Use these links to rapidly review the documentColdwater Creek Inc. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 31, 2004 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-K

|ý                                                                         | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|OR                                                                       
|o                                                                         | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the Fiscal Year Ended January 31, 2004
Commission File Number 0-21915

COLDWATER CREEK INC.(Exact name of registrant as specified in its charter)

|DELAWARE(State of other jurisdiction of
incorporation or organization)                                                                  |  | 82-0419266(I.R.S. Employer Identification No.)
|--------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|ONE COLDWATER CREEK DRIVE, SANDPOINT, IDAHO 83864(Address of principal executive offices) (208) 263-2266(Registrant's telephone number)
|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                                               

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    ý NO    o

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

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act): YES    ý NO    o

At August 2, 2003, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant
was approximately $110,351,000 based upon the closing price on the Nasdaq National Market reported for such date. Shares of Common Stock held by each executive officer and director have been excluded
in that such person may be deemed to be an affiliate. This
determination for executive officer is not necessarily a conclusive determination for other purposes. As of March 31, 2004, 24,220,597 shares of the Registrant's $.01 par value Common Stock
were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or portions thereof) are incorporated by reference into the Parts of this Form 10-K noted:

Part III
incorporates by reference information from the definitive proxy statement for the registrant's 2004 Annual Meeting of Stockholders to be filed with the Commission
pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Form.



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Coldwater Creek Inc.    ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 31, 2004



|         |  |                                                                                      |  | Page
|-------- |  | ------------------------------------------------------------------------------------ |  | ----
|PART I   |  |                                                                                      |  |     
|Item 1.  |  | Business                                                                             |  | 3   
|Item 2.  |  | Properties                                                                           |  | 22  
|Item 3.  |  | Legal Proceedings                                                                    |  | 22  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                  |  | 23  
|PART II  |  |                                                                                      |  |     
|Item 5.  |  | Market for Registrant's Common Equity and Related Stockholder Matters                |  | 27  
|Item 6.  |  | Selected Financial and Operating Data                                                |  | 28  
|Item 7.  |  | Management's Discussion and Analysis and Results of Operations                       |  | 30  
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                           |  | 53  
|Item 8.  |  | Consolidated Financial Statements and Supplementary Data                             |  | 54  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |  | 84  
|Item 9A. |  | Controls and Procedures                                                              |  | 84  
|PART III |  |                                                                                      |  |     
|Item 10. |  | Directors and Executive Officers of the Registrant                                   |  | 84  
|Item 11. |  | Executive Compensation                                                               |  | 84  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                       |  | 84  
|Item 13. |  | Certain Relationships and Related Transactions                                       |  | 84  
|Item 14. |  | Principal Accountant Fees and Services                                               |  | 85  
|PART IV  |  |                                                                                      |  |     
|Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                      |  | 85  

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PART I

Item 1. BUSINESS

The following discussion contains various statements regarding our current strategies, financial position, results of operations, cash
flows, operating and financial trends and uncertainties, as well as certain forward-looking statements regarding our future expectations. When used in this discussion, words such as "anticipate,"
"believe," "estimate," "expect," and similar expressions are intended to identify such forward-looking statements. Our forward-looking statements are based on our current expectations and are subject
to numerous risks and uncertainties. As such, our actual future results, performance or achievements may differ materially from the results expressed in, or implied by, our forward-looking statements.
Please refer to our "Risk Factors" in this Annual Report on Form 10-K. We assume no future obligation to update our forward-looking statements or to provide periodic updates or
guidance.

We maintain an internet web site at http://www.coldwatercreek.com. (This web site address is for information only and is not intended to be an active link or to
incorporate any web site information into this document.) We make available, free of charge, through our website our annual report on Form 10-K, our quarterly reports on
Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are electronically filed with the
SEC.

Coldwater Creek Profile

Coldwater Creek is a specialty retailer of women's apparel, accessories, jewelry and gift items. Founded in 1984 as a catalog company, today we are a
multi-channel retailer generating $518.8 million in net sales in fiscal 2003. We have established a differentiated brand by offering exceptional value through a unique, proprietary merchandise
assortment that reflects a sophisticated yet relaxed and casual lifestyle,
coupled with superior customer service. Our target customers are women between the ages of 30 and 60, a group that spent in excess of $29 billion on apparel in 2002.

We
reach our customers through our direct segment, which encompasses our catalog and e-commerce businesses, and our rapidly expanding base of retail stores. We believe this
multi-channel approach allows us to cross-promote the Coldwater Creek brand and meet our customers' apparel and accessory needs by providing them convenient access to our merchandise lines regardless
of the preferred shopping channel.

Our
catalog business is a significant sales channel and acts as an efficient marketing platform to cross-promote our website and stores. In fiscal 2003, we mailed 117.8 million
catalogs. In July 1999, we launched our full-scale e-commerce website,www.coldwatercreek.com, to
cost-effectively expand our customer base and provide another convenient shopping alternative for our customers. We now have over 2.2 million e-mail addresses to which
we regularly send customized e-mails.

We
initiated testing of a full-line retail store model in 1999 based on our belief that the ability to touch and feel merchandise is an important aspect of a consumer's
shopping experience. Over the past four years, we have been building the infrastructure to support the growth of our retail business and realize the benefits of our multi-channel model by undertaking
the following initiatives:



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Our
retail segment is the key driver in our growth strategy and, in fiscal 2003, accounted for $194.6 million in net sales, or 37.5% of total net sales. As of January 31,
2004, we operated 66 full-line retail stores, 25 of which were opened in fiscal 2003, as well as two resort stores and 16 merchandise clearance outlet stores in 51 markets.

