, between The May 
               Department Stores Company and the Registrant.(3)


                                       19

<PAGE>   20

10.2           Sublease, dated as of April 2, 1996, between The May Department 
               Stores Company and the Registrant.(1)

10.3           Multi-Currency Credit Agreement, among the Registrant, several 
               financial institutions and Bank of America National Trust and 
               Savings Association, and Amendment No. 1 of December 16, 1996
               and Amendment No. 2 of November 10, 1997.*

10.4           Administrative Services Agreement, dated as of April 2, 1996, 
               between The May Department Stores Company and the Registrant.(1)

10.5           1996 Stock Incentive Plan, Payless ShoeSource, Inc. as amended 
               as of March 19, 1998.*

10.6           Spin-Off Stock Plan, Payless ShoeSource, Inc.(1)

10.7           Spin-Off Cash Plan, Payless ShoeSource, Inc.(1)

10.8           Restricted Stock Plan for Non-Management Directors, Payless 
               ShoeSource, Inc. as amended as of July 17, 1997.(4)

10.9           Form of Employment Agreement between the Registrant and certain 
               executives of the Registrant. The Registrant has entered into
               Employment Agreements in the form contained in this exhibit with
               each of the named executive officers which expire at various
               dates on or before May 31, 2001, and which provide for annual
               base salaries at rates not less than the amounts presently paid
               to them.(1)

10.10          Supplementary Retirement Plan of Payless ShoeSource, Inc.(1)

10.11          Profit Sharing Plan of Payless ShoeSource, Inc.(5) 

10.12          Deferred Compensation Plan of Payless ShoeSource, Inc., as 
               amended as of March 19, 1998.*

10.13          Executive Incentive Compensation Plan for Payless Executives of 
               Payless ShoeSource, Inc.(1)

10.14          Form of Management Severance Agreement.  The Registrant has 
               entered into Severance Agreements with the named executive
               officers in the form contained in this exhibit.1 The agreement
               with Mr. Douglass also provides for a "tax gross-up" payment to
               ensure that the above-mentioned payments are not

                                       20

<PAGE>   21

               subject to net reduction due to imposition of excise taxes which
               are payable under Section 4999 of the Internal Revenue Code. The
               agreement with Mr. Jolosky provides for 50% of such payment.

10.15          Form of Indemnification Agreement.(1)

10.16          Deferred Compensation Plan for  Non-Management Directors of 
               Payless ShoeSource, Inc.(6)

10.17          Executive Incentive Compensation Plan for Business Unit 
               Management of Payless ShoeSource, Inc.(7) 

10.18          The Stock Appreciation and Phantom Stock Unit Plan of Payless 
               ShoeSource, Inc. and its Subsidiaries for Payless ShoeSource 
               International Employees.(8)

11.1           Computation of Net Earnings Per Share.*

12.1           Computation of Ratio of Earnings to Fixed Charges.*

13.1           1997 Annual Report to Shareowners of Payless ShoeSource, Inc. 
               (only those portions specifically incorporated by reference 
               shall be deemed filed with the Commission).*

21.1           Subsidiaries of Registrant*

23.1           Consent of Arthur Andersen, LLP.*

24.1           Power of Attorney*

27.1           Financial Data Schedule*
 
* Filed herewith
  1)   Incorporated by reference from the correspondingly numbered Exhibit to 
       Registrant's Registration Statement on Form 10 Dated February 23, 1996
       as amended through April 15, 1996.
  2)   Incorporated by reference from Exhibit 3.1 of the Registrant's Form 
       10-Q (file Number 1-11633) for the quarter ended May 4, 1996.
  3)   Incorporated by reference from Exhibit 10.1 of the Registrant's Form 
       10-Q (file Number 1-11633) for the quarter ended May 4, 1996.
  4)   Incorporated by reference from Exhibit 10.8 of the Registrant's Form 
       10-Q (file Number 1-11633) for the quarter ended November 1, 1997.
  5)   Incorporated by reference from Exhibit 10.11 of Registrant's Form 
       10-Q (File Number 1-11633) for the quarter ended February 1, 1997.      
  6)   Incorporated by reference from Exhibit 10.16 of the Registrant's Form 
       10-Q (file Number 1-11633) for the quarter ended November 1, 1997.
  7)   Incorporated by reference from Exhibit 10.17 of Registrant's Form   
       10-Q (File Number 1-11633) for the quarter ended November 1, 1997.
  8)   Incorporated by reference from Exhibit 10.18 of the Registrant's Form 
       10-Q (file Number 1-11633) for the quarter ended November 1, 1997.

