##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-K


|                                               |  |                                                                                             
|---------------------------------------------- |  | --------------------------------------------------------------------------------------------
|(Mark one)                                    
|x                                              |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934    
|For the fiscal year ended January 31,
    2004
|                                              
|OR                                            
|                                              
|o                                              |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE
ACT OF 1934
|                                              
|                                               |  | For the transition period
    from          to                                              

Commission file number 000-21543

Wilsons The Leather Experts Inc.


(Exact name of registrant as specified in its
charter)


|                                                                                   |  |                                         
|---------------------------------------------------------------------------------- |  | ----------------------------------------
|Minnesota                                                                          |  | 41-1839933                              
|(State or other jurisdiction of
    incorporation or organization)                 |  | (I.R.S. Employer
    Identification No.)
|                                                                                  
|7401 Boone Ave. N., Brooklyn Park, MN
    (Address of principal executive offices) |  | 55428
    (Zip Code)                    

Registrants telephone number, including
area code: (763) 391-4000

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


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


Common stock, $.01 par value

(Title of Class)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past 90 days. 

Yes x         No o

Indicate by check mark if the disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of the registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K. o

Indicate by check mark whether registrant is an
accelerated filer (as defined in Rule 12b-2 of the
Act.)    Yes x No o

The aggregate market value of the voting common
equity held by non-affiliates of the registrant was $142,007,148
based on the closing sale price for the common stock on the last
business day of the registrants most recently completed
second fiscal quarter as reported by the Nasdaq National Market.
For purposes of determining such aggregate market value, all
executive officers and directors of the registrant are
considered to be affiliates of the registrant. This number is
provided only for the purpose of this report on Form 10-K
and does not represent an admission by either the registrant or
any such person as to the status of such person.

The number of shares outstanding of the
registrants common stock, $.01 par value, was
20,876,672 at April 5, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement of
Wilsons The Leather Experts Inc. for the Annual Meeting of
Shareholders to be held on June 3, 2004 (the Proxy
Statement), which will be filed within 120 days after
the registrants fiscal year ended January 31, 2004,
are incorporated by reference into Part III of this Annual
Report on Form 10-K (Form 10-K). The
Compensation Committee Report, the Audit Committee Report, and
the stock performance graph contained in the registrants
Proxy Statement are expressly not incorporated by reference in
this Form 10-K.



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WILSONS THE LEATHER EXPERTS INC.

FORM 10-K

For the fiscal year ended January 31,
2004

TABLE OF CONTENTS

|                                                   |          |             |                                                                                                        |      |  |    | 
|-------------------------------------------------- | -------- | ----------- | ------------------------------------------------------------------------------------------------------ | ---- |  | -- | 
|                                                   |          | DESCRIPTION |                                                                                                        | PAGE
|                                                   |          |             |                                                                                                        |     
|PART I                                             |          |             |                                                                                                        |      |  |   
|                                                  
|                                                   | Item 1.  |             | Business                                                                                               |      |  | 1  | 
|                                                  
|                                                   | Item 2.  |             | Properties                                                                                             |      |  | 17 | 
|                                                  
|                                                   | Item 3.  |             | Legal Proceedings                                                                                      |      |  | 17 | 
|                                                  
|                                                   | Item 4.  |             | Submission of Matters to a
    Vote of Security Holders                                                |      |  | 18 | 
|                                                  
|                                                   | Item 4A. |             | Executive Officers of the
    Registrant                                                               |      |  | 18 | 
|                                                  
|PART II                                            |          |             |                                                                                                        |      |  |   
|                                                  
|                                                   | Item 5.  |             | Market for Registrants
    Common Equity and Related Stockholder Matters                              |      |  | 20 | 
|                                                  
|                                                   | Item 6.  |             | Selected Financial Data                                                                                |      |  | 21 | 
|                                                  
|                                                   | Item 7.  |             | Managements Discussion
    and Analysis of Financial Condition and Results of Operations              |      |  | 23 | 
|                                                  
|                                                   | Item 7A. |             | Quantitative and Qualitative
    Disclosure About Market Risk                                          |      |  | 35 | 
|                                                  
|                                                   | Item 8.  |             | Consolidated Financial
    Statements                                                                  |      |  | 36 | 
|                                                  
|                                                   | Item 9.  |             | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |      |  | 36 | 
|                                                  
|                                                   | Item 9A. |             | Controls and Procedures                                                                                |      |  | 36 | 
|                                                  
|PART III                                           |          |             |                                                                                                        |      |  |   
|                                                  
|                                                   | Item 10. |             | Directors and Executive
    Officers of the Registrant                                                 |      |  | 37 | 
|                                                  
|                                                   | Item 11. |             | Executive Compensation                                                                                 |      |  | 37 | 
|                                                  
|                                                   | Item 12. |             | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |      |  | 37 | 
|                                                  
|                                                   | Item 13. |             | Certain Relationships and
    Related Transactions                                                     |      |  | 37 | 
|                                                  
|                                                   | Item 14. |             | Principal Accountant Fees
    and Services                                                             |      |  | 37 | 
|                                                  
|PART IV                                            |          |             |                                                                                                        |      |  |   
|                                                  
|                                                   | Item 15. |             | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                                    |      |  | 38 | 
|Restated By-Laws                                  
|4th Amendment to Amended/Restated Credit Agreement
|Reaffirmation of Guaranty                         
|Limited Wavier and Fifth Amendment                
|Reaffirmation of Guaranty dated as of April 15th  
|Reaffirmation of Guaranty dated as of Nov. 1, 2002
|6th Amendment to 4th Restated Credit Agreement    
|Reaffirmation of Guaranty dated as of April 27th  
|Code of Business Ethics and Conduct               
|Subsidiaries                                      
|Consent of KPMG LLP                               
|Certification of Chairman and CEO                 
|Certification of Executive VP and CFO             
|Certification of Chairman and CEO                 
|Certification of Executive VP and CFO             





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##### Table of Contents






PART I

When we refer to we,
our, us or Wilsons Leather,
we mean Wilsons The Leather Experts Inc. and its subsidiaries,
including its predecessor companies. Unless otherwise indicated,
references to our fiscal year mean the year ended on the
Saturday closest to January 31. The periods that will end
or have ended on January 29, 2005, January 31, 2004,
February 1, 2003, February 2, 2002, February 3,
2001, and January 29, 2000, are referred to herein as 2004,
2003, 2002, 2001, 2000 and 1999, respectively.






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

Disclosure Regarding Forward-Looking
Statements

The information presented in this Form 10-K
under the headings Item 1. Business and
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations contain
certain forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act). Such forward-looking
statements are based on the beliefs of our management as well as
on assumptions made by and information currently available to us
at the time such statements were made and relate to, among other
things, expected demand for our products, liquidation stores (as
defined herein), financing efforts, merchandising strategy,
capital expenditures, store operations, new store internal rate
of return and competition. Although we believe these statements
are reasonable, readers of this Form 10-K should be aware
that actual results could differ materially from those projected
by such forward-looking statements as a result of a number of
factors, many of which are outside of our control, including
those set forth under Risk Factors, beginning
on page 10 of this Form 10-K. Readers of this
Form 10-K should consider carefully the factors listed
under Risk Factors, as well as the other
information and data contained in this Form 10-K. All
forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the
cautionary statements set forth under Risk
Factors in this section. The words anticipate,
believe, estimate, expect,
intend, plan, target,
may, will, project,
should, continue and similar expressions
or the negative thereof, as they relate to us, are intended to
identify such forward-looking statements. The Company undertakes
no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future
events or otherwise.

Overview

We are the leading specialty retailer of quality
leather outerwear, accessories and apparel in the United States.
Our multi-channel store locations are designed to target a broad
customer base with a superior level of customer service. Through
our worldwide leather sourcing network and in-house design
capabilities, we are able to consistently provide our customers
with quality, fashionable merchandise at attractive prices. Our
business structure results in shorter lead times, allowing us to
react quickly to popular and emerging fashion trends and
customer preferences, rapidly replenish fast-selling merchandise
and minimize fashion risk.

As of January 31, 2004, we operated a total
of 460 stores (excluding the 111 underperforming mall and outlet
stores that we are liquidating  see 
Reorganization and Partial Store Liquidation) located in
45 states and the District of Columbia, including 334 mall
stores, 107 outlet stores and 19 airport locations. Each year we
supplement our permanent stores with temporary seasonal stores
during our peak selling season, which totaled 229 in 2003. Our
mall stores average approximately 2,600 total leased square feet
and feature a large assortment of classic and contemporary
leather outerwear, accessories and apparel. Our outlet stores
are operated primarily under the Wilsons Leather
OutletTM name, average approximately 4,000 total
leased square feet and offer a combination of clearance
merchandise from our mall stores, special outlet-only
merchandise and key in-season goods. Our airport stores average
approximately 700 total leased square feet, feature
travel-related products as well as leather accessories and
provide us the opportunity to showcase our products and the
Wilsons Leather brand to millions of potential customers
each year in some of the busiest airports. Our proprietary
labels, including M. Julian®, Maxima®, Pelle
Studio® and Wilsons LeatherTM, are positioned to
appeal to identified customer lifestyle segments.

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Financial Strategy

Our financial strategy for the next year is to
increase sales and margins by enhancing the productivity of our
existing store base, to strengthen our overall capital position
by reducing our costs and working capital needs and to establish
an appropriate financial structure. Key elements of implementing
this strategy include:

Increase Sales and
Margins.We are employing aggressive
marketing strategies and targeted advertising to build customer
urgency, drive foot traffic into our stores, generate sales and
establish Wilsons Leather as a shopping destination. We believe
that reinvigorating our mall store business remains both our
biggest near-term challenge and best opportunity to return
Wilsons Leather to profitability. Additionally, we are
implementing targeted promotional activities to ensure our
pricing is competitive, while maintaining acceptable margin
levels. Finally, we will continue to upgrade the freshness and
fashion-forward content of our merchandise using bold colors,
rich textures and a broader range of fashions that appeal to
women.

Improve Balance Sheet and Enhance Cash
Position.We are focused on conserving
cash through tight expense controls throughout the organization,
maintaining a leaner corporate headquarters organization,
improving inventory management and limiting new store growth
until we improve the profitability of our existing store base.
Capital expenditures for 2004 are capped at $6.0 million,
with the majority of the funds being allocated to certain fully
obligated store remodels.

Rationalize Store
Count.We had a net reduction of 158
stores in 2003, including the 111 liquidation stores discussed
in Reorganization and Partial Store
Liquidation. In 2004, we plan to open four stores
(primarily outlets) where we have pre-existing commitments and
close approximately 30 to 40 additional locations (primarily as
a result of natural lease terminations) for a net reduction of
26 to 36 stores. In 2004 and beyond, we will continue to analyze
our store profitability on a market-by-market basis and work to
close underperforming stores to minimize our financial risk.

During the last two years, in support of our
overall financial strategy, the following three actions were
taken: 1) discontinued operations for the Travel
Subsidiaries, 2) a reorganization and partial store
liquidation, and 3) additional financing.

Discontinued
Operations

In October 2000, we acquired the El Portal Group,
Inc. (El Portal), a specialty retailer of premium
travel products and accessories with 38 stores based in Las
Vegas, Nevada. In April 2001, we acquired Bentleys Luggage
Corp., including its subsidiary, Florida Luggage Corp.,
(collectively Bentleys), a specialty retailer
of travel products with 106 stores based in Miami, Florida. We
operated these two chains for 24 and 19 months,
respectively, with unsatisfactory financial results and, as a
result, on November 19, 2002, we announced the liquidation
of all 135 stores operated by El Portal and Bentleys (the
Travel Subsidiaries). The Travel Subsidiaries
business is classified as discontinued operations in our
consolidated financial statements and in Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations. Fiscal years 2001 and 2000 have
been reclassified to present discontinued operations for the
Travel Subsidiaries. As a result of the significance of these
reclassifications related to our discontinued operations for the
Travel Subsidiaries, our 2001 and 2000 consolidated financial
statements, which were previously audited by other independent
auditors who have ceased operations, have been re-audited by our
current independent auditors.

Reorganization
and Partial Store Liquidation

On January 22, 2004, we announced that we
would liquidate up to 100 underperforming mall and outlet stores
(subsequently revised to 111 stores  the
liquidation stores) and eliminate approximately 950
store-related positions. We retained a third party liquidator
and real estate firm to assist in this process. The liquidation
stores were selected based on strategic criteria, including
negative sales and earnings trends, projected real estate costs,
location, and financial conditions within the market. In
addition, we announced the elimination of approximately 70
positions at our corporate headquarters in Brooklyn Park,
Minnesota and our distribution center in Las Vegas, Nevada and
the closure of our distribution center in Las Vegas, Nevada. For

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these actions, we expect to take a combined
charge of approximately $34.0 to $36.0 million, of which
approximately $18.0 to $20.0 million will be non-cash.
Approximately $8.6 million of this charge was recorded in
the fourth quarter of 2003 and the remaining $25.0 to
$27.0 million will be expensed primarily in the first half
of 2004. Anticipated proceeds of the liquidation inventory will
range from $14.0 to $16.0 million. The total cash outlay is
anticipated to be at or near zero.


Additional
Financing

On April 25, 2004, we entered into a common
stock and warrant purchase agreement pursuant to which we agreed
to issue 17,948,718 shares of our common stock to three
institutional investors at a price of $1.95 per share (the
Equity Financing). As additional consideration for
the investors commitment, we have issued two million
warrants exercisable for five years to the investors, and at
closing, we will issue an additional two million warrants
exercisable for five years, each at an exercise price of $3.00
per share of common stock. The consummation of the Equity
Financing is subject to certain closing conditions, the
principal condition being shareholder approval. See
Item 7. Managements Discussion and Analysis of
Financial Condition Subsequent Event.

We intend to use the proceeds from the Equity
Financing to repay our 11 1/4% Senior Notes due
August 15, 2004, (the 11 1/4% Senior
Notes) and for general working capital purposes. Covenants
contained within our senior credit facility prohibit us from
borrowing under the revolving portion of our facility and limit
our letters of credit until funds for the payment of the
principal of our 11 1/4% Senior Notes are deposited in an
account controlled by the Agent under our senior credit
facility. We expect that we will need to access the revolving
portion of our credit facility by the middle of July 2004. There
can be no assurance however, that we will be able to complete
the Equity Financing before this time. If we are unable to close
the Equity Financing for any reason, we will need to find an
alternative source of permitted financing for the repayment of
our 11 1/4% Senior Notes. There can be no assurances that
we would be able to obtain such alternative financing before we
need to access our credit facility or repay the 11 1/4%
Senior Notes.

Merchandise Strategy

The elements of our merchandise strategy combine
to create an assortment of labels and products that appeal to
consumers from a broad range of socio-economic, demographic and
cultural profiles. We completed internal market research during
2002 and 2003, and we will continue to survey our customers and
potential customers each year to update our customer
demographics. We believe that our strategy will continue to
position us as the leading specialty retailer of quality leather
outerwear, accessories and apparel and strengthen our brand
position. The principal elements of our merchandise strategy
include:

Grow Brand
Recognition.Our goal is to promote
our proprietary labels and enhance their recognition among
consumers. Our proprietary labels target specific customer
segments: (i) M. Julian® and Maxima® for
fashion-savvy young men and women, (ii) Pelle Studio®
for the more sophisticated, confident and fashion-aware segment
and (iii) Wilsons LeatherTM for the classic,
traditional, value-conscious segment. In addition to our
national network of stores, we promote the Wilsons Leatherbrand through a variety of in-store visual presentations,
radio, newspaper and magazine advertising, direct mail
promotions and our e-commerce site. Reflecting our strength as a
mass-market retailer, we are expanding the power of the
Wilsons Leatherbrand by focusing our marketing and
merchandising on both classic and colorful fashion-forward
styles designed to reach a much broader market. We will continue
to market to our customers ethnic backgrounds, ages,
income levels and fashion requirements through our unique
lifestyle sub-brands.

Optimize Merchandise
Assortment.We reduced our outerwear
stock keeping unit (SKU) count by approximately 50%
during the fall of 2003. We did this by emphasizing key styles
in each of our store formats. After analyzing our holiday season
performance, we determined that we had over-reduced our SKU
count, particularly for womens styles. We are currently
evaluating our merchandise assortment to optimize our mix and
price points. We continue to utilize our outlet channel to more
effectively clear mall merchandise in order to keep our mall
stores fresh and up to date.

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Target Core Customer
Base.Our primary focus this past year
was on using our distinct proprietary labels to tailor price
points and levels of sophistication to grow with customers
throughout their lives. We target customers 18 to 37 years
old, and we are working to ensure that our stores are assorted
with the products they want. Our market research indicated that
the median age of our high-potential, high-volume core customer
is 28 years of age. We are intensifying our efforts to
improve our customer focus and rebuild consumer loyalty by
delivering fashion-right leather merchandise that fits the
lifestyle needs of our customers at prices they find attractive.

Increase the Merchandising of
Accessories.We are focused on
building our accessories business within our retail concepts
with an added emphasis on handbags. To support our objective of
generating demand and sales throughout the year, we have
expanded the accessories assortment in our stores. Through the
development of new product styles and other merchandising
activities, we plan to utilize accessories as an additional way
of attracting more female customers into our stores. These
products complement our outerwear and apparel selection and lead
to higher add-on sales. Our accessories business has
proven to be less seasonal and has been one of the highest
margin and fastest growing categories in our stores.

Capitalize on Worldwide Sourcing
Network.We are able to leverage our
worldwide sourcing network to benefit our stores. Our staff of
in-house designers combines industry experience with the latest
fashion trends to produce product lines that are both classic
and fashion-forward. We have established strong relationships
with suppliers globally and our design team works closely with
our suppliers to ensure seamless development of leather styles,
colors and finishes. We have a staff of 47 professionals in Asia
and the sub-continent, South America, and Europe to ensure that
our designs are manufactured quickly with consistent, quality
standards. We believe that control of design and sourcing
results in shorter lead times than our competitors,
reducing inventory requirements and fashion risk and permitting
in-season reorders.

Pursue Multiple Store
Formats.Our distribution network of
multiple store formats allows us to specifically tailor our
stores with a wide selection of merchandise at multiple price
points and to optimize raw materials usage, inventory flow and
sales across all channels. We operate our stores in malls,
outlet centers and airports, and on an e-commerce site. We
believe we are creating a new level of excitement throughout our
mall stores, creatively using marketing and promotions, and
making sure that we have the optimal leather merchandise
assortment in our mall stores. Our outlet stores enable us to
effectively manage inventories, drive year-round sales, extend
our brand and build our customer base. We also operate temporary
seasonal stores in malls during our peak selling season to
complement our existing store base. These seasonal stores
provide us with opportunities to drive incremental sales, test
new markets and further strengthen the Wilsons Leatherbrand nationally. In the future, we plan to evaluate and
test new growth vehicles, including new retail channels,
compatible new store concepts and new product offerings.

Product Design and Merchandising

Our mission is to tailor our merchandising to a
targeted customer base by offering a broad selection of quality
merchandise at attractive prices. We offer more than 3,200
styles of leather outerwear, accessories, and apparel throughout
our stores. The accessories consist primarily of gloves,
handbags, wallets, briefcases, computer cases, planners and
belts. Our merchandising staff, including buyers and designers,
continually monitors emerging trends and changing consumer
preferences and utilizes information provided by our customers
to ensure that we maintain a consistent and up-to-date selection
of products. To further minimize our inventory risk and maximize
our sales performance, our merchandising team utilizes an
advanced management information system to test new merchandise
in many of our stores before making large commitments and
purchase orders with our suppliers.

We believe that our integrated worldwide sourcing
and in-house design capabilities enable us to gain numerous
competitive advantages. As new market trends are identified, we
make merchandise design decisions to ensure that key features of
fashion merchandise are incorporated in future designs. Our
in-house design staff will create and develop designs to ensure
a consistent quality, theme and image. As part of the design
process, we also consider the anticipated retail prices and
profit margins of the merchandise, the

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availability of leather and raw materials and the
capabilities of the factories that will manufacture the
merchandise.


Some key elements for merchandising our stores
include:



| |   |                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | identifying customer lifestyle segments based on
    demographic factors such as age, fashion awareness, purchasing
    behavior, income, location and ethnicity;
|
| |  | building strong brand recognition and utilizing
    our proprietary labels to target customer lifestyle segments;                                                
|
| |  | driving accessories growth through new styles
    designed to attract customers into our stores; and                                                             
|
| |  | actively managing pricing to maintain value for
    the largest possible customer base.                                                                          

We believe that the name and reputation of the
Wilsons Leatherbrand assures customers they are
purchasing quality and fashionable merchandise. Approximately
90% of the merchandise in our stores is designed and sold under
our proprietary labels: M. Julian®, Maxima®,
Pelle Studio® and Wilsons LeatherTM.

Each of our labels is supplemented with in-store
promotions and visual presentations to further emphasize
customer lifestyle segmentation. We additionally offer a limited
selection of other designer brands such as Kenneth Cole®
and Andrew Marc® in our stores to highlight the value of
our proprietary labels.

The following table sets forth the percentages of
net sales by major merchandise category from 2001 to 2003:

|                     |  |      |       |      |  |      |       |   |  |  |       |  
|-------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                     |  | 2003 |       | 2002 |  | 2001
|Merchandise Category |  |      |       |      |  |     
|Accessories          |  |      | 33.6  | %    |  |      | 31.6  | % |  |  | 28.0  | %
|Womens apparel      |  |      | 33.1  | %    |  |      | 35.0  | % |  |  | 36.3  | %
|Mens apparel        |  |      | 33.3  | %    |  |      | 33.4  | % |  |  | 35.7  | %
|                     |  |      |       |      |  |      |       |   |  |  |       |  
|Total                |  |      | 100.0 | %    |  |      | 100.0 | % |  |  | 100.0 | %
|                     |  |      |       |      |  |      |       |   |  |  |       |  

Sourcing and Quality Assurance

We have developed strong and long-standing
relationships with our manufacturers and tanneries. In 2003,
approximately 90% of our leather garments and accessories were
manufactured by over 60 independently owned manufacturing
facilities throughout Asia and the sub-continent. Our
relationships, coupled with our significant purchasing power,
enable us to achieve economies of scale and ensure that we can
consistently maintain our quality and obtain sufficient
manufacturing capacity when needed.

We believe that our extensive knowledge of the
worlds leather markets is critical in mitigating price
fluctuations in the cost of raw leather during times of high
volatility. While we do not normally obtain possession of a
significant level of raw material, we assist tanneries and
factories in sourcing raw material from all over the world,
ensuring broad access to the marketplace. However, from time to
time we purchase supplies of leather to take advantage of market
opportunities to ensure reserves of quality materials at
acceptable prices. Raw leather is primarily sourced in Italy and
South Korea, with additional product sourced from South America,
Australia, China and New Zealand. Our buying strategies, coupled
with our expertise in leather development, enable us to purchase
entire lots of raw leather and use varying grades of raw leather
in different products, providing us with significant price
advantages.

Our sourcing infrastructure and strong
relationships with our suppliers allow us to effectively control
merchandise production without owning manufacturing facilities.
Our designers and buyers work closely with our sourcing team to
identify and develop leather styles, colors and finishes. We
have a staff of 47 professionals located in China, India, Hong
Kong, South Korea, Thailand, Italy and South America who are
primarily responsible for overseeing the production and quality
assurance process in overseas factories and are supervised by
the sourcing team at our corporate headquarters. Their
responsibilities include inspecting leather

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at the tanneries, coordinating the production
capacity, matching product samples to our technical
specifications, and providing technical assistance and quality
assurance through inspection in the factories.


Our merchandising department works closely with
our overseas personnel to coordinate order fulfillment. We have
consistently maintained our merchandise production cycle at
approximately 90 days. We believe this production cycle is
shorter than that of our competitors and allows us to better
control our production needs and reorder faster-selling
merchandise during our peak selling season. We believe that this
strategy results in more effective and efficient inventory
management and gives us the ability to manage production as the
business climate changes, thus reducing our need for markdowns
on merchandise at the end of our peak selling season.

Store Formats and Locations

As of January 31, 2004, we operated 460
retail stores (excluding the 111 liquidation stores) located in
45 states and the District of Columbia, including
334 mall stores, 107 outlet stores and 19 airport
locations. We regularly supplement our permanent mall stores
with temporary seasonal stores during our peak selling season.
From October 2003 through January 2004, we operated
229 seasonal stores.

Our e-commerce site at
www.wilsonsleather.com offers leather outerwear,
accessories and apparel, as well as company background and
financial information.

Store Locations as of January 31,
2004:

|                     |  |      |     |         |  |         |     |       |  |  |    |  |  |  |     | 
|-------------------- |  | ---- | --- | ------- |  | ------- | --- | ----- |  |  | -- |  |  |  | --- | 
|State                |  | Mall |     | Outlets |  | Airport |     | Total
|                     |  |      |     |         |  |         |     |      
|Alabama              |  |      | 2   |         |  |         | 2   |       |  |  |   |  |  |  | 4   | 
|Arkansas             |  |      | 1   |         |  |         |    |       |  |  |   |  |  |  | 1   | 
|Arizona              |  |      | 2   |         |  |         | 1   |       |  |  |   |  |  |  | 3   | 
|California           |  |      | 33  |         |  |         | 13  |       |  |  | 2  |  |  |  | 48  | 
|Colorado             |  |      | 6   |         |  |         | 3   |       |  |  |   |  |  |  | 9   | 
|Connecticut          |  |      | 5   |         |  |         | 1   |       |  |  |   |  |  |  | 6   | 
|Delaware             |  |      | 3   |         |  |         | 1   |       |  |  |   |  |  |  | 4   | 
|Florida              |  |      | 9   |         |  |         | 7   |       |  |  | 1  |  |  |  | 17  | 
|Georgia              |  |      | 11  |         |  |         | 5   |       |  |  | 3  |  |  |  | 19  | 
|Iowa                 |  |      | 5   |         |  |         | 1   |       |  |  |   |  |  |  | 6   | 
|Idaho                |  |      | 1   |         |  |         |    |       |  |  |   |  |  |  | 1   | 
|Illinois             |  |      | 23  |         |  |         | 3   |       |  |  | 5  |  |  |  | 31  | 
|Indiana              |  |      | 8   |         |  |         | 2   |       |  |  |   |  |  |  | 10  | 
|Kansas               |  |      | 2   |         |  |         |    |       |  |  |   |  |  |  | 2   | 
|Kentucky             |  |      | 4   |         |  |         |    |       |  |  |   |  |  |  | 4   | 
|Louisiana            |  |      | 2   |         |  |         | 1   |       |  |  |   |  |  |  | 3   | 
|Massachusetts        |  |      | 11  |         |  |         | 2   |       |  |  |   |  |  |  | 13  | 
|Maryland             |  |      | 7   |         |  |         | 4   |       |  |  |   |  |  |  | 11  | 
|Maine                |  |      | 3   |         |  |         | 2   |       |  |  |   |  |  |  | 5   | 
|Michigan             |  |      | 18  |         |  |         | 3   |       |  |  |   |  |  |  | 21  | 
|Minnesota            |  |      | 14  |         |  |         | 3   |       |  |  | 1  |  |  |  | 18  | 
|Missouri             |  |      | 5   |         |  |         | 3   |       |  |  |   |  |  |  | 8   | 
|Mississippi          |  |      |    |         |  |         | 2   |       |  |  |   |  |  |  | 2   | 
|North Carolina       |  |      | 8   |         |  |         | 3   |       |  |  |   |  |  |  | 11  | 
|North Dakota         |  |      | 3   |         |  |         |    |       |  |  |   |  |  |  | 3   | 
|Nebraska             |  |      | 2   |         |  |         |    |       |  |  |   |  |  |  | 2   | 
|New Hampshire        |  |      | 4   |         |  |         | 2   |       |  |  |   |  |  |  | 6   | 
|New Jersey           |  |      | 10  |         |  |         | 3   |       |  |  | 1  |  |  |  | 14  | 
|New Mexico           |  |      | 2   |         |  |         | 1   |       |  |  |   |  |  |  | 3   | 
|Nevada               |  |      | 2   |         |  |         | 3   |       |  |  |   |  |  |  | 5   | 
|New York             |  |      | 21  |         |  |         | 5   |       |  |  |   |  |  |  | 26  | 
|Ohio                 |  |      | 17  |         |  |         | 3   |       |  |  |   |  |  |  | 20  | 
|Oklahoma             |  |      | 3   |         |  |         |    |       |  |  |   |  |  |  | 3   | 
|Oregon               |  |      | 6   |         |  |         | 1   |       |  |  |   |  |  |  | 7   | 
|Pennsylvania         |  |      | 18  |         |  |         | 4   |       |  |  | 2  |  |  |  | 24  | 
|Rhode Island         |  |      | 1   |         |  |         | 1   |       |  |  |   |  |  |  | 2   | 
|South Carolina       |  |      |    |         |  |         | 4   |       |  |  |   |  |  |  | 4   | 
|South Dakota         |  |      | 2   |         |  |         |    |       |  |  |   |  |  |  | 2   | 
|Tennessee            |  |      | 7   |         |  |         | 4   |       |  |  |   |  |  |  | 11  | 
|Texas                |  |      | 19  |         |  |         | 5   |       |  |  | 1  |  |  |  | 25  | 
|Utah                 |  |      | 2   |         |  |         | 1   |       |  |  | 1  |  |  |  | 4   | 
|Virginia             |  |      | 6   |         |  |         | 3   |       |  |  | 1  |  |  |  | 10  | 
|Washington           |  |      | 11  |         |  |         | 2   |       |  |  |   |  |  |  | 13  | 
|Wisconsin            |  |      | 13  |         |  |         | 3   |       |  |  |   |  |  |  | 16  | 
|West Virginia        |  |      | 1   |         |  |         |    |       |  |  |   |  |  |  | 1   | 
|District of Columbia |  |      | 1   |         |  |         |    |       |  |  | 1  |  |  |  | 2   | 
|                     |  |      |     |         |  |         |     |       |  |  |    |  |  |  |     | 
|GRAND TOTAL          |  |      | 334 |         |  |         | 107 |       |  |  | 19 |  |  |  | 460 | 
|                     |  |      |     |         |  |         |     |       |  |  |    |  |  |  |     | 

Site Selection for Store Openings and
Closings.We use a detailed process to
identify favorable store locations in existing or new markets.
Within each targeted market, we identify potential sites for new
and replacement stores by evaluating market dynamics. Our site
selection criteria include:



| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | customer segment and demographic data derived
    from our point-of-sale network and outside sources;
|
| |  | information relating to population density in
    concentric circles surrounding the mall;           
|
| |  | the performance of past seasonal stores within
    the mall;                                         
|
| |  | the proposed location within the mall; and                                                           
|
| |  | projected profitability, cost, return on
    investment and cash-flow objectives.                    

6



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Our cross-functional review committee approves
proposed store projects, including new sites and lease renewals.
We periodically evaluate our stores to assess the needs for
remodeling or the timing of possible closure based on economic
factors. We use our knowledge of market areas and rely upon the
familiarity of our name and our national reputation with
landlords to enhance our ability to obtain prime store locations
and negotiate favorable lease terms. In 2004, we plan to open
four stores (primarily outlets) where we have pre-existing
commitments and close approximately 30 to 40 store locations
(primarily as a result of natural lease terminations).

We maintain a dedicated staff with extensive
experience in opening and closing our temporary seasonal stores,
which we leverage in our other concepts. Once a seasonal store
site is selected and the lease is executed, we are usually able
to open a store within three days.

Our real estate, store planning and executive
management teams analyze the performance and profitability of
our stores and markets to assess the potential for new and
replacement stores and to identify underperforming stores. We
estimate that our average net investment in our permanent mall
stores is approximately $236,000 and approximately $319,000 for
our outlet stores, including inventory and capital investment,
net of landlord contributions. In 2004, we expect new stores to
generate a three-year internal rate of return of approximately
15% and have an average discounted payback period of two to
three years. We cannot ensure that our future store
openings will have similar results to those experienced in the
past.

The following chart highlights the number of
stores, by format, opened or closed in each of the last three
years:

|                                       |                       |      |     |        |   |         |    |       |   |  |    |    |   |  |     |      |  
|-------------------------------------- | --------------------- | ---- | --- | ------ | - | ------- | -- | ----- | - |  | -- | -- | - |  | --- | ---- | -
|                                       |                       | Mall |     | Outlet |   | Airport |    | Total
|                                       |                       |      |     |        |   |         |    |      
|Store count as of February 3, 2001     |                       |      | 468 |        |   |         | 74 |       |   |  | 31 |    |   |  | 573 |     
|                                      
|Fiscal year ended February 2,
    2002 |                       |      |     |        |   |         |    |       |   |  |    |    |   |  |     |     
|                                       | Stores opened         |      |     | 39     |   |         |    | 34    |   |  |    | 7  |   |  |     | 80   |  
|                                       | Stores closed         |      |     | (15    | ) |         |    | (14   | ) |  |    | (5 | ) |  |     | (34  | )
|                                       |                       |      |     |        |   |         |    |       |   |  |    |    |   |  |     |     
|                                       | End of year count     |      |     | 492    |   |         |    | 94    |   |  |    | 33 |   |  |     | 619  |  
|                                      
|Fiscal year ended February 1,
    2003 |                       |      |     |        |   |         |    |       |   |  |    |    |   |  |     |     
|                                       | Stores opened         |      |     | 12     |   |         |    | 22    |   |  |    |   |   |  |     | 34   |  
|                                       | Stores closed         |      |     | (21    | ) |         |    | (6    | ) |  |    | (8 | ) |  |     | (35  | )
|                                       |                       |      |     |        |   |         |    |       |   |  |    |    |   |  |     |     
|                                       | End of year count     |      |     | 483    |   |         |    | 110   |   |  |    | 25 |   |  |     | 618  |  
|                                      
|Fiscal year ended January 31,
    2004 |                       |      |     |        |   |         |    |       |   |  |    |    |   |  |     |     
|                                       | Stores opened         |      |     | 6      |   |         |    | 11    |   |  |    |   |   |  |     | 17   |  
|                                       | Stores closed         |      |     | (50    | ) |         |    | (8    | ) |  |    | (6 | ) |  |     | (64  | )
|                                       | Stores in liquidation |      |     | (105   | ) |         |    | (6    | ) |  |    |   |   |  |     | (111 | )
|                                       |                       |      |     |        |   |         |    |       |   |  |    |    |   |  |     |     
|                                       | End of year count     |      |     | 334    |   |         |    | 107   |   |  |    | 19 |   |  |     | 460  |  
|                                       |                       |      |     |        |   |         |    |       |   |  |    |    |   |  |     |     

Mall Stores.We
operated 334 permanent mall stores (excluding
105 stores in liquidation) as of January 31, 2004. Our
mall stores showcase a full range of leather outerwear,
accessories and apparel primarily under our proprietary labels.
These stores average approximately 2,600 total leased
square feet and are located in all types of shopping malls,
serving diverse demographics. A typical mall store will carry a
selection of approximately 1,300 different styles of our
merchandise.

We further supplement our permanent mall stores
with temporary seasonal stores to better capitalize on our peak
selling season. In 2003, we operated 213 seasonal mall stores.
We plan to operate approximately 100 seasonal mall stores
in 2004. Our temporary seasonal stores provide us the
opportunity to test prospective

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mall locations and are generally located in malls
where there is not a permanent store. A typical seasonal store
will carry approximately 450 styles of our merchandise.


Outlet Stores.Our
107 outlet stores (excluding 6 outlet stores in
liquidation) are located in 36 states and operate under the
names Wilsons Leather Outlet and Wallet Works. To maintain brand
image, we generally locate outlet stores in large outlet centers
in areas away from our permanent mall stores. Our Wilsons
Leather Outlet stores offer clearance items and special
outlet-only merchandise as well as certain key in-season
products. Wilsons Leather Outlet stores average approximately
4,000 total leased square feet and generally carry
approximately 2,200 styles of merchandise. Our Wallet Works
stores average 1,400 square feet and carry only
accessories. We currently have minimal Wallet Works stores open
and plan to close the remaining locations over time. In 2003 we
supplemented our permanent outlet stores with temporary seasonal
outlet stores to better capitalize on our peak selling season.
We operated 16 seasonal outlet stores in 2003. We do not plan to
open any seasonal outlet stores in 2004.

