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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549





FORM 10-K


Annual Report Pursuant to Sec. 13 or 15(d)


of the Securities Exchange Act of 1934


|                                 |  |                                 
|-------------------------------- |  | --------------------------------
|For the Fiscal Year Ended 1/1/05 |  | Commission File Number 001-31309




Phoenix Footwear Group, Inc.


(Name of Registrant as Specified in its Charter)


|                                                                                              |  |                                         
|--------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                      |  | 15-0327010                              
|(State or Other Jurisdiction of
    Incorporation or Organization)                            |  | (IRS Employer
    Identification Number)
|                                                                                             
|5759 Fleet Street, Suite 220
    Carlsbad, California(Address of Principal Executive Offices) |  | 92008(Zip Code)                         

(Registrants Telephone Number, Including Area Code)


(760) 602-9688


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


|                                       |  |                                          
|-------------------------------------- |  | -----------------------------------------
|Title of Each Class                    |  | Name of Each Exchange On Which Registered
|                                       |  |                                          
|Common Stock, $.01 Par Value Per Share |  | American Stock Exchange                  

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


None


þ o


o


o þ
















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|                                                                                                                                                                                                               |                                                                                                                       |  |  |  |  |  |  | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|                                                                                                                                                                                                               | 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, Related Stockholder Matters and Issuer Purchases of Equity Securities.
|                                                                                                                                                                                                               | Item 6. Selected Financial Data                                                                                      
|                                                                                                                                                                                                               | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations                        
|                                                                                                                                                                                                               | Item 7A. Quantitative and Qualitative Disclosure About Market Risk                                                   
|                                                                                                                                                                                                               | Item 8. Financial Statements and Supplemental Data                                                                   
|                                                                                                                                                                                                               | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         
|                                                                                                                                                                                                               | Item 9A. Controls and Procedures                                                                                     
|PART III                                                                                                                                                                                                      
|                                                                                                                                                                                                               | Item 10. Directors and Executive Officers of the Registrant                                                          
|                                                                                                                                                                                                               | Item 11. Executive Compensation                                                                                      
|                                                                                                                                                                                                               | Item 12. Security Ownership of Certain Beneficial Owners and Management                                              
|                                                                                                                                                                                                               | Item 13. Certain Relationships and Related Transactions                                                              
|                                                                                                                                                                                                               | Item 14. Principal Accounting Fees and Services                                                                      
|SCHEDULE II CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS                                                                                                                                                    
|SIGNATURES                                                                                                                                                                                                    
|Consolidated Financial Statements as of January 1, 2005 and December 27, 2003, and for Each of the Three Years in the Period Ended January 1, 2005 and Report of Independent Registered Public Accounting Firm
|EXHIBIT 21                                                                                                                                                                                                    
|EXHIBIT 23.1                                                                                                                                                                                                  
|EXHIBIT 24                                                                                                                                                                                                    
|EXHIBIT 31.1                                                                                                                                                                                                  
|EXHIBIT 31.2                                                                                                                                                                                                  
|EXHIBIT 32.1                                                                                                                                                                                                  



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|        |         
|------- | --------
|Item 1. | Business

General


tm






History and Recent Acquisitions










2



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Our Brands




Business Strategy






Portfolio of Current Brands.


Manufacturing Relationships.


Emphasis on Moderate-to-Premium-Priced Categories of the
Footwear and Apparel Markets.


3



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Pre-Season Sales Approach.


Customer Relationships.


Seasoned Management Team.


Growth Strategies




Growth of Existing Brands.


Growth with New Brands.


Growth Through Acquisitions of Footwear, Apparel and Related
Products Companies.


Expand Our Internet and Catalog Operations.


4



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Product Lines


Footwear and Apparel. tm


|                                      |  |                                |                   |                                                                                                                                   |               |                                                                                                                                        |              |   |         | 
|------------------------------------- |  | ------------------------------ | ----------------- | --------------------------------------------------------------------------------------------------------------------------------- | ------------- | -------------------------------------------------------------------------------------------------------------------------------------- | ------------ | - | ------- | 
|                                      |  |                                |                   |                                                                                                                                   |               | Suggested                                                                                                                              |             
|Product Line                          |  | Brands                         |                   |                                                                                                                                   | Target Market |                                                                                                                                        | Retail Price |  
|                                      |  |                                |                   |                                                                                                                                   |               |                                                                                                                                        |              |  
|Womens Dress and Casual Footwear     |  | Trotters, SoftWalk, H.S. Trask |                   | Female Consumer  Ages 35-60.
    Medium income, prefers quality and value over price. Comfort and
    fit are of key importance. |               | $                                                                                                                                      | 59-$139      |  
|Mens Dress and Casual Footwear       |  |                                | H.S. Trask, Strol |                                                                                                                                   |               | Male Consumer  Ages 40-60.
    Medium income, professional, wants and demands the highest
    quality in products purchased.          |              | $ | 99-$199 | 
|Outdoor Sportswear and Travel Apparel |  |                                | Royal Robbins     |                                                                                                                                   |               | Male and Female Consumer  Ages 25-55. Outdoor
    enthusiast, looks for performance features in their casual and
    outdoor apparel. |              | $ | 39-$120 | 

Womens Dress and Casual Footwear.








Mens Dress and Casual Footwear.




Outdoor Sportswear and Travel Apparel.


5



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| |   |                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increasing sales within the mens product offering
    (currently womens products account for approximately 60%
    of the brands offerings);                              
|
| |  | increasing the sales of the brands Fall offering which we
    began to do in fiscal 2004 (currently the Fall season accounts
    for approximately 41% of the brands sales);
|
| |  | introducing a line of Royal Robbins footwear; and                                                                                                                            
|
| |  | broadening our distribution channel for this product line                                                                                                                    

Military Boot Business.


Mil-Spec Combat Boots.


Commercial Combat Boots.


Product Design and Development








6



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Sales and Distribution




Footwear and Apparel.




Military Boot Business.




7



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| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | the convenience of the government;                                           
|
| |  | the lack of funding; or                                                      
|
| |  | our actual or anticipated failure to perform its contractual
    obligations.





8



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Consumer Direct


Footwear and Apparel.




Military Boot Business.


Marketing and Advertising


Footwear and Apparel.


Military Boot Business.


Manufacturing and Sourcing


Footwear and Apparel.


9



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Military Boot Business.








Seasonality and Weather


Footwear and Apparel.


Military Boot Business.


Backlog






10



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Employees




Trademarks and Patents








Competition


Footwear and Apparel.








| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | anticipate and respond to changing consumer demands in a timely
    manner;
|
| |  | maintain brand reputation and authenticity;                                
|
| |  | develop high quality products that appeal to consumers;                    
|
| |  | appropriately price our products;                                          
|
| |  | provide strong and effective marketing support for our products;           
|
| |  | ensure product availability; and                                           
|
| |  | maintain and effectively access our distribution channels.                 



11



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Military Boot Business.




Regulation




Factors That May Affect Forward Looking Statements




| |                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our acquisitions or acquisition efforts, which are
    important to our growth, may not be successful, which may limit
    our growth or adversely affect our results of operations and
    financial condition





| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our future success depends on our ability to respond to
    changing consumer preferences and fashion trends and to develop
    and commercialize new products successfully



12



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| |                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face intense competition, including competition from
    companies with greater resources than ours, and if we are unable
    to compete effectively with these companies, our market share
    may decline and our business and stock price could be
    harmed







| |                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A large portion of our sales are to a relatively small
    group of customers with whom we do not have long-term purchase
    orders, therefore the loss of any one or more of these customers
    could adversely affect our business





| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | The financial instability of our customers could adversely
    affect our business and result in reduced sales, profits and
    cash flows



13



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| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our ability to compete could be jeopardized if we are
    unable to protect our intellectual property rights or if we are
    sued for intellectual property infringement





| |                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our international manufacturing operations are subject to
    the risks of doing business abroad, which could affect our
    ability to manufacture our products in international markets,
    obtain products from foreign suppliers or control the costs of
    our products





| |                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our reliance on independent manufacturers for almost all
    of our non mil-spec products, with whom we do not have long-term
    written agreements, could cause delay and damage customer
    relationships







| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | Our results could be adversely affected by disruptions in
    the manufacturing system for our Altama brand



14



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| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to replace revenues from sales to the DoD
    of products planned to be discontinued, our net sales and our
    consolidated operating results would be adversely
    affected







| |                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Doing business with the U.S. government entails many
    risks that could adversely affect us through the early
    termination of our contracts or by interfering with
    Altamas ability to obtain future government
    contracts





| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | the convenience of the government;                                           
|
| |  | the lack of funding; or                                                      
|
| |  | our actual or anticipated failure to perform our contractual
    obligations.







15



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| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The sales of the Altama brand to the commercial market
    have grown at significant rates over the past three years, and
    there can be no assurance that our net sales growth under this
    brand will continue at this rate





| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on our senior executives to develop and execute
    our strategic plan and manage our operations, and if we are
    unable to retain them, our business could be harmed





| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Fluctuations in the price, availability and quality of raw
    materials could adversely affect our gross profit





| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A decline in general economic conditions could lead to
    reduced consumer demand for our products and could lead to a
    reduction in our net sales, and thus in our ability to obtain
    credit



16



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| |                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our recently completed acquisitions make evaluating our
    operating results difficult given the significance of these
    acquisitions to our operations, and our historical results do
    not give you an accurate indication of how we will perform in
    the future







| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The financing of any future acquisitions we make may
    result in dilution to your stock ownership and/or could increase
    our leverage and our risk of defaulting on our bank debt





| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | Defaults under our secured credit arrangement could result
    in a foreclosure on our assets by our bank





| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | We may be required to recognize impairment charges that
    could adversely affect our reported earnings in future
    periods



17



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| |                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The exercise of outstanding stock options and warrants,
    and the allocation of unallocated shares held by our 401(k)
    plan, would cause dilution to our stockholders ownership
    percentage and/or a reduction in earnings per diluted
    share





| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The charge to earnings from the compensation to employees
    under our employee retirement plan could adversely affect the
    value of your investment in our common stock





| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are controlled by a principal stockholder who may exert
    significant control over us and our significant corporate
    decisions in a manner adverse to your personal investment
    objectives, which could depress the market value of our
    stock





| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | delaying, deferring or preventing a change in control of our
    company;                                                 
|
| |  | impeding a merger, consolidation, takeover or other business
    combination involving our company;                       
|
| |  | causing us to enter into transactions or agreements that are not
    in the best interests of all stockholders; or        
|
| |  | discouraging a potential acquirer from making a tender offer or
    otherwise attempting to obtain control of our company.

18



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| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our inventory levels may exceed our actual needs, which
    could adversely affect our operating results by requiring us to
    make inventory write-downs





| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our financial results may fluctuate from quarter to
    quarter as a result of seasonality in our business, and if we
    fail to meet expectations, the price of our common stock may
    fluctuate





| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Delaware law, our charter documents and agreements with
    our executives may impede or discourage a takeover, even if a
    takeover would be in the interest of our stockholders





| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | Shares of our common stock eligible for public sale could
    cause the market price of our stock to drop, even if our
    business is doing well





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| |                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our stock price has fluctuated significantly during the
    past 12 months and may continue to do so in the future,
    which could result in litigation against us and significant
    losses for investors





| |   |                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the failure of our quarterly operating results or those of
    similarly situated companies to meet expectations;                                           
|
| |  | adverse developments in the footwear or apparel markets and the
    worldwide economy;                                                                      
|
| |  | changes in interest rates;                                                                                                                                  
|
| |  | our failure to meet investors expectations;                                                                                                                
|
| |  | changes in accounting principles;                                                                                                                           
|
| |  | sales of common stock by existing stockholders or holders of
    options;                                                                                   
|
| |  | announcements of key developments by our competitors;                                                                                                       
|
| |  | the reaction of markets to announcements and developments
    involving our company, including future acquisitions and related
    financing activities; and
|
| |  | natural disasters, riots, wars, geopolitical events or other
    developments affecting us or our competitors.                                              





CAUTIONARY STATEMENT


CONCERNING FORWARD-LOOKING INFORMATION






20



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Access to SEC Filings









|        |           
|------- | ----------
|Item 2. | Properties



|                                                |  |               |  |                        |  |                |          | 
|----------------------------------------------- |  | ------------- |  | ---------------------- |  | -------------- | -------- | 
|                                                |  |               |  |                        |  | Approximate    |         
|Facility/Location                               |  | Own/Lease     |  | Description            |  | Square Footage |         
|                                                |  |               |  |                        |  |                |         
|Corporate Headquarters
    Carlsbad, California |  | Lease         |  | Office Space           |  |                | 14,000   | 
|Footwear and Apparel                            |  |               |  |                        |  |                |          | 
|Distribution Center
    Old Town, Maine         |  | Own           |  | Warehouse              |  |                | 75,000   | 
|Distribution Center
    Modesto, California     |  | Lease         |  | Office/Warehouse       |  |                | 20,000   | 
|Berkeley, California                            |  | Lease         |  | Retail                 |  |                | 2,400    | 
|Modesto, California                             |  | Lease         |  | Retail                 |  |                | 4,500    | 
|Dolgeville, New York                            |  | Own           |  | Vacant Land            |  |                | 30 acres | 
|Military Boot Operations                        |  |               |  |                        |  |                |          | 
|Salinas, Puerto Rico                            |  | Lease         |  | Cut and stitch plant   |  |                | 23,000   | 
|Lexington, Tennessee                            |  | Capital Lease |  | Finishing plant        |  |                | 76,000   | 
|Lexington, Tennessee                            |  | Lease         |  | Distribution warehouse |  |                | 30,000   | 
|Atlanta, Georgia                                |  | Lease         |  | Office Space           |  |                | 6,300    | 

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|        |                   
|------- | ------------------
|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, Related
    Stockholder Matters and Issuer Purchases of Equity
    Securities.



|                              |                |      |   |       |     |  |   |      | 
|----------------------------- | -------------- | ---- | - | ----- | --- |  | - | ---- | 
|                              |                | High |   |       | Low | 
|                              |                |      |   |       |     | 
|Year Ended December 27, 2003: |                |      |   |       |     |  |   |     
|                              | First Quarter  |      | $ | 3.63  |     |  | $ | 2.74 | 
|                              | Second Quarter |      | $ | 5.19  |     |  | $ | 3.51 | 
|                              | Third Quarter  |      | $ | 5.92  |     |  | $ | 4.80 | 
|                              | Fourth Quarter |      | $ | 7.49  |     |  | $ | 5.80 | 
|Year Ended January 1, 2005:   |                |      |   |       |     |  |   |     
|                              | First Quarter  |      | $ | 10.30 |     |  | $ | 7.30 | 
|                              | Second Quarter |      | $ | 13.20 |     |  | $ | 8.49 | 
|                              | Third Quarter  |      | $ | 13.85 |     |  | $ | 6.85 | 
|                              | Fourth Quarter |      | $ | 7.88  |     |  | $ | 6.43 | 





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Securities Authorized for Issuance Under Equity Compensation
Plans




Equity Compensation Plan Information


|                                                              |  |                      |           |  |                      |   |                      |                         |  |  |         | 
|------------------------------------------------------------- |  | -------------------- | --------- |  | -------------------- | - | -------------------- | ----------------------- |  |  | ------- | 
|                                                              |  | Number of securities |           |  |                      |   | Number of securities |                        
|                                                              |  | to be issued upon    |           |  | Weighted average     |   |                      | remaining available for | 
|                                                              |  | exercise of          |           |  | exercise price of    |   |                      | future issuance under   | 
|                                                              |  | outstanding options, |           |  | outstanding options, |   |                      | equity comp plans       | 
|Plan Category                                                 |  | warrants and rights  |           |  | warrants and rights  |   |                      | (excluding(a))          | 
|                                                              |  |                      |           |  |                      |   |                      |                         | 
|                                                              |  | (a)                  |           |  | (b)                  |   |                      | (c)                     | 
|Equity compensation plans approved by
    stockholders(1)     |  |                      | 987,000   |  |                      | $ | 7.70                 |                         |  |  | 600,000 | 
|Equity compensation plans not approved by
    stockholders(2) |  |                      | 448,000   |  |                      | $ | 3.51                 |                         |  |  |        | 
|                                                              |  |                      |           |  |                      |   |                      |                         | 
|Total                                                         |  |                      | 1,435,000 |  |                      | $ | 6.39                 |                         |  |  | 600,000 | 
|                                                              |  |                      |           |  |                      |   |                      |                         | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Consists of the following plans: 2001 Long-Term Incentive Plan
    and the 1995 Stock Incentive Plan. No shares are available for
    grant under the 1995 Stock Incentive Plan at January 1,
    2005. The 2001 Long-Term Incentive Plan permits the award of
    stock options, restricted stock and various other stock-based
    awards.                                                                                                                                                                                                         
|   
|(2) | Consists of a) options to purchase 398,000 shares
    of common stock granted to James R. Riedman and Riedman
    Corporation at a weighted average exercise price of
    $2.07 per share in connection with financial guaranties and
    loans granted to us. See Note 10 to our Consolidated
    Financial Statements as of January 1, 2005; and
    b) outstanding underwriter warrants to purchase up to
    50,000 shares at an exercise price of $15.00 per share
    issued in July 2004 in connection with our follow-on public
    offering.