Business Strategies

We believe our success and future growth will be the result of consistent execution of the following business strategies:

Target a highly desirable, underserved customer.Generally, our target customers are women between the ages of 30 and 60.
Women in this age bracket represent approximately 42% of the female population and spent over $29 billion on apparel in 2002. Within this population, our core customer generally has higher than
average levels of disposable income, with total household incomes in excess of $75,000. While teens and younger adult female consumers have a relatively broad range of specialty retail brands from
which to choose, we believe our core customer has more limited options that cater specifically to her tastes and needs. Furthermore, we believe our customer, who has traditionally shopped at
department stores, is migrating away from them, as their product selection and customer service have become less appealing to her over time. For these reasons, we believe that by continuing to make
our brand relevant and accessible to this core customer, we will be able to increase our share of the apparel market over time.

Offer a differentiated brand with broad appeal.We believe the Coldwater Creek brand is synonymous with a sophisticated yet
relaxed and casual lifestyle that appeals to a broad range of women who lead busy, active lives. We design our merchandise, retail stores, catalogs and website to embody the warmth of this
aspirational lifestyle and attitude and to promote the Coldwater Creek brand image. We deliver quality, consistency, convenience and easy care through our proprietary merchandise. Our styles and cuts
are conservative, while, at the same time, our colors, novelty designs and textures provide our customer's wardrobe with flare that she cannot easily find elsewhere.

Deliver the brand through an integrated multi-channel model.Our strategy of offering merchandise across three channels
enables us to enhance visibility of our brand, accessibility to our merchandise and, consequently, customer loyalty. We integrate our three channels in a number of ways, which allows us to maximize
sales and provide superior customer service. These include offering in-store web kiosks to allow customers to purchase items through our website that may not be in stock at stores,
accepting returns through any channel regardless of the point of purchase, systematically reallocating inventory between channels and utilizing the data provided by our direct segment to identify new
store locations. We continue to identify new ways to develop our multi-channel model to further optimize our business.

Provide an outstanding shopping experience through exceptional customer service.We believe our company-wide focus on
exceptional customer service has been integral to our success and has enabled us to build a loyal customer base. In our retail stores, we seek to hire our customers to provide better knowledge and
understanding of our customers' needs. We continually monitor service metrics, such as conversion rates, secret shopper scores, answer rates and order fulfillment rates. We have also invested in
management information systems that provide our associates with easy access to information, including customer purchasing histories, merchandise availability, product specifications, available
substitutes and accessories, and expected shipment dates. By promoting a culture of prompt, knowledgeable and courteous service, no matter how our customers choose to shop, we believe we will continue
to attract a growing customer base and build brand loyalty.

Effectively use and leverage extensive business data across all our channels.Through our heritage as a direct marketer, we
have the systems and discipline to collect customer data across all of our channels. We have formed a dedicated business intelligence group whose mission is to improve decision

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making
by performing a variety of functions, including data warehousing, reporting and analysis, sales forecasting, statistical modeling and geographic analysis. We use these analyses to determine
where to place stores and to more effectively select and allocate merchandise for our stores. We also use this data to personalize our marketing efforts through directed customer communications,
including targeted mailings when we open new stores and regular, customized e-mails. Our executive management team meets daily to review and discuss key business metrics produced by this
group in order to continually assess performance of the business across channels and merchandise assortments. We believe our access to this information and our effective use of it will allow us to
continue to optimize productivity of all our channels.

Execute our growth strategy with an experienced management team.Over the past three years we have built out our team with
senior management who have extensive retail, merchandising, brand-building, real estate, information technology and finance experience from a variety of retail, direct marketing and apparel companies,
including Gap Inc., Newport News, Spiegel, Federated Department Stores, Williams-Sonoma, J. Crew, Toys "R" Us.com, Amazon.com and Tuesday Morning. We believe our management team is
well-rounded in all areas and provides us with a competitive advantage.

Growth Strategy

Over the last four years, we have continually refined our retail store model and operating strategy. We believe we will continue to realize the benefits of our
multi-channel strategy with our retail channel being the primary source of our future growth. Our management team is committed to executing the following key growth strategies:

Expand our retail channel.We believe there is an opportunity for us to grow to 400 to 500 stores in up to 275 to 300
identified markets nationwide over the next six to eight years. As of January 31, 2004, we had 66 full-line retail stores, 25 of which were opened in fiscal 2003. We currently plan
to open 45 new full-line retail stores in fiscal 2004, including two stores opened in March 2004, and 40 to 50 new full-line retail stores in fiscal 2005. Currently, we
have signed leases for 29 store locations for our 2004 plan. The pace, scope and size of our retail store expansion will be influenced by the economic environment, available working capital, our
ability to obtain favorable terms on suitable locations for our stores and, if necessary, external financing. Our core new store model is 5,000 to 6,000 square feet and generally located in upscale
malls and lifestyle centers. In addition, we are introducing a smaller store format of approximately 3,000 to 4,000 square feet. Our goal is to use our smaller stores to access attractive middle
markets, fill in major metropolitan markets and take advantage of a greater number of premium real estate locations.

Further strengthen our brand and build customer loyalty.We continue to identify means of leveraging our brand and building
customer loyalty. Our multi-channel initiatives include the introduction of a multi-channel gift card that is redeemable through any of our channels, wrapping our catalogs with promotional offers to
direct customers in the vicinity of new store openings, offering in-store web kiosks to drive improved customer conversion rates and to increase familiarity with our direct channel, and
accepting direct returns in our retail stores. These initiatives allow us to introduce our direct customers to our retail channel and give us the opportunity to convert a return to an exchange or an
incremental purchase.

As
we grow the retail portion of our business, we believe we will continue to identify new and effective ways to improve our brand visibility and build customer loyalty. For example, we
will be introducing a customer loyalty program during the first half of 2005, under which our customers can earn and redeem points through any of our channels.

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Improve Profitability.As we grow our business and open new stores, we intend to improve our operating income. Key elements
of our profitability improvement strategy include:



Merchandising

Our merchandising philosophy reflects a casual, unhurried approach to living. We offer our customers colorful, proprietary designs and novelty items that reflect
different aspects of their lifestyles, including casual weekend wear, soft career and special occasion. The products we offer are current but not trendy and address our customers' needs for ease and
simplicity. Our "buy-now, wear-now" strategy puts merchandise in front of our customers when it is seasonally appropriate and offers versatile fabrics she can wear for up to
nine months out of the year. Our "easy care" fabrics and comfortable styles are designed to facilitate product care, thereby making her life easier.