Airport Stores.We
launched our airport stores in an effort to showcase our
Wilsons Leatherbrand and accessories. Our
19 airport stores play an instrumental role in growing
brand awareness and showcasing our products to millions of
travelers who pass by our airport stores each year. These stores
average approximately 700 total leased square feet and
carry approximately 1,000 of our best-selling styles, primarily
accessories.

E-Commerce.Our
e-commerce site www.wilsonsleather.com offers
an extension of our store experience and is intended to increase
brand awareness, strengthen the relationship with our customers,
make our merchandise more accessible to our customers and
facilitate cross-marketing with our stores. We are also using
e-mail as a means of reaching out to our customers. The
e-commerce site features key in-season merchandise as well as
promotional merchandise and has been revamped to decrease the
cost structure and improve customer service. In 2003, we had
2.5 million visitors at our www.wilsonsleather.com
e-commerce site, compared to 1.9 million in 2002, and
achieved $4.5 million in online sales, which equates to a
flat year-over-year comparison. We plan to continue to invest
prudently in the development and maintenance of our online
presence, with the Internet serving as an additional shopping
format for our customers, as well as a vehicle for building
brand awareness. We plan to outsource the e-commerce operations
to a third party during the second quarter of 2004.

Store Operations.Our store operations are organized by region. The mall, outlet
and airport stores are divided into four regions, with each
region subdivided into districts. Each district manager is
responsible for approximately 14 stores. Individual stores
are staffed by a manager, an assistant manager, and a complement
of full and part-time sales associates whose numbers fluctuate
based upon expected and actual sales. A typical store manager
has an average of four years experience with our company. Store
managers are responsible for sales and other operations
including hiring and associate training, visual display and
inventory control. All other aspects of store operations are
administered centrally by our corporate offices. Temporary
seasonal stores have a dedicated staff with the same
responsibilities as the staff of our permanent stores. Temporary
seasonal stores also provide an opportunity to develop and
assess the skills of associates being considered for future
permanent store management positions.

A core aspect of our corporate culture is to
focus on employee training and customer service. We emphasize
sales associate training to ensure each associate has knowledge
of our merchandise and the customer segments that the various
labels are designed to serve. Our associates receive ongoing
training in the unique properties of leather, the appropriate
methods of care for the various leather finishes and the product
specifications and details of our merchandise. In addition, we
train associates to perform minor repairs in the store for
customers free of charge.

We regularly evaluate our customer service
performance through customer comment cards, direct surveys of
customers who return merchandise and mall intercept and
telephone interview surveys. We also periodically conduct
customer focus groups. Issues relating to policy, procedure or
merchandise are frequently reviewed to improve service and
quality.

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Distribution

Merchandise for our stores is shipped directly
from merchandise vendors or overseas manufacturers to our
distribution center located in Brooklyn Park, Minnesota and,
until it was closed in January 2004, our distribution
center in Las Vegas, Nevada. We are party to a 15-year
operating lease, with a five-year option to extend, for our
289,000 square-foot distribution center in Brooklyn Park,
Minnesota that is equipped with automated garment-sorting
equipment and hand-held radio frequency scanners for rapid bar
code scanning and enhanced merchandise control. Approximately
30% of the merchandise received in the distribution center is
immediately sent to our stores through cross-docking, which
allows for minimal handling and storage. Additional merchandise
is stored in the distribution center to replenish stores weekly
with key styles and to build inventory for the peak selling
season. Through the integration of merchant and distribution
systems, we are able to replenish goods frequently to ensure
that stores maintain an appropriate level of inventory. As was
mentioned in Reorganization and Partial Store
Liquidation, we ceased distribution activities and closed
the Las Vegas, Nevada distribution center in January 2004.

Marketing and Advertising

Our marketing strategy is to position Wilsons
Leatheras the preferred retailer of quality leather
products for our target customer, capitalizing on our position
as the leading specialty retailer of leather outerwear,
accessories and apparel in the United States. Through compelling
fashion photo imagery in our stores and store fronts, the
Wilsons Leatherbrand identity and current fashion trends
are communicated to customers. Our airport stores showcase the
Wilsons Leatherbrand to millions of travelers annually
in some of the busiest airports in the world. Our e-commerce
site makes our merchandise more accessible to customers,
increases brand awareness and facilitates cross-marketing
efforts with our brick-and-mortar stores.

Marketing to a customers lifestyle supports
our proprietary label collections. Each label targets specific
lifestyles and offers apparel and accessories ranging from
classic to contemporary styling. Targeting Americans between the
ages of 18 and 37 is a key marketing initiative. Market research
we completed during 2002 and 2003 indicates that those consumers
are high-potential, high-volume customers. In addition, we
believe cross-channel brand marketing will be an important
driver in our future success. By leveraging our various selling
formats malls, outlets, airports and our e-commerce
site we intend to strengthen Wilsons Leatherin the
marketplace as the fashion leather leader.

Our marketing efforts extend to our corporate
partners as well. In a move to target more than 75 million
NASCAR fans, we launched an exclusive line of Dale Earnhardt
Incorporated products. The products, including leather jackets
and accessories bearing the marks of Dale Earnhardt Jr.,
the Dale Earnhardt LegacyTM program and NASCAR®,
are sold exclusively throughout Wilsons Leather stores
nationwide. The official launch of the program was promoted and
advertised in leading NASCAR publications in the spring of 2003.
In addition, we launched an exclusive line of Tony Stewart®
products through Joe Gibbs Racing, Inc. Our NASCAR licensed
products have been popular with our customers and we expect to
continue to enhance this product line. In addition, in spring
2004, we added a motorcycle theme with a promotion through
Kawasaki. Our marketing emphasis for spring 2004 has been
focused on highlighting our merchandise through brightly colored
store signage.

We circulated freestanding inserts in various
newspapers during our seasonal promotional period during 2003
and expect to continue to make use of this form of promotion in
key markets across the United States during 2004.

Information Systems

Since 1997, we have invested more than
$29.0 million in improving our information systems,
completing the replacement of major operating platforms in the
functional areas of merchandising, finance, human resources,
manufacturing and store point-of-sale and back-office systems.
These systems provide all levels of our organization access to
information, powerful analytical tools to improve our
understanding of sales and operating trends and the flexibility
needed to anticipate future business needs. We believe that our
current

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systems, which are fully scalable to accommodate
future growth, are adequate to meet our operational plans over
the next several years.


Our point-of-sale and back-office systems have
been designed to, among other things, free store employees
time so that they can focus on serving our customers. Our
point-of-sale system gives each store the ability to view
inventory at other store locations, automates store operations,
human resource and inventory management documentation and
enables customer information collection. On a daily basis, we
obtain sales and inventory data from stores, facilitating
merchandising decisions regarding the allocation of inventory,
pricing and inventory levels. Our connection to our overseas
product sourcing offices provides both field management and home
office personnel access to pertinent business information. The
continuous flow of information to and from our overseas
personnel permits us to control inventory better, plan
manufacturing capacity, regulate merchandise flow and ensure
product consistency among manufacturers.

Competition

The retail leather outerwear, accessories, and
apparel industry is both highly competitive and fragmented. We
believe that the principal bases upon which we compete are
selection, style, quality, price, value, store location and
service. We compete with a broad range of other retailers,
including specialty retailers, department stores, mass
merchandisers and discounters and other retailers of leather
apparel and accessories. During 2003 we faced increased
competition from the mass merchandisers and discounters.

Trademarks

We conduct our business under various trade
names, brand names, trademarks and service marks in the United
States, including M. Julian®, Maxima®, Pelle
Studio®, Wilsons The Leather ExpertsTM, Tannery
West®, Georgetown Leather DesignTM,
WalletWorksTM, Wilsons LeatherTM,
Handcrafted by Wilsons The Leather ExpertsTM, and
Vintage by Wilsons The Leather ExpertsTM.

Employees

As of January 31, 2004, we had approximately
4,150 full-and part-time associates, including
approximately 950 associates working at the
111 liquidation stores. During our peak selling season,
from October through January, we typically employ approximately
3,800 additional seasonal associates. We consider our
relationships with our associates to be good. None of our
associates are governed by collective bargaining agreements.

Available Information

Our Internet address is
www.wilsonsleather.com. We make available free of charge
through our Internet Web site our annual report on
Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) of the Exchange Act,
as amended, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
Securities and Exchange Commission.

Risk Factors

The risks and uncertainties described below are
not the only ones facing our company. Additional risks and
uncertainties also may impair our business operations. If any of
the following risks actually occur, our business, financial
condition and results of operations would likely suffer.



| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | We are unable to borrow under our senior
    credit facility until we obtain financing sufficient to pay off
    the 11 1/4% Senior Notes.

Covenants contained within our senior credit
facility prohibit us from borrowing under the revolving portion
of that facility and limit our letters of credit to
$15.0 million (plus a specified letter of credit for an
aggregate amount of $3.0 million) until funds for the
payment of the principal of our 11 1/4% Senior

10



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Notes are deposited in an account controlled by
the Agent under our senior credit facility. Additional
provisions in our senior credit facility limit our ability to
fund the payment of our 11 1/4% Senior Notes from the
issuance of indebtedness. On April 25, 2004, we entered
into an agreement related to the Equity Financing with three
institutional investors to sell 17,948,718 shares of our
common stock for the aggregate consideration of
$35.0 million, which, if consummated, would provide funds
sufficient to pay off the 11 1/4% Senior Notes;
however, shareholder approval must be obtained and other
conditions must be met before we will receive these funds.
See  Additional Financing. We can make no
assurances that we will be able to consummate the Equity
Financing. If we are unable to close the Equity Financing for
any reason, we will need to obtain an alternative source of
permitted financing before we can borrow under the revolving
portion of our senior credit facility. We can make no assurances
that we will be able to obtain such alternative financing on
acceptable terms or at all. We anticipate that we will need to
access our senior credit facility by the middle of July 2004 and
if we do not obtain the necessary funding from some source other
than operations before such time, we could eventually deplete
our cash reserves and become insolvent or have to consider other
alternatives, including filing for bankruptcy.




| |                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We do not currently have the funds to pay the
    principal amount of our 11 1/4% Senior Notes when due
    in August 2004 and do not anticipate that we will be able
    to refinance the 11 1/4% Senior Notes with
    indebtedness on terms that are permitted by our senior credit
    facility.

Our 11 1/4% Senior Notes are due on
August 15, 2004. We currently do not have the funds to pay
the outstanding principal amount of the 11 1/4% Senior
Notes, which equals $30.6 million. Our senior credit
facility prohibits us from incurring any indebtedness which
refunds, renews, extends or refinances the
11 1/4% Senior Notes on terms more burdensome than the
current terms of such notes, and the rate of interest with
respect to any replacement notes cannot exceed the sum of the
rate of interest on United States treasury obligations of like
tenor at the time of such refunding, renewal, extension or
refinancing, plus 7.0% per annum. We anticipate that we will not
be able to refund, renew, extend or refinance the
11 1/4% Senior Notes with indebtedness that would
comply with such limitations. The senior credit facility permits
us to pay off the 11 1/4% Senior Notes with proceeds
from the sale of equity. As noted earlier, we have entered into
an agreement related to the Equity Financing to sell
17,948,718 shares of our common stock for an aggregate
consideration of $35.0 million, which, if consummated,
would provide funds sufficient to pay off the 11 1/4%
Senior Notes. However, there is no assurance that we will be
able to consummate the Equity Financing. If we are unable to pay
off the 11 1/4% Senior Notes when they are due, the
noteholders would have the right to exercise their legal rights
and remedies. In addition, such failure to pay would result in a
default under our senior credit facility permitting the senior
lenders to accelerate payment of indebtedness (including letters
of credit and the Term B promissory note) under the senior
credit facility and allow them to pursue other remedies
(including foreclosing their liens on our assets). In such
event, we would have to consider other alternatives, including
filing for bankruptcy. See We are unable to borrow
under our senior credit facility until we obtain financing
sufficient to pay off the 11 1/4% Senior Notes.



| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The instruments governing our outstanding debt
    place certain obligations on us and restrictions on our
    operations, which, if not met, could result in our inability to
    borrow under our senior credit facility or other
    penalties.

Covenants contained within our senior credit
facility, as amended, require us to meet certain financial tests
and limit capital expenditures. In addition, certain covenants
and restrictions under our senior credit facility and the
indenture governing our 11 1/4% Senior Notes due
August 2004 limit our ability to pay cash dividends or make
other distributions, to acquire or merge with another entity, to
make investments, loans or guarantees, to borrow additional
funds or dispose of assets and to create liens or other
encumbrances, possibly affecting our flexibility in planning
for, and reacting to, changes in our business.

The failure to comply with the covenants and
restrictions contained in either the senior credit facility or
the indenture governing our 11 1/4% Senior Notes
could, if not cured or waived, result in a default permitting
the senior lenders to accelerate payment of indebtedness
(including letters of credit and the Term B promissory note)
under the senior credit facility and allow them to pursue other
remedies (including foreclosing their liens on our assets).
Acceleration of the indebtedness under the senior credit
facility or the

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occurrence of another event of default under the
indenture governing our 11 1/4% Senior Notes would
also permit the holders of the 11 1/4% Senior Notes to
accelerate payment of such notes and allow such holders to
pursue their remedies.


Our ability to meet our debt service obligations
will be dependent upon our future performance, which will be
subject to general economic conditions and financial, business
and other factors affecting our operations. If we are unable to
generate sufficient cash flow from operations in the future to
service our debt, we may be required to refinance all or a
portion of existing debt or to obtain additional financing.
There can be no assurance that any such refinancing or
additional financing would be possible or could be obtained on
terms that are favorable to us.



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to exit store leases for
    the 111 liquidation stores on terms that are acceptable to us
    and to our senior lenders.

A key component of our restructuring efforts
relates to lease terminations and store liquidations for our 111
liquidation stores. Currently, we have not reached agreement
with landlords with respect to 78% of the leases for the 111
liquidation stores. In addition, our senior lenders have limited
the aggregate amount that we may pay to exit such leases. We can
make no assurances that we will be able to exit such leases on
terms acceptable to us and our senior lenders.



| |                                                                
| | ---------------------------------------------------------------
| | Changes in customer shopping patterns could
    harm our sales.

Most of our stores are located in enclosed
shopping malls and regional outlet centers. Our ability to
sustain or increase the level of sales depends in part on the
continued popularity of malls and outlet centers as shopping
destinations and the ability of malls and outlet centers,
tenants and other attractions to generate a high volume of
customer traffic. Many factors beyond our control may decrease
mall traffic, including, among other things, economic downturns,
the closing of anchor department stores, weather, concerns of
terrorist attacks, construction and accessibility to strip malls
or alternative shopping formats (such as catalogs, e-commerce or
discount stores). Any changes in consumer preferences and
shopping patterns could adversely affect our financial condition
and operating results.



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | The high level of competition in our markets
    may lead to reduced sales and profits.

The retail leather apparel and accessories
markets are highly competitive and fragmented. We compete with a
broad range of other retailers, including other specialty
retailers, department stores, mass merchandisers and
discounters, many of which have greater financial and other
resources. Increased competition may reduce sales, increase
operating expenses, decrease profit margins and negatively
affect our ability to obtain site locations and sales associates
and other employees. During 2003, we faced increased competition
from mass merchandisers and discounters. There can be no
assurance that we will be able to compete successfully in the
future and, if we are unable to do so, our financial condition
and operating results could be adversely affected.



| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The decline in general economic conditions has
    led to reduced consumer demand for our leather apparel and
    accessories, and could adversely affect our business and
    liquidity.

Our future capital requirements depend on the
sustained demand for our leather products. Many factors affect
the level of consumer spending on our products, including, among
others:



| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| |  | general business conditions;                                                                             
|
| |  | interest rates;                                                                                          
|
| |  | the availability of consumer credit;                                                                     
|
| |  | weather;                                                                                                 
|
| |  | continued hostilities in the Middle East and
    other significant national and international events; and
|
| |  | taxation and consumer confidence in future
    economic conditions.                                      

12



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##### Table of Contents



Consumer purchases of discretionary items, such
as our products, tend to decline during recessionary periods
when disposable income is lower. The general slowdown in the
United States economy and the uncertain economic outlook has
adversely affected consumer spending habits and mall traffic,
caused us to accelerate store closings, and resulted in lower
than expected net sales on a quarterly and annual basis.



| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | Our inability to effectively respond to
    changes in fashion trends and consumer demands could adversely
    affect our sales.

Our success depends on our ability to identify
fashion and product trends as well as our ability to anticipate,
gauge and react swiftly to changes in consumer demand. Our
products must remain appealing for a broad range of consumers
with diverse and changing preferences; however, our orders for
products must be placed in advance of customer purchases. We
cannot be certain that we will be able to identify new fashion
trends and adjust our product mix in a timely manner. If we
misjudge market preferences, we may be faced with significant
excess inventories for some products and missed opportunities
for other products. In response, we may be forced to rely on
additional markdowns or promotional sales to dispose of excess,
slow-moving inventories, which may have a material adverse
effect on our business, financial condition and results of
operations.

In addition, we cannot provide assurance that
consumer sentiment toward and demand for leather will not change
or that we will be able to react to any such changes effectively
or at all. For example, certain countries, including the United
States and Canada, that supply the hides used to make leather
products have experienced outbreaks of certain highly publicized
diseases, namely Bovine Spongiform Encephalopathy
(mad-cow disease) and hoof-and-mouth disease. There
can be no assurance that demand for our leather products will
not decline as a result of the publicity regarding these
diseases or new scientific findings with respect to such
diseases. If we are unable to anticipate, gauge and respond to
changes in demand or if we misjudge fashion trends, our
financial condition and operating results could be harmed.



| |                                                                                                  
| | -------------------------------------------------------------------------------------------------
| | Our comparable store sales and results of
    operations have declined over the past three years.

Our comparable store sales declined 6.8%, 7.0%,
and 12.1% in 2003, 2002, and 2001, respectively. We had a net
loss from continuing operations of $33.6 million and
$14.3 million in 2003 and 2002, respectively, and net
income from continuing operations of $7.8 million in 2001.
Our comparable store sales are affected by a variety of factors,
including:



| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | consumer shopping preferences;                                                                  
|
| |  | actions by competitors or mall anchor tenants;                                                  
|
| |  | general economic conditions and, in particular,
    the retail sales environment;               
|
| |  | fashion trends;                                                                                 
|
| |  | changes in our merchandise mix;                                                                 
|
| |  | the timing of new store openings and the relative
    proportion of new stores to mature stores;
|
| |  | maintaining appropriate inventory levels;                                                       
|
| |  | calendar shifts of seasonal periods;                                                            
|
| |  | weather conditions; and                                                                         
|
| |  | timing of promotional events.                                                                   

An inability to generate comparable store
increases could have a material adverse effect on our business,
financial condition and results of operations.

13



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##### Table of Contents





| |                                                        
| | -------------------------------------------------------
| | We may not be able to grow our business as
    planned.

Our long-term operating results will depend, in
part, on our ability to successfully open new stores and to
effectively manage our existing business. Our ability to grow
our business will be limited, however, if we are unable to
improve the sales performance and productivity of our existing
stores. Our future growth will also depend on our ability to:



| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | anticipate fashion trends and design products,
    merchandise stores, manage inventory levels and take timely and
    necessary markdowns in response to such trends;
|
| |  | introduce and expand new selling concepts;                                                                                                                            
|
| |  | identify, negotiate, lease and open stores in
    suitable locations on a profitable and timely basis;                                                                
|
| |  | ensure the availability of and obtain the
    necessary capital to operate our business;                                                                              
|
| |  | consolidate and upgrade our distribution center
    and information systems in an efficient and timely
    manner; and                                                
|
| |  | hire, train and retain qualified personnel,
    including management executives and hourly sales associates.                                                          

We cannot assure you that we will be able to
achieve all or any of these objectives.



| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | A decrease in the availability of leather or
    an increase in its price could harm our business.

The purchase of leather comprised approximately
59.5% and 62.8% of our costs of goods sold for leather apparel
and 47.5% and 49.7% of the costs of goods sold for accessories
in 2003 and 2002, respectively. A number of factors affect the
price of leather, including the demand for leather in the shoe,
furniture and automobile upholstery industries. In addition,
leather supply is influenced by worldwide meat consumption and
the availability of hides. Fluctuations in leather supply and
pricing, which can be significant, may have a material adverse
effect on our business and profitability.



| |                                                                               
| | ------------------------------------------------------------------------------
| | We could have difficulty obtaining merchandise
    from our foreign suppliers.

We import our leather garments and accessories
from independent foreign contract manufacturers located
primarily in China and India. We do not have long-term contracts
or formal supply arrangements with our contract manufacturers.
In 2003, 90.0% of our leather garments and accessories
contracted for manufacture were purchased from foreign
suppliers, with approximately 82.0% purchased from China and
8.0% purchased from India. Trade relations with China and India
have traditionally been unstable. If trade relations with these
countries or any other country from which we source goods
deteriorate, or if any new or additional duties, quotas or taxes
are imposed on imports from these countries, leather purchase
and production costs could increase significantly, negatively
impacting our sales prices, profitability or the demand for
leather merchandise. Further, we cannot predict whether any of
the countries in which our products currently are manufactured
or may be manufactured in the future will be subject to trade
restrictions imposed by the United States government, including
the likelihood, type, or effect of any such restrictions, or
whether any other conditions having an adverse effect on our
ability to source products will occur. In addition, it will take
time for us to transition our sourcing to other countries.
Certain other risks related to foreign sourcing include:



| |   |                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | economic and political instability;                                                                                                                         
|
| |  | transportation delays and interruptions,
    including delays relating to labor disputes;                                                                   
|
| |  | restrictive actions by foreign governments;                                                                                                                 
|
| |  | trade and foreign tax laws;                                                                                                                                 
|
| |  | fluctuations in currency exchange rates and
    restrictions on the transfer of funds; and                                                                  
|
| |  | the possibility of boycotts or other actions
    prompted by domestic concerns regarding foreign labor practices
    or other conditions beyond our control.

14



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##### Table of Contents



Any event causing a sudden disruption of imports
from China, India or other foreign countries, including a
disruption due to financial difficulties of a supplier, could
have a material adverse effect on our business, financial
condition and results of operations. In the event that
commercial transportation is curtailed or substantially delayed
due to a dockworkers strike or other similar work action,
our business may be adversely impacted, as we may have
difficulty shipping merchandise to our distribution centers and
stores.



| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our accounting policies and methods are key to
    how we report our financial condition and results of operations,
    and they may require management to make estimates about matters
    that are inherently uncertain.

Our accounting policies and methods are
fundamental to how we record and report our financial condition
and results of operations. Our management must exercise judgment
in selecting and applying many of these accounting policies and
methods so that not only do they comply with generally accepted
accounting principles, but also that they reflect
managements judgment as to the most appropriate manner in
which to record and report our financial condition and results
of operations. In some cases, management must select the
accounting policy or method to apply from two or more
alternatives, any of which might be reasonable under the
circumstances, yet might result in our reporting materially
different amounts than would have been reported under a
different alternative. Note 2, Summary of Significant
Accounting Policies to our consolidated financial
statements describes our significant accounting policies.

We have identified two accounting policies as
being critical to the presentation of our financial
condition and results of operations because they require
management to make particularly subjective and/or complex
judgments about matters that are inherently uncertain and
because of the likelihood that materially different amounts
would be reported under different conditions or using different
assumptions. These critical accounting policies relate to the
valuation of inventory, and the valuation of property and
equipment for impairment. Because of the uncertainty of
estimates about these matters, we cannot provide any assurance
that we will not:



| |   |                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | significantly increase our allowance for obsolete
    inventory that is significantly higher than the amount
    reserved; or
|
| |  | recognize a significant provision for impairment
    of our fixed assets at our stores.                                      

For more information, refer to Item 7,
Managements Discussion and Analysis of Financial
Condition and Results of OperationsCritical Accounting
Policies in this report.



| |                                                                    
| | -------------------------------------------------------------------
| | The seasonality of our business could affect
    our profitability.

Since our leather outerwear and apparel products
are most often purchased during the holiday season, we
experience substantial fluctuations in our sales and
profitability. We generate a significant portion of our sales
from October through January, which includes the holiday selling
season. We generated 59.4% of our annual sales in that time
period in 2003, and 31.6% in December alone. Because our
profitability, if any, is historically derived in the fourth
quarter, our annual results of operations have been, and will
continue to be, heavily dependent on the results of operations
from October through January.

Given the seasonality of our business,
misjudgments in fashion trends, the effects of war and other
significant national and international events, or unseasonably
warm or severe weather during our peak selling season could have
a material adverse effect on our financial condition and results
of operations. Our results of operations may also fluctuate
significantly as a result of a variety of other factors,
including:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | merchandise mix offered during the peak selling
    season;                                            
|
| |  | the timing and level of markdowns and promotions
    by us during the peak selling season;             
|
| |  | the timing and level of markdowns and promotions
    by our competitors during the peak selling season;
|
| |  | consumer shopping patterns and preferences;                                                            
|
| |  | the net sales contributed by seasonal stores;                                                          

15



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##### Table of Contents





| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | the timing of certain holidays; and                                             
|
| |  | the number of shopping days and weekends between
    Thanksgiving and Christmas.



| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The consummation of the Equity Financing and
    exercise of the warrants would result in a substantial number of
    additional shares of common stock outstanding, which could
    decrease the price of our common stock.

If we are able to consummate the Equity Financing
referred to above under Additional Financing,
we will issue 17,948,718 shares of our common stock, and
warrants to purchase an additional 4,000,000 shares of our
common stock, subject to certain limitations and adjustments.
Increasing the number of additional shares of common stock that
may be eventually sold into the market by this amount could have
a negative impact on the value of the shares that are currently
outstanding. In addition, if we need to obtain additional
financing, the terms on which we may obtain additional financing
may be adversely affected.



| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | The loss of key members of our senior
    management team could adversely affect our business.

Our success depends largely on the efforts and
abilities of our current senior management team. Their
experience and worldwide contacts in the leather products
industry significantly benefit us. If we were to lose the
benefit of their experience and contacts, our business could be
adversely affected. We do not maintain key-man life insurance on
any members of our senior management team.



| |                                                                                    
| | -----------------------------------------------------------------------------------
| | We rely on third parties for upgrading and
    maintaining our information systems.

The efficient operation of our business is
heavily dependent on our information systems. In particular, we
rely heavily on the automated sortation system used in our
distribution center and the merchandise management system used
to track sales and inventory. We also rely on a third-party
package for our accounting, financial reporting and human
resource functions. We depend on our vendors to maintain and
periodically upgrade these systems so that these systems
continue to support our business. The software programs
supporting our automated sorting equipment and processing our
inventory management information were licensed to us by
independent software developers. The inability of these
developers to continue to maintain and upgrade these software
programs would disrupt our operations if we were unable to
convert to alternate systems in an efficient and timely manner.



| |                                                   
| | --------------------------------------------------
| | Ownership of our common stock is
    concentrated.

Our directors and executive officers beneficially
own, in the aggregate, 17.3 percent of our common stock as
of April 5, 2004. In addition, one of the investors in the
Equity Financing currently beneficially owns 18.4 percent of our
common stock. If the Equity Financing is consummated (and
assuming no additional common stock issuance other than the
Equity Financing) this investor will beneficially own 44.0
percent of our common stock. If these shareholders vote together
as a group, they will be able to exert significant influence
over our business and affairs, including the election of
individuals to our board of directors. They will also be able to
significantly affect the outcome of certain actions that require
shareholder approval, including the adoption of amendments to
our Amended and Restated Articles of Incorporation and the
approval of certain mergers, additional financing, sales of
assets and other business acquisitions or dispositions. In
addition, the ownership concentration of our stock may limit
liquidity and cause shareholders to experience price
fluctuations when selling large blocks of our stock.



| |                                                           
| | ----------------------------------------------------------
| | The market price for our common stock may be
    volatile.

Our stock price has been, and is expected to
continue to be, highly volatile. There could be an immediate
adverse impact on our stock price as a result of:



| |   |                                                              
| | - | -------------------------------------------------------------
| |  | inability to refinance debt;                                 
|
| |  | any future sales of our common stock or other
    securities;

16



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##### Table of Contents





| |   |                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------
| |  | a decline in any month or quarter of our revenues
    or earnings;                                                  
|
| |  | a decline in any month or quarter of comparable
    store sales;                                                    
|
| |  | a deviation in our revenues, earnings or
    comparable store sales from levels expected by securities
    analysts;
|
| |  | changes in financial estimates by securities
    analysts; and                                                      
|
| |  | changes in market valuations of other companies
    in the same or similar markets.                                 

In addition, the Nasdaq National Market has
experienced extreme volatility that has often been unrelated to
the performance of particular companies. Future market
fluctuations may cause our stock price to fall regardless of our
performance. Such volatility may limit our ability in the future
to raise additional capital.



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | War, acts of terrorism, or the threat of
    either may negatively impact the availability of merchandise and
    otherwise adversely impact our business.

In the event of war or acts of terrorism, or if
either is threatened, our ability to obtain merchandise
available for sale in our stores may be negatively affected. We
import a substantial portion of our merchandise from other
countries. If imported goods become difficult or impossible to
bring into the United States, and if we cannot obtain such
merchandise from other sources at similar costs, our sales and
profit margins may be adversely affected.

The majority of our stores are located in
enclosed shopping malls and regional outlet centers. In response
to the terrorist attacks of September 11, 2001, security
has been heightened in public areas. Any further threat of
terrorist attacks or actual terrorist events, particularly in
public areas, could lead to lower customer traffic in shopping
malls and outlet centers. In addition, local authorities or mall
management could close shopping malls and outlet centers in
response to any immediate security concern. Mall closures, as
well as lower customer traffic due to security concerns, could
result in decreased sales that would have a material adverse
effect on our business, financial condition and results of
operations.



| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Any significant interruption in the operation
    of our corporate offices and distribution center could have a
    material adverse effect on our business.

Our corporate offices and distribution center are
in one location. Our operations could be materially and
adversely affected if a catastrophic event (such as, but not
limited to, fire, tornadoes, floods or acts of terrorism)
impacts the use of these facilities. There can be no assurances
that we would be successful in obtaining alternative facilities
in a timely manner if such a catastrophic event were to occur.






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

As of January 31, 2004, we operated 460
leased store locations (excluding the 111 liquidation stores).
Substantially all of our stores were located in shopping malls,
outlet malls or airport retail locations. Store leases with
third parties are typically five to 10 years in duration.
Most leases require us to pay annual minimum rent plus a
contingent rent dependent on the stores annual sales in
excess of a specified threshold. As of January 31, 2004, of
the 460 open leased Wilsons Leather stores, an affiliate of CVS
New York, Inc. (CVS) (formerly Melville Corporation,
the parent company to the predecessor companies) guaranteed
approximately 56 leases, all of which were entered into before
the management buyout.

We are party to a 15-year operating lease, with a
five-year option to extend, for a 289,000 square-foot
distribution center and 69,000 square-foot corporate office
space located in Brooklyn Park, Minnesota. We are also party to
a five-year operating lease for an 86,000 square-foot
distribution center in Las Vegas, Nevada that we are
currently marketing for sub-lease. In addition, we are party to
a three-year operating lease for a 45,600 square-foot
distribution center in Maple Grove, Minnesota that we are
currently marketing for sub-lease.

17



---



##### Table of Contents








|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

We are involved in various legal actions arising
in the ordinary course of business. In the opinion of our
management, the ultimate disposition of these matters will not
have a material adverse effect on our consolidated financial
position and results of operations. Pursuant to the sale
agreement entered into in connection with the management buyout
in 1996 of the predecessor companies, CVS agreed to indemnify us
for certain claims. For certain other claims, CVSs
indemnification liability is limited to claims in the aggregate
which exceed $1.2 million, but not to exceed
$12.0 million.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

None.






|         |                                     
|-------- | ------------------------------------
|Item 4A. | Executive Officers of the Registrant

The following table sets forth certain
information concerning our executive officers as of
April 1, 2004:

|                     |  |     |    |          |  |                                                         
|-------------------- |  | --- | -- | -------- |  | --------------------------------------------------------
|Name                 |  | Age |    | Position
|                     |  |     |    |         
|Joel N. Waller       |  |     | 64 |          |  | Chairman and Chief Executive Officer                    
|David L. Rogers      |  |     | 61 |          |  | President and Chief Operating Officer                   
|Peter G. Michielutti |  |     | 47 |          |  | Executive Vice President and Chief Financial
    Officer
|Linda F. Angelacci   |  |     | 49 |          |  | Vice President                                          
|Brian R. Bootay      |  |     | 50 |          |  | Vice President                                          
|Betty A. Goff        |  |     | 47 |          |  | Vice President                                          
|Jenele C. Grassle    |  |     | 44 |          |  | Vice President                                          
|Jeffrey W. Orton     |  |     | 48 |          |  | Vice President                                          
|Arthur J. Padovese   |  |     | 53 |          |  | Vice President                                          
|Steven R. Waller     |  |     | 40 |          |  | Vice President                                          

Joel N. Wallerhas
served as Chairman and Chief Executive Officer of Wilsons
Leather since April 1992. In 1983, CVS hired Mr. Waller as
President of Wilsons Leather, and he served in such capacity
until April 1992. Prior to joining Wilsons Leather,
Mr. Waller served in several capacities at Bermans The
Leather Experts, Inc., a specialty leather retailer, including
Senior Vice President, General Merchandise Manager from 1980 to
1983, Division Merchandise Manager from 1978 to 1980 and Buyer
from 1976 to 1978.

David L. Rogershas
served as President and Chief Operating Officer of Wilsons
Leather since April 1992. In 1988, Mr. Rogers joined
Wilsons Leather as Executive Vice President and Chief Operating
Officer when Bermans The Leather Experts, Inc., a specialty
leather retailer, was acquired by Wilsons Leather, and he served
in such capacity until April 1992. Mr. Rogers served as
Chief Operating Officer of Bermans The Leather Experts, Inc.,
from 1983 to 1988 and Chief Financial Officer from 1980 to 1984.

Peter G. Michieluttihas served as our Executive Vice
President and Chief Financial Officer since March 2003,
responsible for Finance, Information Systems, and Real Estate
and also served as our Senior Vice President and Chief Financial
Officer from March 2001 to February 2003. Prior to joining
Wilsons Leather, Mr. Michielutti held various positions
with US Bancorp, a financial services holding company, from 1998
to 2001, most recently as Executive Vice President from 1999 to
2001. Mr. Michielutti held various positions with Fingerhut
Companies, Inc., a direct marketing retail business, most
recently as Vice President and Chief Operating Officer from 1996
to 1998. He served at Household International, Inc., a financial
service organization, from 1979 to 1995 in various finance
positions.

Linda F. Angelaccihas served as our Vice President
responsible for marketing since October 2002. Prior to joining
Wilsons Leather, Ms. Angelacci was Senior Vice President of
Marketing and Merchandise at The San Francisco Music Box
Company, a specialty retailer of musical giftware, from 1999 to
2002. Ms. Angelacci served in various marketing and
merchandising positions with WH Smith, an airport and hotel gift
store

18



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##### Table of Contents



retailer, from 1995 to 1999, most recently as
Vice President of Marketing and Merchandising and as Vice
President, Account Supervisor for W. B. Doner
Advertising Inc., an advertising agency, from 1991 to 1995.


Brian R. Bootayhas
served as our Vice President responsible for real estate and
construction since October 2000. Prior to joining Wilsons
Leather, Mr. Bootay was Vice President, Leasing at Venator
Group Realty Corporation, a subsidiary of Venator Group, Inc. a
specialty retailer of athletic footwear and apparel, from 1996
to 2000, Senior Vice President, Real Estate at CVS (formerly
Melville Corporation), a diversified specialty retailer, from
1994 to 1996. Mr. Bootay also served as Vice President,
Real Estate at Filenes Basement, Inc., an off-price
specialty retailer, from 1989 to 1994.

Betty A. Goffhas
served as our Vice President responsible for human resources
since February 1992 and served as our Director of Executive
Recruitment and Placement from October 1987 to February 1992.
Prior to joining Wilsons Leather, Ms. Goff served in
various human resource management positions with Fingerhut
Corporation, a subsidiary of Fingerhut Companies, Inc., a
general merchandise catalog retailer, from 1983 to 1987, and
most recently as Manager, Staffing and Employment from 1984 to
1987.