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data





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|                                           |                                            |                                                              |                          |        |              |           |   |              |        |           |              |        |       |            |   |        |        |           |   |        |        |           | 
|------------------------------------------ | ------------------------------------------ | ------------------------------------------------------------ | ------------------------ | ------ | ------------ | --------- | - | ------------ | ------ | --------- | ------------ | ------ | ----- | ---------- | - | ------ | ------ | --------- | - | ------ | ------ | --------- | 
|                                           |                                            | Fiscal Years Ended                                           |                         
|                                           |                                            |                                                              |                         
|                                           |                                            | December 31                                                  |                          |        | December 31, |           |   | December 31, |        |           | December 27, |        |       | January 1, |  
|                                           |                                            | 2000(1)                                                      |                          |        | 2001(2)      |           |   | 2002(3)      |        |           | 2003(4)(5)   |        |       | 2005(6)    |  
|                                           |                                            |                                                              |                          |        |              |           |   |              |        |           |              |        |       |            |  
|                                           |                                            | (In thousands, except share, per share data and stock price) |                         
|Consolidated Statements of Operations Data |                                            |                                                              |                          |        |              |           |   |              |        |           |              |        |       |            |   |        |        |           |   |       
|                                           | Net sales                                  |                                                              | $                        | 33,179 |              |           | $ | 46,851       |        |           | $            | 36,161 |       |            | $ | 39,077 |        |           | $ | 76,386 |       
|                                           | Cost of goods sold                         |                                                              |                          | 22,233 |              |           |   | 31,439       |        |           |              | 22,397 |       |            |   | 22,457 |        |           |   | 44,802 |       
|                                           |                                            |                                                              |                          |        |              |           |   |              |        |           |              |        |       |            |  
|                                           | Gross profit                               |                                                              |                          | 10,946 |              |           |   | 15,412       |        |           |              | 13,764 |       |            |   | 16,620 |        |           |   | 31,584 |       
|                                           | Operating expenses:                        |                                                              |                          |        |              |           |   |              |        |           |              |        |       |            |   |        |        |           |   |        |       
|                                           |                                            | Selling, general and administrative expenses                 |                          |        | 9,705        |           |   |              | 11,917 |           |              |        | 9,661 |            |   |        | 12,696 |           |   |        | 25,610 |          
|                                           |                                            | Other expense, net                                           |                          |        | 1,016        |           |   |              | 375    |           |              |        | 442   |            |   |        | 1,377  |           |   |        | 113    |          
|                                           |                                            |                                                              |                          |        |              |           |   |              |        |           |              |        |       |            |  
|                                           |                                            |                                                              | Total operating expenses |        |              | 10,721    |   |              |        | 12,292    |              |        |       | 10,103     |   |        |        | 14,073    |   |        |        | 25,723    | 
|                                           |                                            |                                                              |                          |        |              |           |   |              |        |           |              |        |       |            |  
|                                           | Operating income                           |                                                              |                          | 225    |              |           |   | 3,120        |        |           |              | 3,661  |       |            |   | 2,547  |        |           |   | 5,861  |       
|                                           | Interest expense                           |                                                              |                          | 1,363  |              |           |   | 1,683        |        |           |              | 751    |       |            |   | 620    |        |           |   | 888    |       
|                                           |                                            |                                                              |                          |        |              |           |   |              |        |           |              |        |       |            |  
|                                           | (Loss) earnings before income taxes        |                                                              |                          | (1,138 | )            |           |   | 1,437        |        |           |              | 2,910  |       |            |   | 1,927  |        |           |   | 4,973  |       
|                                           | Income tax (benefit) expense               |                                                              |                          | (456   | )            |           |   | 67           |        |           |              | 1,207  |       |            |   | 986    |        |           |   | 1,990  |       
|                                           |                                            |                                                              |                          |        |              |           |   |              |        |           |              |        |       |            |  
|                                           | Net (loss) earnings                        |                                                              | $                        | (682   | )            |           | $ | 1,370        |        |           | $            | 1,703  |       |            | $ | 941    |        |           | $ | 2,983  |       
|                                           |                                            |                                                              |                          |        |              |           |   |              |        |           |              |        |       |            |  
|                                           | Net (loss) earnings per
    share(7)       |                                                              |                          |        |              |           |   |              |        |           |              |        |       |            |   |        |        |           |   |        |       
|                                           |                                            |                                                              | Basic                    |        | $            | (0.22     | ) |              | $      | 0.44      |              |        | $     | 0.50       |   |        | $      | 0.24      |   |        | $      | 0.51      | 
|                                           |                                            |                                                              | Diluted                  |        | $            | (0.22     | ) |              | $      | 0.41      |              |        | $     | 0.45       |   |        | $      | 0.22      |   |        | $      | 0.48      | 
|                                           | Weighted average common shares outstanding |                                                              |                          |        |              |           |   |              |        |           |              |        |       |            |   |        |        |           |   |        |       
|                                           |                                            |                                                              | Basic                    |        |              | 3,141,190 |   |              |        | 3,137,688 |              |        |       | 3,418,468  |   |        |        | 3,963,382 |   |        |        | 5,793,920 | 
|                                           |                                            |                                                              | Diluted                  |        |              | 3,141,190 |   |              |        | 3,444,042 |              |        |       | 3,781,634  |   |        |        | 4,350,132 |   |        |        | 6,277,222 | 

|                                |                           |                            |   |   |         |   |   |         |        |  |         |       |        |        |   |       |        |  |   |     |        | 
|------------------------------- | ------------------------- | -------------------------- | - | - | ------- | - | - | ------- | ------ |  | ------- | ----- | ------ | ------ | - | ----- | ------ |  | - | --- | ------ | 
|                                |                           | Years Ended                |  
|                                |                           |                            |  
|                                |                           | Dec. 31                    |   |   | Dec. 31 |   |   | Dec. 31 |        |  | Dec. 27 |       |        | Jan. 1 |  
|                                |                           | 2000                       |   |   | 2001    |   |   | 2002    |        |  | 2003    |       |        | 2005   |  
|                                |                           |                            |   |   |         |   |   |         |        |  |         |       |        |        |  
|                                |                           | (In thousands)             |  
|Consolidated Balance Sheet Data |                           |                            |   |   |         |   |   |         |        |  |         |       |        |        |   |       |        |  |   |    
|                                | Cash and cash equivalents |                            | $ | 1 |         |   | $ | 1,161   |        |  | $       | 1,265 |        |        | $ | 1,058 |        |  | $ | 694 |       
|                                |                           | Working capital            |   |   | (1,607  | ) |   |         | 5,358  |  |         |       | 8,812  |        |   |       | 13,423 |  |   |     | 29,559 | 
|                                |                           | Total assets               |   |   | 38,424  |   |   |         | 27,577 |  |         |       | 18,954 |        |   |       | 36,411 |  |   |     | 91,054 | 
|                                | Contingent liability      |                            |   |  |         |   |   |        |        |  |         |      |        |        |   | 1,942 |        |  |   |    |       
|                                |                           | Total bank debt            |   |   | 18,926  |   |   |         | 14,829 |  |         |       | 3,000  |        |   |       | 12,082 |  |   |     | 26,607 | 
|                                |                           | Total stockholders equity |   | $ | 5,898   |   |   | $       | 7,452  |  |         | $     | 10,112 |        |   | $     | 14,987 |  |   | $   | 49,686 | 






|    |                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes $808,000 of expenses associated with the Companys
    headquarters and distribution operation relocation from
    Dolgeville, New York to the newly acquired facilities in Old
    Town, Maine. Costs

24



---



##### Table of Contents



| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | associated with this relocation included severance, moving
    expenses and closing facilities. In addition, an impairment loss
    of $208,000 was recognized in 2000.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The net amount of $375,000 in Other expense, net
    consists primarily of a $1.2 million gain in connection
    with the divestiture of our slipper business, and a
    $1.7 million loss incurred in connection with the
    termination of the Penobscot Shoe Company pension plan and a net
    gain on the sale of property of $142,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(3) | The net amount of $442,000 in Other expense, net
    consists primarily of losses on dispositions and write-offs on
    asset sales.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(4) | The net amount of $1,377,000 in Other expense, net
    consists primarily of $394,000, or $0.06 per diluted share,
    of non-capitalized acquisition expenses, $354,000, or
    $0.05 per diluted share, associated with the relocation of
    our corporate offices from Old Town, Maine to Carlsbad,
    California, litigation costs and expenses totaling $733,000, or
    $0.17 per diluted share, associated with the dissenting
    stockholders appraisal proceeding resulting from our
    fiscal 2000 acquisition of Penobscot Shoe Company, and a
    $163,000, or $0.02 per diluted share, write-off of a
    non-trade receivable. These amounts were offset partially by an
    excise tax refund totaling $285,000, or $0.07 per diluted
    share, which was not taxable, associated with the fiscal 2001
    termination of the Penobscot pension plan. Interest
    expense includes $376,000, or $0.05 per diluted
    share, of interest expense related to the settlement of the
    dissenting stockholders appraisal proceeding. On an
    aggregate basis, these amounts reduced our fiscal 2003 per
    diluted share earnings by $0.28.
|   
|(5) | In October 2003, we acquired Royal Robbins in a stock purchase
    for an aggregate purchase price of $6.8 million, which
    included the issuance of 71,889 shares of common stock
    valued at $500,000, plus potential contingent earnout cash
    payments through May 2005. In August 2003, we acquired H.S.
    Trask for an aggregate purchase price of $6.4 million which
    included the issuance of 699,980 shares of common stock
    valued at $3.2 million. In connection with these
    acquisitions $109,000 or $0.02 per diluted share of
    acquisition related expenses were not capitalized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(6) | On July 19, 2004, we purchased all of the outstanding
    capital stock of Altama Delta Corporation for approximately
    $37.8 million plus non-competition payments totaling
    $2.0 million and payable over five years. The price
    included the issuance of 196,967 shares of common stock
    valued at $2.5 million. We also incurred approximately
    $740,000 in acquisition-related expenses which increased the net
    purchase price. For a further discussion of the Altama
    acquisition see Managements Discussion and Analysis
    of Financial Condition and Results of Operations 
    Overview and Altama Acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(7) | Per share data has been adjusted to reflect the 2-for-1 stock
    split effective at the close of business on June 12, 2003.
    Phoenix Footwear Group, Inc.s Retirement Savings
    Partnership Plan, a 401(k) plan, held 796,441 shares of our
    common stock as of January 1, 2005. A total of
    478,514 shares were not allocated as of January 1,
    2005 and were classified as treasury shares for accounting
    purposes, but are outstanding for voting purposes and other
    legal purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of Financial
    Condition and Results of Operations

The following discussion should be read in conjunction with
the historical consolidated financial statements and the related
notes and the other financial information included elsewhere in
this Annual Report on Form 10-K. This discussion contains
forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of
any number of factors, including those set forth under
Factors That May Affect Forward Looking Statements
and under other captions contained elsewhere in this Annual
Report on Form 10-K.


Effective January 1, 2003, we changed our accounting
year to a 52/53 week period. Our annual accounting period
ends on the Saturday nearest to December 31. In this Annual
Report on Form 10-K we refer to the fiscal year ended
December 31, 2002 as fiscal 2002, to the fiscal
year ended December 27, 2003 as fiscal 2003, to
the fiscal year ended January 1, 2005 as fiscal
2004, and to the fiscal year ending December 31, 2005
as fiscal 2005. The change in fiscal year end did
not materially impact our fiscal 2004 results of operations or
year-over-year comparisons.


25



---



##### Table of Contents



In this presentation we discuss pro forma organic net sales
growth in our footwear and apparel segment, which is a non-GAAP
financial measure of reported sales based on our pro forma net
sales for this segment both including and excluding the brands
we acquired in fiscal 2003. Management believes that discussing
pro forma organic net sales in this manner provides a better
understanding of our net sales performance and trends than
reported revenue because it allows for more meaningful
comparisons of current-period revenue to that of prior periods
on a comparable basis. SEC rules require supplemental
explanation and reconciliation, which is provided at
 Results of Operations  Fiscal 2004
Compared to Fiscal 2003  Footwear and Apparel
Business Reconciliation.