All
of our apparel is designed, developed and sold under the Coldwater Creek label. We differentiate merchandise lines under separate catalog titles to appeal to different areas of our
customers' wardrobes. Our entire collection of merchandise is available through our website. Merchandise for our retail stores is carefully selected to include the best and most popular items,
historically about one-third of what is offered in our direct segment.

Product Design and Development.Our in-house design and product development team is responsible for
conceptualizing and directing the design of all Coldwater Creek apparel. We believe our in-house team of designers and buyers allows us to exercise significant control over the merchandise
development process and the quality of our product to create an overall merchandise assortment that is consistent with the Coldwater Creek brand.

Our
design team travels to Europe twice a year to capture key themes that will appear in our collections throughout the upcoming seasons. Working in tandem with outside vendors and
fabric designers, our design team creates an overall vision for each season's assortment that is then translated into collections for the season. We believe this approach allows us to introduce fresh
products into our
catalogs and retail locations every season and to supplement these selections with new items or styles throughout the year.

In
the second quarter of fiscal 2004, we intend to open a design studio in New York. We believe this studio will allow us to market new designs more quickly and will provide us with
further opportunities to develop a higher percentage of our distinctive designs, with a dedicated team creating novel prints, patterns and working on new fabric development.

Planning and Allocation.We employ an integrated inventory planning team for our retail and direct sales channels. This group
is responsible for conducting top-down and bottom-up planning and allocation across channels, seasons, collections and promotional events in order to maximize retail store,
catalog and website productivity.

Initial
planning and allocation decisions are made by assessing historical sales, individual item, store and catalog performance, and anticipated economic outlook. Equipped with
distribution center and inventory management systems that allow us to allocate and re-allocate merchandise by channel,

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our
inventory planning group is able to assess sales trends, customer demand and current inventory positions and to allocate items to enhance sales. We track sales at the item level on a daily basis
and adjust our reorder and markdown strategies accordingly. Working together with our design and product development team, our inventory planning team has allowed us to optimize our overall number of
styles and items of merchandise.

Sourcing and Distribution.In the past three years, we have focused on reducing our total number of outside vendors and have
concentrated our production with selected vendors who we believe consistently adhere to our quality standards and production demands. We maintain relationships with approximately 300 vendors and,
during fiscal 2003, sourced 52% of our apparel from our top 20 vendors. During fiscal 2003, approximately 58% of our merchandise was manufactured overseas, most of which we purchase from domestic
suppliers. As retail becomes a more important part of our business we anticipate that more of our merchandise will be sourced directly from overseas manufacturers. In the first half of fiscal 2004, we
plan to create a global sourcing department, which we anticipate will provide an opportunity to increase our margins through direct importing of our proprietary designs. We believe this new
development will allow us to improve economies of scale as we leverage the combined impact of merchandising our retail and direct segments.

We
hold our vendors to strict quality standards, testing products for flammability, care instructions, sizing and durability. Each shipment is checked against a certified sample upon
delivery and can be returned if it does not meet our standards. Additionally, we issue monthly vendor "report cards" to our top 75 vendors to provide them with important feedback and evaluation of
their performance.

We
operate a 600,000 square foot distribution center in Mineral Wells, West Virginia where we receive all of our merchandise. We process all of our retail store replenishment and direct
order shipments from this facility. Our distribution center is able to ship more than 95% of all in-stock items within 24 hours of an order placement and process more than 80% of
all merchandise returns within a 24-hour period. At its current size, we estimate that the distribution center can service an additional 130 stores. This building was designed to allow us
to expand up to a total of 930,000 square feet as needed.

Disposition.Relying on ongoing analysis of product performance, we maintain a disciplined approach to promotional selling of
our merchandise. We conduct four key seasonal sales events per year in our retail stores, catalog and website. Additionally, items with higher-than-expected inventory counts
are cleared through our website or one of our 16 outlet locations. Unlike many other retailers that produce items for sale through their outlet locations, we use our outlets exclusively to manage
overstocked premium merchandise. We believe this approach to disposition of our merchandise conditions our customer to expect to pay full price for our items, effectively managing the margin impact of
off-price selling. Additionally, we have the ability to choose the most efficient channel to use for liquidation at any given time.

Direct Segment Operations

Since the first mailing of ourNorthcountrycatalog in 1985, we have grown our direct segment to include both our
catalog and e-commerce businesses. Our catalogs and e-commerce website are designed to create a distinctive and easy shopping experience. Merchandise presentations feature full
color photographs, graphics and artwork designed to appeal to our target customer. We present our apparel "off-figure", leaving the customer to decide if an item of merchandise is right
for her based on the item's inherent style and design. All catalog and website pages are created and designed by an in-house team of artists, copywriters and editors to ensure a consistent
presentation of the Coldwater Creek brand.

Our
direct channel represented 62.5% of our total net sales in fiscal 2003. As we continue to rollout our retail stores, we expect our direct segment to decrease as a percentage of net
sales over

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time.
It will continue to be a core component of our brand identity and our operations, serving as a valuable source of marketing information, helping promote each of our channels and providing cash
flow to support our retail store expansion.

Our Catalogs

In fiscal 2003, our catalog business generated $175.9 million in net sales, or 33.9% of total net sales. Historically, we have used three catalog titles, Northcountry, SpiritandElements, to feature our entire full-price line of merchandise
using different assortments for each title to target separate sub-groups of our core demographic. In January 2004, we combined our two smaller catalogs, SpiritandElements, and re-introduced the combined catalog under the Spirittitle. The newSpiritcatalog combines the
sophistication of Spiritand the mix-and-match versatility ofElementsin a format that focuses on
the customer's lifestyle. We believe this initiative allows us to better meet the needs of ourSpiritand Elementscustomers by assembling "head-to-toe"
assortments and offering merchandise for a wider range of occasions by combining
soft career wear with sportswear and separates.