Jenele C. Grasslehas served as our Vice President
responsible for merchandising for our mall, airport and seasonal
stores since July 2000. Prior to joining Wilsons Leather,
Ms. Grassle held various positions at Target Corporation, a
general merchandise retailer (formerly Dayton Hudson
Corporation), from 1988 to 2000 and most recently as Divisional
Merchandise Manager from 1994 to 2000.

Jeffrey W. Ortonhas
served as our Chief Information Officer and Vice President
responsible for information systems and logistics since October
1997 and served as our Director of Strategic Analysis from March
1997 to October 1997, and Director of Business Process
Reengineering from September 1993 to March 1997. Prior to
joining Wilsons Leather, Mr. Orton held various positions
at United States Shoe Corporation, a manufacturing and retail
apparel and footwear company, from 1986 to 1993, and most
recently as Director of Footwear Retail Systems from 1992 to
1993.

Arthur J. Padovesehas served as our Vice President
responsible for store sales since February 2003 and Vice
President responsible for outlets from October 2000 to January
2003. Prior to joining Wilsons Leather, Mr. Padovese was an
independent management consultant serving as Chief Operating
Officer and Chief Financial Officer at Appraisal Enhancement
Services, a property appraisal company, from 1999 to 2000, an
investment banker for Green Tree Capital, a financial services
company, from 1998 to 2000, and was co-founder of Jungle
Adventures International Inc., a developer of entertainment
centers, in 1998. He also served as President of Prints Plus,
Inc., a specialty retailer, from 1986 to 1997.

Steven R. Wallerhas
served as our Vice President responsible for sourcing since
January 1999, and served as our Director, Product Development
from September 1998 to January 1999. Prior to joining Wilsons
Leather, Mr. Waller served in various operations and import
positions with G-III Apparel Group, Ltd., a leather and
non-leather apparel manufacturer and distributor, most recently
as Director of Imports from 1987 to 1998. Mr. Waller is the
son of Joel N. Waller, our Chairman and Chief Executive
Officer.

19



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##### Table of Contents






PART II





|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity and
    Related Stockholder Matters

Market Information

Our common stock, $.01 par value, trades on
the Nasdaq National Market under the symbol WLSN. The closing
price of our common stock on April 5, 2004, was $2.85. The
following table presents the high and low market prices from
February 2, 2002 through January 31, 2004.

|                                    |  |      |       |     |  |   |       | 
|----------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|                                   
|Quarterly Common Stock Price Ranges
|                                   
|Fiscal Quarter Ended                |  | High |       | Low
|                                    |  |      |       |    
|May 4, 2002                         |  | $    | 14.26 |     |  | $ | 10.11 | 
|August 3, 2002                      |  | $    | 15.40 |     |  | $ | 8.25  | 
|November 2, 2002                    |  | $    | 9.75  |     |  | $ | 3.99  | 
|February 1, 2003                    |  | $    | 7.25  |     |  | $ | 3.97  | 
|                                   
|May 3, 2003                         |  | $    | 5.17  |     |  | $ | 3.74  | 
|August 2, 2003                      |  | $    | 8.75  |     |  | $ | 5.55  | 
|November 1, 2003                    |  | $    | 10.00 |     |  | $ | 7.13  | 
|January 31, 2004                    |  | $    | 9.10  |     |  | $ | 3.08  | 

There were 85 record holders of our common stock
as of April 5, 2004.

Dividends

We have not declared any cash dividends since our
inception in May 1996. We are currently in a retained deficit
position and unable to pay dividends. In addition, our loan
agreements and the indenture relating to the
11 1/4% Senior Notes contain certain covenants
limiting, among other things, our ability to pay cash dividends
or make other distributions. See Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of OperationsLiquidity and Capital
Resources.

20



---



##### Table of Contents








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

The selected historical consolidated financial
data set forth below should be read in conjunction with
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
Consolidated Financial Statements of the Company,
beginning on page F-1 of this report. The selected
historical consolidated financial data has been derived from our
audited consolidated financial statements.

SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND
OPERATING DATA

(In thousands except per share amounts and
operating data)


|                                                                                                                                                   |                                                                                                                                      |                     |         |             |   |             |         |             |   |             |         |       |   |   |         |       |   |   |         |       |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ------------------- | ------- | ----------- | - | ----------- | ------- | ----------- | - | ----------- | ------- | ----- | - | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                                                                   |                                                                                                                                      |                    
|                                                                                                                                                   |                                                                                                                                      | For the years ended
|                                                                                                                                                   |                                                                                                                                      |                    
|                                                                                                                                                   |                                                                                                                                      | January 31,         |         | February 1, |   | February 2, |         | February 3, |   | January 29,
|                                                                                                                                                   |                                                                                                                                      | 2004                |         | 2003(1)     |   | 2002(1)(2)  |         | 2001(2)(3)  |   | 2000       
|                                                                                                                                                   |                                                                                                                                      |                     |         |             |   |             |         |             |   |            
|Statement of Operations Data:                                                                                                                      |                                                                                                                                      |                     |         |             |   |             |         |             |   |             |         |       |   |   |         |       |   |   |         |      
|Net sales                                                                                                                                          |                                                                                                                                      | $                   | 521,025 |             |   | $           | 571,547 |             |   | $           | 598,299 |       |   | $ | 619,932 |       |   | $ | 543,608 |      
|Gross margin                                                                                                                                       |                                                                                                                                      |                     | 143,965 |             |   |             | 167,243 |             |   |             | 194,964 |       |   |   | 232,531 |       |   |   | 202,868 |      
|Operating income (loss)                                                                                                                            |                                                                                                                                      |                     | (25,920 | )           |   |             | (13,603 | )           |   |             | 22,511  |       |   |   | 66,523  |       |   |   | 59,725  |      
|Income (loss) from continuing operations before
    income taxes, extraordinary item and cumulative effect of a
    change in accounting principle |                                                                                                                                      |                     | (36,788 | )           |   |             | (23,856 | )           |   |             | 12,927  |       |   |   | 62,318  |       |   |   | 54,732  |      
|Provision (benefit) for income taxes                                                                                                               |                                                                                                                                      |                     | (3,205  | )           |   |             | (9,543  | )           |   |             | 5,171   |       |   |   | 21,289  |       |   |   | 21,674  |      
|                                                                                                                                                   |                                                                                                                                      |                     |         |             |   |             |         |             |   |             |         |       |   |   |         |       |   |   |         |      
|Income (loss) from continuing operations before
    extraordinary item and cumulative effect of a change in
    accounting principle               |                                                                                                                                      |                     | (33,583 | )           |   |             | (14,313 | )           |   |             | 7,756   |       |   |   | 41,029  |       |   |   | 33,058  |      
|Income (loss) from discontinued operations, net
    of tax                                                                                         |                                                                                                                                      |                     |        |             |   |             | (42,014 | )           |   |             | (22,093 | )     |   |   | 29      |       |   |   |        |      
|Extraordinary loss on early extinguishment of
    debt, net of tax                                                                                 |                                                                                                                                      |                     |        |             |   |             |        |             |   |             |        |       |   |   | (623    | )     |   |   | (958    | )    
|Cumulative effect of a change in accounting
    principle, net of tax(4)                                                                           |                                                                                                                                      |                     |        |             |   |             | (24,567 | )           |   |             |        |       |   |   |        |       |   |   | (1,449  | )    
|                                                                                                                                                   |                                                                                                                                      |                     |         |             |   |             |         |             |   |             |         |       |   |   |         |       |   |   |         |      
|Net income (loss)                                                                                                                                  |                                                                                                                                      | $                   | (33,583 | )           |   | $           | (80,894 | )           |   | $           | (14,337 | )     |   | $ | 40,435  |       |   | $ | 30,651  |      
|                                                                                                                                                   |                                                                                                                                      |                     |         |             |   |             |         |             |   |             |         |       |   |   |         |       |   |   |         |      
|Basic earnings (loss) per share:                                                                                                                   |                                                                                                                                      |                     |         |             |   |             |         |             |   |             |         |       |   |   |         |       |   |   |         |      
|                                                                                                                                                   | Income (loss) from continuing operations before
    extraordinary item and cumulative effect of a change in
    accounting principle |                     | $       | (1.64       | ) |             | $       | (0.71       | ) |             | $       | 0.45  |   |   | $       | 2.45  |   |   | $       | 2.02  |  
|                                                                                                                                                   | Loss from discontinued operations                                                                                                    |                     |         |            |   |             |         | (2.10       | ) |             |         | (1.28 | ) |   |         |      |   |   |         |      |  
|                                                                                                                                                   | Extraordinary loss on early extinguishment of debt                                                                                   |                     |         |            |   |             |         |            |   |             |         |      |   |   |         | (0.04 | ) |   |         | (0.06 | )
|                                                                                                                                                   | Cumulative effect of a change in accounting
    principle                                                                            |                     |         |            |   |             |         | (1.22       | ) |             |         |      |   |   |         |      |   |   |         | (0.09 | )
|                                                                                                                                                   |                                                                                                                                      |                     |         |             |   |             |         |             |   |             |         |       |   |   |         |       |   |   |         |      
|Basic earnings (loss) per share                                                                                                                    |                                                                                                                                      | $                   | (1.64   | )           |   | $           | (4.03   | )           |   | $           | (0.83   | )     |   | $ | 2.41    |       |   | $ | 1.87    |      
|                                                                                                                                                   |                                                                                                                                      |                     |         |             |   |             |         |             |   |             |         |       |   |   |         |       |   |   |         |      
|Diluted earnings (loss) per share:                                                                                                                 |                                                                                                                                      |                     |         |             |   |             |         |             |   |             |         |       |   |   |         |       |   |   |         |      
|                                                                                                                                                   | Income (loss) from continuing operations before
    extraordinary item and cumulative effect of a change in
    accounting principle |                     | $       | (1.64       | ) |             | $       | (0.71       | ) |             | $       | 0.45  |   |   | $       | 2.36  |   |   | $       | 1.94  |  
|                                                                                                                                                   | Loss from discontinued operations                                                                                                    |                     |         |            |   |             |         | (2.10       | ) |             |         | (1.28 | ) |   |         |      |   |   |         |      |  
|                                                                                                                                                   | Extraordinary loss on early extinguishment of debt                                                                                   |                     |         |            |   |             |         |            |   |             |         |      |   |   |         | (0.03 | ) |   |         | (0.05 | )
|                                                                                                                                                   | Cumulative effect of a change in accounting
    principle                                                                            |                     |         |            |   |             |         | (1.22       | ) |             |         |      |   |   |         |      |   |   |         | (0.09 | )
|                                                                                                                                                   |                                                                                                                                      |                     |         |             |   |             |         |             |   |             |         |       |   |   |         |       |   |   |         |      
|Diluted earnings (loss) per share                                                                                                                  |                                                                                                                                      | $                   | (1.64   | )           |   | $           | (4.03   | )           |   | $           | (0.83   | )     |   | $ | 2.33    |       |   | $ | 1.80    |      
|                                                                                                                                                   |                                                                                                                                      |                     |         |             |   |             |         |             |   |             |         |       |   |   |         |       |   |   |         |      
|Weighted average common shares outstanding:                                                                                                        |                                                                                                                                      |                     |         |             |   |             |         |             |   |             |         |       |   |   |         |       |   |   |         |      
|Basic                                                                                                                                              |                                                                                                                                      |                     | 20,528  |             |   |             | 20,053  |             |   |             | 17,172  |       |   |   | 16,732  |       |   |   | 16,408  |      
|Diluted                                                                                                                                            |                                                                                                                                      |                     | 20,528  |             |   |             | 20,053  |             |   |             | 17,172  |       |   |   | 17,342  |       |   |   | 17,064  |      

21



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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND
OPERATING DATA  (Continued)

(In thousands except per share amounts and
operating data)


|                                                                   |  |                     |       |             |  |             |       |             |  |             |       |    |  |   |       |   |  |   |       |  
|------------------------------------------------------------------ |  | ------------------- | ----- | ----------- |  | ----------- | ----- | ----------- |  | ----------- | ----- | -- |  | - | ----- | - |  | - | ----- | -
|                                                                   |  |                    
|                                                                   |  | For the years ended
|                                                                   |  |                    
|                                                                   |  | January 31,         |       | February 1, |  | February 2, |       | February 3, |  | January 29,
|                                                                   |  | 2004                |       | 2003(1)     |  | 2002(1)(2)  |       | 2001(2)(3)  |  | 2000       
|                                                                   |  |                     |       |             |  |             |       |             |  |            
|Selected Operating Data:                                           |  |                     |       |             |  |             |       |             |  |             |       |    |  |   |       |   |  |   |       |  
|Number of permanent stores open at end of period
    (5)           |  |                     | 460   |             |  |             | 618   |             |  |             | 619   |    |  |   | 573   |   |  |   | 529   |  
|Change in comparable store sales(5)(6)                             |  |                     | (6.8  | )%          |  |             | (7.0  | )%          |  |             | (12.1 | )% |  |   | 4.1   | % |  |   | 11.5  | %
|Net sales per square foot for stores open entire
    period(5)     |  | $                   | 377   |             |  | $           | 380   |             |  | $           | 415   |    |  | $ | 503   |   |  | $ | 478   |  
|Total selling square footage at end of
    period(5)(in thousands) |  |                     | 1,052 |             |  |             | 1,377 |             |  |             | 1,359 |    |  |   | 1,203 |   |  |   | 1,046 |  
|Peak number of seasonal stores during period                       |  |                     | 229   |             |  |             | 284   |             |  |             | 281   |    |  |   | 239   |   |  |   | 274   |  

|                                 |  |               |         |             |  |             |         |             |  |             |         |  |  |   |         |  |  |   |         | 
|-------------------------------- |  | ------------- | ------- | ----------- |  | ----------- | ------- | ----------- |  | ----------- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                 |  |              
|                                 |  | At year ended
|                                 |  |              
|                                 |  | January 31,   |         | February 1, |  | February 2, |         | February 3, |  | January 29,
|                                 |  | 2004          |         | 2003(1)     |  | 2002(1)(2)  |         | 2001(2)(3)  |  | 2000       
|                                 |  |               |         |             |  |             |         |             |  |            
|Balance Sheet Data:              |  |               |         |             |  |             |         |             |  |             |         |  |  |   |         |  |  |   |         | 
|Working capital                  |  | $             | 63,452  |             |  | $           | 108,551 |             |  | $           | 102,262 |  |  | $ | 99,191  |  |  | $ | 126,855 | 
|Inventories                      |  |               | 89,298  |             |  |             | 118,701 |             |  |             | 92,940  |  |  |   | 106,164 |  |  |   | 79,221  | 
|Total assets                     |  |               | 204,127 |             |  |             | 246,491 |             |  |             | 332,946 |  |  |   | 305,992 |  |  |   | 272,554 | 
|Total debt (short and long-term) |  |               | 56,189  |             |  |             | 55,740  |             |  |             | 55,590  |  |  |   | 30,590  |  |  |   | 43,890  | 
|Shareholders equity             |  |               | 85,354  |             |  |             | 117,228 |             |  |             | 184,495 |  |  |   | 174,710 |  |  |   | 131,207 | 



---

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes a charge to operations, before tax, of
    $1.0 and $5.4 million in 2002 and 2001, respectively,
    resulting from the impairment of property and equipment.                                                                                                                                                                                                                                                                
|   
|(2) | Reclassified for the presentation of discontinued
    operations for the Travel Subsidiaries.                                                                                                                                                                                                                                                                                                                                         
|   
|(3) | Our results of operations for the year ended
    February 3, 2001, consisted of 53 weeks as compared to
    52 weeks for all other years presented in this
    Form 10-K.                                                                                                                                                                                                                                                             
|   
|(4) | Includes a charge to operations, net of tax, of
    $24.6 million for the year ended February 1, 2003,
    resulting from the cumulative effect of adopting
    SFAS No. 142, Goodwill and Other Intangible Assets,
    and of $1.4 million, net of tax, for the year ended
    January 29, 2000, resulting from the cumulative effect of
    the adoption of a new method of accounting for revenue
    recognition of layaway sales.
|   
|(5) | The figures for January 31, 2004, exclude
    the 111 liquidation stores.                                                                                                                                                                                                                                                                                                                                                             
|   
|(6) | A store is included in the comparable store sales
    calculation after it has been opened and operated by us for more
    than 52 weeks. The percentage change is computed by
    comparing total net sales for comparable stores as thus defined
    at the end of the applicable reporting period with total net
    sales from comparable stores for the comparable period in the
    prior year.                                 

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

The following discussion of our financial
condition and results of operations should be read in
conjunction with our selected historical consolidated financial
data and consolidated financial statements and notes thereto
appearing elsewhere in this Form 10-K. The consolidated
financial statements for all periods present the Travel
Subsidiaries segment as discontinued operations. See
Discontinued Operations. Unless otherwise
indicated, the following discussion relates only to Wilsons
Leathers continuing operations.

Overview

We measure performance using such key operating
statistics as comparable store sales, sales per square foot,
gross margin percentage and store operating expenses, with a
focus on labor, as a percentage of sales. These results
translate into store operating contribution and store cash flow,
which we use to evaluate overall performance on an individual
store basis. Store operating contribution is calculated by
deducting a stores operating expenses from its gross
margin and is measured as a percentage of sales. Store operating
contribution gives us an overall measure as to whether or not
individual locations and markets are meeting our financial
objectives.

In addition, general and administrative expenses
are monitored in absolute amount, as well as on a percentage of
sales basis. We continue to monitor product costing and
promotional activity, which allows us to generally maintain
acceptable margin levels. Our gross margins are influenced by
the mix of merchandise between outerwear and accessories in our
total sales.

We also measure and evaluate investments in our
retail locations, including inventory and property and
equipment. Inventory performance is primarily measured by
inventory turns, or the number of times store inventory turns
over in a given period, and amounts of owned inventory at
various times based on payment terms from our vendors. The most
significant investments in property and equipment are made at
the time we open a store.

At January 31, 2004, we operated 460 stores
(excluding the 111 liquidation stores) using various formats
including mall stores, outlet stores and airport locations. We
also operated 229 temporary seasonal stores to better capitalize
on our peak selling season from October through December.

During the last two years, in support of our
overall financial strategy, the following three actions were
taken: 1) discontinued operations for the Travel Subsidiaries,
2) a reorganization and partial store liquidation, and 3)
additional financing. These actions are described in greater
detail below.

We generate a significant portion of our sales
from October through January, which includes the holiday selling
season. We generated 59.4% of our annual sales in that time
period in 2003, and 31.6% in December alone. As part of our
strategy to improve operating margins and maximize revenue and
profitability during non-peak selling seasons, we have increased
the number of outlet locations since 2000, which are less
seasonal, and modified our product mix to emphasize accessories.
Accessory sales grew as a percentage of sales to 33.6% in 2003
from 28.0% in 2001, largely as a result of fresh, new styles
designed to match our customers lifestyle needs.

Comparable store sales decreased 6.8%, 7.0%, and
12.1% in 2003, 2002 and 2001, respectively. Income (loss) from
continuing operations as a percentage of sales for the three
years was (6.4%), (2.5%), and 1.3%, respectively. A store is
included in the comparable store sales calculation after it has
been opened and operated by us for more than 52 weeks. The
percentage change is computed by comparing total net sales for
comparable stores as thus defined at the end of the applicable
reporting period with total net sales from comparable stores for
the comparable period in the prior year. The 111 liquidation
stores are not included in comparable store sales for the month
of January 2004.

23



---



##### Table of Contents



The following table contains selected information
for each of our store formats for 2003.

|               |  |               |       |                  |  |              |       |                |  |  |       |  |  |   |         | 
|-------------- |  | ------------- | ----- | ---------------- |  | ------------ | ----- | -------------- |  |  | ----- |  |  | - | ------- | 
|               |  |               |       |                  |  |              |       | Sales per     
|               |  | Sales         |       | Comparable Sales |  | Average Size |       | Square Foot(1)
|               |  |               |       |                  |  |              |       |               
|               |  | (in millions) |       |                  |  | (in selling  |       |               
|               |  |               |       |                  |  | square feet) |       |               
|Mall stores    |  | $             | 330.1 |                  |  |              | (10.1 | )%             |  |  | 2,100 |  |  | $ | 364.7   | 
|Outlet stores  |  |               | 137.2 |                  |  |              | 3.7   | %              |  |  | 3,300 |  |  |   | 372.6   | 
|Airport stores |  |               | 16.1  |                  |  |              | (7.1  | )%             |  |  | 700   |  |  |   | 1,114.8 | 
|E-commerce     |  |               | 4.5   |                  |  |              |      |                |  |  |      |  |  |   |        | 
|Seasonal       |  |               | 33.1  |                  |  |              |      |                |  |  |      |  |  |   |        | 
|               |  |               |       |                  |  |              |       |                |  |  |       |  |  |   |         | 
|Total          |  | $             | 521.0 |                  |  |              |       |                |  |  |       |  |  |   |         | 
|               |  |               |       |                  |  |              |       |                |  |  |       |  |  |   |         | 

The following table contains selected information
for each of our store formats for 2002.

|               |  |               |       |                  |  |              |      |                |  |  |       |  |  |   |         | 
|-------------- |  | ------------- | ----- | ---------------- |  | ------------ | ---- | -------------- |  |  | ----- |  |  | - | ------- | 
|               |  |               |       |                  |  |              |      | Sales per     
|               |  | Sales         |       | Comparable Sales |  | Average Size |      | Square Foot(1)
|               |  |               |       |                  |  |              |      |               
|               |  | (in millions) |       |                  |  | (in selling  |      |               
|               |  |               |       |                  |  | square feet) |      |               
|Mall stores    |  | $             | 376.7 |                  |  |              | (9.2 | )%             |  |  | 2,100 |  |  | $ | 369.3   | 
|Outlet stores  |  |               | 123.1 |                  |  |              | 0.1  | %              |  |  | 3,200 |  |  |   | 370.8   | 
|Airport stores |  |               | 20.3  |                  |  |              | 3.1  | %              |  |  | 600   |  |  |   | 1,193.5 | 
|E-commerce     |  |               | 4.5   |                  |  |              |     |                |  |  |      |  |  |   |        | 
|Seasonal       |  |               | 46.9  |                  |  |              |     |                |  |  |      |  |  |   |        | 
|               |  |               |       |                  |  |              |      |                |  |  |       |  |  |   |         | 
|Total          |  | $             | 571.5 |                  |  |              |      |                |  |  |       |  |  |   |         | 
|               |  |               |       |                  |  |              |      |                |  |  |       |  |  |   |         | 



---



|    |                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Sales per square foot is defined as net sales for
    stores open a full 12 months divided by total selling
    square feet for stores open a full 12 months.

We intend the discussion of our financial
condition and results of operations that follows to provide
information that will assist in understanding our consolidated
financial statements, the changes in certain key items in those
consolidated financial statements from year to year, and the
primary factors that accounted for those changes, as well as how
certain accounting principles, policies and estimates affect our
consolidated financial statements.

Critical Accounting Policies

Our significant accounting policies are described
in Note 2 to our consolidated financial statements
beginning on page F-7 of this report. We believe that the
following discussion addresses our critical accounting policies,
which are those that are most important to the portrayal of our
financial condition and results of operations and require
managements most difficult, subjective and complex
judgments, often as a result of the need to make estimates about
the effect of matters that are inherently uncertain.



| |            
| | -----------
| | Inventories

We value our inventories, which consist primarily
of finished goods held for sale purchased from domestic and
foreign vendors, at the lower of cost or market value,
determined by the retail inventory method on the last-in,
first-out (LIFO) basis. As of January 31, 2004,
and February 1, 2003 the LIFO cost of inventories
approximated the first-in, first-out (FIFO) cost of
inventories. The inventory cost includes the cost of both
merchandise and freight. A periodic review of inventory
quantities on hand is performed to determine if inventory is
properly stated at the lower of cost or market. Factors related
to current inventories such as future consumer demand, fashion
trends, current and anticipated retail markdowns, and class or
type of inventory are analyzed to determine estimated net
realizable values. A provision is recorded to reduce the cost of
inventories to the estimated net realizable values, if required.
Any significant unanticipated changes in

24



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##### Table of Contents



the factors noted above could have a significant
impact on the value of our inventories and our reported
operating results.




| |                                  
| | ---------------------------------
| | Property and Equipment Impairment

Our property and equipment consists principally
of store leasehold improvements and are included in the
Property and equipment line item in our consolidated
balance sheets in our consolidated financial statements. These
long-lived assets are recorded at cost and are amortized using
the straight-line method over the lesser of the applicable store
lease term or the estimated useful life of the leasehold
improvements. The typical initial lease term for our stores is
ten years. We review long-lived assets for impairment whenever
events, such as decisions to close a store or changes in
circumstances, indicate that the carrying value of an asset may
not be recoverable. If the undiscounted future cash flows from
the long-lived assets are less than the carrying value, we
recognize a loss for a particular market of stores impaired
equal to the difference between the carrying value and the
assets fair value, which is indicated by the discounted
future cash flows using a risk-adjusted rate of return. We
recorded a charge of $1.0 million for impaired assets
during the fourth quarter of 2002. During 2003, we did not
record an impairment charge based on our impairment testing.
However, we have accelerated depreciation on the remaining net
book value related to the 111 liquidation stores through the end
of the liquidation sale term (through April 2004). In addition,
decisions to close stores during the year have and will result
in accelerated depreciation over the revised useful life of
those store assets. Most store closures (excluding the 111
liquidation stores) occur upon the lease expiration.

Results of Operations

The following table contains selected information
from our historical consolidated statements of operations,
expressed as a percentage of net sales:

|                                                                      |                                                                                                           |             |       |             |    |             |       |       |    |  |       |      |   
|--------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | ----------- | ----- | ----------- | -- | ----------- | ----- | ----- | -- |  | ----- | ---- | --
|                                                                      |                                                                                                           |            
|                                                                      |                                                                                                           | Years ended
|                                                                      |                                                                                                           |            
|                                                                      |                                                                                                           | January 31, |       | February 1, |    | February 2,
|                                                                      |                                                                                                           | 2004        |       | 2003        |    | 2002       
|                                                                      |                                                                                                           |             |       |             |    |            
|Net sales                                                             |                                                                                                           |             | 100.0 | %           |    |             | 100.0 | %     |    |  | 100.0 | %   
|Cost of goods sold, buying and occupancy costs                        |                                                                                                           |             | 72.4  |             |    |             | 70.7  |       |    |  | 67.4  |     
|                                                                      |                                                                                                           |             |       |             |    |             |       |       |    |  |       |     
|                                                                      | Gross margin                                                                                              |             |       | 27.6        |    |             |       | 29.3  |    |  |       | 32.6 |   
|Selling, general and administrative expenses                          |                                                                                                           |             | 28.9  |             |    |             | 28.8  |       |    |  | 26.5  |     
|Depreciation and amortization                                         |                                                                                                           |             | 3.7   |             |    |             | 2.9   |       |    |  | 2.3   |     
|                                                                      |                                                                                                           |             |       |             |    |             |       |       |    |  |       |     
|                                                                      | Operating income (loss)                                                                                   |             |       | (5.0        | )  |             |       | (2.4  | )  |  |       | 3.8  |   
|Interest expense, net                                                 |                                                                                                           |             | 2.1   |             |    |             | 1.8   |       |    |  | 1.6   |     
|Income tax provision (benefit)                                        |                                                                                                           |             | (0.7  | )           |    |             | (1.7  | )     |    |  | 0.9   |     
|                                                                      |                                                                                                           |             |       |             |    |             |       |       |    |  |       |     
|                                                                      | Income (loss) from continuing operations before
    cumulative effect of a change in accounting principle |             |       | (6.4        | )  |             |       | (2.5  | )  |  |       | 1.3  |   
|Loss from discontinued operations, net of tax                         |                                                                                                           |             |      |             |    |             | (7.4  | )     |    |  | (3.7  | )   
|Cumulative effect of a change in accounting
    principle, net of tax |                                                                                                           |             |      |             |    |             | (4.3  | )     |    |  |      |     
|                                                                      | Net loss                                                                                                  |             |       | (6.4        | )% |             |       | (14.2 | )% |  |       | (2.4 | )%
|                                                                      |                                                                                                           |             |       |             |    |             |       |       |    |  |       |     



| |                      
| | ---------------------
| | 2003 Compared to 2002

Net Sales.Net sales decreased 8.8% to $521.0 million in 2003 from
$571.5 million in 2002. The $50.5 million sales
decrease was due to: (1) a $32.9 million decrease
related to a 6.8% comparable store sales decrease, (2) a
$13.0 million decrease from the full-year impact of 2002
and 2003 store closures, (3) a $14.0 million decrease
from lower seasonal store sales, and (4) a
$0.1 million decrease in e-commerce sales volume. These
decreases were partially offset by a $9.5 million increase
due to the full-year impact of 2002 and 2003 store openings that
were not accounted for as part of comparable store sales.

25



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##### Table of Contents



The primary causes for the net sales decrease
were threefold: (1) lack of promotional programs in the
mall stores that could have brought more mall customers into the
stores during the holiday season, (2) the continuation of a
sluggish economy, and (3) changes in consumer shopping
preferences trending away from traditional mall stores in favor
of mass merchandisers and discounters.

We opened 17 stores and closed 175 stores
(including the 111 liquidation stores) in 2003, compared to
opening 34 stores and closing 35 stores in 2002. As of
January 31, 2004, we operated 460 stores (excluding the 111
liquidation stores) compared to 618 stores at February 1,
2003. Our selling square footage in 2003 decreased 23.6% to
1,052,400 from 1,376,600 in 2002. We operated 229 seasonal
stores during the 2003 holiday season as compared to 284
seasonal stores during 2002.

Cost of Goods Sold, Buying and Occupancy
Costs.Cost of goods sold, buying
and occupancy costs decreased $27.2 million, or 6.7%,
compared to 2002. The $27.2 million decrease from 2002 was
due to: (1) $21.9 million in lower cost of goods sold
costs due to lower sales volume in 2003 compared to 2002,
(2) $3.0 million in lower buying and occupancy costs,
largely due to cost saving initiatives, including rent
reductions of approximately $0.8 million and a 4% lower
average number of permanent stores operated (598 in 2003
compared to 623 in 2002), and (3) $2.3 million in
reduced markdown expense. Despite these savings, cost of goods
sold, buying and occupancy costs increased to 72.4% as a
percentage of sales in 2003 from 70.7% as a percentage of net
sales in 2002 due to the deleveraging effect of lower sales
volume of $50.5 million.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses decreased to $150.7 million in 2003
from $164.5 million in 2002, and increased as a percentage
of net sales to 28.9% from 28.8%. The $13.8 million
decrease was primarily due to: (1) a $10.2 million
decrease in store selling expenses due to tighter cost control
and a new method of hours allocation in the stores resulting in
lower staffing levels during periods of slower sales, (these
initiatives, when combined with a lower average store count,
accounted for a $7.8 million reduction in payroll expense,
which represented 76% of the $10.2 million in store selling
expense savings), (2) a $4.5 million decrease in other
administrative costs related to the reduced store count and
corporate restructuring and cost-saving initiatives, (3) a
$2.0 million decrease in other store expenses also due to a
lower average store count, (4) a $1.9 million decrease
in asset impairments and write-offs, offset by $0.6 million
in increased costs for lease terminations to net a
$1.3 million decrease over 2002, and (5) a
$1.0 million decrease in recruiting, relocation and
severance costs.

These expense reductions were primarily offset by
(1) a $2.2 million increase in general administrative
costs for higher employee benefit costs primarily due to
increased insurance costs and higher costs for consulting fees
related to corporate restructuring and financing activities,
offset by lower payroll expense in 2003 compared to 2002,
(2) a $1.0 million increase in legal costs, and
(3) a $2.0 million increase in various other
miscellaneous costs and reduced transaction fees that offset
selling expenses.

Depreciation and
Amortization.Depreciation and
amortization increased to $19.2 million in 2003 from
$16.3 million in 2002, and increased as a percentage of net
sales to 3.7% from 2.9%. The increase of $2.9 million was
primarily the result of (1) a $1.7 million increase in
accelerated depreciation recorded in 2003 for increased planned
store closures during 2003 and scheduled 2004 closures as
compared to the accelerated depreciation recorded in 2002 for
2002 and planned 2003 store closures, (2) an
$0.8 million charge taken for the re-evaluation of asset
lives for point of sale systems, (3) $0.3 million in
increased amortization and depreciation of administrative assets
due to higher asset levels in 2003 compared to 2002, and
(4) $0.1 million in higher general store depreciation
expense.

Operating
Loss.As a result of the above,
the operating loss equaled a net loss of $25.9 million in
2003 compared to a $13.6 million net loss in 2002, or 5.0%
of net sales in 2003 as compared to 2.4% of net sales in 2002.

Interest
Expense.Net interest expense
increased to $10.9 million in 2003 from $10.3 million
in 2002 primarily due to $0.5 million of waiver fees paid
to our senior lenders related to our EBITDA covenants in our
senior credit facility during the fourth quarter of 2003. In
addition, the decreased borrowings under the revolver during
2003 were offset by higher interest rates and increased debt
issuance cost amortization.

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##### Table of Contents



Income Tax
Benefit.The income tax benefit
was $3.2 million in 2003 compared to $9.5 million in
2002 due to sustained losses, which required the recording of a
valuation allowance against potentially unrealizable net
operating losses in future periods. This resulted in the
effective rate being reduced from 40% in 2002 to 8.7% in 2003.

Net Loss from Continuing
Operations.As a result of the
above, the net loss from continuing operations for 2003 was
$33.6 million compared to a net loss from continuing
operations of $14.3 million in 2002.

Loss from Discontinued Operations and
Cumulative Effect of a Change in Accounting
Principle.There was no loss from
discontinued operations in 2003 as compared to the loss from
discontinued operations of $42.0 million in 2002. Included
in the 2002 figure is $27.2 million in charges, net of tax,
for the disposal of substantially all fixed assets, the markdown
of inventory, and severance and lease termination costs for the
Travel Subsidiaries in 2002, as well as $14.8 million in
losses from operations prior to the announced liquidation. In
addition, in 2002 there was a cumulative effect of a change in
accounting principle charge of $24.6 million, net of tax,
for the Travel Subsidiaries related to the implementation of
Statement of Financial Accounting Standards (SFAS)
SFAS No. 142, Goodwill and Other Intangible
Assets. See Consolidated Financial Statements of the
Company, Note 3. Discontinued Operations, beginning
on page F-12 of this report, for further details.



| |                      
| | ---------------------
| | 2002 Compared to 2001

Net Sales.Net sales decreased 4.5% to $571.5 million in 2002 from
$598.3 million in 2001. The $26.8 million sales
decrease was due to: (1) a $35.6 million decrease from
a 7.0% comparable store sales decrease, (2) an
$18.4 million decrease from 2002 and 2001 store closings,
and (3) a $5.8 million decrease from lower seasonal
store sales. These decreases were offset by (1) a
$32.4 million increase due to new store openings in 2002
that were not accounted for as part of comparable store sales,
and (2) a $0.6 million increase in e-commerce sales
volume.

Causes for the net sales decrease were threefold:
(1) the sluggish economy and the threat of war,
(2) the dockworkers strike on the West Coast that delayed
product shipments to stores at the beginning of the peak retail
season (October), and (3) over-assortment, more promotional
goods at lower price points and a higher than average proportion
of suede products.

We opened 34 stores and closed 35 stores in 2002,
compared to opening 80 stores and closing 34 stores in 2001. As
of February 1, 2003, we operated 618 stores compared to 619
stores at February 2, 2002. Our selling square footage
increased 1.28% to 1,376,600 from 1,359,200 in 2001. We operated
284 seasonal stores during the 2002 holiday season as compared
to 281 seasonal stores during 2001.

Cost of Goods Sold, Buying and Occupancy
Costs.Cost of goods sold, buying
and occupancy costs increased to 70.7% as a percentage of net
sales in 2002 from 67.4% of net sales in 2001 due to lower sales
volume of $26.8 million. The 3.3% increase translates into
a $1.0 million increase over 2001. The percentage variance
is greater due to the deleveraging effect of occupancy costs on
a reduced sales base. This $1.0 million increase from 2001
was due to: (1) $9.5 million in higher buying and
occupancy costs, resulting from an increase in the average
number of permanent stores operated of 3.2% from 604 in 2001 to
623 in 2002, and (2) a $1.9 million increase in
freight costs, due primarily to the West Coast port shutdown,
partially offset by $10.4 million in lower cost of goods
sold costs due to lower sales volume in 2002 compared to 2001.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses increased to $164.5 million in 2002
from $158.5 million in 2001, and increased as a percentage
of net sales to 28.8% from 26.5%. The increase was primarily due
to: (1) a $3.1 million increase in store selling
expenses, including, but not limited to payroll expense, which
fluctuates with the store count, (2) a $5.9 million
increase in general administrative costs for higher employee
benefit costs due to increased insurance costs, costs for
corporate restructuring activities and higher legal fees, and
(3) $2.4 million in lower credit memo service charge
income compared to 2001 since 2001 included the initial impact
of recording the fee and 2002 represented only current year
activity, partially offset by approximately $3.7 million in
lower amounts of fixed asset

27



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##### Table of Contents



impairments and write-offs in 2002, and a
$1.7 million reduction in 2002 expenses due primarily to
lower sales volume.