Overview














26



---



##### Table of Contents



Altama Acquisition














Results of Operations




|                                                       |                              |                   |      |     |              |  |      |            |  |  |      |     | 
|------------------------------------------------------ | ---------------------------- | ----------------- | ---- | --- | ------------ |  | ---- | ---------- |  |  | ---- | --- | 
|                                                       |                              | Fiscal Year Ended |     
|                                                       |                              |                   |     
|                                                       |                              | December 31,      |      |     | December 27, |  |      | January 1, | 
|                                                       |                              | 2002              |      |     | 2003         |  |      | 2005       | 
|                                                       |                              |                   |      |     |              |  |      |            | 
|Net sales                                              |                              |                   | 100% |     |              |  | 100% |            |  |  | 100% |    
|Costs of goods sold                                    |                              |                   | 62%  |     |              |  | 57%  |            |  |  | 59%  |    
|                                                       | Gross profit                 |                   |      | 38% |              |  |      | 43%        |  |  |      | 41% | 
|Selling, general and administrative and other expenses |                              |                   | 28%  |     |              |  | 36%  |            |  |  | 33%  |    
|                                                       | Operating income             |                   |      | 10% |              |  |      | 7%         |  |  |      | 8%  | 
|Interest expense                                       |                              |                   | 2%   |     |              |  | 2%   |            |  |  | 1%   |    
|                                                       | Earnings before income taxes |                   |      | 8%  |              |  |      | 5%         |  |  |      | 7%  | 
|Income tax expense                                     |                              |                   | 3%   |     |              |  | 3%   |            |  |  | 3%   |    
|                                                       | Net earnings                 |                   |      | 5%  |              |  |      | 2%         |  |  |      | 4%  | 

27



---



##### Table of Contents



Fiscal 2004 Compared to Fiscal 2003




| |                       
| | ----------------------
| | Consolidated Net Sales





| |                          
| | -------------------------
| | Consolidated Gross Profit





| |                                
| | -------------------------------
| | Consolidated Operating Expenses







| |                              
| | -----------------------------
| | Consolidated Interest Expense





| |                                  
| | ---------------------------------
| | Consolidated Income Tax Provision



28



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##### Table of Contents





| |                          
| | -------------------------
| | Consolidated Net Earnings



Footwear and Apparel Business




| |          
| | ---------
| | Net Sales





| |             
| | ------------
| | Gross Profit





| |                   
| | ------------------
| | Operating Expenses





| |               
| | --------------
| | Reconciliation



29



---



##### Table of Contents





|                                                                 |                                               |                           |        |        | 
|---------------------------------------------------------------- | --------------------------------------------- | ------------------------- | ------ | ------ | 
|                                                                 |                                               | Unaudited Pro Forma       |       
|                                                                 |                                               | Net Sales                 |       
|                                                                 |                                               | for the Fiscal Year Ended |       
|                                                                 |                                               | December 27, 2003         |       
|                                                                 |                                               |                           |       
|                                                                 |                                               | (In thousands)            |       
|Phoenix Footwear Group, Inc.                                     |                                               |                           |        |       
|                                                                 | Trotters and Softwalk brands                  |                           | $      | 34,404 | 
|                                                                 | H.S. Trask: 8/8/03 
    12/27/03(1)          |                           |        | 3,964  | 
|                                                                 | Royal Robbins: 11/1/03 
    12/27/03(2)      |                           |        | 708    | 
|                                                                 |                                               |                           |       
|                                                                 | Total Net Sales (Actual)                      |                           |        | 39,076 | 
|2003 Acquired Brands (H.S. Trask & Co., Royal Robbins,
    Inc.) |                                               |                           |        |       
|                                                                 | H.S. Trask:1/1/03 
    8/7/03(1)             |                           |        | 4,971  | 
|                                                                 | Royal Robbins, Inc.: 1/1/03 
    10/31/03(2) |                           |        | 15,418 | 
|                                                                 |                                               |                           |       
|Total Footwear and Apparel Segment Pro Forma Net Sales           |                                               | $                         | 59,465 |       
|                                                                 |                                               |                           |       






|    |                                                                       
|--- | ----------------------------------------------------------------------
|(1) | We completed our acquisition of H.S. Trask on August 7,
    2003.     
|   
|(2) | We completed our acquisition of Royal Robbins on
    October 31, 2003.

Military Boot Business




| |          
| | ---------
| | Net Sales





| |             
| | ------------
| | Gross Profit





| |                   
| | ------------------
| | Operating Expenses



30



---



##### Table of Contents





Fiscal
2003 Compared to Fiscal 2002


Net Sales.


Gross Profit.


Selling, General and Administrative Expenses.


Other Expense  Net.


Interest Expense.


Income Taxes.


Net Earnings.


Reconciliation.


31



---



##### Table of Contents





Seasonal and Quarterly Fluctuations




|                              |  |               |       |  |                |   |       |               |  |   |                |  |  |   |        | 
|----------------------------- |  | ------------- | ----- |  | -------------- | - | ----- | ------------- |  | - | -------------- |  |  | - | ------ | 
|                              |  | Fiscal 2003   |      
|                              |  |               |      
|                              |  | First Quarter |       |  | Second Quarter |   |       | Third Quarter |  |   | Fourth Quarter | 
|                              |  |               |       |  |                |   |       |               |  |   |                | 
|Net sales                     |  | $             | 9,207 |  |                | $ | 7,552 |               |  | $ | 11,002         |  |  | $ | 11,316 | 
|Income (loss) from operations |  | $             | 691   |  |                | $ | (353  | )             |  | $ | 1,714          |  |  | $ | 495    | 

|                              |  |               |        |  |                |   |        |               |  |   |                |  |  |   |        |  
|----------------------------- |  | ------------- | ------ |  | -------------- | - | ------ | ------------- |  | - | -------------- |  |  | - | ------ | -
|                              |  | Fiscal 2004   |       
|                              |  |               |       
|                              |  | First Quarter |        |  | Second Quarter |   |        | Third Quarter |  |   | Fourth Quarter | 
|                              |  |               |        |  |                |   |        |               |  |   |                | 
|Net sales                     |  | $             | 18,638 |  |                | $ | 13,876 |               |  | $ | 23,176         |  |  | $ | 20,696 |  
|Income (loss) from operations |  | $             | 2,301  |  |                | $ | 1,242  |               |  | $ | 2,921          |  |  | $ | (603   | )



Liquidity and Capital Resources










32



---



##### Table of Contents









Cash Flows Provided By Operations.




33



---



##### Table of Contents





Investing Activities.




Financing Activities.






34



---



##### Table of Contents





Inflation




Contractual Obligations




|                                          |  |                                       |        |           |        |   |       |           |           |   |           |  |  |         |       |  |  |  |   | 
|----------------------------------------- |  | ------------------------------------- | ------ | --------- | ------ | - | ----- | --------- | --------- | - | --------- |  |  | ------- | ----- |  |  |  | - | 
|                                          |  | Payments Due by Period (in thousands) |       
|                                          |  |                                       |       
|                                          |  |                                       |        | Less than |        |   |       |           | More than |  
|                                          |  | Total                                 |        |           | 1 Year |   |       | 1-3 Years |           |   | 3-5 Years |  |  | 5 Years |      
|                                          |  |                                       |        |           |        |   |       |           |           |   |           |  |  |         |      
|Long-term debt obligations                |  | $                                     | 26,607 |           |        | $ | 3,656 |           |           | $ | 19,059    |  |  | $       | 3,892 |  |  |  |  | 
|Operating leases                          |  |                                       | 847    |           |        |   | 628   |           |           |   | 219       |  |  |         |      |  |  |  |  | 
|Capital lease obligation                  |  |                                       | 79     |           |        |   | 79    |           |           |   |          |  |  |         |      |  |  |  |  | 
|Potential earnout
    payments(1)         |  |                                       | 4,500  |           |        |   | 4,500 |           |           |   |          |  |  |         |      |  |  |  |  | 
|Consulting and non-competition agreements |  |                                       | 2,128  |           |        |   | 678   |           |           |   | 850       |  |  |         | 600   |  |  |  |  | 
|Employment agreements                     |  | $                                     | 2,313  |           |        | $ | 1,238 |           |           | $ | 1,075     |  |  |         |      |  |  |  |  | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In connection with our acquisition of Royal Robbins, we agreed
    to pay as part of the purchase price potential earnout cash
    payments equal to 25% of the gross profit of the Royal Robbins
    product lines for the 12-month periods ending May 31, 2004
    and 2005, respectively, so long as minimum thresholds are
    achieved by the acquired business during these periods. In June
    2004 in connection with this earnout agreement we paid
    $2.0 million relating to the results achieved for the
    12-month period ended May 31, 2004. The $2.5 million
    represents managements current estimate of the potential
    earnout cash payments the Company may be required to pay. Actual
    payments may vary from these estimated amounts. In connection
    with our acquisition of Altama, we agreed to pay as part of the
    purchase price, potential earnout cash payment of
    $2.0 million if the Altama brand sells at least 575,000
    military combat boots to certain DoD agencies between
    October 3, 2004 and October 1, 2005.

Off-Balance Sheet Arrangements




Critical Accounting Policies




35



---



##### Table of Contents







Accounts receivable.


Inventory.


Business Combinations.


Goodwill and Intangible Assets.




| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | the assets ability to continue to generate income from
    operations and positive cash flow in future periods;         
|
| |  | our future plans regarding utilization of the assets;                                                                    
|
| |  | changes in legal ownership or rights to the assets; and                                                                  
|
| |  | changes in consumer demand or acceptance of the related brand
    names, products or features associated with the assets.



36



---



##### Table of Contents





Recent Accounting Pronouncements


Share-Based
Payment. Accounting for Stock-Based Compensation Accounting for Stock Issued to
Employees.


Exchanges of Nonmonetary Assets  An amendment of
APB Opinion No. 29, Accounting for Nonmonetary Transactions


Inventory Costs ,
Inventory Pricing.







|         |                                                              
|-------- | -------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosure About Market
    Risk





37



---



##### Table of Contents








|        |                                           
|------- | ------------------------------------------
|Item 8. | Financial Statements and Supplemental Data

Summarized Quarterly Data (Unaudited)


|                                     |         |                                       |        |      |     |   |        |      |  |   |        |      |  |       |        |       |   |   |        |      | 
|------------------------------------ | ------- | ------------------------------------- | ------ | ---- | --- | - | ------ | ---- |  | - | ------ | ---- |  | ----- | ------ | ----- | - | - | ------ | ---- | 
|                                     |         | Fiscal Year 2004 Quarters             |       
|                                     |         |                                       |       
|                                     |         | 1st                                   |        |      | 2nd |   |        | 3rd  |  |   | 4th    |      |  | Total |       
|                                     |         |                                       |        |      |     |   |        |      |  |   |        |      |  |       |       
|                                     |         | (In thousands, except per share data) |       
|Net sales                            |         | $                                     | 18,638 |      |     | $ | 13,876 |      |  | $ | 23,176 |      |  | $     | 20,696 |       |   | $ | 76,386 |     
|Gross Profit                         |         | $                                     | 8,146  |      |     | $ | 6,289  |      |  | $ | 9,831  |      |  | $     | 7,318  |       |   | $ | 31,584 |     
|Net earnings (loss)                  |         | $                                     | 1,236  |      |     | $ | 643    |      |  | $ | 1,728  |      |  | $     | (624   | )     |   | $ | 2,983  |     
|Earnings (loss) per Common Share:(1) |         |                                       |        |      |     |   |        |      |  |   |        |      |  |       |        |       |   |   |        |     
|                                     | Basic   |                                       | $      | 0.27 |     |   | $      | 0.14 |  |   | $      | 0.26 |  |       | $      | (0.08 | ) |   | $      | 0.51 | 
|                                     | Diluted |                                       | $      | 0.24 |     |   | $      | 0.12 |  |   | $      | 0.24 |  |       | $      | (0.08 | ) |   | $      | 0.48 | 

|                                     |         |                                       |       |      |     |   |       |       |   |   |        |      |  |       |        |      |  |   |        |      | 
|------------------------------------ | ------- | ------------------------------------- | ----- | ---- | --- | - | ----- | ----- | - | - | ------ | ---- |  | ----- | ------ | ---- |  | - | ------ | ---- | 
|                                     |         | Fiscal Year 2003 Quarters             |      
|                                     |         |                                       |      
|                                     |         | 1st                                   |       |      | 2nd |   |       | 3rd   |   |   | 4th    |      |  | Total |       
|                                     |         |                                       |       |      |     |   |       |       |   |   |        |      |  |       |       
|                                     |         | (In thousands, except per share data) |      
|Net sales                            |         | $                                     | 9,207 |      |     | $ | 7,552 |       |   | $ | 11,002 |      |  | $     | 11,316 |      |  | $ | 39,077 |     
|Gross Profit                         |         | $                                     | 4,020 |      |     | $ | 3,187 |       |   | $ | 4,539  |      |  | $     | 4,874  |      |  | $ | 16,620 |     
|Net earnings (loss)                  |         | $                                     | 375   |      |     | $ | (688  | )     |   | $ | 1,146  |      |  | $     | 108    |      |  | $ | 941    |     
|Earnings (loss) per Common Share:(1) |         |                                       |       |      |     |   |       |       |   |   |        |      |  |       |        |      |  |   |        |     
|                                     | Basic   |                                       | $     | 0.10 |     |   | $     | (0.19 | ) |   | $      | 0.28 |  |       | $      | 0.02 |  |   | $      | 0.24 | 
|                                     | Diluted |                                       | $     | 0.10 |     |   | $     | (0.19 | ) |   | $      | 0.26 |  |       | $      | 0.02 |  |   | $      | 0.22 | 






|    |                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Earnings per share are computed individually for each of the
    quarters presented; therefore, the sum of the quarterly earnings
    per share may not necessarily equal the total for the year.












|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure








|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures



38



---



##### Table of Contents












PART III







|         |                                                   
|-------- | --------------------------------------------------
|Item 10. | Directors and Executive Officers of the Registrant








|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation








|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial Owners and
    Management








|         |                                               
|-------- | ----------------------------------------------
|Item 13. | Certain Relationships and Related Transactions








|         |                                       
|-------- | --------------------------------------
|Item 14. | Principal Accounting Fees and Services



39



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##### Table of Contents



PART IV




|         |                                          
|-------- | -----------------------------------------
|Item 15. | Exhibits, Financial Statements Schedules.

The following documents are filed as part of this
report:




| |                                                                 
| | ----------------------------------------------------------------
| | (1) The following financial statements beginning at
    page 46:



| |                                                           
| | ----------------------------------------------------------
| | 1. Report of Independent Registered Public Accounting Firm
|
| | 2. Consolidated Balance Sheets                            
|
| | 3. Consolidated Statements of Operations                  
|
| | 4. Consolidated Statements of Stockholders Equity        
|
| | 5. Consolidated Statements of Cash Flows                  
|
| | 6. Notes to Consolidated Financial Statements             



| |                                                     
| | ----------------------------------------------------
| | (2) Financial Statement Schedules(See
    (c) below)
|
| | (3) Exhibits                                        

| |    |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2  | .1 |  | Agreement and Plan of Merger dated as of June 16, 2003, by
    and among Phoenix Footwear Group, Inc., H.S. Trask &
    Co., PFG Acquisition, Inc. and Nancy Delekta as stockholder
    representative (incorporated by reference to the Quarterly
    Report on Form 10-Q filed August 12, 2003 by Phoenix
    Footwear Group, Inc. (SEC File No. 001-31309)) (Exhibits and
    schedules have been omitted pursuant to Item 601(b)(2) of
    Regulation S-K, but a copy will be furnished supplementally
    to the Securities and Exchange Commission upon request)                                                                                               
|
| | 2  | .2 |  | Letter Amendment to Agreement and Plan of Merger dated
    August 6, 2003, by and among Phoenix Footwear Group, Inc.,
    H.S. Trask & Co., and PFG Acquisition, Inc., and Nancy
    Delekta as stockholder representative (incorporated by reference
    to the Quarterly Report on Form 10-Q filed August 12,
    2003 by Phoenix Footwear Group, Inc. (SEC File
    No. 001-31309))                                                                                                                                                                                                                                                                               
|
| | 2  | .3 |  | Stock Purchase Agreement By and Among Dan J. and Denise L.
    Costa, as trustees of the Dan J. and Denise L. Costa 1997 Family
    Trust and Douglas Vient as trustee of the Kelsie L. Costa Trust
    and the Daniel S. Costa Trust, Royal Robbins, Inc., and Phoenix
    Footwear Group, Inc., dated October 2, 2003 (incorporated
    by reference to Exhibit 2.1 to the Current Report
    Form 8-K dated November 5, 2003 (SEC File
    No. 001-31309)) (Exhibits and schedules have been omitted
    pursuant to Item 601(b)(2) of Regulation S-K, but a
    copy will be furnished supplementally to the Securities and
    Exchange Commission upon request)
|
| | 2  | .4 |  | Stock Purchase Agreement by and among Phoenix Footwear Group,
    Inc., W. Whitlow Wyatt and Altama Delta Corporation dated
    June 15, 2004, (incorporated by reference to the Current
    Report on Form 8-K for June 15, 2004 by Phoenix
    Footwear Group, Inc. (SEC File No. 001-31309)) (Exhibits and
    schedules have been omitted pursuant to Item 601(b)(2) of
    Regulation S-K, but a copy will be furnished supplementary
    to the Securities and Exchange Commission upon request)                                                                                                                                                               
|
| | 3  | .1 |  | Certificate of Incorporation. (incorporated herein by reference
    to Appendix B of the definitive Proxy Statement on
    Schedule 14A dated March 29, 2002 (SEC File
    No. 000-00774)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | 3  | .2 |  | By-Laws. (incorporated herein by reference to Appendix C of
    the definitive Proxy Statement on Schedule 14A dated
    March 29, 2002 (SEC File No. 000-00774)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | 3  | .3 |  | Certificate of Amendment to Certificate of Incorporation.
    (incorporated herein by reference to Exhibit A of the
    Definitive Proxy Statement on Schedule 14A dated
    April 14, 2003 (SEC File No. 001-31309)).                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | 10 | .1 |  | Stock Purchase Agreement between Phoenix Footwear Group, Inc.
    (f/k/a Daniel Green Company) and Riedman Corporation dated
    June 26, 1996 (incorporated by reference to Exhibit 2
    of Form 8-K dated July 10, 1996 (SEC File
    No. 000-00774)).                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | 10 | .2 |  | Stock Purchase Option between Phoenix Footwear Group, Inc.
    (f/k/a Daniel Green Company) and Riedman Corporation dated
    July 29, 1997 (incorporated by reference to
    Exhibit 99.1 of Form SC 13D/ A dated August 11,
    1997 (SEC File No. 005-36674)).*                                                                                                                                                                                                                                                                                                                                                                                                   