Our
two current catalogs are each devoted to slightly different lifestyles within our core customer base:



Additionally,
to serve the gift-giving needs of our customers and generate incremental sales during the important holiday shopping season, each year we assemble selected
merchandise, which is featured in a festiveGifts-to-Gocatalog and on our e-commerce website. Gifts-to-Gogenerally features a varied assortment of the
most popular items featured in our primary merchandise lines described
above.

Since
2000, in an effort to increase the productivity of our direct business and reduce costs, we have reduced our catalog circulation and have been actively promoting the migration of
our customers from our catalogs to our more cost-efficient e-commerce website. We have also focused on decreasing our number of prospect mailings because they increasingly
produce lower response rates and contribute fewer sales than catalog mailings to our proprietary customers. In fiscal 2003, we mailed 117.8 million catalogs, down 35.8% from our peak mailings
of 183.6 million catalogs in 2000. We expect to continue to reduce our catalog circulation, particularly to prospective customers, until we have reached what we believe to be optimal levels.

Our E-commerce Website

As part of our effort to provide our customers with new channels of accessibility, we launched our full-scale e-commerce website, www.coldwatercreek.com, in July of 1999. This cost-effective medium is designed to offer a convenient, user-friendly and secure
online shopping option for our customers. The

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website
features our entire full-price merchandise offering found in our catalogs and retail stores. It also serves as an efficient vehicle for the disposition of excess inventory.

During
2003, we redesigned the website homepage and site navigation, added product color swatching and zooming views and included personalized product recommendations based on customers'
previous purchases. Prior to the 2003 holiday season, we added a new streamlined checkout process and product substitutions. This spring, we expect to test online catalogs and enhanced search
capabilities.

In
fiscal 2003, online sales amounted to $148.3 million and represented 28.6% of total net sales. We have over 2.2 million opt-in e-mail addresses
to which we regularly send promotional e-mails. Our promotional e-mails are customized to meet subscribers' shopping preferences and merchandise tastes.

We
continue to participate in a net sales commission-based program whereby numerous popular Internet search engines and consumer and charitable websites promote the Coldwater Creek brand
to their visitors. These noncompetitive "affiliate" merchants provide convenient hotlink access to our website, which also serves as an effective tool in prospecting for new customers.

Retail Segment Operations

Building on our success in the direct channel, we opened our first full-line store in November 1999, and from 1999 to the spring of 2002 we
opened 34 additional full-line stores, methodically testing and refining our store format and reducing capital expenditures required for build-out. As of January 31,
2004, we operated 66 full-line retail stores, two resort stores and 16 outlet stores in 51 markets. We plan to open 45 new full-line retail stores in fiscal 2004, including two
stores opened in March 2004, and 40 to 50 full-line retail stores in fiscal 2005. In fiscal 2003, retail sales amounted to $194.6 million and represented 37.5% of total net
sales. We expect our retail segment to continue as our primary growth vehicle, as over 90% of women's apparel in the U.S. is purchased in retail stores.

Store Format and Atmosphere

In the second half of 2002, we introduced our scaleable model of 5,000 to 6,000 square foot stores. We have continually improved our construction processes,
materials and fixtures, merchandise layout and store design to minimize our initial capital investment per store, while maintaining an overall atmosphere that is comfortable and relevant to our core
customers.

Our
retail stores are designed to reflect the brand's focus on casual comfort, as well as to highlight merchandise being featured across all channels. Our wide, windowed storefront and
forest green logo above a soft archway provide an inviting first impression to our customers. Our store interiors combine an appealing mix of cherry wood, slate and soft, neutral colored carpeting and
typically offer a seating area for others who may be accompanying our shoppers.

Our
retail stores showcase our apparel assortment and encourage browsing by displaying jewelry, accessories and gifts in a manner that provides the customer with a sense of discovery. We
display apparel according to occasion, separating weekend and casual wear from soft career and special occasion wear. We locate our accessories section next to the dressing rooms, which allows our
sales associates to encourage incremental purchases as customers try on clothes.

Our
5,000 to 6,000 square foot model makes use of central fixtures and tables to evoke elements of our customers' lives. For example, we may display a cozy sweater and comfortable pants
with a chess set or art box, or a colorful cocktail party outfit with a distinctive set of wine glasses. This presentation method promotes the sale of non-apparel items, facilitates our
customers' shopping experiences, further establishes Coldwater Creek as a lifestyle brand and gives our customers an eclectic boutique experience.

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We
are also introducing a 3,000 to 4,000 square foot store model and opened six of these stores in the second half of fiscal 2003. The smaller store format allows us to more effectively
take advantage of wall space to display compelling arrangements. We believe the ability to use wall space for key items will afford us greater productivity per square foot. Our goal is to use these
stores to access smaller markets as well as fill in the larger markets.

Unit Economics

We believe we have developed and refined a scaleable store model for nationwide rollout. Our core new store model of 5,000 to 6,000 square feet assumes an average
initial net investment of $560,000 and anticipates sales per square foot of approximately $500 in the third year of operations. In fiscal 2003, our 41 full-line retail stores that had been
open at least 13 months averaged 7,207 square feet in size and $460 per square foot in net sales. Most of these stores have been open for one to two years. We are also introducing a smaller
store model of 3,000 to 4,000 square feet. This model assumes an average initial net investment of $400,000 and anticipates sales per square foot of approximately $600 in the third year of operations.
We currently have six stores open in this model, none of which has been open for a full year.

Outlet Stores & Resort Stores

In addition to our full-line retail stores, we currently operate 18 outlet stores where we sell excess inventory. We plan to open three outlet stores
in fiscal 2004. We generally locate the outlets within clusters of our retail stores to efficiently manage our inventory clearance activities, but far enough away to avoid significantly diminishing
our full-line store sales. Unlike many other apparel retailers that produce merchandise directly for their outlet stores, merchandise sold through our outlets is limited to overstocked
premium items from our full-line retail stores. We believe this use of our outlet stores enables us to effectively manage our inventory and clearance activities. We currently operate two
resort stores in Sandpoint, Idaho and Jackson Hole, Wyoming.