Depreciation and
Amortization.Depreciation and
amortization increased to $16.3 million in 2002 from
$13.9 million in 2001, and increased as a percentage of net
sales to 2.9% from 2.3%. The increase resulted from depreciation
on a higher base of assets resulting from the $33.0 million
prior year increase in fixed assets, coupled with
$8.8 million in new capital expenditures in 2002
($5.4 million for construction of new stores and the
renovation of existing stores and $3.4 million for
administrative projects).

Operating Income
(Loss).As a result of the above,
operating income (loss) decreased to a net loss of
$13.6 million, or 2.4% of net sales in 2002 from income of
$22.5 million, or 3.8% of net sales in 2001.

Interest
Expense.Net interest expense
increased to $10.3 million in 2002 from $9.6 million
in 2001 due to $0.7 million of lower interest income in
2002 from fewer short-term investments that were held, on
average, for a shorter period, and an increase in interest rates
on short-term debt outstanding, partially offset by lower
average borrowings of long-term debt.

Income Tax Provision
(Benefit).The income tax benefit
was $9.5 million in 2002 compared to a $5.2 million
tax provision in 2001. The effective rate of 40% remained
constant from 2001 to 2002.

Net Income (Loss) from Continuing
Operations.Net loss from
continuing operations for 2002 was $14.3 million compared
to net income from continuing operations of $7.8 million in
2001.

Loss from Discontinued Operations and
Cumulative Effect of a Change in Accounting
Principle.Loss from discontinued
operations was $42.0 million in 2002 compared to
$22.1 million in 2001. Included in the 2002 figure is
$27.2 million in charges, net of tax, for the disposal of
substantially all fixed assets, the markdown of inventory and
severance and lease termination costs for the Travel
Subsidiaries in 2002 and $14.8 million in losses from
operations prior to the announced liquidation. In addition, in
2002 there was a cumulative effect of change in accounting
principle charge of $24.6 million, net of tax, for the
Travel Subsidiaries related to the implementation of
SFAS No. 142, Goodwill and Other Intangible
Assets. See Consolidated Financial Statements of the
Company, Note 3. Discontinued Operations, beginning
on page F-12, for further details.

Liquidity and Capital Resources

Our capital requirements are primarily driven by
our seasonal working capital needs, investments in new stores,
remodeling existing stores, enhancing information systems and
increasing capacity and efficiency for our distribution center.
Our peak working capital needs typically occur during the period
from August through early December as inventory levels are
increased in advance of our peak selling season from October
through January.

General Electric Capital Corporation and a
syndicate of banks have provided us with a senior credit
facility, which was amended on November 1, 2002,
January 31, 2003, April 11, 2003, January 21,
2004, April 15, 2004, and April 27, 2004, that
provides for borrowings of up to $150 million in aggregate
principal amount, including a $25 million Term B promissory
note and a $75 million letter of credit subfacility. The
maximum amount available under the revolving credit portion of
the senior credit facility is limited to:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 85% of net inventories, provided that such
    percentage at no time may exceed 85% of the then applicable
    discount rate applied in appraising such inventories to reflect
    their value as if sold in an orderly liquidation, except that
    the discount rate is gradually increased from August 17 to
    October 1 of each year and gradually decreased from
    December 17 to February 1 of each year, and except
    that such amount is reduced by the amount of certain in-transit
    inventory to the extent such in-transit inventory reflects a
    disproportionate amount of our total inventory;
|
| |  | plus 85% of outstanding and undrawn trade letters
    of credit, provided that such percentage at no time may exceed
    85% of the discount rate applied in appraising the future
    inventories related to such letters of credit to reflect their
    value as if sold in an orderly liquidation;                                                                                                                                                                                                                                                                                                                  

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | plus 85% of credit card receivables;                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | minus a $10.0 million reserve; and                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | minus an additional reserve, upon deposit of the
    proceeds from the Equity Financing in an account controlled by
    the Agent under our senior credit facility, in an amount not to
    exceed $3.5 million, which will be reduced to the extent
    payments are made under the registration rights agreement
    related to the Equity Financing and will be reduced to zero upon
    effectiveness of the resale registration statement.

In addition, borrowings under the senior credit
facility are subject to the further limitations that:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the revolving credit portion of such borrowings
    cannot exceed the sum of 85% of credit card receivables, plus
    85% of the appraised value of inventory (including inventory
    subject to trade letters of credit) as if sold on a going-out-of
    business basis;                                                                                                                                                     
|
| |  | the total borrowings (i.e. the revolving credit
    portion of the facility and the Term B promissory note)
    cannot exceed the sum of 85% of the book value of credit card
    receivables, plus 95% (100% during August, September and
    October) of the appraised value of inventory (including
    inventory subject to trade letters of credit) as if sold on a
    going-out-of business basis;                       
|
| |  | from December 31 of each year, through
    March 31 of the following year, we must have no borrowings
    under the revolving credit portion of the facility and
    outstanding letters of credit must be no greater than
    $20.0 million; and                                                                                                                                                                               
|
| |  | until funds for the payment of the principal of
    our 11 1/4% Senior Notes are deposited in an account
    controlled by the Agent under our senior credit facility, we
    must have no borrowings under the revolving portion of the
    senior credit facility and outstanding letters of credit must be
    no greater than $15.0 million (plus a specified letter of
    credit for an aggregate amount of $3.0 million).

As of January 31, 2004, we had no borrowings
under the senior credit facility, except for the Term B
promissory note, and we had $6.7 million in outstanding
letters of credit.

Except as noted in the next sentence, interest is
payable on revolving credit borrowings at variable rates
determined by LIBOR plus 3.25%, or the prime rate
plus 2.0% (commercial paper rate plus 3.25% if the loan is made
under the swing line portion of the revolver). If we
meet certain financial tests for our fiscal year ending January
29 2005, these rates will be reduced by 0.50% per annum
thereafter. Interest is payable on the $25 million Term B
promissory note at a variable rate equal to the
prime rate plus 4%, plus an additional 5% payable
pursuant to a separate letter agreement with General Electric
Capital Corporation. We pay monthly fees on the unused portion
of the senior credit facility and on the average daily amount of
letters of credit outstanding during each month. Currently, the
senior credit facility expires in June 2005, at which time all
borrowings, including the Term B promissory note, become due and
payable. If we complete a sale of our capital stock on terms
that are acceptable to the lenders under our senior credit
facility and funds for the payment of the principal of the
11 1/4 Senior Notes are deposited in an account controlled
by the Agent under our senior credit facility, the expiration of
the senior credit facility (including the Term B promissory
note) will be extended to June 28, 2008. The lenders have
agreed that the terms of the Equity Financing described above
under   Additional Financing, if
consummated, would be acceptable for this purpose. Prepayment of
the Term B promissory note is subject to a 1% prepayment
fee. The revolving credit portion of the facility is subject to
a 1% prepayment fee under most circumstances. The Term B
promissory note is prepayable on or after July 1, 2002,
only with the consent of the senior lenders under the senior
credit facility.

The senior credit facility contains certain
restrictions and covenants which, among other things, restrict
our ability to make capital expenditures; acquire or merge with
another entity; make investments, loans or guarantees; incur
additional indebtedness; prepay, repurchase or pay any principal
on our 11 1/4% Senior Notes, except pursuant to a
permitted refinancing; create liens or other encumbrances; or
pay cash dividends or make other distributions.

We plan to use the senior credit facility for our
immediate and future working capital needs. Peak borrowings
typically occur from October through December and outstanding
letters of credit typically peak from August through September.
We are dependent on the senior credit facility to fund working
capital and letter of credit needs. We believe that borrowing
capacity under the senior credit facility, assuming that we are

29



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able to obtain equity financing to pay off the
11 1/4% Senior Notes, together with cash on hand, current
and anticipated cash flow from operations, cost reductions
associated with the 111 liquidation stores and the proceeds from
the Equity Financing, will be adequate to meet our working
capital and capital expenditure requirements through 2004. For
2003, the peak borrowings and peak letters of credit outstanding
under the senior credit facility were $72.6 million and
$28.9 million, respectively, and the average amount of
borrowings and the average amount of letters of credit
outstanding were $20.3 million and $12.7 million,
respectively. For 2002, the peak borrowings and peak letters of
credit outstanding under the senior credit facility were
$132.4 million and $34.2 million, respectively, and
the average amount of borrowings and the average amount of
letters of credit outstanding were $41.2 million and
$19.4 million, respectively. For 2001, the peak borrowings
and peak letters of credit outstanding under the senior credit
facility were $145.2 million and $47.9 million,
respectively, and the average amount of borrowings and the
average amount of letters of credit outstanding were
$65.2 million and $25.9 million, respectively.


On August 18, 1997, we completed a private
offering of $75 million of our 11 1/4% Senior
Notes to certain institutional buyers. Interest on the
11 1/4% Senior Notes is payable semi-annually in
arrears on February 15 and August 15 of each year. The
11 1/4% Senior Notes mature on August 15, 2004.
The 11 1/4% Senior Notes are our general unsecured
obligations and rank senior in right of payment to all of our
existing and future subordinated indebtedness and rank on equal
terms in right of payment with all of our other current and
future unsubordinated indebtedness. During 2000 and 1999, we
repurchased $13.3 million and $26.1 million,
respectively, of our 11 1/4% Senior Notes. As of
January 31, 2004, we had $30.6 million of
11 1/4% Senior Notes outstanding, all of which was
classified as current.

We currently do not have the funds to pay the
outstanding principal amount of the 11 1/4% Senior Notes
when they are due on August 15, 2004. Our senior credit
facility prohibits us from incurring any indebtedness which
refunds, renews, extends or refinances the 11 1/4% Senior
Notes on terms more burdensome than the terms of such notes, and
the rate of interest with respect to any replacement notes
cannot exceed the sum of the rate of interest on United States
treasury obligations of like tenor at the time of such
refunding, renewal, extension or refinancing, plus 7.0% per
annum. We anticipate that we will not be able to refund, renew,
extend or refinance the 11 1/4% Senior Notes with
indebtedness that would comply with such limitations. However,
if we complete a sale of our capital stock by August 15,
2004 on terms that are acceptable to the lenders under our
senior credit facility, such lenders have agreed that we may use
the proceeds from such sale to pay our 11 1/4% Senior
Notes. The lenders have agreed that the terms of the Equity
Financing described above under Additional
Financing, if consummated, would be acceptable for this
purpose.

In October 2000, we acquired El Portal, a
specialty retailer of premium travel products and accessories,
for approximately $17.8 million. The acquisition was funded
with cash from working capital and our senior credit facility.
In April 2001, we acquired Bentleys, a specialty retailer
of travel products and accessories, for $34.3 million. The
acquisition was funded with cash from working capital and our
senior credit facility.

In January 2002, we sold 1,900,000 shares of
common stock to an institutional investor in a private placement
for a price of $11.00 per share for net proceeds of
approximately $20.0 million. In April 2002, affiliates of
the institutional investor exercised the option to purchase
100,000 shares of our common stock at a purchase price of
$11.00 per share. The sale was completed on April 12,
2002, for net proceeds of approximately $1.0 million.

On April 30, 2002, we sold
900,000 shares of our common stock in a private placement
at a purchase price of $11.00 per share, for net proceeds
of approximately $9.9 million. On June 10, 2002, the
purchasers in the April private placement exercised the option
to purchase an additional 100,000 shares of our common
stock at a purchase price of $11.00 per share. The sale was
completed on June 13, 2002, for net proceeds of
approximately $1.1 million.

On June 21, 2002, we completed a
sale/leaseback transaction for our headquarters facility and
distribution center in Brooklyn Park, Minnesota for net proceeds
of $12.5 million. A portion of the net proceeds from the
sale/ leaseback, $4.8 million, was used to pay down the
Term B promissory note from $25.0 million to
$20.2 million. The remainder of the proceeds was used for
general corporate purposes.

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On November 4, 2002, pursuant to the First
Amendment to Fourth Amended and Restated Credit Agreement with
General Electric Capital Corporation and the syndicate, we
reborrowed $4.8 million of the Term B promissory note,
which brought the outstanding balance to $25.0 million.

On November 19, 2002, we announced the
liquidation of the stores operated by our Travel Subsidiaries,
as described in Note 3 to the consolidated financial
statements on page F-12 of this report.

On January 22, 2004, we announced a
reorganization and partial store liquidation as described in
Note 4 to the consolidated financial statements on
page F-14 of this report.

Cash Flow Analysis

The following table summarizes our cash flow
activity for fiscal 2003, 2002 and 2001:

|                                                                                 |  |                     |         |             |  |             |         |   |  |   |         |  
|-------------------------------------------------------------------------------- |  | ------------------- | ------- | ----------- |  | ----------- | ------- | - |  | - | ------- | -
|                                                                                 |  |                    
|                                                                                 |  | For the years ended
|                                                                                 |  |                    
|                                                                                 |  | January 31,         |         | February 1, |  | February 2,
|                                                                                 |  | 2004                |         | 2003        |  | 2002       
|                                                                                 |  |                     |         |             |  |            
|                                                                                 |  |                    
|                                                                                 |  | (In thousands)     
|Net cash provided by (used in) operating
    activities of continuing operations |  | $                   | 29,850  |             |  | $           | (37,330 | ) |  | $ | 21,635  |  
|Net cash provided by (used in) investing
    activities of continuing operations |  |                     | (7,289  | )           |  |             | 3,713   |   |  |   | (33,015 | )
|Net cash provided by financing activities of
    continuing operations           |  |                     | 510     |             |  |             | 11,249  |   |  |   | 45,797  |  
|Net cash provided by (used in) discontinued
    operations                       |  |                     | (11,110 | )           |  |             | 13,857  |   |  |   | (48,406 | )
|                                                                                 |  |                     |         |             |  |             |         |   |  |   |         |  
|NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS                         |  | $                   | 11,961  |             |  | $           | (8,511  | ) |  | $ | (13,989 | )
|                                                                                 |  |                     |         |             |  |             |         |   |  |   |         |  

Operating
Activities.Operating activities
of continuing operations for 2003 resulted in cash provided of
$29.9 million compared to cash used of $37.3 million
and cash provided of $21.6 million in 2002 and 2001,
respectively.

The $29.9 million of cash provided by
operating activities in 2003 was comprised of: (1) a
$29.4 million decrease in inventories due to a strategic
operating decision to keep inventory levels more tightly managed
than in previous years, (2) $23.2 million in non-cash
adjustments for depreciation, amortization, property and
equipment impairment, and restricted stock compensation expense,
(3) a $12.8 million increase in deferred taxes,
(4) a $6.7 million increase in taxes
payable/receivable and other liabilities primarily due to net
operating losses, and (5) a $0.1 million decrease in
prepaid assets.

These sources of cash were primarily offset by:
(1) a net loss from continuing operations of
$33.6 million, (2) a $1.0 million increase in
accounts receivable due to a higher mix of credit card sales at
January 31, 2004, due to the 111 store liquidation sale
that began in late January 2004 that only accepts cash and
credit cards, and (3) a $7.8 million decrease in
accounts payable and accrued expenses from a reduction in the
volume of merchandise purchased and the lower level of general
non-merchandise vendor purchases in 2003 compared to 2002.

The $37.3 million of cash used by operating
activities in 2002 was comprised of cash used for: (1) the
net loss from continuing operations of $14.3 million,
(2) a $25.8 million increase in inventories due to
lower sales volumes than anticipated, (3) a
$12.0 million decrease in taxes payable/receivable and
other liabilities primarily due to net operating losses,
(4) a $10.8 million increase in deferred taxes, and
(5) $0.9 million in cash used by various other
operating activities.

These operating uses were partially offset with
cash provided by: (1) $19.4 million in non-cash
adjustments for depreciation, amortization, property and
equipment impairment, and restricted stock compensation expense,
(2) a $3.7 million decrease in accounts receivable due
to fewer tenant allowances resulting from a reduction in capital
expenditures from 2001, and (3) a $3.4 million
increase in accounts payable and accrued expenses primarily as a
result of longer aging of payables.

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The $21.6 million in cash provided by
operating activities in 2001 was comprised of:
(1) $7.8 million provided by net income from
continuing operations, (2) $19.6 million in non-cash
adjustments for depreciation and amortization and property and
equipment impairment, (3) a $13.2 million decrease in
inventories, (4) a $5.6 million decrease in prepaid
expenses due to the timing of February 2002 rent payments,
(5) a $1.9 million decrease in accounts receivable,
(6) a $1.6 million increase in deferred taxes, and
(7) $0.2 million in cash provided by various other
operating activities.

These operating uses were partially offset by
(1) a $7.0 million decrease in accounts payable and
(2) a $21.3 million decrease in income taxes payable
and other liabilities due to reduced income.

Investing
Activities.Investing activities
of continuing operations for 2003 were comprised of
$7.8 million in capital expenditures primarily for the
construction of new stores and the renovation of and
improvements to existing stores, offset by $0.5 million
from proceeds on the sale of property and equipment. For 2004,
capital expenditures are capped at $6.0 million.

Investing activities of continuing operations for
2002 were comprised of $8.8 million in capital expenditures
and additions to other assets used primarily for the
construction of new stores and the renovation of and
improvements to existing stores, offset by $12.5 million in
net proceeds from the sale/leaseback of our headquarters
facility in Brooklyn Park, Minnesota.

Investing activities for 2001 were primarily
comprised of $33.0 million in capital expenditures and
additions to other assets used primarily for the construction of
new stores and the renovation of and improvements to existing
stores.

Financing
Activities.Cash provided by
financing activities of continuing operations in 2003 was
$0.5 million, as a result of: (1) $1.1 million
provided by the issuance of common stock from the exercise of
stock options, (2) $0.5 million provided by the
issuance of notes payable to finance an information services
maintenance agreement. These amounts were offset by
(1) $1.0 million used for debt acquisition costs for
the refinancing of the senior credit facility in April 2003 and
(2) $0.1 million used for the repayment of a note
payable.

Cash provided by financing activities of
continuing operations in 2002 was $11.2 million, which
consisted of $13.2 million provided by the issuance of
common stock from two private placement transactions and the
exercise of stock options, offset by $2.0 million used for
debt acquisition costs.

Cash provided by financing activities in 2001 was
$45.8 million, primarily due to $23.4 million from the
issuance of debt net of repayments and debt acquisition costs
and $22.4 million from the issuance of common stock and
exercise of stock options.

Contractual Obligations and Commercial
Commitments.We have entered into
agreements that create contractual obligations and commercial
commitments. These obligations and commitments will have an
impact on future liquidity and the availability of capital
resources. The tables noted below present a summary of these
obligations and commitments:

Contractual Obligations

Payments Due by Period (in
thousands)

|                                   |  |             |         |           |  |              |        |              |  |            |         |  |  |   |        |  |  |   |        | 
|---------------------------------- |  | ----------- | ------- | --------- |  | ------------ | ------ | ------------ |  | ---------- | ------- |  |  | - | ------ |  |  | - | ------ | 
|                                   |  | Total       |         | Less Than |  | One to Three |        | Four to Five |  | After Five
|                                   |  | Obligations |         | One Year  |  | Years        |        | Years        |  | Years     
|                                   |  |             |         |           |  |              |        |              |  |           
|Operating leases(1)                |  | $           | 274,352 |           |  | $            | 45,161 |              |  | $          | 112,960 |  |  | $ | 81,824 |  |  | $ | 34,407 | 
|Debt obligations                   |  |             | 56,189  |           |  |              | 31,125 |              |  |            | 25,064  |  |  |   |       |  |  |   |       | 
|                                   |  |             |         |           |  |              |        |              |  |            |         |  |  |   |        |  |  |   |        | 
|Total contractual cash obligations |  | $           | 330,541 |           |  | $            | 76,286 |              |  | $          | 138,024 |  |  | $ | 81,824 |  |  | $ | 34,407 | 
|                                   |  |             |         |           |  |              |        |              |  |            |         |  |  |   |        |  |  |   |        | 



---

|    |                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes store and distribution center operating
    leases, which generally provide for payment of direct operating
    costs in addition to rent. These obligation amounts include
    future minimum lease payments and exclude such direct operating
    costs.

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Commercial Commitments

Amount of Commitment Per Period (in
thousands)

|                              |  |           |       |           |  |              |       |              |  |            |   |  |  |   |   |  |  |   |   | 
|----------------------------- |  | --------- | ----- | --------- |  | ------------ | ----- | ------------ |  | ---------- | - |  |  | - | - |  |  | - | - | 
|                              |  | Total     |       |           |  |              |       |              |  |           
|                              |  | Amounts   |       | Less Than |  | One to Three |       | Four to Five |  | After Five
|                              |  | Committed |       | One Year  |  | Years        |       | Years        |  | Years     
|                              |  |           |       |           |  |              |       |              |  |           
|Documentary letters of credit |  | $         | 955   |           |  | $            | 955   |              |  | $          |  |  |  | $ |  |  |  | $ |  | 
|Standby letters of credit     |  |           | 5,786 |           |  |              | 5,786 |              |  |            |  |  |  |   |  |  |  |   |  | 
|                              |  |           |       |           |  |              |       |              |  |            |   |  |  |   |   |  |  |   |   | 
|Total commercial commitments  |  | $         | 6,741 |           |  | $            | 6,741 |              |  | $          |  |  |  | $ |  |  |  | $ |  | 
|                              |  |           |       |           |  |              |       |              |  |            |   |  |  |   |   |  |  |   |   | 

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that
have or are reasonably likely to have a current or future effect
on our financial condition, changes in our financial condition,
revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.

Seasonality and Inflation

A majority of our net sales and operating profit
is generated in the peak selling period from October through
January, which includes the holiday selling season. As a result,
our annual operating results have been, and will continue to be,
heavily dependent on the results of our peak selling period. Net
sales are generally lowest during the period from April through
July, and we typically do not become profitable, if at all,
until the fourth quarter of a given year. Most of our stores are
unprofitable during the first three quarters. Conversely, in a
typical year nearly all of our stores are profitable during the
fourth quarter, even those that may be unprofitable for the full
year. Historically, we have opened most of our stores during the
last half of the year. As a result, new mall stores opened just
prior to the fourth quarter produce profits in excess of their
annualized profits since the stores typically generate losses in
the first nine months of the year.

We do not believe that inflation has had a
material effect on the results of operations during the past
three years; however, there can be no assurance that our
business will not be affected by inflation in the future.

Discontinued Operations

In October 2000, we acquired El Portal, a
38 store chain of premium travel products and accessories
located in Las Vegas, Nevada. In April 2001, we acquired
Bentleys, a 106 store chain of specialty luggage
products based in Miami, Florida. During 2001 and 2002, we
worked to integrate the operations of both companies by
consolidating the two corporate operations in Las Vegas, Nevada
and moving all back-office processing to our headquarters in
Brooklyn Park and Maple Grove, Minnesota. Due to substantial
losses experienced by the Travel Subsidiaries during 2001 and
2002, on November 19, 2002, we announced the liquidation of
all 135 stores operated by the Travel Subsidiaries. The
Travel Subsidiaries and certain of their affiliates entered into
an agreement with a joint venture comprised of Hilco Real
Estate, LLC and Hilco Merchant Resources, LLC
(Hilco) to liquidate the remaining inventory of the
Travel Subsidiaries and exit the store leases. As a result of
this decision, the Travel Subsidiaries have been presented as
discontinued operations effective November 19, 2002, and
the consolidated financial statements were reclassified to
separate the net investment in, and the liabilities and
operating results of, the Travel Subsidiaries.

During 2002, we received net proceeds totaling
$13.9 million as a result of discontinued operations. We
also recorded a $27.2 million charge, net of tax, related
to the exit of the Travel Subsidiaries. This charge primarily
included severance costs, inventory markdowns, a write-off of
store fixed assets, and lease termination fees. For 2002, we
recorded a loss on discontinued operations of $42.0 million
(net of tax), including the $27.2 million charge for the
closure of the Travel Subsidiaries and the $14.8 million
net operating loss in the Travel Subsidiaries during 2002. See
Consolidated Financial Statements of the Company,
Note 3. Discontinued Operations beginning on page
F-12 of this report for more detail.

As of February 1, 2003, all of the Travel
Subsidiaries stores had closed and substantially all of
the lease terminations had been executed. At January 31,
2004, we had net obligations related to discontinued

33



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operations of approximately $0.4 million,
primarily for remaining lease termination costs for a
distribution center and vendor chargeback liabilities. We
believe that we have adequately reserved for the future
obligations of the Travel Subsidiaries.


Reorganization and Partial Store
Liquidation

On January 22, 2004, we announced that we
would liquidate up to 100 underperforming mall and outlet stores
(subsequently revised to 111 stores) and eliminate approximately
950 store-related positions. We entered into an Agency Agreement
with a joint venture comprised of Hilco Merchant Resources, LLC,
Gordon Brothers Retail Partners, LLC and Hilco Real Estate, LLC
(the Hilco/ Gordon Brothers Joint Venture) to
liquidate the inventory in the 111 stores and assist in the
discussions with landlords regarding lease terminations in
approximately 94 of these stores. Pursuant to the Agency
Agreement, the Hilco/ Gordon Brothers Joint Venture will pay us
a guaranteed amount of 84% of the cost value of the inventory,
subject to certain adjustments. The Hilco/ Gordon Brothers Joint
Venture is responsible for all expenses related to the sale. In
addition, we announced that we would eliminate approximately 70
positions at our corporate headquarters in Brooklyn Park,
Minnesota and distribution centers located in Minnesota and
Nevada, as well as the closure of our distribution center in Las
Vegas, Nevada, to better align our financial structure with
current business conditions.

For these actions, we will take a total charge of
approximately $34.0 million to $36.0 million,
primarily during the first half of 2004. We will not book a tax
benefit related to these charges, as we are in a net operating
loss carryforward position. Approximately $18.0 to
$20.0 million of the charges will be non-cash. Anticipated
proceeds of the liquidation inventory will range from $14.0 to
$16.0 million. The total cash outlay is anticipated to be
at or near zero.

We recorded expense related to the charge for
these actions of $8.6 million in January 2004. This
consisted primarily of: (1) a $3.0 million writedown
of inventory transferred to the Hilco/ Gordon Brothers Joint
Venture, (2) a $3.9 million loss on disposal of fixed
assets and accelerated depreciation related to the liquidation
stores and closed distribution centers, (3) $0.7 million
for severance and other employee termination benefits, and
(4) $1.0 million in various additional costs primarily
related to revised store asset lives.

The remaining estimated $25.0 million to
$27.0 million in costs to be incurred in the first half of
2004 related to the liquidation, workforce reduction, and
facilities closures actions will be primarily for lease
termination costs, fixed asset accelerated depreciation for
store closures, and various additional costs incurred to
liquidate the inventories of the liquidation stores.

Subsequent Event

On April 25, 2004, we entered into a common
stock and warrant purchase agreement pursuant to which we agreed
to issue 17,948,718 shares of our common stock to three
institutional investors at a price of $1.95 per share. As
additional consideration for the investors commitment, we
have issued two million warrants exercisable for five years to
the investors, and at closing, will issue an additional two
million warrants exercisable for five years, each at an exercise
price of $3.00 per share of common stock. The closing of
the transaction is subject to a number of closing conditions,
the principal condition being shareholder approval.

We intend to use the proceeds from the Equity
Financing to repay our 11 1/4% Senior Notes, and for
general working capital purposes. However, there can be no
assurance that all conditions to the closing will be met. If we
are unable to close the Equity Financing for any reason, we will
need to find an alternative source of permitted financing for
the repayment of the 11 1/4% Senior Notes before we can
borrow under the revolving portion of our senior credit
facility. There can be no assurances that we will be able to
obtain such financing, on acceptable terms or at all, before we
need to access the revolving portion of our senior credit
facility or before the 11 1/4% Senior Notes become due. We
anticipate that we will need to access the revolving portion of
our senior credit facility by the middle of July 2004, and if we
do not obtain the necessary funding from some source other than
operations before such time, we could eventually deplete our
cash reserves and become insolvent or have to consider other
alternatives, including filing for bankruptcy.

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##### Table of Contents



Quarterly Results

The following table sets forth certain unaudited
consolidated financial information from our historical
consolidated statements of operations for each fiscal quarter of
2003 and 2002. This quarterly information has been prepared on a
basis consistent with our audited consolidated financial
statements appearing elsewhere in this Form 10-K and
reflects adjustments which, in the opinion of management,
consist of normal recurring adjustments, necessary for a fair
presentation of such unaudited quarterly results when read in
conjunction with the audited consolidated financial statements
and notes thereto. All prior periods have been reclassified to
reflect discontinued operations of the Travel Subsidiaries.

|                                                                                                          |  |                  |         |             |  |         |         |        |  |         |         |         |  |         |         |        |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | ----------- |  | ------- | ------- | ------ |  | ------- | ------- | ------- |  | ------- | ------- | ------ |  | - | ------- | - |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                                                          |  |                 
|                                                                                                          |  | Quarter ended(1)
|                                                                                                          |  |                 
|                                                                                                          |  |                  |         |            
|                                                                                                          |  | Fiscal 2003      |         | Fiscal 2002
|                                                                                                          |  |                  |         |            
|                                                                                                          |  | Jan. 31,         |         | Nov. 1,     |  | Aug. 2, |         | May 3, |  | Feb. 1, |         | Nov. 2, |  | Aug. 3, |         | May 4,
|                                                                                                          |  | 2004             |         | 2003        |  | 2003    |         | 2003   |  | 2003    |         | 2002    |  | 2002    |         | 2002  
|                                                                                                          |  |                  |         |             |  |         |         |        |  |         |         |         |  |         |         |       
|Net sales                                                                                                 |  | $                | 268,094 |             |  | $       | 97,880  |        |  | $       | 59,750  |         |  | $       | 95,301  |        |  | $ | 303,108 |   |  | $ | 110,187 |   |  | $ | 63,195  |   |  | $ | 95,057  |  
|Gross margin                                                                                              |  |                  | 100,024 |             |  |         | 22,877  |        |  |         | 2,975   |         |  |         | 18,089  |        |  |   | 115,204 |   |  |   | 26,339  |   |  |   | 3,753   |   |  |   | 21,947  |  
|Operating income (loss)                                                                                   |  |                  | 43,040  |             |  |         | (16,473 | )      |  |         | (33,527 | )       |  |         | (18,960 | )      |  |   | 52,632  |   |  |   | (18,104 | ) |  |   | (32,426 | ) |  |   | (15,705 | )
|Income (loss) from continuing operations before
    cumulative effect of a change in accounting principle |  |                  | 12,372  |             |  |         | (11,618 | )      |  |         | (21,600 | )       |  |         | (12,737 | )      |  |   | 29,800  |   |  |   | (12,799 | ) |  |   | (20,870 | ) |  |   | (10,444 | )
|Loss from discontinued operations                                                                         |  |                  |        |             |  |         |        |        |  |         |        |         |  |         |        |        |  |   | (27,402 | ) |  |   | (4,212  | ) |  |   | (6,168  | ) |  |   | (4,232  | )
|Cumulative effect of a change in accounting
    principle(2)                                              |  |                  |        |             |  |         |        |        |  |         |        |         |  |         |        |        |  |   |        |   |  |   |        |   |  |   |        |   |  |   | (24,567 | )
|Net income (loss)                                                                                         |  | $                | 12,372  |             |  | $       | (11,618 | )      |  | $       | (21,600 | )       |  | $       | (12,737 | )      |  | $ | 2,398   |   |  | $ | (17,011 | ) |  | $ | (27,038 | ) |  | $ | (39,243 | )
|                                                                                                          |  |                  |         |             |  |         |         |        |  |         |         |         |  |         |         |        |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Basic earnings (loss) per share:                                                                          |  |                  |         |             |  |         |         |        |  |         |         |         |  |         |         |        |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Income (loss) from continuing operations before
    cumulative effect of a change in accounting principle |  | $                | 0.60    |             |  | $       | (0.57   | )      |  | $       | (1.05   | )       |  | $       | (0.62   | )      |  | $ | 1.46    |   |  | $ | (0.63   | ) |  | $ | (1.03   | ) |  | $ | (0.54   | )
|                                                                                                          |  |                  |         |             |  |         |         |        |  |         |         |         |  |         |         |        |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Loss from discontinued operations                                                                         |  |                  |        |             |  |         |        |        |  |         |        |         |  |         |        |        |  |   | (1.34   | ) |  |   | (0.21   | ) |  |   | (0.30   | ) |  |   | (0.22   | )
|                                                                                                          |  |                  |         |             |  |         |         |        |  |         |         |         |  |         |         |        |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Cumulative effect of a change in accounting
    principle(2)                                              |  |                  |        |             |  |         |        |        |  |         |        |         |  |         |        |        |  |   |        |   |  |   |        |   |  |   |        |   |  |   | (1.28   | )
|                                                                                                          |  |                  |         |             |  |         |         |        |  |         |         |         |  |         |         |        |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Net income (loss)                                                                                         |  | $                | 0.60    |             |  | $       | (0.57   | )      |  | $       | (1.05   | )       |  | $       | (0.62   | )      |  | $ | 0.12    |   |  | $ | (0.84   | ) |  | $ | (1.33   | ) |  | $ | (2.04   | )
|                                                                                                          |  |                  |         |             |  |         |         |        |  |         |         |         |  |         |         |        |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Diluted earnings per share:                                                                               |  |                  |         |             |  |         |         |        |  |         |         |         |  |         |         |        |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Income (loss) from continuing operations before
    cumulative effect of a change in accounting principle |  | $                | 0.60    |             |  | $       | (0.57   | )      |  | $       | (1.05   | )       |  | $       | (0.62   | )      |  | $ | 1.46    |   |  | $ | (0.63   | ) |  | $ | (1.03   | ) |  | $ | (0.54   | )
|                                                                                                          |  |                  |         |             |  |         |         |        |  |         |         |         |  |         |         |        |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Loss from discontinued operations                                                                         |  |                  |        |             |  |         |        |        |  |         |        |         |  |         |        |        |  |   | (1.34   | ) |  |   | (0.21   | ) |  |   | (0.30   | ) |  |   | (0.22   | )
|                                                                                                          |  |                  |         |             |  |         |         |        |  |         |         |         |  |         |         |        |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Cumulative effect of a change in accounting
    principle(2)                                              |  |                  |        |             |  |         |        |        |  |         |        |         |  |         |        |        |  |   |        |   |  |   |        |   |  |   |        |   |  |   | (1.28   | )
|                                                                                                          |  |                  |         |             |  |         |         |        |  |         |         |         |  |         |         |        |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  
|Net income (loss)                                                                                         |  | $                | 0.60    |             |  | $       | (0.57   | )      |  | $       | (1.05   | )       |  | $       | (0.62   | )      |  | $ | 0.12    |   |  | $ | (0.84   | ) |  | $ | (1.33   | ) |  | $ | (2.04   | )
|                                                                                                          |  |                  |         |             |  |         |         |        |  |         |         |         |  |         |         |        |  |   |         |   |  |   |         |   |  |   |         |   |  |   |         |  



---

|    |                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The sum of the per share amounts for the quarters
    does not equal the totals for the year due to the application of
    the treasury stock method.
|   
|(2) | Relates to implementation of SFAS 142,
    Goodwill and Other Intangible Assets.                                                                   

Recently Issued Accounting
Pronouncements

See Note 2 of the consolidated financial
statements beginning on page F-7 of this report for a full
description of recent accounting pronouncements, including the
respective expected dates of adoption and effects on results of
operations and financial condition.






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

At January 31, 2004, we had cash and cash
equivalents totaling $42.4 million. The effect of a
100 basis point change in interest rates would have an
estimated $0.4 million pre-tax earnings and cash flow
impact, assuming other variables are held constant.