40



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##### Table of Contents



| |    |     |  |                                                                                                                                                                                                                                                                                                                                                         
| | -- | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10 | .3  |  | Stock Purchase Option between Phoenix Footwear Group, Inc.
    (f/k/a Daniel Green Company) and Riedman Corporation dated
    September 1, 1999 (incorporated by reference to
    Exhibit 10.3 to the Annual Report on Form 10-K dated
    March 26, 2004 (SEC file No. 001-31309)).*                                                                   
|
| | 10 | .4  |  | Agreement by and between Phoenix Footwear Group, Inc. and
    Wilhelm Pfander dated December 18, 2000 (incorporated by
    reference to exhibit 10.4 to the Annual Report on
    Form 10-K dated March 26, 2004 (SEC file
    No. 001-31309)). *                                                                                                        
|
| | 10 | .5  |  | Stock Purchase Option between Phoenix Footwear Group, Inc.
    (f/k/a Daniel Green Company) and Riedman Corporation dated
    January 19, 2001 (incorporated by reference to
    Exhibit 99.1 of Form SC 13D/ A dated February 28,
    2001 (SEC File No. 005-36674)).*                                                                                 
|
| | 10 | .6  |  | Stock Purchase Option between Phoenix Footwear Group, Inc.
    (f/k/a Daniel Green Company) and Riedman Corporation dated
    April 11, 2001. (incorporated by reference to
    Exhibit 10.6 to the Annual Report on Form 10-K dated
    March 26, 2004 (SEC file No. 001-31309)).*                                                                     
|
| | 10 | .7  |  | Stock Purchase Option between Phoenix Footwear Group, Inc.
    (f/k/a Daniel Green Company) and James R. Riedman dated
    June 1, 2001 (incorporated by reference to Exhibit 10
    of Form 8-K dated June 26, 2001 (SEC File
    No. 000-00774)).*                                                                                                    
|
| | 10 | .8  |  | Employment Agreement by and between Phoenix Footwear Group, Inc.
    and Greg A. Tunney dated September 1, 2001. (incorporated
    by reference to Exhibit 10.8 to the Annual Report on
    Form 10-K dated March 26, 2004 (SEC file
    No. 001-31309)).*                                                                                              
|
| | 10 | .9  |  | Amendment No. 1 to the Employment Agreement by and between
    Phoenix Footwear Group, Inc. and Greg A. Tunney dated
    September 1, 2001 (incorporated by reference to
    Exhibit 10.9 to the Annual Report on Form 10-K dated
    March 26, 2004 (SEC file No. 001-31309)).*                                                                        
| | 10 | .10 |  | Non-Competition and Non-Disclosure Agreement between Harrison S.
    Trask and H.S. Trask & Co., dated August 6, 2003
    (incorporated by reference to Exhibit 10.5 to the Quarterly
    Report on Form 10-Q dated August 12, 2003 (SEC File
    No. 001-31309)).                                                                                      
|
| | 10 | .11 |  | Employment and Consulting Agreement between Harrison S. Trask
    and H.S. Trask & Co., dated August 6, 2003
    (incorporated by reference to Exhibit 10.4 to the Quarterly
    Report on Form 10-Q dated August 12, 2003 (SEC File
    No. 001-31309)).                                                                                               
|
| | 10 | .12 |  | Assignment for Patent Application (All Rights) by and between
    Wilhelm F. Pfander and Phoenix Footwear Group, Inc. dated
    August 27, 2003 (incorporated by reference to
    Exhibit 10.12 to the Annual Report on Form 10-K dated
    March 26, 2004 (SEC file No. 001-31309)).*                                                                  
|
| | 10 | .13 |  | Noncompetition and Confidentiality Agreement between Phoenix
    Footwear Group, Inc., Royal Robbins, Inc. and Dan J. Costa
    entered into as of October 31, 2003 (incorporated by
    reference to Exhibit 10.3 to the Quarterly Report on
    Form 10-Q dated November 12, 2003 (SEC File
    No. 001-31309)).                                      
|
| | 10 | .14 |  | Consulting Agreement dated October 31, 2003 between Royal
    Robbins, Inc. and Dan J. Costa (incorporated by reference to
    Exhibit 10.2 to the Quarterly Report on Form 10-Q
    dated November 13, 2003 (SEC file No. 001-31309)) .                                                                                                                
|
| | 10 | .15 |  | Employment Agreement by and between Phoenix Footwear Group, Inc.
    and Francisco Morales dated October 31, 2003 (incorporated
    by reference to Exhibit 10.16 to the Annual Report on
    Form 10-K dated March 26, 2004 (SEC file
    No. 001-31309)).*                                                                                            
|
| | 10 | .16 |  | Employment Agreement by and between Phoenix Footwear Group, Inc.
    and James R. Riedman dated January 1, 2004 (incorporated by
    reference to Exhibit 10.17 to the Annual Report on
    Form 10-K dated March 26, 2004 (SEC file
    No. 001-31309)).*                                                                                              
|
| | 10 | .17 |  | Employment Agreement by and between Phoenix Footwear Group, Inc.
    and Richard E. White, dated June 15, 2004 (incorporated by
    reference to Exhibit No. 10.18 to the Phoenix Footwear
    Group, Inc. Registration Statement on Form S-2, Amendment
    No. 1 (File No. 333-114109) filed on June 16,
    2004, as amended).*                      
|
| | 10 | .18 |  | Form Indemnity Agreement by and between Phoenix Footwear
    Group, Inc. and the directors and executive officers of the
    Company (incorporated by reference to
    Exhibit No. 10.19 to the Phoenix Footwear Group, Inc.
    Registration Statement on Form S-2, Amendment No. 1
    (File No. 333-114109) filed on June 16, 2004, as
    amended).*

41



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##### Table of Contents



| |    |     |  |                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10 | .19 |  | Lock-Up Agreement executed by Riedman Corporation dated
    May 19, 2004 (incorporated by reference to
    Exhibit No. 10.25 to the Phoenix Footwear Group, Inc.
    Registration Statement on Form S-2, Amendment No. 1
    (File No. 333-114109) filed on June 16, 2004, as
    amended).                                                                                                                  
|
| | 10 | .20 |  | Lock-Up Agreement executed by the Retirement Committee of the
    Phoenix Footwear Group, Inc. (formerly Daniel Green Company)
    Retirement Savings Partnership Plan dated June 10, 2004
    (incorporated by reference to Exhibit No. 10.26 to the
    Phoenix Footwear Group, Inc. Registration Statement on
    Form S-2, Amendment No. 1 (File No. 333-114109)
    filed on June 16, 2004, as amended).
|
| | 10 | .21 |  | Form Lock-Up Agreement executed by the directors, officers
    and certain principal shareholders of Phoenix Footwear Group,
    Inc. (incorporated by reference to Exhibit No. 10.27
    to the Phoenix Footwear Group, Inc. Registration Statement on
    Form S-2, Amendment No. 1 (File No. 333-114109)
    filed on June 16, 2004, as amended).                                                         
|
| | 10 | .22 |  | Registration Rights Agreement by and between Phoenix Footwear
    Group, Inc., and W. Whitlow Wyatt, dated July 19, 2004
    (incorporated by reference to Exhibit 10.6 to the Quarterly
    Report on Form 10-Q filed on August 6, 2004 by Phoenix
    Footwear Group, Inc. (SEC File No. 001-31309)).                                                                                                      
|
| | 10 | .23 |  | Escrow Agreement by and among Phoenix Footwear Group, Inc., W.
    Whitlow Wyatt and Escrow Agent, dated July 19, 2004
    (incorporated by reference to Exhibit 10.7 to the Quarterly
    Report on Form 10-Q filed on August 6, 2004 by Phoenix
    Footwear Group, Inc. (SEC File No. 001-31309)).                                                                                                        
|
| | 10 | .24 |  | Consulting Agreement by and among Phoenix Footwear Group, Inc.,
    and W. Whitlow Wyatt, dated July 19, 2004 (incorporated by
    reference to Exhibit 10.8 to the Quarterly Report on
    Form 10-Q filed on August 6, 2004 by Phoenix Footwear
    Group, Inc. (SEC File No. 001-31309)).                                                                                                                 
|
| | 10 | .25 |  | Non-Competition and Confidentiality Agreement by and among
    Phoenix Footwear Group, Inc., and W. Whitlow Wyatt, dated
    July 19, 2004 (incorporated by reference to
    Exhibit 10.9 to the Quarterly Report on Form 10-Q
    filed on August 6, 2004 by Phoenix Footwear Group, Inc.
    (SEC File No. 001-31309)).                                                                                    
|
| | 10 | .26 |  | Third Amended and Restated Revolving Credit and Term Loan
    Agreement By and Between Phoenix Footwear Group, Inc. and
    Manufacturers and Traders Trust Company, dated July 19,
    2004 (incorporated by reference to Exhibit 10.10 to the
    Quarterly Report on Form 10-Q filed on August 6, 2004
    by Phoenix Footwear Group, Inc. (SEC File No. 001-31309)).                                     
|
| | 10 | .27 |  | Letter Agreement by and between Altama Delta Corporation and
    Ro-Search, Incorporated dated September 13, 1984, as
    amended (incorporated by reference to
    Exhibit No. 10.28 to the Phoenix Footwear Group, Inc.
    Registration Statement on Form S-2, Amendment No. 1
    (File No. 333-114109) filed on June 16, 2004, as
    amended).                                                         
|
| | 10 | .28 |  | Award/ Contract by and between the Defense Supply Center
    Philadelphia and Altama Delta Corporation dated
    September 30, 2003 (incorporated by reference to
    Exhibit No. 10.29 to the Phoenix Footwear Group, Inc.
    Registration Statement on Form S-2, Amendment No. 1
    (File No. 333-114109) filed on June 16, 2004, as
    amended).                                                       
|
| | 10 | .29 |  | Amendment dated September 8, 2004, to the Award/ Contract
    by and between the Defense Supply Center Philadelphia and Altama
    Delta Corporation dated September 30, 2003 (incorporated by
    reference to Exhibit 10.1 to the Quarterly Report on
    Form 10-Q dated November 9, 2004 (SEC File
    No. 001-31309)).                                                                                  
|
| | 10 | .30 |  | Supplemental Agreement dated September 30, 2004 to the
    Award/ Contract by and between the Defense Supply Center
    Philadelphia and Altama Delta Corporation dated
    September 30, 2003 (incorporated by reference to
    Exhibit 10.7 to the Quarterly Report on Form 10-Q
    dated November 9, 2004 (SEC File No. 001-31309)).                                                                     
|
| | 10 | .31 |  | Third Amended and Restated Revolving Credit and Term Loan
    Agreement Amendment Number 1 dated as of February 1,
    2005 between Phoenix Footwear Group, Inc. and Manufacturers and
    Traders Trust Company (incorporated by reference to
    Exhibit 10.1 to the Current Report on Form 8-K for
    February 1, 2005 (SEC File No. 001-31309)).                                                        
|
| | 10 | .32 |  | $4,000,000 Overline Credit Note dated February 1, 2005 by
    Phoenix Footwear Group, Inc. in favor of Manufacturers and
    Traders Trust Company (incorporated by reference to
    Exhibit 10.2 to the Current Report on Form 8-K for
    February 1, 2005 by Phoenix Footwear Group, Inc. (SEC File
    No. 001-31309)).                                                                                  

42



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| |    |    |  |                                                                                                                                                          
| | -- | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | 21 | .  |  | Subsidiaries of Registrant.                                                                                                                              
|
| | 23 | .1 |  | Consent of Deloitte & Touche LLP                                                                                                                         
|
| | 24 | .  |  | Power of Attorney.                                                                                                                                       
|
| | 31 | .1 |  | Certification of Richard E. White pursuant to
    Rule 13a-14(a) and 15d-14(a), as adopted pursuant to
    Section 302 of the Sarbanes-Oxley Act of 2002.
|
| | 31 | .2 |  | Certification of Kenneth Wolf pursuant to Rule 13a-14(a)
    and 15d-14(a), as adopted pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.    
|
| | 32 | .1 |  | Certification pursuant to 18 U.S.C. Section 1350, as
    adopted pursuant to Section 906 of the Sarbanes-Oxley Act
    of 2002.                          






|  |                                                        
|- | -------------------------------------------------------
|* | Management contract or compensatory plan or arrangement

Financial Statement Schedules




| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1) Consolidated Valuation and Qualifying Accounts
    (Schedule II)                                                                                                                                                                               
|
| | 2) Other Financial Statement Schedules not included in this
    Annual Report on Form 10-K have been omitted because they
    are not applicable or because the required information is
    included in the financial statements or notes thereto.