(b)    Reports on Form 8-K:

                                       21

<PAGE>   22

The Company will furnish to shareowners upon request, and without charge, a copy
of the 1997 Annual Report and the proxy statement, portions of which are
incorporated by reference in the Form 10-K. The Company will furnish any other
exhibit at cost.

On March 9, 1998, the Company filed a Current Report on Form 8-K, reporting on
Item 5, Other Events and Item 7, Exhibits. In the Report, the Company provided
its press release on March 2, 1998, which announced that the Company had
received a tax ruling from the Internal Revenue Service enabling it to proceed
with its planned repurchase of $150 million worth of the common stock of the
Company.
 
All other schedules and exhibits of the Company for which provision is made in
the applicable regulations of the Securities and Exchange Commission have been
omitted, as they are not required or are inapplicable or the information
required thereby has been given otherwise.

                                   SIGNATURES

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.

                               PAYLESS SHOESOURCE, INC.

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


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of registrant and in
the capacities and on the dates indicated.


                    Principal Executive Officer:


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


                                       22
<PAGE>   23

                             Principal Financial and
                               Accounting Officer:


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

                                   Directors:


Date:                          By: /s/ Steven J. Douglass*             
      ---------------              -------------------------------------
                                        Steven J. Douglass
                                        Chairman and
                                        Chief Executive Officer

Date:                          By: /s/ Richard A. Jolosky*             
      ---------------              -------------------------------------
                                        Richard A. Jolosky
                                        President and Director

Date:                          By: /s/ Daniel Boggan Jr.*        
      ---------------              -------------------------------------
                                        Daniel Boggan Jr.
                                        Director

Date:                          By: /s/ Howard R. Fricke*          
      ---------------              -------------------------------------
                                        Howard R. Fricke
                                        Director

Date:                          By: /s/ Thomas A. Hays*            
      ---------------              -------------------------------------
                                        Thomas A. Hays
                                        Director

Date:                          By: /s/ Mylle B. Mangum*           
      ---------------              -------------------------------------
                                        Mylle B. Mangum
                                        Director

Date:                          By: /s/ Michael E. Murphy*         
      ---------------              -------------------------------------
                                        Michael E. Murphy
                                        Director

Date:                          By: /s/ Robert L. Stark*           
      ---------------              -------------------------------------
                                        Robert L. Stark
                                        Director



*Executed by William J. Rainey, attorney-in-fact, on behalf of the indicated
Director pursuant to Power of Attorney dated March 19, 1998, with Thomas A. Hays
granting Power of Attorney dated March 24, 1998.
 

 
                                       23
<PAGE>   24


                                  EXHIBIT INDEX


 Exhibit
 Number                            Description
 ------                            ----------- 
 
   2.1   Distribution Agreement

   3.1   Amended and Restated Articles of Incorporation of
         the Company

   3.2   Amended and Restated Bylaws of the Company

   4.1   Rights Agreement

  10.1   Tax Sharing Agreement

  10.2   Sublease

  10.3   Multi-Currency Credit Agreement

  10.4   Administrative Services Agreement

  10.5   1996 Stock Incentive Plan

  10.6   Spin-Off Stock Plan

  10.7   Spin-Off Cash Plan

  10.8   Restricted Stock Plan for Non-Management Directors

  10.9   Employment Agreement

  10.10  Supplementary Retirement Plan

  10.11  Profit Sharing Plan

  10.12  Deferred Compensation Plan of Payless ShoeSource, Inc.

  10.13  Executive Incentive Compensation Plan for
         Payless Executives

  10.14  Management Severance Agreement

  10.15  Indemnification Agreement

  10.16  Deferred Compensation Plan for Non-Management


                                       24
<PAGE>   25

         Directors of Payless ShoeSource, Inc.

  10.17  Executive Compensation Plan for Business Unit
         Management

  10.18  Stock Appreciation and Phantom Stock Unit Plan

  11.1   Computation of Net Earnings Per Share

  12.1   Computation of Ratio of Earning to Fixed Charges

  13.1   1997 Annual Report to Shareowners

  21.1   Subsidiaries of Registrant

  23.1   Consents of Arthur Andersen, LLP

  24.1   Power of Attorney

  27.1   Financial Data Schedule





                                       25