Our senior credit facility carries interest rate
risk that is generally related to LIBOR, the commercial paper
rate or the prime rate. If any of those rates were to change
while we were borrowing under the facility,

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interest expense would increase or decrease
accordingly. As of January 31, 2004, there were no
outstanding borrowings under the senior credit facility (other
than the Term B promissory note) and $6.7 million in
outstanding letters of credit.


We have no earnings or cash flow exposure due to
market risks on our long-term debt obligations as a result of
the fixed-rate nature of the debt. However, interest rate
changes would affect the fair market value of the debt. At
January 31, 2004, we had fixed rate debt of
$30.6 million maturing in August 2004.






|        |                                  
|------- | ---------------------------------
|Item 8. | Consolidated Financial Statements

Consolidated financial statements required
pursuant to this Item begin on page F-1 of this Form 10-K.
Pursuant to the applicable accounting regulations of the
Securities and Exchange Commission, we are not required to
provide supplementary data.






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

On May 9, 2002, we discontinued the
engagement of Arthur Andersen LLP (Arthur Andersen)
as our independent auditors and engaged KPMG LLP
(KPMG) as our independent auditors for the fiscal
year ending February 1, 2003. Our Audit Committee approved
discontinuing the engagement of Arthur Andersen and engaging
KPMG as our independent auditors.

In connection with Arthur Andersens audits
for our fiscal years ended February 2, 2002, and
February 3, 2001, and through May 9, 2002, there were
no disagreements between Arthur Andersen and us on any matters
of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which
disagreements, if not resolved to the satisfaction of Arthur
Andersen, would have caused Arthur Andersen to make reference to
the subject matter of the disagreements in connection with its
report on our consolidated financial statements for such years,
and there were no reportable events as defined in
Item 304(a)(i)(v) of Regulation S-K.

Reports of Arthur Andersen on our consolidated
financial statements for the fiscal years ended February 2,
2002, and February 3, 2001, contained no adverse opinions
or disclaimers of opinion, nor were the reports qualified or
modified as to uncertainty, audit scope or accounting principles.

During the years ended February 2, 2002, and
February 3, 2001, and through May 9, 2002, we did not
consult KPMG with respect to the application of accounting
principles to a specified transaction, either completed or
proposed, or the type of audit opinion that might be rendered on
the consolidated financial statements of the Company and its
subsidiaries, or any other matters or reportable events as set
forth in Items 304(a)(2)(i) and (ii) of
Regulation S-K.






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

Evaluation of Disclosure Controls and
Procedures

Based on their evaluation as of the end of the
period covered by this report, our Chief Executive Officer and
our Chief Financial Officer have concluded that our disclosure
controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) are effective to ensure that
information required to be disclosed by us in reports that we
file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Disclosure
procedures only provide reasonable assurance that the controls
will meet their objectives. There can be no assurance that the
controls will be effective in all circumstances. There were no
significant changes in our internal control over financial
reporting during the most recently completed fiscal quarter that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.

36



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##### Table of Contents






PART III

Certain information required by Part III is
incorporated by reference from our definitive Proxy Statement
for the Annual Meeting of Shareholders to be held on
June 3, 2004, (the Proxy Statement) which will
be filed with the Securities and Exchange Commission pursuant to
Regulation 14A within 120 days after January 31,
2004.

Except for those portions specifically
incorporated in this Form 10-K by reference to our Proxy
Statement, no other portions of the Proxy Statement are deemed
to be filed as part of this Form 10-K.






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

Incorporated by reference in this Form 10-K
is the information appearing under the headings Election
of Directors and Section 16(a) Beneficial
Ownership Reporting Compliance, in our Proxy Statement.
For information concerning executive officers and family
relationships between any director or executive officer, see
Item 4a. Executive Officers of the Registrant
in this Form 10-K.

In March 2004, we adopted a Code of Business
Ethics and Conduct applicable to all associates and directors of
our company, including our chief executive officer, chief
operating officer, chief financial officer, controller,
treasurer and other employees performing similar functions. A
copy of the Code of Business Ethics and Conduct is attached to
this Form 10-K as Exhibit 14.1. We intend to file on a
Form 8-K any amendments to, or waivers from, our Code of
Business Ethics and Conduct within two days of any such
amendment or waiver.






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

Incorporated by reference in this Form 10-K
is the information appearing under the headings Election
of Directors Director Compensation and
Executive Compensation Summary Compensation
Table, Stock Options, Option Grants in Last Fiscal
Year, Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values Equity Compensation Plan
Information and Employment Contracts, in our Proxy
Statement.






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

Incorporated by reference in this Form 10-K
is the information appearing under the heading Security
Ownership of Principal Shareholders and Management, and
Equity Compensation Plan Information, in our Proxy
Statement.






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

Incorporated by reference in this Form 10-K
is the information appearing under the heading Certain
Relationships and Related Transactions, in our Proxy
Statement.






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

Incorporated into this item by reference is the
information under the headings Audit Fees, Audit-Related
Fees, Tax Fees, and All Other Fees and Pre-Approval
of Services, in our Proxy Statement.

37



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##### Table of Contents






PART IV






|         |                                                                                         
|-------- | ----------------------------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statements, Financial
    Statement Schedule and Reports on Form 8-K

(a)     Documents
filed as part of this report:

|   |  |                                                    
|-- |  | ---------------------------------------------------
|1. |  | Financial Statements:                              
|  
|   |  | Independent Auditors Report                       
|  
|   |  | Consolidated Balance Sheets                        
|  
|   |  | Consolidated Statements of Operations              
|  
|   |  | Consolidated Statements of Shareholders
    Equity
|  
|   |  | Consolidated Statements of Cash Flows              
|  
|   |  | Notes to Consolidated Financial Statements         
|  
|   |  | Financial Statement Schedule                       



| |     |                     
| | --- | --------------------
| | (b) | Reports on Form 8-K:



| |  |                                                                                                                                                                                                                                          
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | On November 18, 2003, the Company announced
    its third quarter earnings for the period ended November 1,
    2003.                                                                                                                    
|
| |  | On January 22, 2004, the Company announced
    the liquidation of over 100 stores (subsequently changed to 111)
    through a third-party liquidator. The report on Form 8-K
    regarding the liquidation was filed on February 6, 2004.



| |     |          
| | --- | ---------
| | (c) | Exhibits:

The
following exhibits are filed as part of this Form 10-K for
the year ended January 31, 2004.

|        |     |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  |  |                           | 
|------- | --- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | ------------------------- | 
|Exhibit |     |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|No.     |     | Description |  | Method of Filing                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |     |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 2.1 |             |  | Sale Agreement dated as of May 24, 1996 by
    and among CVS New York, Inc. (formerly known as Melville
    Corporation), Wilsons Center Inc. and Wilsons The Leather
    Experts Inc. (1)                                                                                                                                                                                                                                                             |  |  | Incorporated by Reference | 
|        | 3.1 |             |  | Amended and Restated Articles of Incorporation of
    Wilsons The Leather Experts Inc. adopted June 16, 1998, as
    amended by the Articles of Amendment dated February 17,
    2000, and the Articles of Amendment dated May 23,
    2002.(2)                                                                                                                                                                                                        |  |  | Incorporated by Reference | 
|        | 3.2 |             |  | Restated Bylaws of Wilsons The Leather Experts
    Inc. as amended June 16, 1998, January 25, 2000,
    May 23, 2002, and February 5, 2004.                                                                                                                                                                                                                                                                                                            |  |  | Electronic Transmission   | 
|        | 4.1 |             |  | Specimen of common stock
    certificate.(3)                                                                                                                                                                                                                                                                                                                                                                                                           |  |  | Incorporated by Reference | 
|        | 4.2 |             |  | Indenture dated as of August 18, 1997, by
    and among Wilsons The Leather Experts Inc., the other
    corporations listed on the signature pages thereof, and Wells
    Fargo Bank Minnesota, National Association (formerly known as
    Norwest Bank Minnesota, National Association), including
    specimen Certificate of 11 1/4% Series A Senior Notes
    due 2004 and specimen Certificate of 11 1/4% Series B
    Senior Notes due 2004.(4) |  |  | Incorporated by Reference | 
|        | 4.3 |             |  | Registration Rights Agreement dated as of
    May 25, 1996, by and among CVS New York, Inc.
    (formerly known as Melville Corporation), Wilsons The Leather
    Experts Inc., the Managers listed on the signature pages
    thereto, Leather Investors Limited Partnership I and the
    Partners listed on the signature pages thereto.(5)                                                                                                         |  |  | Incorporated by Reference | 

38



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |  |                           | 
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------------------------- | 
|Exhibit |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|No.     |       | Description |  | Method of Filing                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        | 4.4   |             |  | Amendment to Registration Rights Agreement dated
    as of August 12, 1999, by and among Wilsons The Leather
    Experts Inc. and the Shareholders listed on the attachments
    thereto.(6)                                                                                                                                                                                                                                                                                                                               |  |  | Incorporated by Reference | 
|        | 4.5   |             |  | Registration Rights Agreement dated as of
    January 10, 2002, by and among Wilsons The Leather Experts
    Inc. and the Investors signatory thereto.(7)                                                                                                                                                                                                                                                                                                                                                                  |  |  | Incorporated by Reference | 
|        | 4.6   |             |  | Letter Amendment to the Common Stock Purchase
    Agreement and the Registration Rights Agreement dated
    January 14, 2002, by and between Wilsons The Leather
    Experts Inc. and Bricoleur Capital Management LLC.(8)                                                                                                                                                                                                                                                                                                 |  |  | Incorporated by Reference | 
|        | 4.7   |             |  | Registration Rights Agreement dated as of
    April 24, 2002, by and among Wilsons The Leather Experts
    Inc. and the Investors signatory thereto.(9)                                                                                                                                                                                                                                                                                                                                                                    |  |  | Incorporated by Reference | 
|        | 4.8   |             |  | Common Stock and Warrant Purchase Agreement,
    dated as of April 25, 2004, by and among Wilsons The
    Leather Experts Inc. and the purchasers identified on the
    signatory pages thereto (the Purchase
    Agreement).(10)                                                                                                                                                                                                                                                                                        |  |  | Incorporated by Reference | 
|        | 4.9   |             |  | Registration Rights Agreement, dated as of
    April 25, 2004, by and among Wilsons The Leather Experts
    Inc. and the investors identified therein.(11)                                                                                                                                                                                                                                                                                                                                                                 |  |  | Incorporated by Reference | 
|        | 4.10  |             |  | Form of Warrant issued to the Purchasers named in
    the Purchase Agreement on April 25, 2004.(12)                                                                                                                                                                                                                                                                                                                                                                                                                        |  |  | Incorporated by Reference | 
|        | 10.1  |             |  | Parent Guaranty dated as of May 25, 1996, by
    Wilsons The Leather Experts Inc., Wilsons Center, Inc., Rosedale
    Wilsons, Inc. and River Hills Wilsons, Inc. in favor of General
    Electric Capital Corporation.(13)                                                                                                                                                                                                                                                                                                |  |  | Incorporated by Reference | 
|        | *10.2 |             |  | Wilsons The Leather Experts Inc. Amended
    Executive and Key Management Incentive Plan.(14)                                                                                                                                                                                                                                                                                                                                                                                                                              |  |  | Incorporated by Reference | 
|        | *10.3 |             |  | Wilsons The Leather Experts Inc.
    401(k) Plan.(15)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  | Incorporated by Reference | 
|        | *10.4 |             |  | Employment Agreement dated as of May 25,
    1996, between Wilsons The Leather Experts Inc. and Joel
    Waller.(1)                                                                                                                                                                                                                                                                                                                                                                                                        |  |  | Incorporated by Reference | 
|        | *10.5 |             |  | Employment Agreement dated as of May 25,
    1996, between Wilsons The Leather Experts Inc. and David
    Rogers.(1)                                                                                                                                                                                                                                                                                                                                                                                                       |  |  | Incorporated by Reference | 
|        | 10.6  |             |  | Fourth Amended and Restated Credit Agreement
    dated as of April 23, 2002, among Wilsons Leather Holdings
    Inc., as Borrower, the Lenders signatory thereto from time to
    time, as Lenders, and General Electric Capital Corporation, as
    Agent, Lender, Term Lender and Swing Line Lender, GECC Capital
    Markets Corp., Inc. as Lead Arranger, the CIT Group/ Business
    Credit, Inc., as Lender and Documentation Agent and Wells Fargo
    Retail Finance LLC, as Lender and Syndication
    Agent.(16) |  |  | Incorporated by Reference | 
|        | 10.7  |             |  | Store Guarantors Guaranty dated as of
    May 25, 1996, by Bermans The Leather Experts, Inc., Wilsons
    House of Suede, Inc., Wilsons Tannery West, Inc., the Georgetown
    Subsidiaries that are signatories thereto and the Individual
    Store Subsidiaries that are signatories thereto, in favor of
    General Electric Capital Corporation.(17)                                                                                                                                                                |  |  | Incorporated by Reference | 
|        | *10.8 |             |  | Wilsons The Leather Experts Inc. Amended 1996
    Stock Option Plan.(3)                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  |  | Incorporated by Reference | 
|        | 10.9  |             |  | Joinder Agreement dated as of May 24, 1999,
    by and between the Store Guarantors that are signatories thereto
    and General Electric Capital Corporation.(18)                                                                                                                                                                                                                                                                                                                                                         |  |  | Incorporated by Reference | 

39



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##### Table of Contents



|        |        |             |  |                                                                                                                                                                                                                                                                                                       |  |  |                           | 
|------- | ------ | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------------------------- | 
|Exhibit |        |             |  |                                                                                                                                                                                                                                                                                                      
|No.     |        | Description |  | Method of Filing                                                                                                                                                                                                                                                                                     
|        |        |             |  |                                                                                                                                                                                                                                                                                                      
|        | 10.10  |             |  | Pledge Agreement dated as of May 24, 1999,
    by and between Wilsons Leather of Delaware Inc. and General
    Electric Capital Corporation, individually and as agent for the
    lenders signatory to the Credit Agreement.(19)                                                                     |  |  | Incorporated by Reference | 
|        | 10.11  |             |  | Pledge Agreement dated as of May 24, 1999,
    between Wilsons International, Inc. and General Electric Capital
    Corporation, individually and as agent for the lenders signatory
    to the Credit Agreement.(20)                                                                                 |  |  | Incorporated by Reference | 
|        | 10.12  |             |  | Pledge Agreement dated as of May 25, 1996,
    between Wilsons The Leather Experts Inc. and General Electric
    Capital Corporation, individually and as agent for the lenders
    signatory to the Credit Agreement.(21)                                                                            |  |  | Incorporated by Reference | 
|        | 10.13  |             |  | Pledge Agreement dated as of May 25, 1996,
    between Wilsons Center, Inc. and General Electric Capital
    Corporation, individually and as agent for the lenders signatory
    to the Credit Agreement.(22)                                                                                        |  |  | Incorporated by Reference | 
|        | 10.14  |             |  | Pledge Agreement dated as of May 25, 1996,
    between Rosedale Wilsons, Inc. and General Electric Capital
    Corporation, individually and as agent for the lenders signatory
    to the Credit Agreement.(23)                                                                                      |  |  | Incorporated by Reference | 
|        | 10.15  |             |  | Pledge Agreement dated as of May 25, 1996,
    between River Hills Wilsons, Inc. and General Electric Capital
    Corporation, individually and as agent for the lenders signatory
    to the Credit Agreement.(24)                                                                                   |  |  | Incorporated by Reference | 
|        | 10.16  |             |  | Reaffirmation of Guaranty dated as of
    May 24, 1999, by Wilsons The Leather Experts Inc., Wilsons
    Center, Inc., Rosedale Wilsons, Inc., River Hills Wilsons, Inc.
    and the Store Guarantors listed on the signature pages thereto
    in favor of General Electric Capital Corporation.(25) |  |  | Incorporated by Reference | 
|        | 10.17  |             |  | Amendment No. 2 to Pledge Agreement dated as
    of July 31, 1997, between River Hills Wilsons, Inc. and
    General Electric Capital Corporation.(26)                                                                                                                                                |  |  | Incorporated by Reference | 
|        | 10.18  |             |  | Joinder Agreement dated as of July 31, 1997,
    by and between Wilsons International Inc. and General Electric
    Capital Corporation.(27)                                                                                                                                                          |  |  | Incorporated by Reference | 
|        | 10.19  |             |  | Reaffirmation of Guaranty dated as of
    July 31, 1997, by Wilsons The Leather Experts Inc., Wilsons
    Center, Inc., Rosedale Wilsons, Inc. and River Hills Wilsons,
    Inc., in favor of General Electric Capital
    Corporation.(28)                                                           |  |  | Incorporated by Reference | 
|        | 10.20  |             |  | Wilsons The Leather Experts Inc. 1998 Stock
    Option Plan. (29)                                                                                                                                                                                                                                     |  |  | Incorporated by Reference | 
|        | 10.21  |             |  | Reaffirmation of Guaranty dated
    September 24, 1999, by Wilsons The Leather Experts Inc.,
    Wilsons Center, Inc., Rosedale Wilsons, Inc. and River Hills
    Wilsons, Inc.(30)                                                                                                                   |  |  | Incorporated by Reference | 
|        | *10.22 |             |  | First Amendment to Employment Agreement dated as
    of April 3, 2000, between Wilsons The Leather Experts Inc.
    and Joel N. Waller.(31)                                                                                                                                                           |  |  | Incorporated by Reference | 
|        | *10.23 |             |  | First Amendment to Employment Agreement as of
    March 23, 2000, between Wilsons The Leather Experts Inc.
    and David L. Rogers.(32)                                                                                                                                                               |  |  | Incorporated by Reference | 
|        | 10.24  |             |  | Amended and Restated Security Agreement dated as
    of June 19, 2001, by and among Wilsons Leather Holdings
    Inc. and the other Grantors listed on the signature pages
    thereto, in favor of General Electric Capital Corporation, in
    its capacity as Agent for Lenders.(33)               |  |  | Incorporated by Reference | 

40



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##### Table of Contents



|        |        |             |  |                                                                                                                                                                                                                                                                                                                                  |  |  |                           | 
|------- | ------ | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------------------------- | 
|Exhibit |        |             |  |                                                                                                                                                                                                                                                                                                                                 
|No.     |        | Description |  | Method of Filing                                                                                                                                                                                                                                                                                                                
|        |        |             |  |                                                                                                                                                                                                                                                                                                                                 
|        | 10.25  |             |  | Joinder Agreement dated as of October 31,
    2000, by and between the Store Guarantors that are signatories
    thereto and General Electric Capital Corporation.(34)                                                                                                                                                           |  |  | Incorporated by Reference | 
|        | 10.26  |             |  | Pledge Amendment dated as of October 31,
    2000, by River Hills Wilsons, Inc.(35)                                                                                                                                                                                                                                              |  |  | Incorporated by Reference | 
|        | 10.27  |             |  | Pledge Agreement dated as of October 31,
    2000, by and between WWT, Inc. and General Electric Capital
    Corporation, individually and as agent for the lenders signatory
    to the Credit Agreement.(36)                                                                                                                   |  |  | Incorporated by Reference | 
|        | 10.28  |             |  | Reaffirmation of Guaranty dated as of
    October 31, 2000, by Wilsons The Leather Experts Inc.,
    Wilsons Center, Inc., Rosedale Wilsons, Inc., River Hills
    Wilsons, Inc. and the Store Guarantors listed on the signature
    pages thereto in favor of General Electric Capital
    Corporation.(37)                    |  |  | Incorporated by Reference | 
|        | 10.29  |             |  | Wilsons The Leather Experts Inc. 2000 Long Term
    Incentive Plan, as amended on August 24, 2000,
    March 21, 2002, June 11, 2003 and September 18,
    2003.(38)                                                                                                                                                             |  |  | Incorporated by Reference | 
|        | 10.30  |             |  | Joinder Agreement dated as of April 13,
    2001, by and between the Store Guarantors that are signatory
    thereto and General Electric Capital Corporation.(39)                                                                                                                                                               |  |  | Incorporated by Reference | 
|        | 10.31  |             |  | Pledge Amendment, dated as of April 13,
    2001, by WWT, Inc. (40)                                                                                                                                                                                                                                                              |  |  | Incorporated by Reference | 
|        | 10.32  |             |  | Pledge Agreement, dated as of April 13,
    2001, between Bentleys Luggage Corp. and General Electric
    Capital Corporation, individually and as agent for the lenders
    signatory to the Credit Agreement.(41)                                                                                                             |  |  | Incorporated by Reference | 
|        | 10.33  |             |  | Reaffirmation Of Guaranty dated as of
    April 13, 2001, by Wilsons The Leather Experts Inc.,
    Wilsons Center, Inc., Rosedale Wilsons, Inc. and River Hills
    Wilsons, Inc., in favor of General Electric Capital
    Corporation.(42)                                                                                     |  |  | Incorporated by Reference | 
|        | 10.34  |             |  | Reaffirmation Of Guaranty dated as of
    June 19, 2001, by Wilsons The Leather Experts Inc., Wilsons
    Center, Inc., Rosedale Wilsons, Inc. and River Hills Wilsons,
    Inc., in favor of General Electric Capital
    Corporation.(43)                                                                                      |  |  | Incorporated by Reference | 
|        | 10.35  |             |  | Reaffirmation of Guaranty dated as of
    April 23, 2002, by Wilsons The Leather Experts Inc.,
    Wilsons Center, Inc., Rosedale Wilsons, Inc., River Hills
    Wilsons, Inc. and the Store Guarantors listed on the signature
    pages thereto in favor of General Electric Capital Corporation
    as Agent for Lenders.(44) |  |  | Incorporated by Reference | 
|        | 10.36  |             |  | Agreement to Purchase Office/ Warehouse Building
    by and between Bermans The Leather Experts, Inc., a Delaware
    Corporation, as Seller and IRET Properties, a North Dakota
    limited partnership, as Purchaser, Dated as of June 19,
    2002.(45)                                                                       |  |  | Incorporated by Reference | 
|        | 10.37  |             |  | Lease, IRET Properties Landlord to Bermans The
    Leather Experts, Inc. Tenant, dated June 21,
    2002.(46)                                                                                                                                                                                                                    |  |  | Incorporated by Reference | 
|        | 10.38  |             |  | First Amendment to Fourth Amended and Restated
    Credit Agreement dated as of November 1, 2002, by and among
    Wilsons Leather Holdings Inc., General Electric Capital
    Corporation, the credit parties signatory thereto and the
    lenders signatory thereto.(47)                                                      |  |  | Incorporated by Reference | 
|        | *10.39 |             |  | Unqualified Release Agreement dated
    August 22, 2002, by and between John A. Fowler and
    Wilsons Leather Holdings Inc. (48)                                                                                                                                                                                                |  |  | Incorporated by Reference | 
|        | *10.40 |             |  | Consulting Agreement dated August 11, 2002,
    by and between John A. Fowler and Wilsons Leather Holdings
    Inc.(49)                                                                                                                                                                                                          |  |  | Incorporated by Reference | 

41



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##### Table of Contents



|        |        |             |  |                                                                                                                                                                                                                                                                                                                                                      |  |  |                           | 
|------- | ------ | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------------------------- | 
|Exhibit |        |             |  |                                                                                                                                                                                                                                                                                                                                                     
|No.     |        | Description |  | Method of Filing                                                                                                                                                                                                                                                                                                                                    
|        |        |             |  |                                                                                                                                                                                                                                                                                                                                                     
|        | 10.41  |             |  | Limited Waiver and Second Amendment to Fourth
    Amended and Restated Credit Agreement dated as of
    January 21, 2003, among Wilsons Leather Holdings Inc.,
    General Electric Capital Corporation, as Lender, Term Lender,
    Swing Line Lender and as Agent, the Credit Parties signatory
    thereto and the Lenders signatory thereto.(50) |  |  | Incorporated by Reference | 
|        | *10.42 |             |  | Unqualified Release Agreement dated
    December 9, 2002, by and between John Serino and River
    Hills Wilsons, Inc.(51)                                                                                                                                                                                                                           |  |  | Incorporated by Reference | 
|        | 10.43  |             |  | Limited Waiver and Third Amendment to Fourth
    Amended and Restated Credit Agreement dated as of April 11,
    2003, among Wilsons Leather Holdings Inc., General Electric
    Capital Corporation, as Lender, Term Lender, Swing Line Lender
    and as Agent, the Credit Parties signatory thereto and the
    Lenders signatory thereto.(52)    |  |  | Incorporated by Reference | 
|        | 10.44  |             |  | Reaffirmation of Guaranty dated as of
    April 11, 2003, by Wilsons The Leather Experts Inc.,
    Wilsons Center, Inc., Rosedale Wilsons, Inc., River Hills
    Wilsons, Inc. and the Store Guarantors listed on the signature
    pages thereto in favor of General Electric Capital Corporation
    as Agent for Lenders.(53)                     |  |  | Incorporated by Reference | 
|        | *10.45 |             |  | Wilsons The Leather Experts Inc. Employee Stock
    Purchase Plan, as amended.(54)                                                                                                                                                                                                                                                                   |  |  | Incorporated by Reference | 
|        | 10.46  |             |  | Fourth Amendment to Fourth Amended and Restated
    Credit Agreement dated as of January 21, 2004, among
    Wilsons Leather Holdings Inc., General Electric Capital
    Corporation, as Lender, Term Lender, Swing Line Lender and as
    Agent, the Credit Parties signatory thereto and the Lenders
    signatory thereto.                        |  |  | Electronic Transmission   | 
|        | 10.47  |             |  | Reaffirmation of Guaranty dated as of
    January 21, 2004, by Wilsons The Leather Experts Inc.,
    Wilsons Center, Inc., Rosedale Wilsons, Inc., River Hills
    Wilsons, Inc. and the Store Guarantors listed on the signature
    pages thereto in favor of General Electric Capital Corporation
    as Agent for Lenders.                       |  |  | Electronic Transmission   | 
|        | 10.48  |             |  | Limited Waiver and Fifth Amendment to Fourth
    Amended and Restated Credit Agreement dated as of April 15,
    2004 among Wilsons Leather Holdings Inc., General Electric
    Capital Corporation, as Lender, Term Lender, Swing Line Lender
    and as Agent, the Credit Parties signatory thereto                                                |  |  | Electronic Transmission   | 
|        | 10.49  |             |  | Reaffirmation of Guaranty dated as of
    April 15, 2004 by Wilsons The Leather Experts Inc., Wilsons
    Center, Inc., Rosedale Wilsons, Inc., River Hills Wilsons, Inc.
    and the Store Guarantors listed on the signature pages thereto
    in favor of General Electric Capital Corporation as Agent for
    Lenders                           |  |  | Electronic Transmission   | 
|        | 10.50  |             |  | Reaffirmation of Guaranty dated as of
    November 1, 2002 by Wilsons The Leather Experts Inc.,
    Wilsons Center, Inc., Rosedale Wilsons, Inc., River Hills
    Wilsons, Inc. and the Store Guarantors listed on the signature
    pages thereto in favor of General Electric Capital Corporation
    as Agent for Lenders                         |  |  | Electronic Transmission   | 
|        | 10.51  |             |  | Joinder Agreement dated as of October 10,
    2000, by and between Wilsons Leather Direct Inc. and General
    Electric Capital Corporation(55)                                                                                                                                                                                                      |  |  | Incorporated by Reference | 

42



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##### Table of Contents



|        |       |             |  |                                                                                                                                                                                                                                                                                                                             |  |  |                           | 
|------- | ----- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ------------------------- | 
|Exhibit |       |             |  |                                                                                                                                                                                                                                                                                                                            
|No.     |       | Description |  | Method of Filing                                                                                                                                                                                                                                                                                                           
|        |       |             |  |                                                                                                                                                                                                                                                                                                                            
|        | 10.52 |             |  | Sixth Amendment to Fourth Amended and Restated
    Credit Agreement dated as of April 27, 2004 among Wilsons
    Leather Holdings Inc., General Electric Capital Corporation, as
    Lender, Term Lender, Swing Line Lender and as Agent, the Credit
    Parties signatory thereto and the Lenders signatory thereto        |  |  | Electronic Transmission   | 
|        | 10.53 |             |  | Reaffirmation of Guaranty dated as of
    April 27, 2004 by Wilsons The Leather Experts Inc., Wilsons
    Center, Inc., Rosedale Wilsons, Inc., River Hills Wilsons, Inc.
    and the Store Guarantors listed on the signature pages thereto
    in favor of General Electric Capital Corporation as Agent for
    Lenders. |  |  | Electronic Transmission   | 
|        | 14.1  |             |  | Code of Business Ethics and Conduct.                                                                                                                                                                                                                                                                                        |  |  | Electronic Transmission   | 
|        | 16.1  |             |  | Letter Regarding Arthur Andersen
    LLP.(56)                                                                                                                                                                                                                                                                               |  |  | Incorporated by Reference | 
|        | 21.1  |             |  | Subsidiaries of Wilsons The Leather Experts
    Inc.                                                                                                                                                                                                                                                                        |  |  | Electronic Transmission   | 
|        | 23.1  |             |  | Consent of KPMG LLP.                                                                                                                                                                                                                                                                                                        |  |  | Electronic Transmission   | 
|        | 31.1  |             |  | Certification of Chief Executive Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of
    2002.                                                                                                                                                                                                                 |  |  | Electronic Transmission   | 
|        | 31.2  |             |  | Certification of Chief Financial Officer pursuant
    to Section 302 of the Sarbanes-Oxley Act of
    2002.                                                                                                                                                                                                                 |  |  | Electronic Transmission   | 
|        | 32.1  |             |  | Certification of Chief Executive Officer pursuant
    to Section 1350, Chapter 63 of Title 18, United
    States Code, as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                            |  |  | Electronic Transmission   | 
|        | 32.2  |             |  | Certification of Chief Financial Officer pursuant
    to Section 1350, Chapter 63 of Title 18, United
    States Code, as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002.                                                                                                                            |  |  | Electronic Transmission   | 



---



| |   |                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------
| | * | Management contract, compensating plan or
    arrangement required to be filed as an exhibit to this Annual
    Report on Form 10-K.



| |     |                                                                                                                                                                                                      
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to the same numbered
    exhibit to the Companys Registration Statement on
    Form S-1 (333-13967) filed with the Commission on
    October 11, 1996.                    
|
| | (2) | Incorporated by reference to the same numbered
    exhibit to the Companys Report on Form 10-Q for the
    quarter ended May 4, 2002 (File No. 0-21543).                                            
|
| | (3) | Incorporated by reference to the same numbered
    exhibit to Amendment No. 1 to the Companys
    Registration Statement on Form S-1 (333-13967) filed with
    the Commission on December 24, 1996.
|
| | (4) | Incorporated by reference to Exhibit 10.3 to
    the Companys Report on Form 10-Q for the quarter
    ended August 2, 1997, filed with the Commission.                                              
|
| | (5) | Incorporated by reference to Exhibit 4.8 to
    the Companys Registration Statement on Form S-1
    (333-13967) filed with the Commission on October 11, 1996.                                      
|
| | (6) | Incorporated by reference to the same numbered
    exhibit to the Companys Report on Form 10-K for the
    fiscal year ended January 29, 2000, filed with the
    Commission (File No. 0-21543).    
|
| | (7) | Incorporated by reference to Exhibit 4.2 to
    the Companys Report on Form 8-K filed with the
    Commission on January 23, 2002.                                                                  
|
| | (8) | Incorporated by reference to Exhibit 4.3 to
    the Companys Report on Form 8-K filed with the
    Commission on January 23, 2002.                                                                  
|
| | (9) | Incorporated by reference to Exhibit 4.2 to
    the Companys Report on Form 8-K filed with the
    Commission on May 3, 2002.                                                                       



|     |                                                                                                                   
|---- | ------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to Exhibit 4.1 to
    the Companys Current Report on Form 8-K dated
    April 26, 2004.
|    
|(11) | Incorporated by reference to Exhibit 4.2 to
    the Companys Current Report on Form 8-K dated
    April 26, 2004.

43



---



##### Table of Contents





|     |                                                                                                                                                                                     
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(12) | Incorporated by reference to Exhibit 4.3 to
    the Companys Current Report on Form 8-K dated
    April 26, 2004.                                                                  
|    
|(13) | Incorporated by reference to Exhibit 10.8 to
    the Companys Report on Form 10-Q for the quarter
    ended August 2, 1997, filed with the Commission.                             
|    
|(14) | Incorporated by reference to Exhibit 10.2 to
    the Companys Report on Form 10-Q for the quarter
    ended May 4, 2002, filed with the Commission.                                
|    
|(15) | Incorporated by Reference to Exhibit 10.3 to
    the Companys Report on Form 10-K for the fiscal year
    ended February 2, 2002, filed with the Commission.                       
|    
|(16) | Incorporated by reference to Exhibit 10.1 to
    the Companys Report on Form 10-Q for the quarter
    ended May 4, 2002 filed, with the Commission.                                
|    
|(17) | Incorporated by reference to Exhibit 10.10
    to the Companys Report on Form 10-Q for the quarter
    ended August 2, 1997, filed with the Commission.                            
|    
|(18) | Incorporated by reference to Exhibit 10.3 to
    the Companys Report on Form 10-Q for the quarter
    ended May 1, 1999, filed with the Commission.                                
|    
|(19) | Incorporated by reference to Exhibit 10.4 to
    the Companys Report on Form 10-Q for the quarter
    ended May 1, 1999, filed with the Commission.                                
|    
|(20) | Incorporated by reference to Exhibit 10.5 to
    the Companys Report on Form 10-Q for the quarter
    ended May 1, 1999, filed with the Commission.                                
|    
|(21) | Incorporated by reference to Exhibit 10.21
    to Amendment No. 4 to the Companys Registration
    Statement on Form S-1 (333-13967) filed with the Commission
    on May 27, 1997.
|    
|(22) | Incorporated by reference to Exhibit 10.22
    to Amendment No. 4 to the Companys Registration
    Statement on Form S-1 (333-13967) filed with the Commission
    on May 27, 1997.
|    
|(23) | Incorporated by reference to Exhibit 10.23
    to Amendment No. 4 to the Companys Registration
    Statement on Form S-1 (333-13967) filed with the Commission
    on May 27, 1997.
|    
|(24) | Incorporated by reference to Exhibit 10.24
    to Amendment No. 4 to the Companys Registration
    Statement on Form S-1 (333-13967) filed with the Commission
    on May 27, 1997.
|    
|(25) | Incorporated by reference to Exhibit 10.6 to
    the Companys Report on Form 10-Q for the quarter
    ended May 1, 1999, filed with the Commission.                                
|    
|(26) | Incorporated by reference to Exhibit 10.6 to
    the Companys Report on Form 10-Q for the quarter
    ended August 2, 1997, filed with the Commission.                             
|    
|(27) | Incorporated by reference to Exhibit 10.7 to
    the Companys Report on Form 10-Q for the quarter
    ended August 2, 1997, filed with the Commission.                             
|    
|(28) | Incorporated by reference to Exhibit 10.9 to
    the Companys Report on Form 10-Q for the quarter
    ended August 2, 1997, filed with the Commission.                             
|    
|(29) | Incorporated by reference to Exhibit 10.31
    to the Companys Report on Form 10-K for the fiscal
    year ended January 31, 1998, filed with the Commission.                      
|    
|(30) | Incorporated by reference to Exhibit 10.2 to
    the Companys Report on Form 10-Q for the quarter
    ended October 30, 1999, filed with the Commission.                           
|    
|(31) | Incorporated by reference to Exhibit 10.27
    to the Companys Report on Form 10-K for the fiscal
    year ended January 29, 2000, filed with the Commission.                      
|    
|(32) | Incorporated by reference to Exhibit 10.28
    to the Companys Report on Form 10-K for the fiscal
    year ended January 29, 2000, filed with the Commission.                      
|    
|(33) | Incorporated by reference to Exhibit 10.2 to
    the Companys Report on Form 8-K filed with the
    Commission on June 25, 2001.                                                   
|    
|(34) | Incorporated by reference to Exhibit 10.4 to
    the Companys Report on Form 10-Q for the quarter
    ended October 28, 2000, filed with the Commission.                           