Store Management and Training

We organize our stores into regions and districts, which are overseen by regional and district managers who report to our executive vice president, retail stores.
Each district manager oversees between six and ten store managers. On average, our store managers have 11 years of experience as retail managers. Approximately 24% of our managers have district
manager-level experience with major brands in the retail sector.

Store Locations

The following table indicates our retail stores by location.

|State      |  | Store Name                 |  | City          |  | Store Type |  | Open Date         
|---------- |  | -------------------------- |  | ------------- |  | ---------- |  | ------------------
|Arizona    |  | Park Place                 |  | Tucson        |  | Mall       |  | December 14, 2000 
|           |  | Kierland Commons           |  | Scottsdale    |  | Lifestyle  |  | September 28, 2001
|Arkansas   |  | Park Plaza Mall            |  | Little Rock   |  | Mall       |  | October 14, 2003  
|California |  | The Shops at Mission Viejo |  | Mission Viejo |  | Mall       |  | November 4, 2000  
|           |  | Fashion Square             |  | Sherman Oaks  |  | Mall       |  | June 27, 2001     
|           |  | Stanford Shopping Center   |  | Palo Alto     |  | Mall       |  | November 9, 2001  
|           |  | Arden Fair                 |  | Sacramento    |  | Mall       |  | November 21, 2001 
|           |  | Valley Fair                |  | Santa Clara   |  | Mall       |  | March 21, 2002    
|           |  | State Street               |  | Santa Barbara |  | Street     |  | May 21, 2002      
|           |  | Broadway Plaza             |  | Walnut Creek  |  | Street     |  | June 4, 2002      
|           |  | Carmel Plaza               |  | Carmel        |  | Street     |  | June 10, 2002     
|           |  | The Shops on Lake Avenue   |  | Pasadena      |  | Street     |  | November 14, 2002 
|           |  |                            |  |               |  |            |  |                   

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|               |  | Gilroy Premium Outlets           |  | Gilroy             |  | Outlet    |  | November 25, 2002 
|-------------- |  | -------------------------------- |  | ------------------ |  | --------- |  | ------------------
|               |  | Desert Hills Premium Outlets     |  | Cabazon            |  | Outlet    |  | October 2, 2003   
|               |  | The Forum at La Costa            |  | Carlsbad           |  | Lifestyle |  | November 26, 2003 
|Colorado       |  | Flatiron Crossing                |  | Broomfield         |  | Mall      |  | September 1, 2000 
|               |  | Aspen Grove                      |  | Littleton          |  | Lifestyle |  | November 8, 2001  
|               |  | The Shops at Briargate           |  | Colorado Springs   |  | Lifestyle |  | August 14, 2003   
|Connecticut    |  | Stamford Town Center             |  | Stamford           |  | Mall      |  | November 6, 2003  
|Delaware       |  | The Shipyard Shops               |  | Wilmington         |  | Outlet    |  | May 18, 1999      
|               |  | Rehoboth Outlets                 |  | Rehoboth Beach     |  | Outlet    |  | August 7, 2003    
|Florida        |  | International Plaza              |  | Tampa              |  | Mall      |  | November 7, 2003  
|Georgia        |  | The Forum on Peachtree Parkway   |  | Norcross           |  | Lifestyle |  | April 18, 2002    
|               |  | The Avenue at West Cobb          |  | Marietta           |  | Lifestyle |  | September 18, 2003
|               |  | North Georgia Outlet             |  | Dawsonville        |  | Outlet    |  | October 21, 2003  
|Idaho          |  | Cedar Street Bridge              |  | Sandpoint          |  | Resort    |  | May 1, 1988       
|               |  | Boise Towne Square               |  | Boise              |  | Mall      |  | May 23, 2001      
|Illinois       |  | Deer Park Town Center            |  | Deer Park          |  | Lifestyle |  | October 20, 2000  
|               |  | Old Orchard Center               |  | Skokie             |  | Mall      |  | October 30, 2001  
|               |  | Geneva Commons                   |  | Geneva             |  | Lifestyle |  | September 5, 2002 
|               |  | The Shoppes at Grand Prairie     |  | Peoria             |  | Lifestyle |  | August 5, 2003    
|               |  | Main Street Promenade            |  | Naperville         |  | Street    |  | September 9, 2003 
|Indiana        |  | The Fashion Mall at Keystone     |  | Indianapolis       |  | Mall      |  | July 30, 2002     
|               |  | Lighthouse Place Premium Outlets |  | Michigan City      |  | Outlet    |  | March 9, 2004     
|Iowa           |  | Northpark Mall                   |  | Davenport          |  | Mall      |  | October 14, 2003  
|Kansas         |  | Town Center Plaza                |  | Leawood            |  | Lifestyle |  | November 5, 1999  
|Kentucky       |  | Oxmoor Center                    |  | Louisville         |  | Mall      |  | May 14, 2003      
|Maine          |  | Tanger Outlet Center             |  | Kittery            |  | Outlet    |  | November 28, 1997 
|Maryland       |  | Towson Town Center               |  | Baltimore          |  | Mall      |  | March 16, 2004    
|Massachusetts  |  | Natick Mall                      |  | Natick             |  | Mall      |  | August 31, 2001   
|Michigan       |  | Prime Outlets at Birch Run       |  | Birch Run          |  | Outlet    |  | March 3, 1998     
|               |  | The Village of Rochester Hills   |  | Rochester Hills    |  | Lifestyle |  | October 15, 2002  
|               |  | Eastwood Towne Center            |  | Lansing            |  | Lifestyle |  | November 12, 2002 
|               |  | Woodland                         |  | Grand Rapids       |  | Mall      |  | May 20, 2003      
|Minnesota      |  | Rosedale Center                  |  | Roseville          |  | Mall      |  | November 15, 2001 
|               |  | The Shoppes at Arbor Lakes       |  | Maple Grove        |  | Lifestyle |  | September 2, 2003 
|Missouri       |  | West County Center               |  | Des Peres          |  | Mall      |  | September 20, 2002
|               |  | Osage Beach Premium Outlets      |  | Osage Beach        |  | Outlet    |  | February 4, 2003  
|               |  | Shops at Boardwalk               |  | Kansas City        |  | Lifestyle |  | June 17, 2003     
|               |  | Battlefield Mall                 |  | Springfield        |  | Mall      |  | March 2, 2004     
|Montana        |  | Rimrock Mall                     |  | Billings           |  | Mall      |  | October 27, 2003  
|New Jersey     |  | The Promenade at Sagemore        |  | Marlton            |  | Lifestyle |  | November 1, 2001  
|               |  | Garden State Plaza               |  | Paramus            |  | Mall      |  | November 15, 2001 
|               |  | Menlo Park Mall                  |  | Edison             |  | Mall      |  | May 8, 2002       
|New York       |  | Walt Whitman Mall                |  | Huntington Station |  | Mall      |  | November 21, 2001 
|               |  | Eastview Mall                    |  | Victor             |  | Mall      |  | November 1, 2003  
|               |  | Waterloo Premium Outlets         |  | Waterloo           |  | Outlet    |  | April 5, 2004     
|North Carolina |  | South Park Mall                  |  | Charlotte          |  | Mall      |  | August 24, 2001   
|               |  | Streets at Southpoint            |  | Durham             |  | Mall      |  | March 8, 2002     
|               |  | Triangle Town Center             |  | Raleigh            |  | Mall      |  | May 6, 2003       
|Ohio           |  | Rookwood Commons                 |  | Cincinnati         |  | Lifestyle |  | August 30, 2000   
|               |  | Polaris Fashion Place            |  | Columbus           |  | Mall      |  | October 25, 2001  
|               |  | Prime Outlets at Jeffersonville  |  | Jeffersonville     |  | Outlet    |  | October 2, 2002   
|               |  | Legacy Village                   |  | Lyndhurst          |  | Lifestyle |  | October 24, 2003  
|Oregon         |  | Factory Stores at Lincoln City   |  | Lincoln City       |  | Outlet    |  | June 21, 2002     
|Pennsylvania   |  | The Court at King of Prussia     |  | King of Prussia    |  | Mall      |  | October 5, 2001   
|               |  | Prime Outlets at Grove City      |  | Grove City         |  | Outlet    |  | September 25, 2002
|               |  |                                  |  |                    |  |           |  |                   