43



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##### Table of Contents






SCHEDULE II     CONSOLIDATED
VALUATION AND QUALIFYING ACCOUNTS


For The Years Ended January 1, 2005, December 27,
2003 and December 31, 2002


|                                     |  |                |        |   |             |           |        |               |  |   |     |  
|------------------------------------ |  | -------------- | ------ | - | ----------- | --------- | ------ | ------------- |  | - | --- | -
|                                     |  |                |        |   |             | Valuation |       
|                                     |  | Allowance for  |        |   | Reserve for |           |        | Allowance for | 
|                                     |  | Doubtful       |        |   | Obsolete    |           |        | Deferred Tax  | 
|Period                               |  | Accounts       |        |   | Inventory   |           |        | Assets        | 
|                                     |  |                |        |   |             |           |        |               | 
|                                     |  | (In thousands) |       
|Balance, December 31, 2001           |  | $              | 1,468  |   |             | $         | 741    |               |  | $ | 60  |  
|Provision                            |  |                | 1,327  |   |             |           | 1,814  |               |  |   |    |  
|Write-off, disposal, costs and other |  |                | (2,316 | ) |             |           | (2,071 | )             |  |   | (60 | )
|                                     |  |                |        |   |             |           |        |               | 
|Balance, December 31, 2002           |  | $              | 479    |   |             | $         | 484    |               |  |   |    |  
|                                     |  |                |        |   |             |           |        |               | 
|Provision                            |  |                | 738    |   |             |           | 883    |               |  |   |    |  
|Write-off, disposal, costs and other |  |                | (191   | ) |             |           | (489   | )             |  |   |    |  
|                                     |  |                |        |   |             |           |        |               | 
|Balance, December 27, 2003           |  | $              | 1,026  |   |             | $         | 878    |               |  |   |    |  
|                                     |  |                |        |   |             |           |        |               | 
|Provision                            |  |                | 654    |   |             |           | 1,100  |               |  |   |    |  
|Write-off, disposal, costs and other |  |                | (113   | ) |             |           | (1,096 | )             |  |   |    |  
|                                     |  |                |        |   |             |           |        |               | 
|Balance, January 1, 2005             |  | $              | 1,567  |   |             | $         | 882    |               |  |   |    |  
|                                     |  |                |        |   |             |           |        |               | 

44



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##### Table of Contents






SIGNATURES






| |                                 
| | --------------------------------
| | Phoenix Footwear Group,
    Inc.



| |     |                     
| | --- | --------------------
| | By: | /s/ Richard E. White

| |                        
| | -----------------------
| |                        
| | Richard E. White,      
| | Chief Executive Officer





|                                         |  |                                                                          |  |               |  | 
|---------------------------------------- |  | ------------------------------------------------------------------------ |  | ------------- |  | 
|Signature                                |  | Title                                                                    |  | Date         
|                                         |  |                                                                          |  |              
|                                        
|/s/ James R. RiedmanJames
    R. Riedman |  | Chairman                                                                 |  | April 1, 2005
|                                        
|/s/ Richard E. WhiteRichard
    E. White |  | Chief Executive Officer
    (Principal Executive Officer)                |  | April 1, 2005
|                                        
|/s/ Kenneth WolfKenneth
    Wolf         |  | Chief Financial Officer
    (Principal Accounting and Financial Officer) |  | April 1, 2005
|                                        
|/s/ Wilhelm PfanderWilhelm
    Pfander   |  | Director and Senior VP of Sourcing                                       |  | April 1, 2005
|                                        
|/s/ Steven DePerriorSteven
    DePerrior |  | Director                                                                 |  | April 1, 2005
|                                        
|/s/ Gregory HardenGregory
    Harden     |  | Director                                                                 |  | April 1, 2005
|                                        
|/s/ John KratzerJohn
    Kratzer         |  | Director                                                                 |  | April 1, 2005
|                                        
|/s/ Fred PortFred
    Port               |  | Director                                                                 |  | April 1, 2005
|                                        
|/s/ John RobbinsJohn
    Robbins         |  | Director                                                                 |  | April 1, 2005



45



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##### Table of Contents



PHOENIX FOOTWEAR GROUP, INC.







Consolidated Financial Statements as of January 1, 2005
and December 27, 2003, and


for Each of the Three Years in the Period Ended
January 1, 2005 and


Report of Independent Registered Public Accounting Firm


46



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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM












Deloitte & Touche
LLP






47



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##### Table of Contents



PHOENIX FOOTWEAR GROUP, INC.


CONSOLIDATED BALANCE SHEETS


JANUARY 1, 2005 AND DECEMBER 27, 2003


|                                           |                                                                                                                                           |                            |            |            |            |   |            |            |            | 
|------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | 
|                                           |                                                                                                                                           | 2004                       |            |            | 2003       |  
|                                           |                                                                                                                                           |                            |            |            |            |  
|CURRENT ASSETS:                            |                                                                                                                                           |                            |            |            |            |   |            |           
|                                           | Cash                                                                                                                                      |                            | $          | 694,000    |            |   | $          | 1,058,000  |           
|                                           | Accounts receivable (less allowances of $1,567,000 in 2004 and
    $1,026,000 in 2003)                                                    |                            |            | 11,177,000 |            |   |            | 8,083,000  |           
|                                           | Inventories  net                                                                                                                         |                            |            | 28,317,000 |            |   |            | 12,717,000 |           
|                                           | Other receivable                                                                                                                          |                            |            | 911,000    |            |   |            | 530,000    |           
|                                           | Other current assets                                                                                                                      |                            |            | 2,971,000  |            |   |            | 803,000    |           
|                                           | Deferred income tax asset                                                                                                                 |                            |            | 256,000    |            |   |            |           |           
|                                           |                                                                                                                                           |                            |            |            |            |  
|                                           |                                                                                                                                           | Total current assets       |            |            | 44,326,000 |   |            |            | 23,191,000 | 
|PLANT AND EQUIPMENT  Net                  |                                                                                                                                           |                            | 3,530,000  |            |            |   | 1,623,000  |           
|OTHER ASSETS:                              |                                                                                                                                           |                            |            |            |            |   |            |           
|                                           | Other assets  net                                                                                                                        |                            |            | 121,000    |            |   |            | 115,000    |           
|                                           | Goodwill                                                                                                                                  |                            |            | 20,374,000 |            |   |            | 5,178,000  |           
|                                           | Unamortizable intangibles                                                                                                                 |                            |            | 17,975,000 |            |   |            | 3,820,000  |           
|                                           | Intangible assets, net                                                                                                                    |                            |            | 4,728,000  |            |   |            | 1,766,000  |           
|                                           | Other receivable                                                                                                                          |                            |            |           |            |   |            | 718,000    |           
|                                           |                                                                                                                                           |                            |            |            |            |  
|                                           |                                                                                                                                           | Total other assets         |            |            | 43,198,000 |   |            |            | 11,597,000 | 
|                                           |                                                                                                                                           |                            |            |            |            |  
|TOTAL ASSETS                               |                                                                                                                                           | $                          | 91,054,000 |            |            | $ | 36,411,000 |           
|                                           |                                                                                                                                           |                            |            |            |            |  
|                                          
|LIABILITIES AND STOCKHOLDERS EQUITY      
|                                          
|CURRENT LIABILITIES:                       |                                                                                                                                           |                            |            |            |            |   |            |           
|                                           | Accounts payable                                                                                                                          |                            | $          | 7,568,000  |            |   | $          | 4,782,000  |           
|                                           | Accrued expenses                                                                                                                          |                            |            | 3,543,000  |            |   |            | 1,077,000  |           
|                                           | Contingent liability                                                                                                                      |                            |            |           |            |   |            | 1,942,000  |           
|                                           | Notes payable  current                                                                                                                   |                            |            | 3,656,000  |            |   |            | 1,661,000  |           
|                                           | Deferred income tax                                                                                                                       |                            |            |           |            |   |            | 195,000    |           
|                                           | Income taxes payable                                                                                                                      |                            |            |           |            |   |            | 111,000    |           
|                                           |                                                                                                                                           |                            |            |            |            |  
|                                           |                                                                                                                                           | Total current liabilities  |            |            | 14,767,000 |   |            |            | 9,768,000  | 
|OTHER LIABILITIES:                         |                                                                                                                                           |                            |            |            |            |   |            |           
|                                           | Notes payable  noncurrent                                                                                                                |                            |            | 10,451,000 |            |   |            | 4,941,000  |           
|                                           | Notes payable  line of credit                                                                                                            |                            |            | 12,500,000 |            |   |            | 5,480,000  |           
|                                           | Other long-term liabilities                                                                                                               |                            |            | 1,511,000  |            |   |            |           |           
|                                           | Deferred income tax liability                                                                                                             |                            |            | 2,139,000  |            |   |            | 1,235,000  |           
|                                           |                                                                                                                                           |                            |            |            |            |  
|                                           |                                                                                                                                           | Total other liabilities    |            |            | 26,601,000 |   |            |            | 11,656,000 | 
|                                           |                                                                                                                                           |                            |            |            |            |  
|                                           |                                                                                                                                           | Total liabilities          |            |            | 41,368,000 |   |            |            | 21,424,000 | 
|Commitments and contingencies (Note 5)     |                                                                                                                                           |                            |            |            |            |   |            |           
|STOCKHOLDERS EQUITY:                      |                                                                                                                                           |                            |            |            |            |   |            |           
|                                           | Common stock, $.01 par value 
    50,000,000 shares authorized; 7,858,000 and
    5,061,000 shares issued in 2004 and 2003, respectively |                            |            | 78,000     |            |   |            | 51,000     |           
|                                           | Additional paid-in-capital                                                                                                                |                            |            | 42,685,000 |            |   |            | 11,190,000 |           
|                                           | Retained earnings                                                                                                                         |                            |            | 8,303,000  |            |   |            | 5,320,000  |           
|                                           |                                                                                                                                           |                            |            |            |            |  
|                                           |                                                                                                                                           |                            | 51,066,000 |            |            |   | 16,561,000 |           
|                                           | Less: Treasury stock at cost, 504,000 and 603,000 shares in
    2004 and 2003, respectively                                               |                            |            | (1,380,000 | )          |   |            | (1,574,000 | )         
|                                           |                                                                                                                                           |                            |            |            |            |  
|                                           |                                                                                                                                           | Total stockholders equity |            |            | 49,686,000 |   |            |            | 14,987,000 | 
|                                           |                                                                                                                                           |                            |            |            |            |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                           | $                          | 91,054,000 |            |            | $ | 36,411,000 |           
|                                           |                                                                                                                                           |                            |            |            |            |  



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PHOENIX FOOTWEAR GROUP, INC.


CONSOLIDATED STATEMENTS OF OPERATIONS


YEARS ENDED JANUARY 1, 2005, DECEMBER 27, 2003 AND
DECEMBER 31, 2002


|                             |                                              |                          |            |            |            |   |            |            |            |   |            |           |            | 
|---------------------------- | -------------------------------------------- | ------------------------ | ---------- | ---------- | ---------- | - | ---------- | ---------- | ---------- | - | ---------- | --------- | ---------- | 
|                             |                                              | 2004                     |            |            | 2003       |   |            | 2002       |           
|                             |                                              |                          |            |            |            |   |            |            |           
|NET SALES                    |                                              | $                        | 76,386,000 |            |            | $ | 39,077,000 |            |            | $ | 36,161,000 |          
|COST OF GOODS SOLD           |                                              |                          | 44,802,000 |            |            |   | 22,457,000 |            |            |   | 22,397,000 |          
|                             |                                              |                          |            |            |            |   |            |            |           
|GROSS PROFIT                 |                                              |                          | 31,584,000 |            |            |   | 16,620,000 |            |            |   | 13,764,000 |          
|                             |                                              |                          |            |            |            |   |            |            |           
|OPERATING EXPENSES:          |                                              |                          |            |            |            |   |            |            |            |   |            |          
|                             | Selling, general and administrative expenses |                          |            | 25,610,000 |            |   |            | 12,696,000 |            |   |            | 9,661,000 |           
|                             | Other expense  net                          |                          |            | 113,000    |            |   |            | 1,377,000  |            |   |            | 442,000   |           
|                             |                                              |                          |            |            |            |   |            |            |           
|                             |                                              | Total operating expenses |            |            | 25,723,000 |   |            |            | 14,073,000 |   |            |           | 10,103,000 | 
|                             |                                              |                          |            |            |            |   |            |            |           
|OPERATING INCOME             |                                              |                          | 5,861,000  |            |            |   | 2,547,000  |            |            |   | 3,661,000  |          
|INTEREST EXPENSE             |                                              |                          | 888,000    |            |            |   | 620,000    |            |            |   | 751,000    |          
|                             |                                              |                          |            |            |            |   |            |            |           
|EARNINGS BEFORE INCOME TAXES |                                              |                          | 4,973,000  |            |            |   | 1,927,000  |            |            |   | 2,910,000  |          
|INCOME TAX EXPENSE           |                                              |                          | 1,990,000  |            |            |   | 986,000    |            |            |   | 1,207,000  |          
|                             |                                              |                          |            |            |            |   |            |            |           
|NET EARNINGS                 |                                              | $                        | 2,983,000  |            |            | $ | 941,000    |            |            | $ | 1,703,000  |          
|                             |                                              |                          |            |            |            |   |            |            |           
|NET EARNINGS PER SHARE:      |                                              |                          |            |            |            |   |            |            |            |   |            |          
|                             | Basic                                        |                          | $          | 0.51       |            |   | $          | 0.24       |            |   | $          | 0.50      |           
|                             |                                              |                          |            |            |            |   |            |            |           
|                             | Diluted                                      |                          | $          | 0.48       |            |   | $          | 0.22       |            |   | $          | 0.45      |           
|                             |                                              |                          |            |            |            |   |            |            |           



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PHOENIX FOOTWEAR GROUP, INC.


CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


YEARS ENDED JANUARY 1, 2005, DECEMBER 27, 2003 AND
DECEMBER 31, 2002


|                               |                                                                         |              |           |           |            |   |           |            |   |                |            |            |   |        |           |           |        |  |            |         |   |   |            |          |   |   |            |            |  
|------------------------------ | ----------------------------------------------------------------------- | ------------ | --------- | --------- | ---------- | - | --------- | ---------- | - | -------------- | ---------- | ---------- | - | ------ | --------- | --------- | ------ |  | ---------- | ------- | - | - | ---------- | -------- | - | - | ---------- | ---------- | -
|                               |                                                                         | Common Stock |           |           | Additional |   |           |            |   | Treasury Stock |            |            |  
|                               |                                                                         |              |           |           | Paid-In    |   |           | Retained   |   |                |            |            |   |       
|                               |                                                                         | Shares       |           |           | Amount     |   |           | Capital    |   |                | Earnings   |            |   | Shares |           |           | Amount |  |            | Total   |  
|                               |                                                                         |              |           |           |            |   |           |            |   |                |            |            |   |        |           |           |        |  |            |         |  
|BALANCE  January 1, 2002 2001 |                                                                         |              | 4,180,000 |           |            | $ | 5,224,000 |            |   | $              | 2,089,000  |            |   | $      | 2,676,000 |           |        |  | (1,048,000 | )       |   | $ | (2,537,000 | )        |   | $ | 7,452,000  |           
|                               | Issuance of common stock                                                |              |           | 408,000   |            |   |           | 511,000    |   |                |            | 244,000    |   |        |           |           |        |  |            |         |   |   |            |          |   |   |            | 755,000    |  
|                               | Purchases of treasury stock                                             |              |           |           |            |   |           |            |   |                |            |            |   |        |           |           |        |  |            | (20,000 | ) |   |            | (35,000  | ) |   |            | (35,000    | )
|                               | Allocation of shares in Company sponsored defined contribution
    plan |              |           |           |            |   |           |            |   |                |            | 59,000     |   |        |           |           |        |  |            | 70,000  |   |   |            | 178,000  |   |   |            | 237,000    |  
|                               | Effect of change in par value                                           |              |           |           |            |   |           | (5,689,000 | ) |                |            | 5,689,000  |   |        |           |           |        |  |            |         |   |   |            |          |   |   |            |            |  
|                               | Net earnings  2002                                                     |              |           |           |            |   |           |            |   |                |            |            |   |        |           | 1,703,000 |        |  |            |         |   |   |            |          |   |   |            | 1,703,000  |  
|                               |                                                                         |              |           |           |            |   |           |            |   |                |            |            |   |        |           |           |        |  |            |         |  
|BALANCE  December 31, 2002    |                                                                         |              | 4,588,000 |           |            |   | 46,000    |            |   |                | 8,081,000  |            |   |        | 4,379,000 |           |        |  | (998,000   | )       |   |   | (2,394,000 | )        |   |   | 10,112,000 |           
|                               | Issuance of common stock                                                |              |           | 35,000    |            |   |           |            |   |                |            | 34,000     |   |        |           |           |        |  |            |         |   |   |            |          |   |   |            | 34,000     |  
|                               | Purchases of treasury stock                                             |              |           |           |            |   |           |            |   |                |            |            |   |        |           |           |        |  |            | (58,000 | ) |   |            | (201,000 | ) |   |            | (201,000   | )
|                               | Allocation of shares in Company sponsored defined contribution
    plan |              |           |           |            |   |           |            |   |                |            | 97,000     |   |        |           |           |        |  |            | 119,000 |   |   |            | 305,000  |   |   |            | 402,000    |  
|                               | Retirement of treasury stock                                            |              |           | (334,000  | )          |   |           | (3,000     | ) |                |            | (713,000   | ) |        |           |           |        |  |            | 334,000 |   |   |            | 716,000  |   |   |            |            |  
|                               | Issuance of common stock in connection with acquisitions                |              |           | 772,000   |            |   |           | 8,000      |   |                |            | 3,691,000  |   |        |           |           |        |  |            |         |   |   |            |          |   |   |            | 3,699,000  |  
|                               | Net earnings  2003                                                     |              |           |           |            |   |           |            |   |                |            |            |   |        |           | 941,000   |        |  |            |         |   |   |            |          |   |   |            | 941,000    |  
|                               |                                                                         |              |           |           |            |   |           |            |   |                |            |            |   |        |           |           |        |  |            |         |  
|BALANCE  December 27, 2003    |                                                                         |              | 5,061,000 |           |            | $ | 51,000    |            |   | $              | 11,190,000 |            |   | $      | 5,320,000 |           |        |  | (603,000   | )       |   | $ | (1,574,000 | )        |   | $ | 14,987,000 |           
|                               |                                                                         |              |           |           |            |   |           |            |   |                |            |            |   |        |           |           |        |  |            |         |  
|                               | Issuance of common stock                                                |              |           | 100,000   |            |   |           |            |   |                |            | 260,000    |   |        |           |           |        |  |            |         |   |   |            |          |   |   |            | 260,000    |  
|                               | Purchases of treasury stock                                             |              |           |           |            |   |           |            |   |                |            |            |   |        |           |           |        |  |            | (15,000 | ) |   |            | (100,000 | ) |   |            | (100,000   | )
|                               | Allocation of shares in Company sponsored defined contribution
    plan |              |           |           |            |   |           |            |   |                |            | 560,000    |   |        |           |           |        |  |            | 114,000 |   |   |            | 294,000  |   |   |            | 854,000    |  
|                               | Issuance of common stock in connection with acquisitions                |              |           | 2,697,000 |            |   |           | 27,000     |   |                |            | 30,675,000 |   |        |           |           |        |  |            |         |   |   |            |          |   |   |            | 30,702,000 |  
|                               | Net earnings  2004                                                     |              |           |           |            |   |           |            |   |                |            |            |   |        |           | 2,983,000 |        |  |            |         |   |   |            |          |   |   |            | 2,983,000  |  
|                               |                                                                         |              |           |           |            |   |           |            |   |                |            |            |   |        |           |           |        |  |            |         |  
|BALANCE  January 1, 2005      |                                                                         |              | 7,858,000 |           |            | $ | 78,000    |            |   | $              | 42,685,000 |            |   | $      | 8,303,000 |           |        |  | (504,000   | )       |   | $ | (1,380,000 | )        |   | $ | 49,686,000 |           
|                               |                                                                         |              |           |           |            |   |           |            |   |                |            |            |   |        |           |           |        |  |            |         |  



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PHOENIX FOOTWEAR GROUP, INC.


CONSOLIDATED STATEMENTS OF CASH FLOWS


YEARS ENDED JANUARY 1, 2005, DECEMBER 27, 2003 AND
DECEMBER 31, 2002


|                                      |                                                                                                |                                                                        |                         |                                  |                                                  |   |            |             |         |   |            |            |         |  |           |             |  
|------------------------------------- | ---------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ----------------------- | -------------------------------- | ------------------------------------------------ | - | ---------- | ----------- | ------- | - | ---------- | ---------- | ------- |  | --------- | ----------- | -
|                                      |                                                                                                | 2004                                                                   |                         |                                  | 2003                                             |   |            | 2002        |        
|                                      |                                                                                                |                                                                        |                         |                                  |                                                  |   |            |             |        
|CASH FLOWS FROM OPERATING ACTIVITIES: |                                                                                                |                                                                        |                         |                                  |                                                  |   |            |             |         |   |            |           
|                                      | Net earnings                                                                                   |                                                                        | $                       | 2,983,000                        |                                                  |   | $          | 941,000     |         |   | $          | 1,703,000  |        
|                                      | Adjustments to reconcile net earnings to net cash
    (used) provided by operating activities: |                                                                        |                         |                                  |                                                  |   |            |             |         |   |            |            |        
|                                      |                                                                                                | Depreciation and amortization                                          |                         |                                  | 1,219,000                                        |   |            |             | 317,000 |   |            |            | 266,000 | 
|                                      |                                                                                                | Provision for losses on accounts receivable                            |                         |                                  | 203,000                                          |   |            |             | 252,000 |   |            |            | 142,000 | 
|                                      |                                                                                                | Write-off of non-trade receivable                                      |                         |                                  |                                                 |   |            |             | 163,000 |   |            |            |        | 
|                                      |                                                                                                | Deferred income tax asset/liability                                    |                         |                                  | (313,000                                         | ) |            |             | 727,000 |   |            |            | 699,000 | 
|                                      |                                                                                                | Allocation of shares in defined contribution plan                      |                         |                                  | 854,000                                          |   |            |             | 402,000 |   |            |            | 237,000 | 
|                                      |                                                                                                | Loss on impairment of assets                                           |                         |                                  |                                                 |   |            |             |        |   |            |            | 338,000 | 
|                                      |                                                                                                | Loss (Gain) on sale of property and equipment                          |                         |                                  |                                                 |   |            |             | 8,000   |   |            |            |        | 
|                                      |                                                                                                | Changes in assets and liabilities (net of effect of
    acquisitions): |                         |                                  |                                                  |   |            |             |         |   |            |            |         | 
|                                      |                                                                                                |                                                                        | (Increase) decrease in: |                                  |                                                  |   |            |             |         |   |            |            |         |  |          
|                                      |                                                                                                |                                                                        |                         | Accounts receivable              |                                                  |   | (1,039,000 | )           |         |   | 1,288,000  |            |         |  | 2,376,000 |            
|                                      |                                                                                                |                                                                        |                         | Inventories                      |                                                  |   | (9,320,000 | )           |         |   | (2,272,000 | )          |         |  | 3,791,000 |            
|                                      |                                                                                                |                                                                        |                         | Other receivable                 |                                                  |   | (338,000   | )           |         |   | 300,000    |            |         |  | 129,000   |            
|                                      |                                                                                                |                                                                        |                         | Other current assets             |                                                  |   | (267,000   | )           |         |   | (1,204,000 | )          |         |  | 19,000    |            
|                                      |                                                                                                |                                                                        |                         | Other assets                     |                                                  |   | 92,000     |             |         |   | 48,000     |            |         |  |          |            
|                                      |                                                                                                |                                                                        | Increase (decrease) in: |                                  |                                                  |   |            |             |         |   |            |            |         |  |          
|                                      |                                                                                                |                                                                        |                         | Accounts payable                 |                                                  |   | 2,169,000  |             |         |   | 2,435,000  |            |         |  | 286,000   |            
|                                      |                                                                                                |                                                                        |                         | Accrued expenses                 |                                                  |   | 1,536,000  |             |         |   | (1,428,000 | )          |         |  | (99,000   | )          
|                                      |                                                                                                |                                                                        |                         | Liability to former stockholders |                                                  |   |           |             |         |   | (1,806,000 | )          |         |  |          |            
|                                      |                                                                                                |                                                                        |                         | Other long-term liabilities      |                                                  |   | (587,000   | )           |         |   |           |            |         |  |          |            
|                                      |                                                                                                |                                                                        |                         | Income taxes payable             |                                                  |   | (111,000   | )           |         |   | 111,000    |            |         |  |          |            
|                                      |                                                                                                |                                                                        |                         |                                  |                                                  |   |            |             |        
|                                      |                                                                                                |                                                                        |                         |                                  | Net cash (used) provided by operating activities |   |            | (2,919,000  | )       |   |            | 282,000    |         |  |           | 9,887,000   |  
|                                      |                                                                                                |                                                                        |                         |                                  |                                                  |   |            |             |        
|CASH FLOWS FROM INVESTING ACTIVITIES: |                                                                                                |                                                                        |                         |                                  |                                                  |   |            |             |         |   |            |           
|                                      | Purchases of equipment                                                                         |                                                                        |                         | (969,000                         | )                                                |   |            | (326,000    | )       |   |            | (309,000   | )      
|                                      | Proceeds from disposal of property and equipment                                               |                                                                        |                         |                                 |                                                  |   |            | 457,000     |         |   |            | 76,000     |        
|                                      | Proceeds from other receivable                                                                 |                                                                        |                         |                                 |                                                  |   |            |            |         |   |            | 1,578,000  |        
|                                      | Acquisitions, net of cash acquired                                                             |                                                                        |                         | (37,581,000                      | )                                                |   |            | (7,925,000  | )       |   |            |           |        
|                                      |                                                                                                |                                                                        |                         |                                  |                                                  |   |            |             |        
|                                      |                                                                                                |                                                                        |                         |                                  | Net cash (used) provided by investing activities |   |            | (38,550,000 | )       |   |            | (7,794,000 | )       |  |           | 1,345,000   |  
|                                      |                                                                                                |                                                                        |                         |                                  |                                                  |   |            |             |        
|CASH FLOWS FROM FINANCING ACTIVITIES: |                                                                                                |                                                                        |                         |                                  |                                                  |   |            |             |         |   |            |           
|                                      | Net borrowings (payments) on notes payable  line
    of credit                                |                                                                        |                         | 5,394,000                        |                                                  |   |            | 3,979,000   |         |   |            | (8,200,000 | )      
|                                      | Proceeds from notes payable                                                                    |                                                                        |                         | 10,000,000                       |                                                  |   |            | 4,500,000   |         |   |            | 2,728,000  |        
|                                      | Repayments of notes payable                                                                    |                                                                        |                         | (2,534,000                       | )                                                |   |            | (927,000    | )       |   |            | (5,607,000 | )      
|                                      | Issuance of common stock                                                                       |                                                                        |                         | 28,436,000                       |                                                  |   |            | 34,000      |         |   |            | 5,000      |        
|                                      | Purchases of treasury stock                                                                    |                                                                        |                         | (100,000                         | )                                                |   |            | (201,000    | )       |   |            | (35,000    | )      
|                                      | Debt issuance and other costs                                                                  |                                                                        |                         | (91,000                          | )                                                |   |            | (80,000     | )       |   |            | (19,000    | )      
|                                      |                                                                                                |                                                                        |                         |                                  |                                                  |   |            |             |        
|                                      |                                                                                                |                                                                        |                         |                                  | Net cash provided (used) by financing activities |   |            | 41,105,000  |         |   |            | 7,305,000  |         |  |           | (11,128,000 | )
|                                      |                                                                                                |                                                                        |                         |                                  |                                                  |   |            |             |        
|NET (DECREASE) INCREASE IN CASH       |                                                                                                |                                                                        | (364,000                | )                                |                                                  |   | (207,000   | )           |         |   | 104,000    |           
|CASH  Beginning of year              |                                                                                                |                                                                        | 1,058,000               |                                  |                                                  |   | 1,265,000  |             |         |   | 1,161,000  |           
|                                      |                                                                                                |                                                                        |                         |                                  |                                                  |   |            |             |        
|CASH  End of year                    |                                                                                                | $                                                                      | 694,000                 |                                  |                                                  | $ | 1,058,000  |             |         | $ | 1,265,000  |           
|                                      |                                                                                                |                                                                        |                         |                                  |                                                  |   |            |             |        

(Continued)




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PHOENIX FOOTWEAR GROUP, INC.


CONSOLIDATED STATEMENTS OF CASH
FLOWS  (Continued)


YEARS ENDED JANUARY 1, 2005, DECEMBER 27, 2003 AND
DECEMBER 31, 2002


|                                     |                                     |                                                                                                                                                                                                                           |   |           |      |  |   |         |  |  |   |         |  | 
|------------------------------------ | ----------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | --------- | ---- |  | - | ------- |  |  | - | ------- |  | 
|                                     |                                     | 2004                                                                                                                                                                                                                      |   |           | 2003 |  |   | 2002    | 
|                                     |                                     |                                                                                                                                                                                                                           |   |           |      |  |   |         | 
|SUPPLEMENTAL CASH FLOW INFORMATION  |                                     |                                                                                                                                                                                                                           |   |           |      |  |   |         |  |  |   |        
|                                     | Cash paid during the year for:      |                                                                                                                                                                                                                           |   |           |      |  |   |         |  |  |   |         | 
|                                     | Interest                            |                                                                                                                                                                                                                           | $ | 853,000   |      |  | $ | 862,000 |  |  | $ | 540,000 | 
|                                     |                                     |                                                                                                                                                                                                                           |   |           |      |  |   |         | 
|                                     | Income taxes                        |                                                                                                                                                                                                                           | $ | 3,532,000 |      |  | $ | 565,000 |  |  | $ | 567,000 | 
|                                     |                                     |                                                                                                                                                                                                                           |   |           |      |  |   |         | 
|SUPPLEMENTAL DISCLOSURE OF NONCASH   |                                     |                                                                                                                                                                                                                           |   |           |      |  |   |         |  |  |   |        
|                                     | INVESTING AND FINANCING ACTIVITIES: |                                                                                                                                                                                                                           |   |           |      |  |   |         |  |  |   |         | 
|                                     |                                     | In 2004, the Company issued 196,967 shares of common stock in
    connection with its acquisition of Altama.                                                                                                              |   |           |      |  |   |         |  |  |   |         |  | 
|                                     |                                     | During 2003, the Company issued 699,980 shares of common stock
    in connection with its acquisition of H.S. Trask and issued
    71,889 shares of common stock in connection with its acquisition
    of Royal Robbins. |   |           |      |  |   |         |  |  |   |         |  | 
|                                     |                                     | During 2002, a $750,000 note payable was converted into
    204,000 shares of common stock                                                                                                                                |   |           |      |  |   |         |  |  |   |         |  | 

(Concluded)




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PHOENIX FOOTWEAR GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


YEARS ENDED JANUARY 1, 2005, DECEMBER 27, 2003 AND
DECEMBER 31, 2002




|   |                                                                           
|-- | --------------------------------------------------------------------------
|1. | DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES









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PHOENIX FOOTWEAR GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)
















|                        |  |  |          | 
|----------------------- |  |  | -------- | 
|Buildings               |  |  | 25 years | 
|Machinery and equipment |  |  | 10 years | 
|Computers               |  |  | 4 years  | 
|Vehicles                |  |  | 4 years  | 
|Furniture and fixtures  |  |  | 8 years  | 



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PHOENIX FOOTWEAR GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Goodwill
and Other Intangible Assets.