44



---



##### Table of Contents





|     |                                                                                                                                                                  
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|(35) | Incorporated by reference to Exhibit 10.5 to
    the Companys Report on Form 10-Q for the quarter
    ended October 28, 2000, filed with the Commission.        
|    
|(36) | Incorporated by reference to Exhibit 10.6 to
    the Companys Report on Form 10-Q for the quarter
    ended October 28, 2000, filed with the Commission.        
|    
|(37) | Incorporated by reference to Exhibit 10.3 to
    the Companys Report on Form 10-Q for the quarter
    ended October 28, 2000, filed with the Commission.        
|    
|(38) | Incorporated by reference to Exhibit 99.1 to
    the Companys Registration Statement on Form S-8
    (333-109977) filed with the Commission on October 24, 2003.
|    
|(39) | Incorporated by reference to Exhibit 10.1 to
    the Companys Report on Form 10-Q for the quarter
    ended May 5, 2001, filed with the Commission.             
|    
|(40) | Incorporated by reference to Exhibit 10.2 to
    the Companys Report on Form 10-Q for the quarter
    ended May 5, 2001, filed with the Commission.             
|    
|(41) | Incorporated by reference to Exhibit 10.3 to
    the Companys Report on Form 10-Q for the quarter
    ended May 5, 2001, filed with the Commission.             
|    
|(42) | Incorporated by reference to Exhibit 10.4 to
    the Companys Report on Form 10-Q for the quarter
    ended May 5, 2001, filed with the Commission.             
|    
|(43) | Incorporated by reference to Exhibit 10.3 to
    the Companys Report on Form 8-K filed with the
    Commission on June 25, 2001.                                
|    
|(44) | Incorporated by reference to Exhibit 10.2 to
    the Companys Report of Form 10-Q for the quarter
    ended May 4, 2002, filed with the Commission.             
|    
|(45) | Incorporated by reference to Exhibit 10.1 to
    the Companys Report on Form 10-Q for the quarter
    ended August 3, 2002, filed with the Commission.          
|    
|(46) | Incorporated by reference to Exhibit 10.2 to
    the Companys Report on Form 10-Q for the quarter
    ended August 3, 2002, filed with the Commission.          
|    
|(47) | Incorporated by reference to Exhibit 10.1 to
    the Companys Report on Form 10-Q for the quarter
    ended November 2, 2002, filed with the Commission.        
|    
|(48) | Incorporated by reference to Exhibit 10.2 to
    the Companys Report on Form 10-Q for the quarter
    ended November 2, 2002, filed with the Commission.        
|    
|(49) | Incorporated by reference to Exhibit 10.3 to
    the Companys Report on Form 10-Q for the quarter
    ended November 2, 2002, filed with the Commission.        
|    
|(50) | Incorporated by reference to Exhibit 10.41
    to the Companys Report on Form 10-K for the year
    ended February 1, 2003, filed with the Commission.          
|    
|(51) | Incorporated by reference to Exhibit 10.42
    to the Companys Report on Form 10-K for the year
    ended February 1, 2003, filed with the Commission.          
|    
|(52) | Incorporated by reference to Exhibit 10.43
    to the Companys Report on Form 10-K for the year
    ended February 1, 2003, filed with the Commission.          
|    
|(53) | Incorporated by reference to Exhibit 10.44
    to the Companys Report on Form 10-K for the year
    ended February 1, 2003, filed with the Commission.          
|    
|(54) | Incorporated by reference to Exhibit 10.2 to
    the Companys Report on Form 10-Q for the quarter
    ended May 3, 2003, filed with the Commission.             
|    
|(55) | Incorporated by reference to Exhibit 10.33 to the
    Companys Report on Form 10-K for the year ended
    February 3, 2001, filed with the Commission.          
|    
|(56) | Incorporated by reference to Exhibit 16.1 to
    the Companys Report on Form 8-K filed on May 15,
    2002, with the Commission.                                

45



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES

Index to Consolidated Financial Statements and
Financial Statement Schedule

|                                                                                                                                     |  |      |      | 
|------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ---- | 
|                                                                                                                                     |  | Page
|                                                                                                                                     |  |     
|Independent Auditors
    Report                                                                                                     |  |      | F-2  | 
|Consolidated Balance Sheets
    as of January 31, 2004, and February 1, 2003                                                         |  |      | F-3  | 
|Consolidated Statements of
    Operations for the years ended January 31, 2004,
    February 1, 2003, and February 2, 2002           |  |      | F-4  | 
|Consolidated Statements of
    Shareholders Equity for the years ended January 31,
    2004, February 1, 2003, and February 2, 2002 |  |      | F-5  | 
|Consolidated Statements of
    Cash Flows for the years ended January 31, 2004,
    February 1, 2003, and February 2, 2002           |  |      | F-6  | 
|Notes to Consolidated
    Financial Statements                                                                                       |  |      | F-7  | 
|Financial Statement Schedule:                                                                                                        |  |      |      | 
|Schedule IIValuation
    and Qualifying Accounts                                                                                    |  |      | F-27 | 

F-1



---



##### Table of Contents






INDEPENDENT AUDITORS REPORT

To The Board of Directors and Shareholders,

Wilsons The Leather Experts Inc.:


We have audited the accompanying consolidated
balance sheets of Wilsons The Leather Experts Inc. and
subsidiaries as of January 31, 2004, and February 1,
2003, and the related consolidated statements of operations,
shareholders equity and cash flows for each of the three
fiscal years in the period ended January 31, 2004. In
connection with our audits of the consolidated financial
statements, we also have audited the financial statement
schedule as listed in the accompanying index. These consolidated
financial statements and financial statement schedule are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on
our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Wilsons The Leather Experts
Inc. and subsidiaries as of January 31, 2004, and
February 1, 2003, and the results of their operations and
their cash flows for each of the three fiscal years in the
period ended January 31, 2004, in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

As discussed in Note 2 to the consolidated
financial statements, effective February 3, 2002, the
Company adopted the provisions of Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets.



| |                 
| | ----------------
| | /s/     KPMG LLP

Minneapolis, Minnesota

March 9, 2004, except as to


Note 18, which is as of


April 27, 2004


F-2



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES




CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share
amounts)

|                                                                                                                                                                                        |                                                                                          |                                            |         |             |         |  |        |         |         | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ----------- | ------- |  | ------ | ------- | ------- | 
|                                                                                                                                                                                        |                                                                                          | January 31,                                |         | February 1,
|                                                                                                                                                                                        |                                                                                          | 2004                                       |         | 2003       
|                                                                                                                                                                                        |                                                                                          |                                            |         |            
|ASSETS                                                                                                                                                                                 
|                                                                                                                                                                                       
|CURRENT ASSETS:                                                                                                                                                                         |                                                                                          |                                            |         |             |         |  |        |        
|                                                                                                                                                                                        | Cash and cash equivalents                                                                |                                            | $       | 42,403      |         |  | $      | 30,442  |        
|                                                                                                                                                                                        | Accounts receivable, net of allowance of $88 and
    $145 in 2003 and 2002, respectively |                                            |         | 6,122       |         |  |        | 5,162   |        
|                                                                                                                                                                                        | Inventories                                                                              |                                            |         | 89,298      |         |  |        | 118,701 |        
|                                                                                                                                                                                        | Prepaid expenses                                                                         |                                            |         | 3,719       |         |  |        | 3,812   |        
|                                                                                                                                                                                        | Assets of discontinued operations                                                        |                                            |         |            |         |  |        | 3,379   |        
|                                                                                                                                                                                        | Deferred income taxes                                                                    |                                            |         |            |         |  |        | 3,777   |        
|                                                                                                                                                                                        | Refundable income taxes                                                                  |                                            |         |            |         |  |        | 3,064   |        
|                                                                                                                                                                                        |                                                                                          |                                            |         |             |         |  |        |        
|                                                                                                                                                                                        |                                                                                          | TOTAL CURRENT ASSETS                       |         |             | 141,542 |  |        |         | 168,337 | 
|Property and equipment, net                                                                                                                                                             |                                                                                          |                                            | 60,047  |             |         |  | 73,974 |        
|Goodwill and other assets, net of accumulated
    amortization of $4,721 and $2,979 in 2003 and 2002, respectively                                                                      |                                                                                          |                                            | 2,538   |             |         |  | 3,315  |        
|Deferred income taxes                                                                                                                                                                   |                                                                                          |                                            |        |             |         |  | 865    |        
|                                                                                                                                                                                        |                                                                                          |                                            |         |             |         |  |        |        
|                                                                                                                                                                                        |                                                                                          | TOTAL ASSETS                               |         | $           | 204,127 |  |        | $       | 246,491 | 
|                                                                                                                                                                                        |                                                                                          |                                            |         |             |         |  |        |        
|                                                                                                                                                                                       
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                                                                                                               
|                                                                                                                                                                                       
|CURRENT LIABILITIES:                                                                                                                                                                    |                                                                                          |                                            |         |             |         |  |        |        
|                                                                                                                                                                                        | Accounts payable                                                                         |                                            | $       | 10,198      |         |  | $      | 19,447  |        
|                                                                                                                                                                                        | Notes payable                                                                            |                                            |         | 490         |         |  |        |        |        
|                                                                                                                                                                                        | Current portion of long-term debt                                                        |                                            |         | 30,635      |         |  |        | 45      |        
|                                                                                                                                                                                        | Accrued expenses                                                                         |                                            |         | 26,670      |         |  |        | 25,219  |        
|                                                                                                                                                                                        | Liabilities of discontinued operations                                                   |                                            |         | 406         |         |  |        | 15,075  |        
|                                                                                                                                                                                        | Income taxes payable                                                                     |                                            |         | 3,214       |         |  |        |        |        
|                                                                                                                                                                                        | Deferred income taxes                                                                    |                                            |         | 6,477       |         |  |        |        |        
|                                                                                                                                                                                        |                                                                                          |                                            |         |             |         |  |        |        
|                                                                                                                                                                                        |                                                                                          | TOTAL CURRENT LIABILITIES                  |         |             | 78,090  |  |        |         | 59,786  | 
|Long-term debt                                                                                                                                                                          |                                                                                          |                                            | 25,064  |             |         |  | 55,695 |        
|Other long-term liabilities                                                                                                                                                             |                                                                                          |                                            | 13,893  |             |         |  | 13,782 |        
|Deferred income taxes                                                                                                                                                                   |                                                                                          |                                            | 1,726   |             |         |  |       |        
|                                                                                                                                                                                        |                                                                                          |                                            |         |             |         |  |        |        
|                                                                                                                                                                                        |                                                                                          | TOTAL LIABILITIES                          |         |             | 118,773 |  |        |         | 129,263 | 
|                                                                                                                                                                                        |                                                                                          |                                            |         |             |         |  |        |        
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                           |                                                                                          |                                            |         |             |         |  |        |        
|                                                                                                                                                                                       
|SHAREHOLDERS EQUITY:                                                                                                                                                                   |                                                                                          |                                            |         |             |         |  |        |        
|Common stock, $.01 par value;
    150,000,000 shares authorized; 20,807,706 and
    20,473,033 shares issued and outstanding on
    January 31, 2004 and February 1, 2003, respectively |                                                                                          |                                            | 208     |             |         |  | 205    |        
|Additional paid-in capital                                                                                                                                                              |                                                                                          |                                            | 100,633 |             |         |  | 99,010 |        
|Retained earnings (accumulated deficit)                                                                                                                                                 |                                                                                          |                                            | (14,788 | )           |         |  | 18,707 |        
|Unearned compensation                                                                                                                                                                   |                                                                                          |                                            | (701    | )           |         |  | (691   | )      
|Accumulated other comprehensive income (loss)                                                                                                                                           |                                                                                          |                                            | 2       |             |         |  | (3     | )      
|                                                                                                                                                                                        |                                                                                          |                                            |         |             |         |  |        |        
|                                                                                                                                                                                        |                                                                                          | TOTAL SHAREHOLDERS EQUITY                 |         |             | 85,354  |  |        |         | 117,228 | 
|                                                                                                                                                                                        |                                                                                          |                                            |         |             |         |  |        |        
|                                                                                                                                                                                        |                                                                                          | TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |         | $           | 204,127 |  |        | $       | 246,491 | 
|                                                                                                                                                                                        |                                                                                          |                                            |         |             |         |  |        |        

The accompanying notes are an integral part of
these consolidated financial statements.

F-3



---



##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES




CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)

|                                                                                                                                              |                                                                                                                                |                                                           |         |             |         |             |         |         |         |   |         |         |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------- | ------- | ----------- | ------- | ----------- | ------- | ------- | ------- | - | ------- | ------- | ------- | -
|                                                                                                                                              |                                                                                                                                |                                                          
|                                                                                                                                              |                                                                                                                                | For the years ended                                      
|                                                                                                                                              |                                                                                                                                |                                                          
|                                                                                                                                              |                                                                                                                                | January 31,                                               |         | February 1, |         | February 2,
|                                                                                                                                              |                                                                                                                                | 2004                                                      |         | 2003        |         | 2002       
|                                                                                                                                              |                                                                                                                                |                                                           |         |             |         |            
|NET SALES                                                                                                                                     |                                                                                                                                | $                                                         | 521,025 |             |         | $           | 571,547 |         |         | $ | 598,299 |        
|COST OF GOODS SOLD, BUYING AND OCCUPANCY COSTS                                                                                                |                                                                                                                                |                                                           | 377,060 |             |         |             | 404,304 |         |         |   | 403,335 |        
|                                                                                                                                              |                                                                                                                                |                                                           |         |             |         |             |         |         |         |   |         |        
|                                                                                                                                              | Gross margin                                                                                                                   |                                                           |         | 143,965     |         |             |         | 167,243 |         |   |         | 194,964 |        
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                                                                                  |                                                                                                                                |                                                           | 150,678 |             |         |             | 164,513 |         |         |   | 158,511 |        
|DEPRECIATION AND AMORTIZATION                                                                                                                 |                                                                                                                                |                                                           | 19,207  |             |         |             | 16,333  |         |         |   | 13,942  |        
|                                                                                                                                              |                                                                                                                                |                                                           |         |             |         |             |         |         |         |   |         |        
|                                                                                                                                              | Operating income (loss)                                                                                                        |                                                           |         | (25,920     | )       |             |         | (13,603 | )       |   |         | 22,511  |        
|INTEREST EXPENSE, net                                                                                                                         |                                                                                                                                |                                                           | 10,868  |             |         |             | 10,253  |         |         |   | 9,584   |        
|                                                                                                                                              |                                                                                                                                |                                                           |         |             |         |             |         |         |         |   |         |        
|                                                                                                                                              | Income (loss) from continuing operations before
    income taxes and cumulative effect of a change in accounting
    principle |                                                           |         | (36,788     | )       |             |         | (23,856 | )       |   |         | 12,927  |        
|INCOME TAX PROVISION (BENEFIT)                                                                                                                |                                                                                                                                |                                                           | (3,205  | )           |         |             | (9,543  | )       |         |   | 5,171   |        
|                                                                                                                                              |                                                                                                                                |                                                           |         |             |         |             |         |         |         |   |         |        
|                                                                                                                                              | Income (loss) from continuing operations before
    cumulative effect of a change in accounting principle                      |                                                           |         | (33,583     | )       |             |         | (14,313 | )       |   |         | 7,756   |        
|LOSS FROM DISCONTINUED OPERATIONS, net of tax
    (including loss on disposal of $0, $27,247 and $0 in 2003, 2002
    and 2001, respectively) |                                                                                                                                |                                                           |        |             |         |             | (42,014 | )       |         |   | (22,093 | )      
|CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
    PRINCIPLE, net of tax of $1,727 in 2002                                                       |                                                                                                                                |                                                           |        |             |         |             | (24,567 | )       |         |   |        |        
|                                                                                                                                              |                                                                                                                                |                                                           |         |             |         |             |         |         |         |   |         |        
|                                                                                                                                              |                                                                                                                                | Net loss                                                  |         | $           | (33,583 | )           |         | $       | (80,894 | ) |         | $       | (14,337 | )
|                                                                                                                                              |                                                                                                                                |                                                           |         |             |         |             |         |         |         |   |         |        
|BASIC AND DILUTED LOSS PER SHARE:                                                                                                             |                                                                                                                                |                                                           |         |             |         |             |         |         |         |   |         |        
|                                                                                                                                              | Income (loss) from continuing operations before
    cumulative effect of a change in accounting principle                      |                                                           | $       | (1.64       | )       |             | $       | (0.71   | )       |   | $       | 0.45    |        
|                                                                                                                                              | Loss from discontinued operations                                                                                              |                                                           |         |            |         |             |         | (2.10   | )       |   |         | (1.28   | )      
|                                                                                                                                              | Cumulative effect of a change in accounting
    principle                                                                      |                                                           |         |            |         |             |         | (1.22   | )       |   |         |        |        
|                                                                                                                                              |                                                                                                                                |                                                           |         |             |         |             |         |         |         |   |         |        
|                                                                                                                                              |                                                                                                                                | Basic and diluted loss per share                          |         | $           | (1.64   | )           |         | $       | (4.03   | ) |         | $       | (0.83   | )
|                                                                                                                                              |                                                                                                                                |                                                           |         |             |         |             |         |         |         |   |         |        
|                                                                                                                                              |                                                                                                                                | Weighted average shares outstandingbasic
    and diluted |         |             | 20,528  |             |         |         | 20,053  |   |         |         | 17,172  |  
|                                                                                                                                              |                                                                                                                                |                                                           |         |             |         |             |         |         |         |   |         |        

The accompanying notes are an integral part of
these consolidated financial statements.

F-4



---



##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES




CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY

(In thousands, except share amounts)

|                          |                                                                    |                                         |            |            |   |          |     |              |   |               |         |               |   |        |        |        |   |   |         |         |   |   |     |   |     |   |         |         |     |  
|------------------------- | ------------------------------------------------------------------ | --------------------------------------- | ---------- | ---------- | - | -------- | --- | ------------ | - | ------------- | ------- | ------------- | - | ------ | ------ | ------ | - | - | ------- | ------- | - | - | --- | - | --- | - | ------- | ------- | --- | -
|                          |                                                                    |                                         |            |            |   |          |     | Retained     |   | Accumulated   |         |              
|                          |                                                                    | Common stock                            |            | Additional |   |          |     | earnings/    |   | other         |         | Total        
|                          |                                                                    |                                         |            | paid-in    |   | Deferred |     | (accumulated |   | comprehensive |         | shareholders
|                          |                                                                    | Shares                                  |            | Amount     |   | capital  |     | compensation |   | deficit)      |         | income (loss) |   | equity
|                          |                                                                    |                                         |            |            |   |          |     |              |   |               |         |               |   |       
|BALANCE, February 3, 2001 |                                                                    |                                         | 16,885,750 |            |   | $        | 169 |              |   | $             | 60,495  |               |   | $      |       |        |   | $ | 114,017 |         |   | $ | 29  |   |     | $ | 174,710 |        
|                          | Net loss                                                           |                                         |            |           |   |          |     |             |   |               |         |              |   |        |        |       |   |   |         | (14,337 | ) |   |     |  |     |   |         | (14,337 | )  
|                          | Other comprehensive loss                                          |                                         |            |            |   |          |     |              |   |               |         |               |   |        |        |        |   |   |         |         |   |   |     |   |     |   |         |         |    
|                          |                                                                    | Foreign currency translation adjustment |            |            |  |          |     |              |  |               |         |               |  |        |        |        |  |   |         |         |  |   |     |   | (59 | ) |         |         | (59 | )
|                          |                                                                    |                                         |            |            |   |          |     |              |   |               |         |               |   |        |        |        |   |   |         |         |   |   |     |   |     |   |         |        
|                          | Comprehensive loss                                                 |                                         |            |           |   |          |     |             |   |               |         |              |   |        |        |       |   |   |         |        |   |   |     |  |     |   |         | (14,396 | )  
|                          |                                                                    |                                         |            |            |   |          |     |              |   |               |         |               |   |        |        |        |   |   |         |         |   |   |     |   |     |   |         |        
|                          | Stock options exercised                                            |                                         |            | 281,921    |   |          |     | 2            |   |               |         | 1,874         |   |        |        |       |   |   |         |        |   |   |     |  |     |   |         | 1,876   |    
|                          | Tax benefit on employee stock options                              |                                         |            |           |   |          |     |             |   |               |         | 1,412         |   |        |        |       |   |   |         |        |   |   |     |  |     |   |         | 1,412   |    
|                          | Shares issued under the Companys employee
    stock purchase plan |                                         |            | 54,374     |   |          |     | 1            |   |               |         | 526           |   |        |        |       |   |   |         |        |   |   |     |  |     |   |         | 527     |    
|                          | Restricted stock issued to employees                               |                                         |            | 82,500     |   |          |     | 1            |   |               |         | 1,569         |   |        |        | (1,570 | ) |   |         |        |   |   |     |  |     |   |         |        |    
|                          | Compensation expense for restricted stock issued
    to employees  |                                         |            |           |   |          |     |             |   |               |         |              |   |        |        | 327    |   |   |         |        |   |   |     |  |     |   |         | 327     |    
|                          | Private placement of common stock, net of
    issuance costs       |                                         |            | 1,900,000  |   |          |     | 19           |   |               |         | 20,020        |   |        |        |       |   |   |         |        |   |   |     |  |     |   |         | 20,039  |    
|                          |                                                                    |                                         |            |            |   |          |     |              |   |               |         |               |   |        |        |        |   |   |         |         |   |   |     |   |     |   |         |        
|BALANCE, February 2, 2002 |                                                                    |                                         | 19,204,545 |            |   |          | 192 |              |   |               | 85,896  |               |   |        | (1,243 | )      |   |   | 99,680  |         |   |   | (30 | ) |     |   | 184,495 |        
|                          | Net loss                                                           |                                         |            |           |   |          |     |             |   |               |         |              |   |        |        |       |   |   |         | (80,894 | ) |   |     |  |     |   |         | (80,894 | )  
|                          | Other comprehensive loss                                          |                                         |            |            |   |          |     |              |   |               |         |               |   |        |        |        |   |   |         |         |   |   |     |   |     |   |         |         |    
|                          |                                                                    | Foreign currency translation adjustment |            |            |  |          |     |              |  |               |         |               |  |        |        |        |  |   |         |         |  |   |     |   | 27  |   |         |         | 27  |  
|                          |                                                                    |                                         |            |            |   |          |     |              |   |               |         |               |   |        |        |        |   |   |         |         |   |   |     |   |     |   |         |        
|                          | Comprehensive loss                                                 |                                         |            |           |   |          |     |             |   |               |         |              |   |        |        |       |   |   |         |        |   |   |     |  |     |   |         | (80,867 | )  
|                          |                                                                    |                                         |            |            |   |          |     |              |   |               |         |               |   |        |        |        |   |   |         |         |   |   |     |   |     |   |         |        
|                          | Stock options exercised                                            |                                         |            | 108,664    |   |          |     | 1            |   |               |         | 720           |   |        |        |       |   |   |         |        |   |   |     |  |     |   |         | 721     |    
|                          | Tax benefit on employee stock options                              |                                         |            |           |   |          |     |             |   |               |         | 168           |   |        |        |       |   |   |         |        |   |   |     |  |     |   |         | 168     |    
|                          | Shares issued under the Companys employee
    stock purchase plan |                                         |            | 71,449     |   |          |     | 1            |   |               |         | 498           |   |        |        |       |   |   |         |        |   |   |     |  |     |   |         | 499     |    
|                          | Restricted stock cancellation                                      |                                         |            | (11,625    | ) |          |     |             |   |               |         | (221          | ) |        |        | 221    |   |   |         |        |   |   |     |  |     |   |         |        |    
|                          | Compensation expense for restricted stock issued
    to employees  |                                         |            |           |   |          |     |             |   |               |         |              |   |        |        | 331    |   |   |         |        |   |   |     |  |     |   |         | 331     |    
|                          | Private placement of common stock, net of
    issuance costs       |                                         |            | 1,100,000  |   |          |     | 11           |   |               |         | 11,949        |   |        |        |       |   |   |         |        |   |   |     |  |     |   |         | 11,960  |    
|                          | Joint venture distribution                                         |                                         |            |           |   |          |     |             |   |               |         |              |   |        |        |       |   |   |         | (79     | ) |   |     |  |     |   |         | (79     | )  
|                          |                                                                    |                                         |            |            |   |          |     |              |   |               |         |               |   |        |        |        |   |   |         |         |   |   |     |   |     |   |         |        
|BALANCE, February 1, 2003 |                                                                    |                                         | 20,473,033 |            |   |          | 205 |              |   |               | 99,010  |               |   |        | (691   | )      |   |   | 18,707  |         |   |   | (3  | ) |     |   | 117,228 |        
|                          | Net loss                                                           |                                         |            |           |   |          |     |             |   |               |         |              |   |        |        |       |   |   |         | (33,583 | ) |   |     |  |     |   |         | (33,583 | )  
|                          | Other comprehensive loss                                          |                                         |            |            |   |          |     |              |   |               |         |               |   |        |        |        |   |   |         |         |   |   |     |   |     |   |         |         |    
|                          |                                                                    | Foreign currency translation adjustment |            |            |  |          |     |              |  |               |         |               |  |        |        |        |  |   |         |         |  |   |     |   | 5   |   |         |         | 5   |  
|                          |                                                                    |                                         |            |            |   |          |     |              |   |               |         |               |   |        |        |        |   |   |         |         |   |   |     |   |     |   |         |        
|                          | Comprehensive loss                                                 |                                         |            |           |   |          |     |             |   |               |         |              |   |        |        |       |   |   |         |        |   |   |     |  |     |   |         | (33,578 | )  
|                          |                                                                    |                                         |            |            |   |          |     |              |   |               |         |               |   |        |        |        |   |   |         |         |   |   |     |   |     |   |         |        
|                          | Stock options exercised                                            |                                         |            | 144,648    |   |          |     | 1            |   |               |         | 794           |   |        |        |       |   |   |         |        |   |   |     |  |     |   |         | 795     |    
|                          | Tax benefit on employee stock options                              |                                         |            |           |   |          |     |             |   |               |         | 185           |   |        |        |       |   |   |         |        |   |   |     |  |     |   |         | 185     |    
|                          | Shares issued under the Companys employee
    stock purchase plan |                                         |            | 76,742     |   |          |     | 1            |   |               |         | 288           |   |        |        |       |   |   |         |        |   |   |     |  |     |   |         | 289     |    
|                          | Net restricted stock issued to employees                           |                                         |            | 113,283    |   |          |     | 1            |   |               |         | 356           |   |        |        | (360   | ) |   |         |        |   |   |     |  |     |   |         | (3      | )  
|                          | Compensation expense for restricted stock issued
    to employees  |                                         |            |           |   |          |     |             |   |               |         |              |   |        |        | 350    |   |   |         |        |   |   |     |  |     |   |         | 350     |    
|                          | Joint venture contribution                                         |                                         |            |           |   |          |     |             |   |               |         |              |   |        |        |       |   |   |         | 88      |   |   |     |  |     |   |         | 88      |    
|                          |                                                                    |                                         |            |            |   |          |     |              |   |               |         |               |   |        |        |        |   |   |         |         |   |   |     |   |     |   |         |        
|BALANCE, January 31, 2004 |                                                                    |                                         | 20,807,706 |            |   | $        | 208 |              |   | $             | 100,633 |               |   | $      | (701   | )      |   | $ | (14,788 | )       |   | $ | 2   |   |     | $ | 85,354  |        
|                          |                                                                    |                                         |            |            |   |          |     |              |   |               |         |               |   |        |        |        |   |   |         |         |   |   |     |   |     |   |         |        

The accompanying notes are an integral part of
these consolidated financial statements.

F-5



---



##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In thousands)

|                                                           |                                                                                                                                   |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |         |         |         |  
|---------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ----------- | ------ | ----------- | ------ | ------- | ------- | ------- | ------- | ------- | ------- | ------- | -
|                                                           |                                                                                                                                   |                                                                      
|                                                           |                                                                                                                                   | For the years ended                                                  
|                                                           |                                                                                                                                   |                                                                      
|                                                           |                                                                                                                                   | January 31,                                                           |                                                                                  | February 1, |        | February 2,
|                                                           |                                                                                                                                   | 2004                                                                  |                                                                                  | 2003        |        | 2002       
|                                                           |                                                                                                                                   |                                                                       |                                                                                  |             |        |            
|OPERATING ACTIVITIES:                                      |                                                                                                                                   |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |        
|                                                           | Net loss                                                                                                                          |                                                                       | $                                                                                | (33,583     | )      |             | $      | (80,894 | )       |         | $       | (14,337 | )      
|                                                           |                                                                                                                                   | Loss from discontinued operations, net of tax                         |                                                                                  |             |       |             |        |         | 42,014  |         |         |         | 22,093  |        
|                                                           |                                                                                                                                   | Cumulative effect of a change in accounting
    principle, net of tax |                                                                                  |             |       |             |        |         | 24,567  |         |         |         |        |        
|                                                           |                                                                                                                                   |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |        
|                                                           | Income (loss) from continuing operations                                                                                          |                                                                       |                                                                                  | (33,583     | )      |             |        | (14,313 | )       |         |         | 7,756   |        
|                                                           | Adjustments to reconcile income (loss) from
    continuing operations to net cash provided by (used in)
    operating activities: |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |         |        
|                                                           |                                                                                                                                   | Depreciation                                                          |                                                                                  |             | 19,134 |             |        |         | 16,291  |         |         |         | 13,878  |        
|                                                           |                                                                                                                                   | Amortization                                                          |                                                                                  |             | 73     |             |        |         | 42      |         |         |         | 64      |        
|                                                           |                                                                                                                                   | Amortization of deferred financing costs                              |                                                                                  |             | 1,728  |             |        |         | 1,104   |         |         |         | 728     |        
|                                                           |                                                                                                                                   | Loss on disposal of assets                                            |                                                                                  |             | 1,903  |             |        |         | 1,586   |         |         |         | 4,924   |        
|                                                           |                                                                                                                                   | Restricted stock compensation expense                                 |                                                                                  |             | 350    |             |        |         | 331     |         |         |         | 327     |        
|                                                           |                                                                                                                                   | Deferred income taxes                                                 |                                                                                  |             | 12,845 |             |        |         | (10,790 | )       |         |         | 1,600   |        
|                                                           | Changes in operating assets and liabilities:                                                                                      |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |         |        
|                                                           |                                                                                                                                   | Accounts receivable, net                                              |                                                                                  |             | (960   | )           |        |         | 3,715   |         |         |         | 1,866   |        
|                                                           |                                                                                                                                   | Inventories                                                           |                                                                                  |             | 29,403 |             |        |         | (25,761 | )       |         |         | 13,224  |        
|                                                           |                                                                                                                                   | Prepaid expenses                                                      |                                                                                  |             | 93     |             |        |         | (874    | )       |         |         | 5,619   |        
|                                                           |                                                                                                                                   | Refundable income taxes                                               |                                                                                  |             | 3,064  |             |        |         | (3,064  | )       |         |         |        |        
|                                                           |                                                                                                                                   | Accounts payable and accrued expenses                                 |                                                                                  |             | (7,798 | )           |        |         | 3,365   |         |         |         | (7,025  | )      
|                                                           |                                                                                                                                   | Income taxes payable and other liabilities                            |                                                                                  |             | 3,598  |             |        |         | (8,962  | )       |         |         | (21,326 | )      
|                                                           |                                                                                                                                   |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |        
|                                                           |                                                                                                                                   |                                                                       | Net cash provided by (used in) operating
    activities of continuing operations |             |        | 29,850      |        |         |         | (37,330 | )       |         |         | 21,635  |  
|                                                           |                                                                                                                                   |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |        
|INVESTING ACTIVITIES:                                      |                                                                                                                                   |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |        
|                                                           | Additions to property, equipment and other assets                                                                                 |                                                                       |                                                                                  | (7,788      | )      |             |        | (8,754  | )       |         |         | (32,990 | )      
|                                                           | Proceeds from sale of property and equipment                                                                                      |                                                                       |                                                                                  | 499         |        |             |        |        |         |         |         |        |        
|                                                           | Net proceeds from sale leaseback                                                                                                  |                                                                       |                                                                                  |            |        |             |        | 12,546  |         |         |         |        |        
|                                                           | Changes in other assets                                                                                                           |                                                                       |                                                                                  |            |        |             |        | (79     | )       |         |         | (25     | )      
|                                                           |                                                                                                                                   |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |        
|                                                           |                                                                                                                                   |                                                                       | Net cash provided by (used in) investing
    activities of continuing operations |             |        | (7,289      | )      |         |         | 3,713   |         |         |         | (33,015 | )
|                                                           |                                                                                                                                   |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |        
|FINANCING ACTIVITIES:                                      |                                                                                                                                   |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |        
|                                                           | Proceeds from issuance of common stock, net                                                                                       |                                                                       |                                                                                  | 1,081       |        |             |        | 13,180  |         |         |         | 22,442  |        
|                                                           | Proceeds from issuance of notes payable                                                                                           |                                                                       |                                                                                  | 490         |        |             |        |        |         |         |         |        |        
|                                                           | Debt acquisition costs                                                                                                            |                                                                       |                                                                                  | (1,025      | )      |             |        | (2,108  | )       |         |         | (1,586  | )      
|                                                           | Proceeds from issuance of long-term debt                                                                                          |                                                                       |                                                                                  |            |        |             |        | 4,950   |         |         |         | 25,000  |        
|                                                           | Repayments of long-term debt                                                                                                      |                                                                       |                                                                                  | (41         | )      |             |        | (4,800  | )       |         |         |        |        
|                                                           | Other                                                                                                                             |                                                                       |                                                                                  | 5           |        |             |        | 27      |         |         |         | (59     | )      
|                                                           |                                                                                                                                   |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |        
|                                                           |                                                                                                                                   |                                                                       | Net cash provided by financing activities of
    continuing operations           |             |        | 510         |        |         |         | 11,249  |         |         |         | 45,797  |  
|                                                           |                                                                                                                                   |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |        
|NET CASH PROVIDED BY (USED IN) DISCONTINUED
    OPERATIONS |                                                                                                                                   |                                                                       | (11,110                                                                          | )           |        |             | 13,857 |         |         |         | (48,406 | )      
|                                                           |                                                                                                                                   |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |        
|NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS   |                                                                                                                                   |                                                                       | 11,961                                                                           |             |        |             | (8,511 | )       |         |         | (13,989 | )      
|CASH AND CASH EQUIVALENTS, beginning of
    period         |                                                                                                                                   |                                                                       | 30,442                                                                           |             |        |             | 38,953 |         |         |         | 52,942  |        
|                                                           |                                                                                                                                   |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |        
|CASH AND CASH EQUIVALENTS, end of
    period               |                                                                                                                                   | $                                                                     | 42,403                                                                           |             |        | $           | 30,442 |         |         | $       | 38,953  |        
|                                                           |                                                                                                                                   |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |        
|SUPPLEMENTAL CASH FLOW INFORMATION:                        |                                                                                                                                   |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |        
|                                                           | Cash paid during the year for                                                                                                    |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |         |        
|                                                           |                                                                                                                                   | Interest                                                              |                                                                                  | $           | 9,265  |             |        | $       | 9,199   |         |         | $       | 8,478   |        
|                                                           |                                                                                                                                   |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |        
|                                                           |                                                                                                                                   | Income taxes                                                          |                                                                                  | $           | 898    |             |        | $       | 1,651   |         |         | $       | 14,699  |        
|                                                           |                                                                                                                                   |                                                                       |                                                                                  |             |        |             |        |         |         |         |         |        

The accompanying notes are an integral part of
these consolidated financial statements.

F-6



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


January 31, 2004, and February 1,
2003



|  |                       
|- | ----------------------
|1 | Nature of organization

Wilsons The Leather Experts Inc. (Wilsons
Leather or the Company) is the leading
specialty retailer of quality leather outerwear, accessories and
apparel in the United States. At January 31, 2004, Wilsons
Leather operated 460 stores (excluding 111 underperforming mall
and outlet stores the Company is in the process of liquidating,
as discussed in Note 4) located in 45 states and
the District of Columbia, including 334 Wilsons Leather mall
stores, 107 Wilsons Leather outlet stores and 19 airport
locations. The Company supplemented its permanent stores with
229, 284, and 281 seasonal stores during its peak selling season
from October through January during fiscal years 2003, 2002 and
2001, respectively.



|  |                                               
|- | ----------------------------------------------
|2 | Summary of significant accounting
    policies



| |                      
| | ---------------------
| | Basis of presentation

The accompanying consolidated financial
statements include those of the Company and all of its
subsidiaries. All material intercompany balances and
transactions between the entities have been eliminated in
consolidation. At January 31, 2004, Wilsons Leather
operated in one segment: selling leather outerwear, accessories
and apparel. The Companys chief operating decision-maker
evaluates revenue and profitability performance on an enterprise
basis to make operating and strategic decisions.