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|               |  | The Shoppes at English Village         |  | N. Wales          |  | Lifestyle |  | September 30, 2003
|-------------- |  | -------------------------------------- |  | ----------------- |  | --------- |  | ------------------
|South Carolina |  | Tanger Factory Outlets at Myrtle Beach |  | Myrtle Beach      |  | Outlet    |  | June 28, 2002     
|Tennessee      |  | CoolSprings Galleria                   |  | Franklin          |  | Mall      |  | April 22, 2003    
|               |  | The Shops of Saddle Creek              |  | Germantown        |  | Lifestyle |  | April 29, 2003    
|               |  | Tanger Outlet Center at Five Oaks      |  | Sevierville       |  | Outlet    |  | July 25, 2003     
|               |  | Wolfchase Galleria                     |  | Memphis           |  | Mall      |  | October 20, 2003  
|Texas          |  | Stonebriar Centre                      |  | Frisco            |  | Mall      |  | August 4, 2000    
|               |  | The Woodlands Mall                     |  | The Woodlands     |  | Mall      |  | October 26, 2001  
|               |  | Highland Village Shopping Center       |  | Houston           |  | Lifestyle |  | November 8, 2001  
|               |  | Tanger Outlet Center                   |  | San Marcos        |  | Outlet    |  | November 25, 2002 
|               |  | Alamo Quarry Market                    |  | San Antonio       |  | Lifestyle |  | October 7, 2003   
|Utah           |  | The Gateway                            |  | Salt Lake City    |  | Lifestyle |  | November 1, 2001  
|Vermont        |  | Equinox Square                         |  | Manchester Center |  | Outlet    |  | July 3, 2003      
|Virginia       |  | Leesburg Corner Premium Outlets        |  | Leesburg          |  | Outlet    |  | October 26, 1998  
|               |  | Tysons Corner Center                   |  | McLean            |  | Mall      |  | November 19, 2002 
|               |  | Short Pump Town Center                 |  | Richmond          |  | Mall      |  | September 4, 2003 
|Washington     |  | 5th Ave. & Pine St.                    |  | Seattle           |  | Street    |  | November 12, 1999 
|Wisconsin      |  | Mayfair Mall                           |  | Wauwatosa         |  | Mall      |  | November 21, 2001 
|               |  | West Towne Mall                        |  | Madison           |  | Mall      |  | April 15, 2003    
|               |  | Fox River Mall                         |  | Appleton          |  | Mall      |  | September 1, 2003 
|Wyoming        |  | Town Square                            |  | Jackson Hole      |  | Resort    |  | June 1, 1997      

Real Estate Strategy

We locate our new stores primarily in regional shopping malls and lifestyle centers. Lifestyle centers are generally located in affluent suburban areas and
feature a clustered assortment of well-known specialty retailers, including bookstores and home goods retailers, other apparel retailers and full service restaurants, in an
open-air format. Currently, approximately 58% of our full-line stores are located in traditional malls, 33% in lifestyle centers and 9% in street locations.

We
utilize a disciplined, fact-based site selection process to determine our store locations. We believe we are at a competitive advantage to other traditional retailers as
we are able to collect significant amounts of data regarding the location and concentration of our customers through our direct segment. This data, combined with additional demographic research, helps
us identify markets and target specific locations based on geographic clustering of our direct segment customers.