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PHOENIX FOOTWEAR GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                |                                                                 |      |      |           |      |   |      |           |  |   |      |           | 
|------------------------------- | --------------------------------------------------------------- | ---- | ---- | --------- | ---- | - | ---- | --------- |  | - | ---- | --------- | 
|                                |                                                                 | 2004 |      |           | 2003 |   |      | 2002      | 
|                                |                                                                 |      |      |           |      |   |      |           | 
|Basic net earnings per share:   |                                                                 |      |      |           |      |   |      |           |  |   |      |          
|                                | Net earnings                                                    |      | $    | 2,983,000 |      |   | $    | 941,000   |  |   | $    | 1,703,000 | 
|                                | Weighted average common shares outstanding                      |      |      | 5,794,000 |      |   |      | 3,963,000 |  |   |      | 3,418,000 | 
|Basic net earnings per share    |                                                                 | $    | 0.51 |           |      | $ | 0.24 |           |  | $ | 0.50 |          
|                                |                                                                 |      |      |           |      |   |      |           | 
|Diluted net earnings per share: |                                                                 |      |      |           |      |   |      |           |  |   |      |          
|                                | Net earnings                                                    |      | $    | 2,983,000 |      |   | $    | 941,000   |  |   | $    | 1,703,000 | 
|                                | Interest on convertible debt                                    |      |      |          |      |   |      |          |  |   |      | 17,000    | 
|                                |                                                                 |      |      |           |      |   |      |           | 
|                                | Net earnings and effect of assumed conversions                  |      | $    | 2,983,000 |      |   | $    | 941,000   |  |   | $    | 1,720,000 | 
|                                |                                                                 |      |      |           |      |   |      |           | 
|                                | Weighted average common shares outstanding                      |      |      | 5,794,000 |      |   |      | 3,963,000 |  |   |      | 3,418,000 | 
|                                | Effect of stock options outstanding                             |      |      | 483,000   |      |   |      | 387,000   |  |   |      | 262,000   | 
|                                | Effect of convertible debt                                      |      |      |          |      |   |      |          |  |   |      | 102,000   | 
|                                |                                                                 |      |      |           |      |   |      |           | 
|                                | Weighted average common and potential common shares outstanding |      |      | 6,277,000 |      |   |      | 4,350,000 |  |   |      | 3,782,000 | 
|                                |                                                                 |      |      |           |      |   |      |           | 
|Diluted net earnings per share  |                                                                 | $    | 0.48 |           |      | $ | 0.22 |           |  | $ | 0.45 |          
|                                |                                                                 |      |      |           |      |   |      |           | 







Accounting for Stock-Based
Compensation  Transition and Disclosure Accounting for Stock-Based
Compensation Accounting
for Stock Issued to Employees


56



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PHOENIX FOOTWEAR GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                |             |      |   |           |      |  |   |         |  |  |   |           | 
|------------------------------- | ----------- | ---- | - | --------- | ---- |  | - | ------- |  |  | - | --------- | 
|                                |             | 2004 |   |           | 2003 |  |   | 2002    | 
|                                |             |      |   |           |      |  |   |         | 
|Net earnings:                   |             |      |   |           |      |  |   |         |  |  |   |          
|                                | As reported |      | $ | 2,983,000 |      |  | $ | 941,000 |  |  | $ | 1,703,000 | 
|                                | Pro forma   |      | $ | 1,727,000 |      |  | $ | 518,000 |  |  | $ | 1,463,000 | 
|Basic net earnings per share:   |             |      |   |           |      |  |   |         |  |  |   |          
|                                | As reported |      | $ | 0.51      |      |  | $ | 0.24    |  |  | $ | 0.50      | 
|                                | Pro forma   |      | $ | 0.30      |      |  | $ | 0.13    |  |  | $ | 0.43      | 
|Diluted net earnings per share: |             |      |   |           |      |  |   |         |  |  |   |          
|                                | As reported |      | $ | 0.48      |      |  | $ | 0.22    |  |  | $ | 0.45      | 
|                                | Pro forma   |      | $ | 0.28      |      |  | $ | 0.12    |  |  | $ | 0.39      | 






Share-Based
Payment. Accounting for Stock-Based Compensation Accounting for Stock Issued to
Employees.


Exchanges of Nonmonetary Assets  An amendment of
APB Opinion No. 29, Accounting for Nonmonetary Transactions


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PHOENIX FOOTWEAR GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Inventory Costs ,
Inventory Pricing.






|   |            
|-- | -----------
|2. | INVENTORIES



|                |  |                 |            |  |                   |   |            | 
|--------------- |  | --------------- | ---------- |  | ----------------- | - | ---------- | 
|                |  | January 1, 2005 |            |  | December 27, 2003 |  
|                |  |                 |            |  |                   |  
|Raw materials   |  | $               | 1,861,000  |  |                   | $ |           | 
|Work in process |  |                 | 807,000    |  |                   |   |           | 
|Finished goods  |  |                 | 25,649,000 |  |                   |   | 12,717,000 | 
|                |  |                 |            |  |                   |  
|                |  | $               | 28,317,000 |  |                   | $ | 12,717,000 | 
|                |  |                 |            |  |                   |  



|   |                               
|-- | ------------------------------
|3. | GOODWILL AND INTANGIBLE ASSETS

|                        |                                            |         |  |                 |       |   |                   |              |  |          |         |         |  |       |             |            |              |          |           |           |  |   |        |        |  |   |           |           | 
|----------------------- | ------------------------------------------ | ------- |  | --------------- | ----- | - | ----------------- | ------------ |  | -------- | ------- | ------- |  | ----- | ----------- | ---------- | ------------ | -------- | --------- | --------- |  | - | ------ | ------ |  | - | --------- | --------- | 
|                        |                                            |         |  | January 1, 2005 |       |   | December 27, 2003 |             
|                        |                                            | Useful  |  |                 |       |   |                   |              | 
|                        |                                            | Life    |  |                 |       |   | Accumulated       |              |  | Net Book |         |         |  |       | Accumulated |            |              | Net Book |          
|                        |                                            | (Years) |  |                 | Gross |   |                   | Amortization |  |          | Value   |         |  | Gross |             |            | Amortization |          |           | Value     | 
|                        |                                            |         |  |                 |       |   |                   |              |  |          |         |         |  |       |             |            |              |          |           |           | 
|Non-amortizing:         |                                            |         |  |                 |       |   |                   |              |  |          |         |         |  |       |             |            |              |          |           |           |  |   |        |        |  |   |           |          
|                        | Trademarks/tradenames and DoD relationship |         |  |                 |       |   | $                 | 17,975,000   |  |          | $       |        |  |       | $           | 17,975,000 |              |          | $         | 3,820,000 |  |   | $      |       |  |   | $         | 3,820,000 | 
|Amortizing:             |                                            |         |  |                 |       |   |                   |              |  |          |         |         |  |       |             |            |              |          |           |           |  |   |        |        |  |   |           |          
|                        | Customer lists                             |         |  | 5-13            |       |   |                   | 3,222,000    |  |          |         | 278,000 |  |       |             | 2,944,000  |              |          |           | 1,513,000 |  |   |        | 43,000 |  |   |           | 1,470,000 | 
|                        | Other                                      |         |  | 2-5             |       |   |                   | 2,021,000    |  |          |         | 237,000 |  |       |             | 1,784,000  |              |          |           | 311,000   |  |   |        | 15,000 |  |   |           | 296,000   | 
|                        |                                            |         |  |                 |       |   |                   |              |  |          |         |         |  |       |             |            |              |          |           |           | 
|Total intangible assets |                                            |         |  |                 |       | $ | 5,243,000         |              |  | $        | 515,000 |         |  | $     | 4,728,000   |            |              | $        | 1,824,000 |           |  | $ | 58,000 |        |  | $ | 1,766,000 |          
|                        |                                            |         |  |                 |       |   |                   |              |  |          |         |         |  |       |             |            |              |          |           |           | 



58



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PHOENIX FOOTWEAR GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|           |  |   |           | 
|---------- |  | - | --------- | 
|2005       |  | $ | 761,000   | 
|2006       |  |   | 752,000   | 
|2007       |  |   | 752,000   | 
|2008       |  |   | 737,000   | 
|2009       |  |   | 522,000   | 
|Thereafter |  |   | 1,204,000 | 
|           |  |   |          
|           |  | $ | 4,728,000 | 
|           |  |   |          





|   |                         
|-- | ------------------------
|4. | PLANT AND EQUIPMENT, net



|                                   |  |      |           |  |      |   |           | 
|---------------------------------- |  | ---- | --------- |  | ---- | - | --------- | 
|                                   |  | 2004 |           |  | 2003 |  
|                                   |  |      |           |  |      |  
|Land and buildings                 |  | $    | 923,000   |  |      | $ | 688,000   | 
|Machinery, furniture and equipment |  |      | 2,184,000 |  |      |   | 560,000   | 
|Leasehold improvements             |  |      | 390,000   |  |      |   | 211,000   | 
|Computers                          |  |      | 1,391,000 |  |      |   | 1,034,000 | 
|Vehicles                           |  |      | 77,000    |  |      |   | 76,000    | 
|                                   |  |      |           |  |      |  
|                                   |  |      | 4,965,000 |  |      |   | 2,569,000 | 
|Less accumulated depreciation      |  |      | 1,435,000 |  |      |   | 946,000   | 
|                                   |  |      |           |  |      |  
|Plant and equipment  net          |  | $    | 3,530,000 |  |      | $ | 1,623,000 | 
|                                   |  |      |           |  |      |  





|   |                              
|-- | -----------------------------
|5. | COMMITMENTS AND CONTINGENCIES





|                      |      |   |         |         | 
|--------------------- | ---- | - | ------- | ------- | 
|Year ending December: |      |   |         |        
|                      | 2005 |   |         | 707,000 | 
|                      | 2006 |   |         | 219,000 | 
|                      |      |   |        
|                      |      | $ | 926,000 |        
|                      |      |   |        



59



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##### Table of Contents



PHOENIX FOOTWEAR GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |              
|-- | -------------
|6. | BENEFIT PLANS



| |                          
| | -------------------------
| | DEFINED CONTRIBUTION PLAN





|   |             
|-- | ------------
|7. | ACQUISITIONS





|                                           |  |   |            |  
|------------------------------------------ |  | - | ---------- | -
|Current assets                             |  | $ | 4,320,000  |  
|Property, plant and equipment              |  |   | 15,000     |  
|Intangible assets, subject to amortization |  |   | 794,000    |  
|Goodwill                                   |  |   | 2,617,000  |  
|Unamortizable intangibles                  |  |   | 1,230,000  |  
|                                           |  |   |           
|Total assets acquired                      |  |   | 8,976,000  |  
|Current liabilities                        |  |   | (2,522,000 | )
|                                           |  |   |           
|Net assets acquired                        |  | $ | 6,454,000  |  
|                                           |  |   |           





60



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##### Table of Contents



PHOENIX FOOTWEAR GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                           |  |   |            |  
|------------------------------------------ |  | - | ---------- | -
|Current assets                             |  | $ | 4,449,000  |  
|Property, plant and equipment              |  |   | 513,000    |  
|Other assets                               |  |   | 6,000      |  
|Intangible assets, subject to amortization |  |   | 1,031,000  |  
|Goodwill                                   |  |   | 1,065,000  |  
|Unamortizable intangibles                  |  |   | 2,590,000  |  
|                                           |  |   |           
|Total assets acquired                      |  |   | 9,654,000  |  
|Current liabilities                        |  |   | (825,000   | )
|Contingent liability                       |  |   | (1,942,000 | )
|                                           |  |   |           
|Net assets acquired                        |  | $ | 6,887,000  |  
|                                           |  |   |           







61



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PHOENIX FOOTWEAR GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                           |  |   |            |  
|------------------------------------------ |  | - | ---------- | -
|Current assets                             |  | $ | 9,530,000  |  
|Property, plant and equipment              |  |   | 1,705,000  |  
|Intangible assets, subject to amortization |  |   | 3,413,000  |  
|Goodwill                                   |  |   | 14,698,000 |  
|Unamortizable intangibles                  |  |   | 14,155,000 |  
|                                           |  |   |           
|Total assets acquired                      |  |   | 43,501,000 |  
|                                           |  |   |           
|Current liabilities                        |  |   | (3,220,000 | )
|                                           |  |   |           
|Net assets acquired                        |  | $ | 40,281,000 |  
|                                           |  |   |           





|                                       |  |             |             |  |             |   |            | 
|-------------------------------------- |  | ----------- | ----------- |  | ----------- | - | ---------- | 
|                                       |  | Fiscal 2004 |             |  | Fiscal 2003 |  
|                                       |  |             |             |  |             |  
|Pro forma net sales                    |  | $           | 100,899,000 |  |             | $ | 94,846,000 | 
|                                       |  |             |             |  |             |  
|Pro forma net income                   |  | $           | 5,839,000   |  |             | $ | 4,605,000  | 
|                                       |  |             |             |  |             |  
|Basic Pro forma net income per share   |  | $           | .79         |  |             | $ | .63        | 
|                                       |  |             |             |  |             |  
|Diluted Pro forma net income per share |  | $           | .75         |  |             | $ | .60        | 
|                                       |  |             |             |  |             |  



|   |     
|-- | ----
|8. | DEBT



62



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##### Table of Contents



PHOENIX FOOTWEAR GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








63



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##### Table of Contents



PHOENIX FOOTWEAR GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                                                                                                                     |  |      |            |  |      |   |            | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---------- |  | ---- | - | ---------- | 
|                                                                                                                                                                     |  | 2004 |            |  | 2003 |  
|                                                                                                                                                                     |  |      |            |  |      |  
|Revolving line of credit to bank; secured by accounts
    receivable, inventory and equipment; interest due monthly at
    LIBOR plus 275 basis points               |  | $    | 5,000,000  |  |      | $ | 5,000,000  | 
|Revolving line of credit to bank; secured by accounts
    receivable, inventory and equipment; interest due monthly at
    Prime plus .25%                           |  |      | 7,500,000  |  |      |   | 480,000    | 
|Term loan payable to bank in annual installments of $750,000
    through 2006, interest due monthly at LIBOR plus 300 basis
    points                               |  |      | 1,500,000  |  |      |   | 2,250,000  | 
|Term loan payable to bank in quarterly installments of $150,000
    through 2008, interest due monthly at LIBOR plus 300 basis
    points                            |  |      | 2,250,000  |  |      |   | 2,850,000  | 
|Term loan payable to bank in monthly installments of $25,000
    through 2008, interest due monthly at LIBOR plus 300 basis
    points                               |  |      | 1,175,000  |  |      |   | 1,475,000  | 
|Term loan payable to bank in monthly installments of $167,000
    through 2009, interest due monthly at LIBOR plus 300 basis
    points                              |  |      | 9,167,000  |  |      |   |           | 
|Note payable to financial institution; collateralized by
    vehicle; interest at 0%; principal payable $493 monthly;
    remaining principal balance due July 2007  |  |      | 15,000     |  |      |   | 21,000     | 
|Note payable to financial institution; collateralized by
    vehicle; interest at 4.9%; principal payable $574 monthly;
    remaining principal balance due May 2004 |  |      |           |  |      |   | 3,000      | 
|Note payable to financial institution; collateralized by
    vehicle; interest at 6.9%; principal payable $551 monthly;
    remaining principal balance due May 2004 |  |      |           |  |      |   | 3,000      | 
|                                                                                                                                                                     |  |      |            |  |      |  
|                                                                                                                                                                     |  |      | 26,607,000 |  |      |   | 12,082,000 | 
|Less: current portion                                                                                                                                                |  |      | 3,656,000  |  |      |   | 1,661,000  | 
|                                                                                                                                                                     |  |      |            |  |      |  
|Noncurrent portion                                                                                                                                                   |  | $    | 22,951,000 |  |      | $ | 10,421,000 | 
|                                                                                                                                                                     |  |      |            |  |      |  



|     |       |   |            |            | 
|---- | ----- | - | ---------- | ---------- | 
|2005 |       | $ | 3,656,000  |           
|2006 |       |   | 16,156,000 |           
|2007 |       |   | 2,903,000  |           
|2008 |       |   | 2,725,000  |           
|2009 |       |   | 1,167,000  |           
|     |       |   |           
|     | Total |   | $          | 26,607,000 | 
|     |       |   |           