As more fully described in Note 3, El Portal
Group, Inc., Bentleys Luggage Corp. and Florida
Luggage Corp. (the Travel Subsidiaries) were
liquidated during 2002 and are being presented as discontinued
operations effective November 19, 2002, and the
consolidated financial statements have been reclassified to
segregate the net investment in, and the liabilities and
operating results of, the Travel Subsidiaries for all prior
periods presented. Prior to the liquidation, the Travel
Subsidiaries were reported as a separate operating segment.

As more fully described in Note 4, on
January 22, 2004, the Company announced that it would
liquidate up to 100 underperforming mall and outlet stores
(subsequently revised to 111 stores) and eliminate approximately
950 store-related positions. In addition, the Company recorded
certain reorganization costs related to asset write-offs and
severance and outplacement costs for approximately 70 positions
at its headquarters location and distribution centers.



| |            
| | -----------
| | Fiscal year

The Companys fiscal year ends on the
Saturday closest to January 31. The periods ended
January 31, 2004, February 1, 2003, and
February 2, 2002, are referred to herein as fiscal years
2003, 2002 and 2001, respectively. The results of operations for
fiscal years 2003, 2002 and 2001 consisted of 52 weeks.



| |                 
| | ----------------
| | Use of estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Matters of
significance in which management relies on these estimates
relate primarily to the realizability of assets, such as
accounts receivable, property and equipment, and inventories,
and the adequacy of certain accrued liabilities and reserves.
Ultimate results could differ from those estimates.

F-7



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



| |                  
| | -----------------
| | Reclassifications

Certain amounts included in the consolidated
financial statements have been reclassified in prior years to
conform with the fiscal 2003 financial statement presentation.
Reclassification of these amounts had no effect on previously
reported shareholders equity or net income (loss).



| |                                     
| | ------------------------------------
| | Fair values of financial instruments

The carrying value of the Companys current
financial assets and liabilities, because of their short-term
nature, approximates fair value. The carrying value of the
Companys 11 1/4% Senior Notes due
August 15, 2004, (the 11 1/4% Senior
Notes) issued in August 1997 approximated fair value as of
January 31, 2004 and February 1, 2003.



| |                          
| | -------------------------
| | Cash and cash equivalents

Cash equivalents consist principally of
short-term investments with original maturities of three months
or less and are recorded at cost, which approximates fair value.
The short-term investments consist primarily of commercial paper
and money market funds. Interest income of $0.1 million,
$0.2 million and $0.8 million in fiscal years 2003,
2002 and 2001, respectively, is included in interest expense,
net in the accompanying statements of operations.



| |            
| | -----------
| | Inventories

The Company values its inventories, which consist
primarily of finished goods held for sale that have been
purchased from domestic and foreign vendors, at the lower of
cost or market value, determined by the retail inventory method
on the last-in, first-out (LIFO) basis. As of
January 31, 2004, and February 1, 2003, the LIFO cost
of inventories approximated the first-in, first-out
(FIFO) cost of inventories. The inventory cost
includes the cost of merchandise and freight. A periodic review
of inventory quantities on hand is performed to determine if
inventory is properly stated at the lower of cost or market.
Factors related to current inventories such as future consumer
demand, fashion trends, current aging, current and anticipated
retail markdowns, and class or type of inventory are analyzed to
determine estimated net realizable values. A provision is
recorded to reduce the cost of inventories to the estimated net
realizable values, if required. Any significant unanticipated
changes in the factors noted above could have a significant
impact on the value of the Companys inventories and its
reported operating results.

Inventories consisted of the following (in
thousands):

|               |  |             |        |             |  |   |         | 
|-------------- |  | ----------- | ------ | ----------- |  | - | ------- | 
|               |  | January 31, |        | February 1,
|               |  | 2004        |        | 2003       
|               |  |             |        |            
|Raw materials  |  | $           | 3,189  |             |  | $ | 2,872   | 
|Finished goods |  |             | 86,109 |             |  |   | 115,829 | 
|               |  |             |        |             |  |   |         | 
|               |  | $           | 89,298 |             |  | $ | 118,701 | 
|               |  |             |        |             |  |   |         | 



| |                       
| | ----------------------
| | Property and equipment

The Companys property and equipment
consists principally of store leasehold improvements and are
included in the Property and equipment line item in
its consolidated balance sheets included in this report. These
long-lived assets are recorded at cost and are amortized using
the straight-line method over the lesser of the applicable store
lease term or the estimated useful life of the leasehold
improvements. The typical initial lease term for the
Companys stores is ten years and the estimated useful
lives of the assets range from five to ten years. Lease
extensions subsequent to initial lease term requiring capital
additions are depreciated over the term of the lease extension.
Property and equipment retired or disposed of are removed from
cost and related

F-8



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

accumulated depreciation accounts. Maintenance
and repairs are charged directly to expense as incurred. Major
renewals or replacements are capitalized after making the
necessary adjustment to the asset and accumulated depreciation
accounts for the items renewed or replaced.



| |                                                      
| | -----------------------------------------------------
| | Store closing and impairment of long-lived
    assets

The Company continually reviews its stores
operating performance and assesses plans for store closures. In
accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets,(SFAS No. 144) losses related to the
impairment of long-lived assets are recognized when expected
future cash flows are less than the assets carrying value.
When a store is closed or when a change in circumstances
indicates the carrying value of an asset may not be recoverable,
the Company evaluates the carrying value of the asset in
relation to its expected future cash flows. If the carrying
value is greater than the expected future cash flows, a
provision is made for the impairment of the asset to write the
asset down to its estimated fair value. Fair value is determined
by estimating net future cash flows, discounted using a
risk-adjusted rate of return. These impairment charges are
recorded as a component of selling, general and administrative
expenses and are disclosed in Note 7.

When a store under a long-term lease is to be
closed, the Company records a liability for any lease
termination or broker fees at the time an agreement related to
such closing is executed. At January 31, 2004, and
February 1, 2003, the Company had $0.5 million and
$0.4 million, respectively, accrued for store lease
terminations.



| |         
| | --------
| | Goodwill

Goodwill represents the excess of costs over fair
value of assets of businesses acquired. The Company adopted the
provisions of SFAS No. 142, Goodwill and Other
Intangible Assets, (SFAS No. 142) as
of February 3, 2002. Goodwill and intangible assets
acquired in a purchase business combination and determined to
have an indefinite useful life are not amortized, but instead
tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142
also requires that intangible assets with estimable useful lives
be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144.

Under the transitional provisions of
SFAS No. 142, the Companys goodwill related to
the Travel Subsidiaries was tested for impairment during the
second quarter of 2002 using a February 2, 2002,
measurement date. Each of the Companys reporting units was
tested for impairment by comparing the fair value of each
reporting unit with its carrying value. A reporting unit is the
same as, or one level below, an operating segment. For the
purposes of the Company, reporting units were defined as Wilsons
and Travel at the measurement date. Fair value was determined
based on a valuation study performed by an independent
third-party that primarily considered the discounted cash flow
method, guideline company (comparable companies) and
similar transaction methods. As a result of the Companys
impairment test, the Company recorded a pretax impairment loss
to reduce the carrying value of goodwill of the Travel
Subsidiaries by $26.3 million to its implied fair value.
Impairment was due to a combination of factors including
acquisition price, post-acquisition capital expenditures and
operating performance. In accordance with
SFAS No. 142, the cumulative effect of this accounting
change was reported in the Companys statement of
operations net of a $1.7 million tax benefit.



| |                    
| | -------------------
| | Debt issuance costs

Debt issuance costs are amortized over the life
of the related debt. Accumulated amortization amounted to
approximately $4.6 million and $2.9 million at
January 31, 2004, and February 1, 2003, respectively.
Amortization expense is included in interest expense in the
accompanying consolidated statements of operations.

F-9



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



| |                    
| | -------------------
| | Revenue recognition

The Company recognizes sales upon customer
receipt of the merchandise generally at the point of sale.
Shipping and handling revenues are excluded from net sales as a
contra-expense and the related costs are included in costs of
goods sold, buying and occupancy costs. Revenue for gift
certificate or gift card sales and store credits is recognized
at redemption. A reserve is provided at the time of sale for
projected merchandise returns based upon historical experience.
The Company recognizes revenue for on-line sales at the time
goods are received by the customer. An allowance for on-line
sales is recorded to cover in-transit shipments, as product is
shipped to these customers Free on Board destination.



| |                    
| | -------------------
| | Store opening costs

Non-capital expenditures, such as advertising and
payroll costs related to new store openings, are charged to
expense as incurred.



| |                  
| | -----------------
| | Advertising costs

Advertising costs included in selling, general
and administrative expenses, are expensed when incurred.
Advertising costs amounted to $12.8 million,
$12.6 million and $13.3 million in 2003, 2002 and
2001, respectively.



| |             
| | ------------
| | Income taxes

Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date.



| |                             
| | ----------------------------
| | Foreign currency translation

The functional currency for the Companys
foreign operations is the applicable foreign currency. The
translation from the applicable foreign currency to
U.S. dollars is performed for balance sheet accounts using
the current exchange rate in effect at the balance sheet date
and for revenue and expense accounts using a weighted average
exchange rate during the period. The gains or losses resulting
from such translation are included in shareholders equity
as other comprehensive loss. Transaction gains and losses are
reflected in income. The Company did not enter into any hedging
transactions during 2003.



| |               
| | --------------
| | Loss per share

Basic loss per share is computed by dividing the
net loss by the weighted average number of common shares
outstanding during the year. Diluted loss per share is computed
by dividing the net loss by the sum of the weighted average
number of common shares outstanding plus all additional common
shares that would have been outstanding if potentially dilutive
common shares related to stock options had been issued

F-10



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

(calculated using the treasury stock method). The
following table reconciles the number of shares utilized in the
loss per share calculations (in thousands):

|                                                       |  |                     |        |             |  |             |        |  |  |  |        | 
|------------------------------------------------------ |  | ------------------- | ------ | ----------- |  | ----------- | ------ |  |  |  | ------ | 
|                                                       |  |                    
|                                                       |  | For the years ended
|                                                       |  |                    
|                                                       |  | January 31,         |        | February 1, |  | February 2,
|                                                       |  | 2004                |        | 2003        |  | 2002       
|                                                       |  |                     |        |             |  |            
|Weighted average common shares
    outstandingbasic   |  |                     | 20,528 |             |  |             | 20,053 |  |  |  | 17,172 | 
|Effect of dilutive securities: stock options           |  |                     |       |             |  |             |       |  |  |  |       | 
|                                                       |  |                     |        |             |  |             |        |  |  |  |        | 
|Weighted average common shares
    outstandingdiluted |  |                     | 20,528 |             |  |             | 20,053 |  |  |  | 17,172 | 
|                                                       |  |                     |        |             |  |             |        |  |  |  |        | 



| |                         
| | ------------------------
| | Stock-based compensation

As permitted by SFAS No. 123,
Accounting for Stock-Based
Compensation,(SFAS No. 123) the
Company uses the intrinsic-value method for employee stock-based
compensation pursuant to Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees,(APB No. 25) under which no compensation
cost has been recognized. The Company adopted the disclosure
provisions for employee stock-based compensation and the
fair-value method for non-employee stock-based compensation of
SFAS No. 123. Had compensation cost for the stock
option plans been determined consistent with
SFAS No. 123, the Companys net loss and basic
and diluted loss per share would have been the following pro
forma amounts (in thousands, except per share amounts):

|                                  |                                                |                     |   |             |   |             |   |         |   |  |   |         |  
|--------------------------------- | ---------------------------------------------- | ------------------- | - | ----------- | - | ----------- | - | ------- | - |  | - | ------- | -
|                                  |                                                |                    
|                                  |                                                | For the years ended
|                                  |                                                |                    
|                                  |                                                | January 31,         |   | February 1, |   | February 2,
|                                  |                                                | 2004                |   | 2003        |   | 2002       
|                                  |                                                |                     |   |             |   |            
|Net loss:                         |                                                |                     |   |             |   |             |   |         |   |  |   |        
|                                  | As reported                                    |                     | $ | (33,583     | ) |             | $ | (80,894 | ) |  | $ | (14,337 | )
|                                  | Stock option and purchase plans                |                     |   | (1,519      | ) |             |   | (1,700  | ) |  |   | (1,412  | )
|                                  |                                                |                     |   |             |   |             |   |         |   |  |   |        
|                                  | Pro forma loss                                 |                     | $ | (35,102     | ) |             | $ | (82,594 | ) |  | $ | (15,749 | )
|                                  |                                                |                     |   |             |   |             |   |         |   |  |   |        
|Basic and diluted loss per share: |                                                |                     |   |             |   |             |   |         |   |  |   |        
|                                  | As reported                                    |                     | $ | (1.64       | ) |             | $ | (4.03   | ) |  | $ | (0.83   | )
|                                  | Stock option and purchase plans                |                     |   | (0.07       | ) |             |   | (0.09   | ) |  |   | (0.09   | )
|                                  |                                                |                     |   |             |   |             |   |         |   |  |   |        
|                                  | Pro forma loss                                 |                     | $ | (1.71       | ) |             | $ | (4.12   | ) |  | $ | (0.92   | )
|                                  |                                                |                     |   |             |   |             |   |         |   |  |   |        
|                                  | Weighted average fair value of options granted |                     | $ | 2.04        |   |             | $ | 6.60    |   |  | $ | 7.22    |  

The pro forma amounts shown above may not be
indicative of the effects on reported net loss. The fair value
of each option granted is estimated on the date of grant using
the Black-Scholes option pricing model with the following
assumptions used for grants in 2003, 2002 and 2001:

|     |  |                  |      |          |  |          |      |            |  |  |     |  |  |  |       | 
|---- |  | ---------------- | ---- | -------- |  | -------- | ---- | ---------- |  |  | --- |  |  |  | ----- | 
|     |  | Weighted Average |      | Dividend |  | Expected |      | Expected  
|     |  | Risk Free Rate   |      | Yield    |  | Lives    |      | Volatility
|     |  |                  |      |          |  |          |      |           
|2003 |  |                  | 3.0% |          |  |          | 0.0% |            |  |  | 5.0 |  |  |  | 55.3% | 
|2002 |  |                  | 2.0% |          |  |          | 0.0% |            |  |  | 6.5 |  |  |  | 52.6% | 
|2001 |  |                  | 3.5% |          |  |          | 0.0% |            |  |  | 6.9 |  |  |  | 46.3% | 



| |                              
| | -----------------------------
| | New accounting pronouncements

In December 2003, the Financial Accounting
Standards Board (FASB) issued FASB Interpretation
Number (FIN) 46 (revised December 2003),
Consolidation of Variable Interest Entities(FIN 46R), which addresses how a business
enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity.
FIN 46R replaces

F-11



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

FIN 46, Consolidation of Variable
Interest Entities, which was issued in January 2003. The
Company is required to apply FIN 46R to variable interests
in variable interest entities (VIEs) created after
December 31, 2003. For variable interests in VIEs created
before January 1, 2004, FIN 46R will be applied
beginning on January 1, 2005. For any VIEs that must be
consolidated under FIN 46R that were created before
January 1, 2004, the assets, liabilities and noncontrolling
interests of the VIEs initially would be measured at their
carrying amounts, with any differences between the net amounts
added to the balance sheet and any previously recognized
interest being recognized as the cumulative effect of a change
in accounting principle. If determining the carrying amounts is
not practicable, fair value at the date FIN 46R first
applies may be used to measure the assets, liabilities and
noncontrolling interest of the VIEs. FIN 46R did not have
an impact on the Companys consolidated financial
statements.

FASB Statement No. 150 (the
Statement) Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity, was issued in May 2003. The Statement establishes
standards for the classification and measurement of certain
financial instruments with characteristics of both liabilities
and equity. The Statement also includes required disclosures for
financial instruments within its scope. For the Company, the
Statement was effective for instruments entered into or modified
after May 31, 2003, and otherwise will be effective as of
January 1, 2004, except for mandatorily redeemable
financial instruments. For certain mandatorily redeemable
financial instruments, the Statement will be effective for the
Company on January 1, 2005. The effective date has been
deferred indefinitely for certain other types of mandatorily
redeemable financial instruments. As of January 31, 2004,
the Company does not have any financial instruments that are
within the scope of the Statement. The provisions of the
Statement will be applied to future financial instruments that
are entered into or modified subsequent to January 31, 2004.

In December 2002, the Emerging Issues Task Force
(EITF) issued EITF 00-21, Revenue
Arrangements with Multiple Deliverables(EITF 00-21). EITF 00-21 addresses
certain aspects of the accounting for arrangements under which a
company will perform multiple revenue generating activities. In
some arrangements, the different revenue generating activities
(deliverables) are sufficiently separable, and there exists
sufficient evidence of their fair values to separately account
for some or all of the deliverables (that is, there are separate
units of accounting). In other arrangements, some or all of the
deliverables are not independently functional, or there is not
sufficient evidence of their fair values to account for them
separately. EITF 00-21 addresses the circumstances under
which an arrangement involving multiple deliverables should be
divided into separate units of accounting. EITF 00-21 does
not change otherwise applicable revenue recognition criteria.
The provisions of EITF 00-21 were effective beginning in
the third quarter of 2003. The adoption of EITF 00-21 did
not have an impact on the Companys revenue recognition.



|  |                        
|- | -----------------------
|3 | Discontinued operations

In November 2002, the Company liquidated the
Travel Subsidiaries, which consisted of 135 stores, due to their
large operating losses. In accordance with
SFAS No. 144, the Travel Subsidiaries have been
presented as a discontinued operation effective
November 19, 2002, and the consolidated financial
statements were reclassified to segregate the assets,
liabilities and operating results of the Travel Subsidiaries for
all periods presented.

Beginning on November 19, 2002, and
continuing through the fourth quarter of 2002, the Company
liquidated the inventory and fixed assets of the Travel
Subsidiaries. The Travel Subsidiaries and certain of their
affiliates entered into an Agency Agreement with a joint venture
comprised of Hilco Merchant Resources, LLC and Hilco Real
Estate, LLC (collectively Hilco) to liquidate the
inventory in such stores and exit the store leases. Pursuant to
the Agency Agreement, Hilco paid the Company a guaranteed amount
of 85% of the cost value of the inventory, subject to certain
adjustments. Hilco was responsible for all expenses related to
the sale. In addition, Hilco assisted in negotiations to exit
certain leases.

F-12



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

A summary of the components of the Travel
Subsidiaries discontinued operations charges is as follows (in
millions):

|                                           |  |                  |      | 
|------------------------------------------ |  | ---------------- | ---- | 
|                                           |  | Charges for the 
|                                           |  | Year Ended      
|                                           |  | February 1, 2003
|                                           |  |                 
|Inventory Markdowns                        |  | $                | 5.9  | 
|Fixed asset write-downs                    |  |                  | 18.2 | 
|Other selling and administrative expenses  |  |                  | 4.6  | 
|Lease terminations and store closing costs |  |                  | 10.7 | 
|                                           |  |                  |      | 
|                                           |  | $                | 39.4 | 
|                                           |  |                  |      | 
|Loss on disposition, net of tax            |  | $                | 27.2 | 
|                                           |  |                  |      | 

The charges referred to above represent
expenditures for the following major liquidation activities:



| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | markdowns on inventories;                                                                                              
| |  | write-off of substantially all store fixed assets
    for the 135 store chain;                                         
| |  | miscellaneous employee related termination costs
    and other administrative costs related to the
    liquidation; and
| |  | lease termination fees to exit all store leases.                                                                       

The following represents the summary operating
results of the Travel Subsidiaries presented as discontinued
operations (in thousands):

|                                             |  |                     |   |             |  |             |         |   |  |   |         |  
|-------------------------------------------- |  | ------------------- | - | ----------- |  | ----------- | ------- | - |  | - | ------- | -
|                                             |  |                    
|                                             |  | For the years ended
|                                             |  |                    
|                                             |  | January 31,         |   | February 1, |  | February 2,
|                                             |  | 2004                |   | 2003        |  | 2002       
|                                             |  |                     |   |             |  |            
|Net sales                                    |  | $                   |  |             |  | $           | 77,570  |   |  | $ | 121,783 |  
|                                             |  |                     |   |             |  |             |         |   |  |   |         |  
|Loss before income taxes                     |  | $                   |  |             |  | $           | (24,613 | ) |  | $ | (32,080 | )
|                                             |  |                     |   |             |  |             |         |   |  |   |         |  
|Net loss, net of income tax                  |  | $                   |  |             |  | $           | (14,767 | ) |  | $ | (22,093 | )
|Loss on disposition, net of income tax       |  |                     |  |             |  |             | (27,247 | ) |  |   |        |  
|                                             |  |                     |   |             |  |             |         |   |  |   |         |  
|Loss from discontinued operations            |  | $                   |  |             |  | $           | (42,014 | ) |  | $ | (22,093 | )
|                                             |  |                     |   |             |  |             |         |   |  |   |         |  
|Loss before income taxes, per share          |  | $                   |  |             |  | $           | (1.23   | ) |  | $ | (1.87   | )
|                                             |  |                     |   |             |  |             |         |   |  |   |         |  
|Net loss per share, net of income tax        |  | $                   |  |             |  | $           | (0.74   | ) |  | $ | (1.28   | )
|Loss on disposition, per share               |  |                     |  |             |  |             | (1.36   | ) |  |   |        |  
|                                             |  |                     |   |             |  |             |         |   |  |   |         |  
|Loss from discontinued operations, per share |  | $                   |  |             |  | $           | (2.10   | ) |  | $ | (1.28   | )
|                                             |  |                     |   |             |  |             |         |   |  |   |         |  

In 2002, the Travel Subsidiaries also recorded an
after-tax loss of $24.6 million for the cumulative effect
of a change in accounting principle due to goodwill impairment.
The charge was effective as of the beginning of 2002 under
SFAS No. 142.

F-13



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

The current and noncurrent assets and liabilities
of the Travel Subsidiaries as of January 31, 2004, and
February 1, 2003, were as follows (in thousands):

|                                               |  |             |      |             |  |   |         |  
|---------------------------------------------- |  | ----------- | ---- | ----------- |  | - | ------- | -
|                                               |  | January 31, |      | February 1,
|                                               |  | 2004        |      | 2003       
|                                               |  |             |      |            
|Cash and cash equivalents                      |  | $           |     |             |  | $ | 882     |  
|Accounts receivable, net                       |  |             |     |             |  |   | 104     |  
|Other current assets                           |  |             |     |             |  |   | 2,393   |  
|                                               |  |             |      |             |  |   |         |  
|Current assets of discontinued operations      |  |             |     |             |  |   | 3,379   |  
|                                               |  |             |      |             |  |   |         |  
|Total assets of discontinued operations        |  | $           |     |             |  | $ | 3,379   |  
|                                               |  |             |      |             |  |   |         |  
|Accounts payable                               |  | $           |     |             |  | $ | 590     |  
|Other current liabilities                      |  |             | 406  |             |  |   | 14,485  |  
|                                               |  |             |      |             |  |   |         |  
|Current liabilities of discontinued operations |  |             | 406  |             |  |   | 15,075  |  
|                                               |  |             |      |             |  |   |         |  
|Total liabilities of discontinued operations   |  |             | 406  |             |  |   | 15,075  |  
|                                               |  |             |      |             |  |   |         |  
|Net liabilities of discontinued operations     |  | $           | (406 | )           |  | $ | (11,696 | )
|                                               |  |             |      |             |  |   |         |  

In May 2003, the Company sold its Miami, Florida
distribution center for net proceeds of $2.5 million. This
facility was an asset acquired in the Bentleys Luggage
Corp. acquisition. The $2.4 million in net assets held for
sale was reported as current assets of discontinued
operations at February 1, 2003. The net proceeds from
the sale decreased cash used by discontinued operations for the
period.

The following summarizes the Travel
Subsidiaries disposal reserve activity during the year
ended January 31, 2004 (in thousands):

|                                             |  |             |        |       |  |           |         |             |  |   |      |   |  |   |     | 
|-------------------------------------------- |  | ----------- | ------ | ----- |  | --------- | ------- | ----------- |  | - | ---- | - |  | - | --- | 
|                                             |  | February 1, |        |       |  |           |         | January 31,
|                                             |  | 2003        |        | Usage |  | Transfers |         | 2004       
|                                             |  |             |        |       |  |           |         |            
|Store closing(1)                             |  | $           | 12,653 |       |  | $         | (12,608 | )           |  | $ | 343  |   |  | $ | 388 | 
|Taxes                                        |  |             | 720    |       |  |           | (645    | )           |  |   | (57  | ) |  |   | 18  | 
|Severance                                    |  |             | 600    |       |  |           | (590    | )           |  |   | (10  | ) |  |   |    | 
|Miscellaneous                                |  |             | 512    |       |  |           | (374    | )           |  |   | (138 | ) |  |   |    | 
|Accounts payable                             |  |             | 590    |       |  |           | (452    | )           |  |   | (138 | ) |  |   |    | 
|                                             |  |             |        |       |  |           |         |             |  |   |      |   |  |   |     | 
|Total liabilities of discontinued operations |  | $           | 15,075 |       |  | $         | (14,669 | )           |  | $ |     |   |  | $ | 406 | 
|                                             |  |             |        |       |  |           |         |             |  |   |      |   |  |   |     | 



---



| |     |                                                                                                                                      
| | --- | -------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Primarily includes lease termination costs and
    vendor chargebacks associated with the liquidation of the Travel
    Subsidiaries.



|  |                                                 
|- | ------------------------------------------------
|4 | Reorganization and partial store
    liquidation

On January 22, 2004, the Company announced
that it would liquidate up to 100 underperforming mall and
outlet stores (subsequently revised to 111 stores 
the liquidation stores) and eliminate approximately
950 store-related positions. The Company entered into an Agency
Agreement with a joint venture comprised of Hilco Merchant
Resources, LLC, Gordon Brothers Retail Partners, LLC and Hilco
Real Estate, LLC (the Hilco/ Gordon Brothers Joint
Venture) to liquidate the inventory in the 111 stores and
assist in the discussions with landlords regarding lease
terminations in approximately 94 of these stores. Pursuant to
the Agency Agreement, the Hilco/ Gordon Brothers Joint Venture
will pay the Company a guaranteed amount of 84% of the cost
value of the inventory, subject to certain adjustments. The
Hilco/ Gordon Brothers Joint

F-14



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

Venture will be responsible for all expenses
related to the sale. The liquidation stores were selected based
on strategic criteria, including negative sales and earnings
trends, projected real estate costs, location and financial
conditions within the market. In addition, the Company announced
that it would eliminate approximately 70 positions at its
corporate headquarters in Brooklyn Park, Minnesota and its
distribution center in Las Vegas, Nevada, close its distribution
center in Las Vegas, Nevada, and write-off essentially all
remaining assets located at its distribution centers in Maple
Grove, Minnesota and Las Vegas, Nevada.

The Company recorded expense for these actions of
$8.6 million in January 2004. This consisted primarily of:
(1) a $3.0 million writedown of inventory transferred
to the Hilco/ Gordon Brothers Joint Venture, (2) a
$3.9 million loss on disposal of fixed assets and
accelerated depreciation related to the liquidation stores and
closed distribution centers, (3) $0.7 million for
severance and other employee termination benefits, and
(4) $1.0 million in various additional costs primarily
related to revised store asset lives.

The remaining costs to be incurred in the first
half of 2004 related to the liquidation, workforce reduction and
facilities closures actions will be primarily for lease
termination costs, fixed asset accelerated depreciation for
store closures and various additional costs incurred to
liquidate the inventories of the liquidation stores.



|  |                          
|- | -------------------------
|5 | Goodwill and other assets

Goodwill and other assets consisted of the
following (in thousands):

|                             |  |             |       |             |  |   |       | 
|---------------------------- |  | ----------- | ----- | ----------- |  | - | ----- | 
|                             |  | January 31, |       | February 1,
|                             |  | 2004        |       | 2003       
|                             |  |             |       |            
|Goodwill, net                |  | $           | 54    |             |  | $ | 54    | 
|Debt issuance costs, net     |  |             | 2,395 |             |  |   | 3,098 | 
|Other intangible assets, net |  |             | 89    |             |  |   | 163   | 
|                             |  |             |       |             |  |   |       | 
|                             |  | $           | 2,538 |             |  | $ | 3,315 | 
|                             |  |             |       |             |  |   |       | 

Other intangible assets include trademarks and
organization costs, which are being amortized over periods of
five to 15 years. Amortization expense related to other
intangible assets for the year ended January 31, 2004, was
$72,000.

Estimated amortization expense for each of the
five succeeding fiscal years, based on the other intangible
assets as of January 31, 2004, is as follows (in thousands):

|     |  |                   |    | 
|---- |  | ----------------- | -- | 
|     |  | Estimated Expense
|     |  |                  
|2004 |  | $                 | 57 | 
|2005 |  | $                 | 7  | 
|2006 |  | $                 | 8  | 
|2007 |  | $                 | 7  | 
|2008 |  | $                 | 8  | 

The Companys goodwill at January 31,
2004, and February 1, 2003, relates to remaining Wallet
Works stores operated by the Company.

The Companys adoption of
SFAS No. 142 eliminated the amortization of goodwill
beginning in the first quarter of 2002. Due to the insignificant
amount of goodwill amortization that was recorded in fiscal
year 2001, the impact on the previously reported net loss
and net loss per share was de minimis and, therefore, has not
been separately disclosed.

F-15



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



|  |                    
|- | -------------------
|6 | Accounts receivable

Accounts receivable consisted of the following
(in thousands):

|                                      |       |             |       |             |  |   |       |       | 
|------------------------------------- | ----- | ----------- | ----- | ----------- |  | - | ----- | ----- | 
|                                      |       | January 31, |       | February 1,
|                                      |       | 2004        |       | 2003       
|                                      |       |             |       |            
|Trade receivables                     |       | $           | 5,290 |             |  | $ | 3,851 |      
|Other receivables                     |       |             | 964   |             |  |   | 1,524 |      
|                                      |       |             |       |             |  |   |       |      
|                                      | Total |             |       | 6,254       |  |   |       | 5,375 | 
|Less Allowance for doubtful accounts |       |             | (88   | )           |  |   | (145  | )    
|Less Deferred sales(1)               |       |             | (44   | )           |  |   | (68   | )    
|                                      |       |             |       |             |  |   |       |      
|                                      | Total |             | $     | 6,122       |  |   | $     | 5,162 | 
|                                      |       |             |       |             |  |   |       |      



---



|    |                                     
|--- | ------------------------------------
|(1) | Deferred in-transit e-commerce sales



|  |                       
|- | ----------------------
|7 | Property and equipment

Property and equipment consisted of the following
(in thousands):

|                                                    |                            |             |         |             |  |   |         |         | 
|--------------------------------------------------- | -------------------------- | ----------- | ------- | ----------- |  | - | ------- | ------- | 
|                                                    |                            | January 31, |         | February 1,
|                                                    |                            | 2004        |         | 2003       
|                                                    |                            |             |         |            
|Land                                                |                            | $           |        |             |  | $ | 200     |        
|Equipment and furniture                             |                            |             | 91,555  |             |  |   | 90,111  |        
|Leasehold improvements                              |                            |             | 32,267  |             |  |   | 32,934  |        
|                                                    |                            |             |         |             |  |   |         |        
|                                                    | Total                      |             |         | 123,822     |  |   |         | 123,245 | 
|Less Accumulated depreciation and
    amortization |                            |             | (63,775 | )           |  |   | (49,271 | )      
|                                                    |                            |             |         |             |  |   |         |        
|                                                    | Net property and equipment |             | $       | 60,047      |  |   | $       | 73,974  | 
|                                                    |                            |             |         |             |  |   |         |        

In 2002, the Company adopted
SFAS No. 144. In the fourth quarter of 2002, the
Company determined, based on its most recent sales projections
for certain markets in which Wilsons Leather has stores, that
the current estimate of the future undiscounted cash flows in
certain of these markets would not be sufficient to recover the
carrying value of those stores fixed assets. Accordingly,
the Company recorded an impairment loss of $1.0 million in
the fourth quarter of 2002 related to those store assets. Such
assets were written down to fair-value less the expected
disposal value, if any, of such furniture, fixtures and
equipment. During 2003, the Companys impairment testing
did not indicate any impairment. However, as discussed in
Note 4, Reorganization and partial store
liquidation, accelerated depreciation is being recorded
for the liquidation stores throughout the term of the
liquidation sale.

F-16



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



|  |                 
|- | ----------------
|8 | Accrued expenses

Accrued expenses consisted of the following (in
thousands):

|                              |       |             |       |             |  |   |       |        | 
|----------------------------- | ----- | ----------- | ----- | ----------- |  | - | ----- | ------ | 
|                              |       | January 31, |       | February 1,
|                              |       | 2004        |       | 2003       
|                              |       |             |       |            
|Compensation and benefits     |       | $           | 7,761 |             |  | $ | 9,840 |       
|Taxes other than income taxes |       |             | 4,761 |             |  |   | 2,918 |       
|Legal                         |       |             | 2,741 |             |  |   | 1,102 |       
|Rent                          |       |             | 2,357 |             |  |   | 2,474 |       
|Interest                      |       |             | 1,946 |             |  |   | 1,988 |       
|Other                         |       |             | 7,104 |             |  |   | 6,897 |       
|                              |       |             |       |             |  |   |       |       
|                              | Total |             | $     | 26,670      |  |   | $     | 25,219 | 
|                              |       |             |       |             |  |   |       |       



|  |               
|- | --------------
|9 | Long-term debt

Long-term debt at January 31, 2004, and
February 1, 2003, consisted of the following (in thousands):

|                       |  |             |         |             |  |   |        |  
|---------------------- |  | ----------- | ------- | ----------- |  | - | ------ | -
|                       |  | January 31, |         | February 1,
|                       |  | 2004        |         | 2003       
|                       |  |             |         |            
|Senior notes           |  | $           | 30,590  |             |  | $ | 30,590 |  
|Term B promissory note |  |             | 25,000  |             |  |   | 25,000 |  
|Note payable           |  |             | 490     |             |  |   |       |  
|Other loans            |  |             | 109     |             |  |   | 150    |  
|                       |  |             |         |             |  |   |        |  
|Total debt             |  | $           | 56,189  |             |  | $ | 55,740 |  
|Less: current portion  |  |             | (31,125 | )           |  |   | (45    | )
|                       |  |             |         |             |  |   |        |  
|Total long-term debt   |  | $           | 25,064  |             |  | $ | 55,695 |  
|                       |  |             |         |             |  |   |        |  



| |             
| | ------------
| | Senior notes

On August 18, 1997, the Company issued
$75.0 million of 11 1/4% Senior Notes. Interest
on the 11 1/4% Senior Notes is payable semiannually in
arrears on February 15 and August 15 of each year. The
Company repurchased an aggregate of $44.4 million of the
11 1/4% Senior Notes in the years 1998, 1999 and 2000.
As of January 31, 2004, and February 1, 2003, the
outstanding balance on the 11 1/4% Senior Notes was
$30.6 million. The 11 1/4% Senior Notes are due
August 15, 2004 and were classified as current as of
January 31, 2004.

The 11 1/4% Senior Notes are general
unsecured obligations that rank senior in right of payment to
all existing and future subordinated indebtedness and rank on
equal terms in right of payment with all other current and
future unsubordinated indebtedness. The indenture governing the
11 1/4% Senior Notes contains numerous operating
covenants that limit the discretion of management with respect
to certain business matters and that place significant
restrictions on, among other things, the ability of the Company
to incur additional indebtedness, to create liens or other
encumbrances, to declare or pay any dividend, to make certain
payments or investments, loans and guarantees, and to sell or
otherwise dispose of assets and merge or consolidate with
another entity. At January 31, 2004, the Company was in
compliance with or had received waivers for all covenants of the
11 1/4% Senior Notes.

F-17



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



| |                                                      
| | -----------------------------------------------------
| | Term B promissory note and senior credit
    facility

General Electric Capital Corporation and a
syndicate of banks have provided the Company with a senior
credit facility, which was amended on November 1, 2002, January
31, 2003, April 11, 2003, and January 21, 2004, that
provides for borrowings of up to $205 million in aggregate
principal amount, including a $25 million Term B
promissory note and a $75 million letter of credit
subfacility.