After
a specific location is identified, we evaluate the opportunity based on other factors, including attractiveness of economic and business terms of the lease, overall mix of tenants
within the mall or center and proximity to direct competitors. Our real estate committee, comprised of our Chief Executive Officer, President and Chief Merchandising Officer, Executive Vice President
and Chief Financial Officer, Executive Vice President, Retail Stores and our Divisional Vice President of Real Estate, must approve each transaction before a lease is signed. We then contract the
design, build-out and fixturing of the stores and coordinate directly with vendors and landlords during construction.

Customer Service

Over the past 20 years, we have built a reputation and company-wide culture of providing superior customer service. We view customer service as
a critical aspect of our business that can be consistently improved upon. Accordingly, we monitor service metrics for our call center operations, retail stores and distribution center on a daily
basis.

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A
central feature of our commitment to customer service is our unconditional return policy for all of our merchandise. A customer can return an item for any reason at any time through
any channel, regardless of the point of purchase. We believe this policy builds customer loyalty and helps overcome any reluctance a customer may have to purchasing merchandise from catalogs or via
the Internet.

We
have invested in management information systems that provide our associates with easy access to information, including customer purchasing histories, merchandise availability, product
specifications, available substitutes and accessories and expected shipment dates, which allows our call center and retail sales associates to answer questions and deal with customer complaints
directly.

We
have also established the following practices to provide consistently high levels of customer service through our direct channel:



We
have implemented several measures to ensure that we maintain our tradition of superior customer service in our retail stores:



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Marketing and Promotion

Our marketing and promotion initiatives focus on reinforcing our brand message and retaining our existing customers and attracting new customers. As we grow our
business and broaden our retail footprint, we intend to increase our mass marketing initiatives to enhance national visibility of the brand.

We
believe our ability to effectively design and run each of our marketing and promotional programs is enhanced by our proprietary database of customer information, which includes
demographic data, purchasing history by sales channel and their physical proximity to our existing and planned retail stores. This system allows us to segment our customer base according to many
variables to analyze each segment's performance and buying patterns. We use the resulting information to adjust the frequency, timing and content of our various programs and promotions to maximize the
productivity of each one.

As
we have moved to a multi-channel strategy we have implemented the following marketing and promotional initiatives to maximize purchases by our existing customers in all three of our
channels, reinforce the Coldwater Creek brand, and encourage customer loyalty:



In
November 2003, we launched a multi-channel gift card to replace our gift certificate program. We also anticipate introducing a customer loyalty program in early 2005 that
allows customers to earn and redeem award points through all our channels.

As
part of our e-commerce marketing initiatives, we participate in an affiliate website program. We select popular Internet search engines, consumer and charitable websites
to promote the Coldwater Creek brand to their visitors and provide convenient hotlink access to our website in exchange for a commission based on net sales from referred customers.

We
also conduct a national magazine advertising campaign to reinforce awareness of Coldwater Creek as we open stores in new markets, draw the attention of potential direct customers and
establish national visibility for our brand. We run full-page, color advertisements to promote our three channels in lifestyle and shelter publications consistent with the Coldwater Creek
brand, includingBetter Homes and Gardens, Sunset, Country LivingandCooking Light. In Spring 2004, we
will also begin testing these advertisements in local and regional publications in new and existing retail markets. In addition, in

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fiscal
2004 we expect to increase mailings targeted at customers who live within driving distance of our existing retail stores to drive traffic to those stores.

Information Technology

We are committed to investing in our information systems to increase operating efficiency, provide superior customer service and support our anticipated growth.
Our management information systems consist of a full range of selling channel solutions, including retail point-of-sale, catalog and e-commerce systems, financial
and merchandising systems, including inventory planning, distribution and control, sales reporting, credit, accounts payable, merchandise reporting and logistics.

Our
systems allow us to monitor hourly and daily performance metrics in our direct and retail channels. These systems enable us to analyze the historical performance of individual
merchandise items by various categories and have allowed us to realize increased accuracy in our product performance forecasting, and, as such, better manage our retail inventory, reduce product
overstocks and backorders, increase our in-stock levels and realize additional logistic efficiencies.

Our
technical infrastructure provides for geographic diversity and redundant computing complexes to serve our growing and expanding multi-channel business. We have data centers located
in three of our corporate facilities that provide for instant backup in the event of a telecommunications or systems failure. Our call center telecommunication system is designed to reduce the risk of
telephone delays and capacity constraints and allows us to operate our call centers as a single "virtual call center". Calls coming into one location are automatically routed to the other locations if
the load is too high or if a call center is unable to receive incoming calls due to factors such as natural disasters, power failures or systems problems. Additionally, we have call center
capabilities in our Sandpoint, Idaho facility that we use to capture overflow traffic.

We
have also installed network and server load balancing devices that allow customer orders received on our e-commerce website to be routed to the least busy server farm and
the least busy server in that farm. We use encryption technology to protect sensitive customer information transmitted on our website. We protect company sensitive information on our servers from
unauthorized access using industry standard network security systems in addition to anti-virus and firewall protection.

We
expect to continue to make significant investments in our systems and infrastructure to support our retail store expansion, inventory management, merchandising, order taking and
customer service, order fulfillment, marketing, product development and financial control and reporting and forecasting.

Competition

The women's retail apparel market is highly competitive. Our competitors range from specialty apparel retailers, such as Chico's, Talbots and J. Jill, to small
single-sales channel catalog, e-commerce and retail store companies. We also compete with national department stores, such as Bloomingdale's, Macy's, JC Penney, Dillards and Nordstrom, and
with discount retailers that offer women's apparel and accessories, such as Kohl's and Target.

We
believe that we compete principally on the basis of the distinctive merchandise selection and superior customer service associated with the Coldwater Creek brand, as well as our
commitment to understanding and providing merchandise that is relevant to our targeted customer base. With over 90% of women's apparel being purchased in retail stores in 2002, we believe that our
retail store expansion will allow us to compete more effectively in the women's apparel market by providing this important aspect of the shopping experience to more of our customers. We also believe
that our integrated, multi-channel strategy enhances our ability to compete by allowing our customers to choose the most convenient sales channel and allowing us to reach a broader audience in
existing and in new markets and to continue to build Coldwater Creek into a nationally recognized brand.