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##### Table of Contents



PHOENIX FOOTWEAR GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |             
|-- | ------------
|9. | INCOME TAXES



|          |         |      |           |           |      |   |         |         |  |   |           |         | 
|--------- | ------- | ---- | --------- | --------- | ---- | - | ------- | ------- |  | - | --------- | ------- | 
|          |         | 2004 |           |           | 2003 |   |         | 2002    | 
|          |         |      |           |           |      |   |         |         | 
|Current:  |         |      |           |           |      |   |         |         |  |   |           |        
|          | Federal |      | $         | 1,861,000 |      |   | $       | 477,000 |  |   | $         | 440,000 | 
|          | State   |      |           | 442,000   |      |   |         | 172,000 |  |   |           | 68,000  | 
|          |         |      |           |           |      |   |         |         | 
|          |         |      | 2,303,000 |           |      |   | 649,000 |         |  |   | 508,000   |        
|          |         |      |           |           |      |   |         |         | 
|Deferred: |         |      |           |           |      |   |         |         |  |   |           |        
|          | Federal |      |           | (196,000  | )    |   |         | 185,000 |  |   |           | 609,000 | 
|          | State   |      |           | (117,000  | )    |   |         | 152,000 |  |   |           | 90,000  | 
|          |         |      |           |           |      |   |         |         | 
|          |         |      | (313,000  | )         |      |   | 337,000 |         |  |   | 699,000   |        
|          |         |      |           |           |      |   |         |         | 
|Total     |         | $    | 1,990,000 |           |      | $ | 986,000 |         |  | $ | 1,207,000 |        
|          |         |      |           |           |      |   |         |         | 



|                                                   |  |      |           |  |      |   |         |      |  |   |           |  
|-------------------------------------------------- |  | ---- | --------- |  | ---- | - | ------- | ---- |  | - | --------- | -
|                                                   |  | 2004 |           |  | 2003 |   |         | 2002 | 
|                                                   |  |      |           |  |      |   |         |      | 
|Expense at statutory rate                          |  | $    | 1,691,000 |  |      | $ | 655,000 |      |  | $ | 990,000   |  
|State and other taxes  net of federal tax benefit |  |      | 212,000   |  |      |   | 137,000 |      |  |   | 104,000   |  
|Items not deductible                               |  |      | 41,000    |  |      |   | 151,000 |      |  |   | 66,000    |  
|Change in valuation allowance                      |  |      | 0         |  |      |   | 24,000  |      |  |   | (60,000   | )
|Other                                              |  |      | 46,000    |  |      |   | 19,000  |      |  |   | 107,000   |  
|                                                   |  |      |           |  |      |   |         |      | 
|Income tax expense                                 |  | $    | 1,990,000 |  |      | $ | 986,000 |      |  | $ | 1,207,000 |  
|                                                   |  |      |           |  |      |   |         |      | 



65



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##### Table of Contents



PHOENIX FOOTWEAR GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                 |  |         |          |   |            |   |            |  
|-------------------------------- |  | ------- | -------- | - | ---------- | - | ---------- | -
|                                 |  | 2004    |         
|                                 |  |         |         
|                                 |  | Current |          |   | Noncurrent |  
|                                 |  |         |          |   |            |  
|ASSETS                          
|Non-deductible bad debt reserves |  | $       | 596,000  |   |            | $ |           |  
|UNICAP                           |  |         | 219,000  |   |            |   |           |  
|Inventory                        |  |         | 49,000   |   |            |   |           |  
|Other accruals                   |  |         | 140,000  |   |            |   | 110,000    |  
|Net operating loss carryforwards |  |         |         |   |            |   | 38,000     |  
|                                
|LIABILITIES                     
|Pension                          |  |         | (471,000 | ) |            |   |           |  
|Depreciation                     |  |         |         |   |            |   | (168,000   | )
|Tollgate Taxes                   |  |         |          |   |            |   | (193,000   | )
|Purchased Intangibles            |  |         |         |   |            |   | (1,926,000 | )
|Other accruals                   |  |         | (277,000 | ) |            |   |           |  
|                                 |  |         |          |   |            |  
|Deferred income tax liability    |  | $       | 256,000  |   |            | $ | (2,139,000 | )
|                                 |  |         |          |   |            |  

|                                 |  |         |          |   |            |   |            |  
|-------------------------------- |  | ------- | -------- | - | ---------- | - | ---------- | -
|                                 |  | 2003    |         
|                                 |  |         |         
|                                 |  | Current |          |   | Noncurrent |  
|                                 |  |         |          |   |            |  
|ASSETS                          
|Non-deductible bad debt reserves |  | $       | 438,000  |   |            | $ |           |  
|Inventory                        |  |         |         |   |            |   | 63,000     |  
|Other accruals                   |  |         | 206,000  |   |            |   | 167,000    |  
|Net operating loss carryforwards |  |         |         |   |            |   | 82,000     |  
|                                
|LIABILITIES                     
|Installment sale gain            |  |         | (171,000 | ) |            |   | (287,000   | )
|Pension                          |  |         | (668,000 | ) |            |   |           |  
|Depreciation                     |  |         |         |   |            |   | (515,000   | )
|Purchased Intangibles            |  |         |         |   |            |   | (745,000   | )
|                                 |  |         |          |   |            |  
|Deferred income tax liability    |  | $       | (195,000 | ) |            | $ | (1,235,000 | )
|                                 |  |         |          |   |            |  



|    |                                 
|--- | --------------------------------
|10. | LIABILITY TO FORMER STOCKHOLDERS



66



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##### Table of Contents



PHOENIX FOOTWEAR GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|    |                     
|--- | --------------------
|11. | STOCKHOLDERS EQUITY







|                                       |  |      |           |          |       |   |       |      |          |  |           |   |  |          |      |  |       |  |         |   |  |   |      | 
|-------------------------------------- |  | ---- | --------- | -------- | ----- | - | ----- | ---- | -------- |  | --------- | - |  | -------- | ---- |  | ----- |  | ------- | - |  | - | ---- | 
|                                       |  |      |           | Weighted |       |   |       |      | Weighted |  |           |   |  | Weighted |     
|                                       |  |      |           | Average  |       |   |       |      | Average  |  |           |   |  | Average  |     
|                                       |  |      |           | Exercise |       |   |       |      | Exercise |  |           |   |  | Exercise |     
|                                       |  | 2004 |           |          | Price |   |       | 2003 |          |  | Price     |   |  | 2002     |      |  | Price | 
|                                       |  |      |           |          |       |   |       |      |          |  |           |   |  |          |      |  |       | 
|Options outstanding, beginning of year |  |      | 1,046,000 |          |       | $ | 3.28  |      |          |  | 756,000   |   |  | $        | 2.46 |  |       |  | 578,000 |   |  | $ | 1.97 | 
|Options granted                        |  |      | 611,000   |          |       | $ | 10.30 |      |          |  | 332,000   |   |  | $        | 4.97 |  |       |  | 180,000 |   |  | $ | 4.15 | 
|Options exercised                      |  |      | (100,000  | )        |       | $ | 3.20  |      |          |  | (33,000   | ) |  | $        | 1.77 |  |       |  | (2,000  | ) |  | $ | 3.63 | 
|Options cancelled                      |  |      | (77,000   | )        |       | $ | 5.80  |      |          |  | (9,000    | ) |  | $        | 2.57 |  |       |  |        |   |  |   |     | 
|                                       |  |      |           |          |       |   |       |      |          |  |           |   |  |          |      |  |       | 
|Options outstanding  end of year      |  |      | 1,480,000 |          |       | $ | 6.06  |      |          |  | 1,046,000 |   |  | $        | 3.28 |  |       |  | 756,000 |   |  | $ | 2.46 | 
|                                       |  |      |           |          |       |   |       |      |          |  |           |   |  |          |      |  |       | 
|Options exercisable  end of year      |  |      | 920,000   |          |       | $ | 4.06  |      |          |  | 722,000   |   |  | $        | 2.50 |  |       |  | 702,000 |   |  | $ | 2.59 | 
|                                       |  |      |           |          |       |   |       |      |          |  |           |   |  |          |      |  |       | 



67



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PHOENIX FOOTWEAR GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                        |  |                     |           |          |                     |  |            |                |  |   |                 |  |  |                |         |  |  |   |       | 
|----------------------- |  | ------------------- | --------- | -------- | ------------------- |  | ---------- | -------------- |  | - | --------------- |  |  | -------------- | ------- |  |  | - | ----- | 
|                        |  | Options Outstanding |           |          | Options Exercisable | 
|                        |  |                     |           |          |                     | 
|                        |  |                     |           | Weighted |                     |  |            |                | 
|                        |  | Number              |           |          | Average             |  |            | Weighted       |  |   | Number          |  |  | Weighted       |        
|                        |  | Outstanding         |           |          | Remaining           |  |            | Average        |  |   | Exercisable at  |  |  | Average        |        
|Range of Exercise Price |  | January 1, 2005     |           |          | Contractual Life    |  |            | Exercise Price |  |   | January 1, 2005 |  |  | Exercise Price |        
|                        |  |                     |           |          |                     |  |            |                |  |   |                 |  |  |                |        
|$ 1.73 to $ 1.84        |  |                     | 244,000   |          |                     |  | 6.34 years |                |  | $ | 1.78            |  |  |                | 244,000 |  |  | $ | 1.78  | 
|$ 2.03 to $ 3.65        |  |                     | 490,000   |          |                     |  | 6.87 years |                |  | $ | 2.84            |  |  |                | 440,000 |  |  | $ | 2.79  | 
|$ 4.45 to $ 5.80        |  |                     | 50,000    |          |                     |  | 7.91 years |                |  | $ | 5.08            |  |  |                | 40,000  |  |  | $ | 5.16  | 
|$ 6.77 to $ 7.05        |  |                     | 85,000    |          |                     |  | 8.86 years |                |  | $ | 6.99            |  |  |                | 34,000  |  |  | $ | 6.98  | 
|$ 8.10 to $ 9.05        |  |                     | 279,000   |          |                     |  | 7.87 years |                |  | $ | 8.47            |  |  |                | 90,000  |  |  | $ | 8.46  | 
|$10.45 to $11.40        |  |                     | 242,000   |          |                     |  | 9.55 years |                |  | $ | 11.27           |  |  |                | 43,000  |  |  | $ | 11.31 | 
|$ 13.33                 |  |                     | 90,000    |          |                     |  | 9.36 years |                |  | $ | 13.33           |  |  |                | 29,000  |  |  | $ | 13.33 | 
|                        |  |                     |           |          |                     |  |            |                |  |   |                 |  |  |                |        
|                        |  |                     | 1,480,000 |          |                     |  | 7.62 years |                |  | $ | 6.06            |  |  |                | 920,000 |  |  | $ | 4.06  | 
|                        |  |                     |           |          |                     |  |            |                |  |   |                 |  |  |                |        





|    |                   
|--- | ------------------
|12. | OTHER EXPENSE, NET









|    |                    
|--- | -------------------
|13. | SEGMENT INFORMATION



68



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##### Table of Contents



PHOENIX FOOTWEAR GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                                         |                      |                   |            |            |                   |   |            |   | 
|---------------------------------------- | -------------------- | ----------------- | ---------- | ---------- | ----------------- | - | ---------- | - | 
|                                         |                      | Fiscal Year Ended |            |            | Fiscal Year Ended |  
|                                         |                      | January 1,        |            |            | December 27,      |  
|                                         |                      | 2005              |            |            | 2003              |  
|                                         |                      |                   |            |            |                   |  
|Net revenues                             |                      |                   |            |            |                   |   |            |  
|Footwear and apparel                     |                      | $                 | 62,750,000 |            |                   | $ | 39,077,000 |  
|Military boots                           |                      |                   | 13,636,000 |            |                   |   |           |  
|                                         |                      |                   |            |            |                   |  
|                                         |                      | $                 | 76,386,000 |            |                   | $ | 39,077,000 |  
|                                         |                      |                   |            |            |                   |  
|Operating income                         |                      |                   |            |            |                   |   |            |  
|Footwear and apparel                     |                      | $                 | 8,226,000  |            |                   | $ | 2,547,000  |  
|Military boots                           |                      |                   | 2,358,000  |            |                   |   |           |  
|Reconciling items(1)                     |                      |                   | (4,723,000 | )          |                   |   |           |  
|                                         |                      |                   |            |            |                   |  
|                                         |                      | $                 | 5,861,000  |            |                   | $ | 2,547,000  |  
|                                         |                      |                   |            |            |                   |  
|Identifiable assets                      |                      |                   |            |            |                   |   |            |  
|Footwear and apparel                     |                      | $                 | 28,785,000 |            |                   | $ | 36,411,000 |  
|Military boots                           |                      |                   | 7,527,000  |            |                   |   |           |  
|Goodwill and non-amortizable intangibles |                      |                   |            |            |                   |   |            |  
|                                         | Footwear and apparel |                   |            | 9,148,000  |                   |   |            |  | 
|                                         | Military boots       |                   |            | 28,853,000 |                   |   |            |  | 
|Reconciling items(2)                     |                      |                   | 16,741,000 |            |                   |   |           |  
|                                         |                      |                   |            |            |                   |  
|                                         |                      | $                 | 91,054,000 |            |                   | $ | 36,411,000 |  
|                                         |                      |                   |            |            |                   |  
|Depreciation and amortization            |                      |                   |            |            |                   |   |            |  
|Footwear and apparel                     |                      | $                 | 812,000    |            |                   | $ | 317,000    |  
|Military boots                           |                      |                   | 407,000    |            |                   |   |           |  
|                                         |                      |                   |            |            |                   |  
|                                         |                      | $                 | 1,219,000  |            |                   | $ | 317,000    |  
|                                         |                      |                   |            |            |                   |  






|    |                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents corporate general and administrative expenses and
    other income (expense) not utilized by management in determining
    segment profitability.                                               
|   
|(2) | Identifiable assets are comprised of net inventory, certain
    property and plant and equipment. Reconciling items represent
    unallocated corporate assets not segregated between the two
    segments.

69



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##### Table of Contents



PHOENIX FOOTWEAR GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|    |                 
|--- | ----------------
|14. | SUBSEQUENT EVENT





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