The Term B promissory note is collateralized
by the Companys inventory and is due in June 2005. The
remainder of the senior credit facility is collateralized by the
Companys inventory, equipment and credit card receivables
and expires in June 2005. Interest on cash borrowings under the
senior credit facility is at LIBOR plus 2.75%, the commercial
paper rate plus 2.75% or the prime rate plus 1.50%. With respect
to the Term B promissory note, the interest rate is the prime
rate plus 4%, plus an additional 5% pursuant to a separate
letter agreement with General Electric Capital Corporation. The
Company pays monthly fees on the unused portion of the senior
credit facility and on the average daily amount of letters of
credit outstanding during each month.

The senior credit facility contains a requirement
that the Company amend, refund, renew, extend or refinance the
outstanding 11 1/4% Senior Notes on or before
April 15, 2004, so that no principal payment with respect
to any such amended, refunded, renewed, extended or refinanced
notes is due on or before September 1, 2005. See
Note 18.

The senior credit facility contains certain
restrictions and covenants which, among other things, restrict
our ability to make capital expenditures; acquire or merge with
another entity; make investments, loans or guarantees; incur
additional indebtedness; prepay, repurchase or pay any principal
on any 11 1/4% senior notes, except pursuant to a
permitted refinancing; create liens or other encumbrances; or
pay cash dividends or make other distributions. At
January 31, 2004, the Company was in compliance with or had
received waivers for all covenants related to the senior credit
facility.

At January 31, 2004, and February 1,
2003, there were no borrowings under the revolving portion of
the senior credit facility, and there were $6.7 million and
$15.2 million in letters of credit outstanding,
respectively. The Term B promissory note had a balance of
$25.0 million on January 31, 2004, and
February 1, 2003.

As of January 31, 2004, annual debt
maturities were as follows (in thousands):

|           |  |   |        | 
|---------- |  | - | ------ | 
|2004       |  | $ | 31,125 | 
|2005       |  |   | 25,045 | 
|2006       |  |   | 19     | 
|2007       |  |   |       | 
|Thereafter |  |   |       | 
|           |  |   |        | 
|           |  | $ | 56,189 | 
|           |  |   |        | 



|   |             
|-- | ------------
|10 | Income taxes

The income tax provision (benefit) is comprised
of the following (in thousands):

|        |          |                     |   |             |        |             |   |        |        |   |   |       |       | 
|------- | -------- | ------------------- | - | ----------- | ------ | ----------- | - | ------ | ------ | - | - | ----- | ----- | 
|        |          |                    
|        |          | For the years ended
|        |          |                    
|        |          | January 31,         |   | February 1, |        | February 2,
|        |          | 2004                |   | 2003        |        | 2002       
|        |          |                     |   |             |        |            
|Current |          |                     |   |             |        |             |   |        |        |   |   |      
|        | Federal  |                     | $ | (15,514     | )      |             | $ | (6,322 | )      |   | $ | 3,210 |      
|        | State    |                     |   | (536        | )      |             |   | 874    |        |   |   | 361   |      
|        | Deferred |                     |   | 12,845      |        |             |   | (4,095 | )      |   |   | 1,600 |      
|        |          |                     |   |             |        |             |   |        |        |   |   |      
|        |          | Total               |   | $           | (3,205 | )           |   | $      | (9,543 | ) |   | $     | 5,171 | 
|        |          |                     |   |             |        |             |   |        |        |   |   |      

F-18



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

Reconciliations between the provision for income
taxes and the amount computed by applying the U.S. federal
statutory income tax rate are as follows (in thousands):

|                              |  |                     |         |             |  |             |        |   |  |   |       | 
|----------------------------- |  | ------------------- | ------- | ----------- |  | ----------- | ------ | - |  | - | ----- | 
|                              |  |                    
|                              |  | For the years ended
|                              |  |                    
|                              |  | January 31,         |         | February 1, |  | February 2,
|                              |  | 2004                |         | 2003        |  | 2002       
|                              |  |                     |         |             |  |            
|Statutory rate                |  | $                   | (12,876 | )           |  | $           | (8,350 | ) |  | $ | 4,524 | 
|State income taxes            |  |                     | (1,830  | )           |  |             | (943   | ) |  |   | 435   | 
|Change in valuation allowance |  |                     | 13,222  |             |  |             |       |   |  |   |      | 
|Decrease in required reserves |  |                     | (1,671  | )           |  |             |       |   |  |   |      | 
|Other                         |  |                     | (50     | )           |  |             | (250   | ) |  |   | 212   | 
|                              |  |                     |         |             |  |             |        |   |  |   |       | 
|                              |  | $                   | (3,205  | )           |  | $           | (9,543 | ) |  | $ | 5,171 | 
|                              |  |                     |         |             |  |             |        |   |  |   |       | 

Reconciliations of the U.S. federal
statutory income tax rate to the effective rate are as follows:

|                              |  |                     |       |             |  |             |      |   |  |  |      |  
|----------------------------- |  | ------------------- | ----- | ----------- |  | ----------- | ---- | - |  |  | ---- | -
|                              |  |                    
|                              |  | For the years ended
|                              |  |                    
|                              |  | January 31,         |       | February 1, |  | February 2,
|                              |  | 2004                |       | 2003        |  | 2002       
|                              |  |                     |       |             |  |            
|Statutory rate                |  |                     | 35.0  | %           |  |             | 35.0 | % |  |  | 35.0 | %
|State income taxes            |  |                     | 5.0   | %           |  |             | 4.0  | % |  |  | 3.4  | %
|Change in valuation allowance |  |                     | (35.9 | )%          |  |             | 0.0  | % |  |  | 0.0  | %
|Decrease in required reserves |  |                     | 4.5   | %           |  |             | 0.0  | % |  |  | 0.0  | %
|Other                         |  |                     | 0.1   | %           |  |             | 1.0  | % |  |  | 1.6  | %
|                              |  |                     |       |             |  |             |      |   |  |  |      |  
|                              |  |                     | 8.7   | %           |  |             | 40.0 | % |  |  | 40.0 | %
|                              |  |                     |       |             |  |             |      |   |  |  |      |  

The decrease in required reserves is due to audit
settlements.

F-19



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the net
deferred tax asset and liability were as follows (in thousands):

|                                             |                                        |                                                    |        |             |        |   |       |        |       | 
|-------------------------------------------- | -------------------------------------- | -------------------------------------------------- | ------ | ----------- | ------ | - | ----- | ------ | ----- | 
|                                             |                                        |                                                   
|                                             |                                        | For the years ended                               
|                                             |                                        |                                                   
|                                             |                                        | January 31,                                        |        | February 1,
|                                             |                                        | 2004                                               |        | 2003       
|                                             |                                        |                                                    |        |            
|Net deferred tax asset (liability)current   |                                        |                                                    |        |             |        |   |       |       
|                                             | Accrued liabilities                    |                                                    | $      | 4,112       |        |   | $     | 5,154  |      
|                                             | State net operating loss carryforwards |                                                    |        |            |        |   |       | 494    |      
|                                             | Allowances                             |                                                    |        | 35          |        |   |       | 57     |      
|                                             | Inventories                            |                                                    |        | (5,832      | )      |   |       | (4,801 | )    
|                                             | Intangibles                            |                                                    |        | 61          |        |   |       | (1,092 | )    
|                                             | Other                                  |                                                    |        | (196        | )      |   |       | 3,965  |      
|                                             | Less: valuation allowance              |                                                    |        | (4,657      | )      |   |       |       |      
|                                             |                                        |                                                    |        |             |        |   |       |       
|                                             |                                        | Total deferred tax asset (liability)current       |        | $           | (6,477 | ) |       | $      | 3,777 | 
|                                             |                                        |                                                    |        |             |        |   |       |       
|Net deferred tax asset (liability)long-term |                                        |                                                    |        |             |        |   |       |       
|                                             | Accrued liabilities                    |                                                    | $      | 7,134       |        |   | $     | 5,299  |      
|                                             | State net operating loss carryforwards |                                                    |        | 4,085       |        |   |       | 3,044  |      
|                                             | Property and equipment                 |                                                    |        | (5,113      | )      |   |       | (7,478 | )    
|                                             | Other                                  |                                                    |        | 734         |        |   |       |       |      
|                                             | Less: valuation allowance              |                                                    |        | (8,566      | )      |   |       |       |      
|                                             |                                        |                                                    |        |             |        |   |       |       
|                                             |                                        | Total deferred tax asset
    (liability)long-term |        | $           | (1,726 | ) |       | $      | 865   | 
|                                             |                                        |                                                    |        |             |        |   |       |       
|Net deferred tax asset (liability)           |                                        | $                                                  | (8,203 | )           |        | $ | 4,642 |       
|                                             |                                        |                                                    |        |             |        |   |       |       

Included in the net deferred tax asset at
January 31, 2004, and February 1, 2003, is
$0.1 million and $6.7 million, respectively, relating
to discontinued operations. This deferred tax asset relates
primarily to accrued discontinued operations expenses including
severance payable, store closing reserve, lease termination
costs and state net operating loss carryforwards.

The Company files federal and state income tax
returns based on a 52/53 week year ending on the Saturday
closest to July 31. As of the tax year ending
August 2, 2003, the Company had federal net operating loss
carryforwards of $27.9 million that expire in 2023 and
federal capital loss carryforwards of $18.3 million that
expire in 2008. The Company is gathering additional information
to determine if the capital loss should be treated as an
ordinary loss. In addition, as of August 2, 2003, the
Company had state net operating loss carryforwards that expire
at varying dates through 2024. The Company has not taken a tax
benefit on any of the federal (ordinary or capital) or state tax
loss carryforwards.

The ability to utilize net operating loss
carryforwards may be limited under various provisions of the
Internal Revenue Code. At this time, no study has been performed
to determine if such limitations are applicable.

In evaluating the Companys ability to
recover deferred tax assets, consideration of all available
positive and negative evidence including past operating results,
the existence of cumulative losses in the most recent fiscal
years and forecasts of future taxable income has been made. In
determining future taxable income, the Company is responsible
for assumptions utilized including the amount of state and
federal pre-tax operating income, the reversal of temporary
differences and the implementation of feasible and prudent tax
planning

F-20



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

strategies. These assumptions require significant
judgment about the forecasts of future taxable income and are
consistent with the plans and estimates that are being used to
manage the underlying business.

In light of cumulative losses over the past three
fiscal years, the Company believes that it is more likely than
not that its deferred tax assets will not be realized.
Accordingly, a valuation allowance has been established against
the net deferred tax assets exclusive of the LIFO reserve.

As discussed in Note 3, the Company
announced in November 2002, that it would exit the Travel
Subsidiaries business by the end of the fourth quarter of 2002.
The Company recorded a provision for exiting discontinued
operations including operating losses during the phase-out
period of $39.4 million. The provision includes accruals
for severance payments, asset writedowns and estimated operating
losses during the phase-out period. A summary of the
discontinued operations and the related tax impacts is as
follows (in thousands):

|                         |                                                             |                                                              |   |             |   |             |   |         |         |   |   |         |         |  
|------------------------ | ----------------------------------------------------------- | ------------------------------------------------------------ | - | ----------- | - | ----------- | - | ------- | ------- | - | - | ------- | ------- | -
|                         |                                                             |                                                             
|                         |                                                             | For the years ended                                         
|                         |                                                             |                                                             
|                         |                                                             | January 31,                                                  |   | February 1, |   | February 2,
|                         |                                                             | 2004                                                         |   | 2003        |   | 2002       
|                         |                                                             |                                                              |   |             |   |            
|Discontinued Operations: |                                                             |                                                              |   |             |   |             |   |         |         |   |   |        
|                         | Loss from discontinued operations                           |                                                              | $ |            |   |             | $ | (24,613 | )       |   | $ | (32,080 | )      
|                         | Income tax benefit of loss from discontinued
    operations |                                                              |   |            |   |             |   | 9,846   |         |   |   | 9,987   |        
|                         | Loss on disposition                                         |                                                              |   |            |   |             |   | (39,429 | )       |   |   |        |        
|                         | Income tax benefit of loss on disposition                   |                                                              |   |            |   |             |   | 12,182  |         |   |   |        |        
|                         |                                                             |                                                              |   |             |   |             |   |         |         |   |   |        
|                         |                                                             | Net loss from discontinued operations, net of
    income tax |   | $           |  |             |   | $       | (42,014 | ) |   | $       | (22,093 | )
|                         |                                                             |                                                              |   |             |   |             |   |         |         |   |   |        



|   |              
|-- | -------------
|11 | Capital stock



| |                           
| | --------------------------
| | Private placement offering

In January 2002, the Company sold
1,900,000 shares of common stock in a private placement
(the Placement) at $11.00 per share for total
proceeds, net of offering costs, of approximately
$20.0 million. On April 8, 2002, affiliates of the
purchasers in the Placement exercised the option under the stock
purchase agreement relating to the Placement, to purchase an
additional 100,000 shares for an aggregate purchase price
of $1.1 million, which sale was completed on April 12,
2002, for net proceeds of approximately $1.0 million.

On April 30, 2002, the Company sold
900,000 shares of its common stock in a private placement
at a purchase price of $11.00 per share, for net proceeds
of approximately $9.9 million. On June 10, 2002, the
purchasers in the April private placement exercised the option
to purchase an additional 100,000 shares of common stock at
a purchase price of $11.00 per share. The sale was
completed on June 13, 2002, for net proceeds of
approximately $1.1 million.



|   |              
|-- | -------------
|12 | Stock options

The Company has adopted the amended 1996 Stock
Option Plan, the 1998 Stock Option Plan and the 2000 Long Term
Incentive Plan (collectively the Plans), pursuant to
which options to acquire an aggregate of 4,250,000 shares
of its common stock may be granted.

The Compensation Committee of the board of
directors is responsible for administering the Plans and
approves grants in connection therewith. All outstanding stock
options granted since the Company became a publicly held
corporation have been granted at an option price equal to the
fair market value of the common stock on the date of grant and
generally vest, cumulatively, on a prorated basis on the first,
second and third anniversaries from the date of the grant.

F-21



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

The following is a summary of stock option
information and weighted average exercise prices for the
Companys stock option plans:

|                                 |           |                               |           |                  |   |                  |       |          |  |        |           |          |   |   |       |       |  |  |           |          |   |   |       |       | 
|-------------------------------- | --------- | ----------------------------- | --------- | ---------------- | - | ---------------- | ----- | -------- |  | ------ | --------- | -------- | - | - | ----- | ----- |  |  | --------- | -------- | - | - | ----- | ----- | 
|                                 |           |                              
|                                 |           | As of and for the years ended
|                                 |           |                              
|                                 |           |                               |           |                  |   |                 
|                                 |           | January 31, 2004              |           | February 1, 2003 |   | February 2, 2002
|                                 |           |                               |           |                  |   |                 
|                                 |           |                               |           | Weighted         |   |                  |       | Weighted |  |        |           | Weighted
|                                 |           |                               |           | Average          |   |                  |       | Average  |  |        |           | Average 
|                                 |           |                               |           | Exercise         |   |                  |       | Exercise |  |        |           | Exercise
|                                 |           | Shares                        |           | Price            |   | Shares           |       | Price    |  | Shares |           | Price   
|                                 |           |                               |           |                  |   |                  |       |          |  |        |           |         
|Outstanding, beginning of year   |           |                               | 2,000,562 |                  |   | $                | 10.71 |          |  |        | 1,982,982 |          |   | $ | 10.11 |       |  |  | 1,742,117 |          |   | $ | 8.45  |      
|                                 | Granted   |                               |           | 272,500          |   |                  |       | 4.04     |  |        |           | 260,000  |   |   |       | 12.93 |  |  |           | 562,585  |   |   |       | 13.74 | 
|                                 | Exercised |                               |           | (144,648         | ) |                  |       | 5.50     |  |        |           | (108,664 | ) |   |       | 6.64  |  |  |           | (281,921 | ) |   |       | 6.66  | 
|                                 | Forfeited |                               |           | (174,490         | ) |                  |       | 10.78    |  |        |           | (133,756 | ) |   |       | 9.37  |  |  |           | (39,799  | ) |   |       | 13.69 | 
|                                 |           |                               |           |                  |   |                  |       |          |  |        |           |          |   |   |       |       |  |  |           |          |   |   |       |      
|Outstanding, end of year         |           |                               | 1,953,924 |                  |   | $                | 10.16 |          |  |        | 2,000,562 |          |   | $ | 10.71 |       |  |  | 1,982,982 |          |   | $ | 10.11 |      
|                                 |           |                               |           |                  |   |                  |       |          |  |        |           |          |   |   |       |       |  |  |           |          |   |   |       |      
|Exercisable, end of year         |           |                               | 1,364,729 |                  |   | $                | 10.68 |          |  |        | 1,343,307 |          |   | $ | 9.23  |       |  |  | 1,200,782 |          |   | $ | 7.38  |      
|                                 |           |                               |           |                  |   |                  |       |          |  |        |           |          |   |   |       |       |  |  |           |          |   |   |       |      
|Available for grant, end of year |           |                               | 1,103,054 |                  |   |                  |       |          |  |        | 564,347   |          |   |   |       |       |  |  | 678,966   |          |   |   |       |      
|                                 |           |                               |           |                  |   |                  |       |          |  |        |           |          |   |   |       |       |  |  |           |          |   |   |       |      

The following table summarizes information about
the weighted average remaining contracted life (in years) and
the weighted average exercise prices for stock options
outstanding as of the year ended January 31, 2004:

|                |                  |                                                                           |  |                     |           |          |  |           |     |          |  |   |       |  |  |  |           |  |  |   |       | 
|--------------- | ---------------- | ------------------------------------------------------------------------- |  | ------------------- | --------- | -------- |  | --------- | --- | -------- |  | - | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |                  |                                                                          
|                |                  | Options Outstanding and Exercisable by Price Range as of January 31, 2004
|                |                  |                                                                          
|                |                  |                                                                           |  |                    
|                |                  | Options Outstanding                                                       |  | Options Exercisable
|                |                  |                                                                           |  |                    
|                |                  |                                                                           |  | Weighted            |           |          |  | Weighted 
|                |                  |                                                                           |  | Average             |           |          |  | Average  
|Range of        |                  | Number of                                                                 |  | Remaining           |           | Exercise |  | Number of |     | Exercise
|Exercise Prices |                  | Options                                                                   |  | Life                |           | Price    |  | Options   |     | Price   
|                |                  |                                                                           |  |                     |           |          |  |           |     |         
|                | $ 2.07  - $ 4.14 |                                                                           |  |                     | 283,780   |          |  |           | 8.8 |          |  | $ | 3.95  |  |  |  | 14,980    |  |  | $ | 2.99  | 
|                | $ 4.14  - $ 6.21 |                                                                           |  |                     | 521,447   |          |  |           | 3.7 |          |  | $ | 5.83  |  |  |  | 516,114   |  |  | $ | 5.83  | 
|                | $ 6.21  - $ 8.28 |                                                                           |  |                     | 55,015    |          |  |           | 5.1 |          |  | $ | 6.93  |  |  |  | 47,182    |  |  | $ | 6.95  | 
|                | $ 8.28 - $10.34  |                                                                           |  |                     | 13,503    |          |  |           | 4.6 |          |  | $ | 9.28  |  |  |  | 13,103    |  |  | $ | 9.29  | 
|                | $10.34 - $12.41  |                                                                           |  |                     | 453,349   |          |  |           | 5.7 |          |  | $ | 11.26 |  |  |  | 345,349   |  |  | $ | 11.27 | 
|                | $12.41 - $14.48  |                                                                           |  |                     | 264,651   |          |  |           | 8.1 |          |  | $ | 13.72 |  |  |  | 115,184   |  |  | $ | 13.73 | 
|                | $14.48 - $16.55  |                                                                           |  |                     | 150,529   |          |  |           | 6.6 |          |  | $ | 15.72 |  |  |  | 123,142   |  |  | $ | 15.63 | 
|                | $16.55 - $18.62  |                                                                           |  |                     | 38,675    |          |  |           | 6.5 |          |  | $ | 17.21 |  |  |  | 38,675    |  |  | $ | 17.21 | 
|                | $18.62 - $20.69  |                                                                           |  |                     | 172,975   |          |  |           | 5.1 |          |  | $ | 19.77 |  |  |  | 151,000   |  |  | $ | 19.89 | 
|                |                  |                                                                           |  |                     |           |          |  |           |     |          |  |   |       |  |  |  |           |  |  |   |       | 
|                |                  |                                                                           |  |                     | 1,953,924 |          |  |           | 5.9 |          |  | $ | 10.16 |  |  |  | 1,364,729 |  |  | $ | 10.68 | 
|                |                  |                                                                           |  |                     |           |          |  |           |     |          |  |   |       |  |  |  |           |  |  |   |       | 

The Company accounts for its stock-based awards
using the intrinsic value method in accordance with APB
No. 25 and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial
statements for employee stock option awards granted at fair
market value.

The Companys calculations are based on a
single-option valuation approach and forfeitures are recognized
as they occur. Had compensation cost for Wilsons Leathers
stock option plans been determined based on the fair value at
the grant date for awards from 1996 through 2003, consistent
with the provisions of SFAS No. 123, the
Companys net loss and loss per share would have been
increased to the pro forma amounts disclosed in Note 2.

F-22



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



|   |                       
|-- | ----------------------
|13 | Employee benefit plans



| |                              
| | -----------------------------
| | 2000 Long Term Incentive Plan

The 2000 Long Term Incentive Plan provides that
the Compensation Committee may grant incentive stock options,
non-qualified stock options, stock appreciation rights,
restricted stock and performance share awards, and determine the
terms and conditions of each grant. In March 2003 and March
2001, 120,000 and 82,500 shares of restricted stock were
issued under this plan, respectively.

These restricted stock awards outstanding vest
ratably over four years from the date of grant, subject to
acceleration if certain performance targets are met. When
restricted shares are issued, deferred compensation is recorded
as a reduction of shareholders equity. Annual compensation
is charged to expense over the vesting period. During 2003, 2002
and 2001, $350,000, $331,000, and $327,000 was charged to
expense for vested restricted shares, respectively.



| |                           
| | --------------------------
| | 401(k) profit sharing plan

The Company has a defined contribution 401(k)
profit-sharing plan for eligible employees, which is qualified
under Sections 401(a) and 401(k) of the Internal Revenue
Code of 1986. Employees are entitled to make tax deferred
contributions of up to 30% of their eligible compensation,
subject to annual IRS limitations. For employees who have worked
less than three years, the Company matches 25% of contributions,
up to a maximum of 4% of the employees eligible
compensation. For employees who have worked more than three
years, the Company matches 50% of contributions, up to a maximum
of 4% of the employees eligible compensation. Company
contributions net of forfeitures were $0.0 million,
$0.1 million, and $0.4 million in 2003, 2002, and
2001, respectively. The Company may also, at its discretion,
make a profit-sharing contribution to the 401(k) plan for each
plan year. No profit sharing contributions were made during the
years 2001 through 2003. The Companys matching
contributions vest after three years of service or upon death of
the employee and its profit sharing contributions vest after
five years.



| |                             
| | ----------------------------
| | Employee stock purchase plan

The Company has an employee stock purchase plan
that is qualified under Section 423 of the Internal Revenue
Code of 1986. Employees are entitled to have payroll deductions
withheld that are used to purchase company stock at a 15%
discount at defined times during the year. The Company has
allowed for 625,000 shares of common stock to be purchased
under this plan. As of January 31, 2004,
256,721 shares had been issued under the plan.



|   |                              
|-- | -----------------------------
|14 | Commitments and contingencies



| |       
| | ------
| | Leases

The Company has noncancelable operating leases,
primarily for retail stores, which expire through 2017. A
limited number of the leases contain renewal options for periods
ranging from one to five years. These leases

F-23



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

generally require the Company to pay costs, such
as real estate taxes, common area maintenance costs and
contingent rentals based on sales. Net rental expense for all
operating leases was as follows (in thousands):

|                      |  |                     |        |             |  |             |        |  |  |   |        | 
|--------------------- |  | ------------------- | ------ | ----------- |  | ----------- | ------ |  |  | - | ------ | 
|                      |  |                    
|                      |  | For the years ended
|                      |  |                    
|                      |  | January 31,         |        | February 1, |  | February 2,
|                      |  | 2004                |        | 2003        |  | 2002       
|                      |  |                     |        |             |  |            
|Minimum rentals       |  | $                   | 56,236 |             |  | $           | 57,492 |  |  | $ | 53,686 | 
|Contingent rentals    |  |                     | 1,921  |             |  |             | 2,918  |  |  |   | 3,216  | 
|                      |  |                     |        |             |  |             |        |  |  |   |        | 
|                      |  |                     | 58,157 |             |  |             | 60,410 |  |  |   | 56,902 | 
|LessSublease rentals |  |                     |       |             |  |             |       |  |  |   |       | 
|                      |  |                     |        |             |  |             |        |  |  |   |        | 
|Total                 |  | $                   | 58,157 |             |  | $           | 60,410 |  |  | $ | 56,902 | 
|                      |  |                     |        |             |  |             |        |  |  |   |        | 

As of January 31, 2004, the future minimum
rental payments due under operating leases, excluding lease
obligations for closed stores, were as follows (in thousands):

|                     |            |       |   |        |         | 
|-------------------- | ---------- | ----- | - | ------ | ------- | 
|Fiscal years ending: |            |       |   |       
|                     | 2004       |       | $ | 45,161 |        
|                     | 2005       |       |   | 41,148 |        
|                     | 2006       |       |   | 37,527 |        
|                     | 2007       |       |   | 34,285 |        
|                     | 2008       |       |   | 31,070 |        
|                     | Thereafter |       |   | 85,161 |        
|                     |            |       |   |       
|                     |            | Total |   | $      | 274,352 | 
|                     |            |       |   |       

As of January 31, 2004, 56 of the
Companys 460 leases continued to be guaranteed by CVS
New York, Inc. (CVS) (formerly Melville
Corporation, the parent company to the Predecessor Companies) a
New York corporation. Leases entered into subsequent to the
Management Buyout are no longer guaranteed by CVS.



| |           
| | ----------
| | Litigation

In January 2003, a class action was brought on
behalf of current and former store managers of the Company in
California regarding their classification as exempt from
overtime pay. In July 2003, the Company reached a confidential
settlement of the class action through mediation. A charge of
$1.9 million related to this settlement was taken during
the second quarter of 2003. In October 2003, the court granted
preliminary approval of the settlement. The court granted final
approval of the settlement on January 30, 2004.

The Company is involved in various other legal
actions arising in the ordinary course of business. In the
opinion of management, the ultimate disposition of these matters
will not have a material adverse effect on the Companys
consolidated financial position and results of operations.
Pursuant to the sale agreement entered into in connection with
the Management Buyout, CVS has agreed to indemnify the Company
for certain claims. For certain other claims, CVSs
indemnification liability is limited to claims in the aggregate
which exceed $1.2 million, but not to exceed
$12.0 million.



| |           
| | ----------
| | Guarantees

As of January 31, 2004, and February 1,
2003, the Company had outstanding letters of credit of
approximately $6.7 million and $15.2 million,
respectively (see Note 9), which were primarily used to
guarantee foreign merchandise purchase orders.

F-24



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)



|   |                                            
|-- | -------------------------------------------
|15 | Sale/leaseback of headquarters
    facility

During June 2002, the Company entered into an
agreement for the sale and leaseback of its corporate
headquarters and distribution center in Brooklyn Park,
Minnesota, for net proceeds of $12.5 million. The initial
term of the lease is 15 years, with an option to renew for
an additional five-year period. The agreement includes an option
for the Company to buy out the lease at the end of the tenth
year for a price of $500,000. The lease is classified as an
operating lease in accordance with SFAS No. 13,
Accounting for Leases.

The net book value of the building approximated
$3.1 million and has been removed from the accounts. The
$9.4 million gain on the sale has been deferred and the
appropriate amounts properly classified under short and
long-term liabilities. The short-term portion is included in
accrued expenses and the long-term portion is
included in other long-term liabilities on the
balance sheet. Payments under the lease approximate
$1.37 million for the first year, with an annual increase
of 2.5% each year thereafter.



|   |                           
|-- | --------------------------
|16 | Related-party transactions

The Company regularly conducts business with
G-III Apparel Group, Ltd. (G-III), of which the chairman and
chief executive officer served during part of 2002 on Wilsons
Leathers board of directors. Purchases from G-III totaled
$2.3 million, $4.6 million and $2.3 million, for
2003, 2002 and 2001, respectively. The Company believes that
transactions with G-III are on terms no less favorable to it
than those obtainable in arms-length transactions with
unaffiliated third parties.

The Company conducts business with Tsutani
Leather Expert Co., Ltd. (Tsutani), of which an executive of
Wilsons Leather is a director. Purchases from Tsutani totaled
$0.0 million, $0.2 million and $0.0 million, in
2003, 2002 and 2001, respectively. The Company believes that
transactions with Tsutani are on terms no less favorable to it
than those obtainable in arms-length transactions with
unaffiliated third parties.

During 2002, Richard Liu, Chairman of one of the
Companys major suppliers (Superior Holdings International,
Ltd.), became a greater than 5% shareholder of the
Companys common stock. Superior Holdings International,
Ltd. sold $14.7 million and $22.7 million of products
to the Company during 2003 and 2002, respectively. The Company
believes that transactions with Superior Holdings International,
Ltd. are on terms no less favorable to it than those obtainable
in arms-length transactions with unaffiliated third
parties.



|   |          
|-- | ---------
|17 | Liquidity

The Company currently does not have the funds to
pay the outstanding principal amount of the 11 1/4% Senior
Notes when they are due on August 15, 2004. The senior
credit facility prohibits the Company from incurring any
indebtedness which refunds, renews, extends or refinances the
11 1/4% Senior Notes on terms more burdensome than the
current terms of such notes, and the rate of interest with
respect to any replacement notes cannot exceed the sum of the
rate of interest on United States treasury obligations of like
tenor at the time of such refunding, renewal, extension or
refinancing, plus 7.0% per annum. The Company anticipates that
it will not be able to refund, renew, extend or refinance the
11 1/4% Senior Notes with indebtedness that would comply
with such limitations. However, if the Company completes a sale
of its capital stock by August 15, 2004 on terms that are
acceptable to the lenders under the senior credit facility, such
lenders have agreed that the Company may use the proceeds from
such sale to pay the 11 1/4% Senior Notes. The lenders have
agreed that the terms of the Equity Financing described in
Note 18, if consummated, would be acceptable for this
purpose.



|   |                  
|-- | -----------------
|18 | Subsequent events

On April 15, 2004 and April 27, 2004,
the Company amended its senior credit facility. Currently, the
senior credit facility expires in June 2005, at which time all
borrowings, including the Term B promissory note, become
due and payable. If the Company completes a sale of its capital
stock on terms that are acceptable to

F-25



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##### Table of Contents



WILSONS THE LEATHER EXPERTS INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)

the lenders under the senior credit facility and
funds for the payment of the principal of the 11 1/4 Senior
Notes are deposited in an account controlled by the Agent under
our senior credit facility, the expiration of the senior credit
facility (including the $25.0 million Term B
promissory note) will be extended to June 28, 2008. Due to
the reduced borrowing needs as a result of the liquidation of
the 111 stores, the size of the credit line (excluding the
$25.0 million Term B promissory note) has been reduced
from $180.0 million to $125.0 million. The amended
agreement waives defaults under previous EBITDA covenants,
resets covenants for future time periods, modifies the borrowing
base calculation and caps the amount that can be paid to
landlords as a result of the liquidation of the 111 stores.
The amended agreement limits letters of credit to
$15.0 million (plus a specified letter of credit for an
aggregate amount of $3.0 million) and prohibits borrowing
under the line until funds for the payment of the principal of
the 11 1/4% Senior Notes due August 15, 2004 are
deposited in an account controlled by the Agent under the
Companys senior credit facility. The Company anticipates
that it will not need to access the revolving credit facility,
other than for letters of credit purposes, until the middle of
July 2004.

On April 25, 2004, the Company entered into
an agreement to issue 17,948,718 shares of the
Companys common stock (the Equity Financing)
to three institutional investors at a price of $1.95 per
share. As additional consideration for the investors
commitment, the Company has issued two million warrants
exercisable for five years to the investors, and at closing,
will issue an additional two million warrants exercisable for
five years, each at an exercise price of $3.00 per share of
common stock. The closing of the transaction is subject to a
number of closing conditions, the principal condition being the
approval of the Companys shareholders.

The Company intends to use the proceeds from the
Equity Financing to repay the 11 1/4% Senior Notes due
August 15, 2004, and for general working capital purposes.
If the Company is unable to close this Equity Financing for any
reason, it will need to find an alternative source of permitted
financing for the repayment of its 11 1/4% Senior
Notes before the Company will be permitted to borrow under the
senior credit facility. There can be no assurances that the
Company will be able to obtain such financing before it needs to
access the revolving portion of the senior credit facility or
repay the 11 1/4% Senior Notes.

F-26



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Schedule II

|                                                                      |  |            |     |            |  |          |       |            |  |           |   |  |  |   |        |   |  |   |     | 
|--------------------------------------------------------------------- |  | ---------- | --- | ---------- |  | -------- | ----- | ---------- |  | --------- | - |  |  | - | ------ | - |  | - | --- | 
|                                                                      |  |            |     |            |  |          |       |           
|Valuation and Qualifying Accounts                                     |  |            |     | Additions  |  |          |       |           
|(In thousands)                                                        |  |            |     |            |  |          |       |           
|                                                                      |  | Balance at |     | Charged to |  | Charged  |       |            |  | Balance  
|                                                                      |  | Beginning  |     | Costs and  |  | to Other |       |            |  | at End of
|                                                                      |  | of Period  |     | Expenses   |  | Accounts |       | Deductions |  | Period   
|                                                                      |  |            |     |            |  |          |       |            |  |          
|Year ended February 2, 2002:                                          |  |            |     |            |  |          |       |            |  |           |   |  |  |   |        |   |  |   |     | 
|Allowance for doubtful accounts deducted from
    accounts receivable |  | $          | 803 |            |  | $        | 897   |            |  | $         |  |  |  | $ | (1,349 | ) |  | $ | 351 | 
|Year ended February 1, 2003:                                          |  |            |     |            |  |          |       |            |  |           |   |  |  |   |        |   |  |   |     | 
|Allowance for doubtful accounts deducted from
    accounts receivable |  | $          | 351 |            |  | $        | 1,327 |            |  | $         |  |  |  | $ | (1,533 | ) |  | $ | 145 | 
|Year ended January 31, 2004:                                          |  |            |     |            |  |          |       |            |  |           |   |  |  |   |        |   |  |   |     | 
|Allowance for doubtful accounts deducted from
    accounts receivable |  | $          | 145 |            |  | $        | 874   |            |  | $         |  |  |  | $ | (931   | ) |  | $ | 88  | 

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##### Table of Contents



SIGNATURES

Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on
April 29, 2004:



| |                                 
| | --------------------------------
| | WILSONS THE LEATHER EXPERTS INC.
| | (registrant)                    



| |     |                   
| | --- | ------------------
| | By: | /s/ JOEL N. WALLER

| |                                     
| | ------------------------------------
| |                                     
| | Joel N. Waller,                     
| | Chairman and Chief Executive Officer
| | (principal executive officer)       



| |     |                         
| | --- | ------------------------
| | By: | /s/ PETER G. MICHIELUTTI

| |                                                 
| | ------------------------------------------------
| |                                                 
| | Peter G. Michielutti,                           
| | Executive Vice President                        
| | and Chief Financial Officer                     
| | (principal financial and accounting
    officer)

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below on
April 29, 2004, by the following persons on behalf of the
registrant and in the capacities indicated:

|                                          |  |          |  | 
|----------------------------------------- |  | -------- |  | 
|                                         
|/s/ JOEL N. WALLER JOEL N. WALLER         |  | Director |  | 
|                                         
|/s/ DAVID L. ROGERS DAVID L. ROGERS       |  | Director |  | 
|                                         
|/s/ LYLE BERMAN LYLE BERMAN               |  | Director |  | 
|                                         
|/s/ MICHAEL T. COWHIG MICHAEL T. COWHIG   |  | Director |  | 
|                                         
|/s/ BRADLEY K. JOHNSON BRADLEY K. JOHNSON |  | Director |  | 
|                                         
|/s/ WILLIAM F. FARLEY WILLIAM F. FARLEY   |  | Director |  | 
|                                         
|/s/ MICHAEL J. MCCOY MICHAEL J. MCCOY     |  | Director |  | 

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