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Employees

As of January 31, 2004, we had 1,467 full-time employees and 1,966 part-time employees. During our peak selling season, which
includes the months of November and December, we utilize a substantial number of temporary employees. None of our employees are covered by collective bargaining agreements. We consider our employee
relations to be good.

Trademarks

Our registered trademarks include Coldwater Creek®, Coldwater Creek Spirit® and the stylized Coldwater Creek logo. We believe that our
registered and common law trademarks have significant value and are instrumental to our ability to create and sustain demand for and market our merchandise.

Risk Factors

We may be unable to successfully implement our retail store rollout strategy, which could result in significantly lower revenue growth.

The
key driver of our growth strategy is our retail store expansion. We currently plan to open 45 new stores in fiscal 2004, including two stores opened in March 2004, and 40 to 50 new
stores in fiscal 2005. We believe we will ultimately have 400 to 500 retail stores. However, there can be no assurance that these stores will be opened, will be opened in a timely manner, or, if
opened, that these stores will be profitable. Our ability to open our planned retail stores depends on our ability to successfully:



Any
miscalculations or shortcomings in the planning and control of our retail growth strategy could materially impact our results of operations and our financial condition.

We may continue to refine our retail store model, which could delay our planned retail store rollout and result in slower revenue growth.

We
have made numerous refinements in our retail store format since opening our first full-line store in 1999. Our retail model may undergo further refinements as we gain
experience operating more stores. If we determine to make further refinements to our store model, it may delay the progress of our retail store rollout, which could slow our anticipated revenue
growth. We
are required to make long-term financial commitments when leasing retail store locations, which would make it more costly for us to close or relocate stores that do not prove to be
successful. Furthermore, retail store operations entail substantial fixed costs, including costs associated with maintaining inventory levels, leasehold improvements, fixtures, store design and
information and management systems, and we must continue to make these investments to maintain our current and future stores.

We may not select optimal locations for our retail stores, which could harm our net sales.

The
success of individual retail stores will depend to a great extent on locating them in desirable shopping venues in markets that include our target demographic. The success of
individual stores may depend on the success of the shopping malls or lifestyle centers in which they are located. In addition, the demographic and other marketing data we rely on in determining the
location of our stores cannot predict future consumer preferences and buying trends with complete accuracy. As a result, retail stores we open may not be profitable or may be less successful than we
anticipate.

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We may be unable to manage the costs associated with our catalog business, which could harm our results of operations.

We
incur substantial costs associated with our catalog mailings, including paper, postage, merchandise acquisition and human resource costs associated with catalog layout and design,
production and circulation and increased inventories. Most of these costs are incurred prior to mailing. As a result, we are not able to adjust the costs of a particular catalog mailing to reflect the
actual subsequent performance of the catalog. Increases in U.S. Postal Service rates and the cost of telecommunications services, paper and catalog production could result in lower profits for our
catalog business to the extent we are unable to pass these costs onto our customers or implement more cost effective printing, mailing or distribution systems. Because our catalog business accounts
for a significant portion of total net sales, any performance shortcomings experienced by our catalog business would likely have a material adverse effect on our overall business, financial condition,
results of operations and cash flows.

Response rates to our catalogs could decline, which would negatively impact our net sales and results of operations.

Response
rates to our catalog mailings and, as a result, the net sales generated by each catalog mailing, can be affected by factors beyond our control such as changing consumer
preferences, willingness to purchase goods through catalogs, weak economic conditions and uncertainty, and unseasonable weather in key geographic markets. A portion of our catalog mailings are to
prospective customers. These
mailings generally have lower and less predictable response rates than mailings to our existing customers. Additionally, it has become more difficult for us and other direct retailers to obtain
quality prospecting mailing lists, which may limit our ability to maintain the size of our active catalog customer list. Lower response rates could result in
lower-than-expected full-price sales and higher-than-expected clearance sales at substantially reduced margins.

Our direct segment sales may decline if we are unable to mail our catalogs in a timely manner.

The
timely mailing of our catalogs is critical to the success of our direct business, particularly during our peak holiday selling seasons, and requires the involvement of many different
groups within our organization as well as outside vendors. Consequently, we are subject to potential delays at multiple points throughout the process of producing a catalog, many of which we may be
unable to prevent. Any delay in mailing a catalog could cause customers to forego or defer purchases from us.

Consumers concerns about purchasing items via the Internet as well as external or internal infrastructure system failures could negatively impact our e-commerce
sales or cause us to incur additional costs.

Our
e-commerce business is vulnerable to consumer privacy concerns relating to purchasing items over the Internet, security breaches, and failures of internet infrastructure
and communications systems. If consumer confidence in making purchases over the Internet declines as a result of privacy or other concerns, our e-commerce net sales could decline. We may
be required to incur increased costs to address or remedy any system failures or security breaches.

We may be unable to manage expanding operations and the complexities of our multi-channel strategy, which could harm our results of operations.

During
the past few years, with the implementation of our multi-channel business model, our overall business has become substantially more complex. This increasing complexity has
resulted and will continue to result in increased demands on our managerial, operational and administrative

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resources
and has forced us to develop new expertise. In order to manage our complex multi-channel strategy, we will be required to continue, among other things, to:



We may be unable to anticipate changing customer preferences and to respond in a timely manner by adjusting our merchandise offerings, which could result in lower
sales.

Our
future success will depend on our ability to continually select the right merchandise assortment, maintain appropriate inventory levels and creatively present merchandise in a way
that is appealing to our customers. Consumer preferences cannot be predicted with certainty, as they continually change and vary from region to region. On average, we begin the design process for our
apparel nine to ten months before merchandise is available to our customers, and we typically begin to make purchase commitments four to six months in advance. These lead times make it difficult for
us to respond quickly to changing consumer preferences and amplify the consequences of any misjudgments we might make in anticipating customer preferences. Consequently, if we misjudge our customers'
merchandise preferences or purchasing habits, our sales may decline significantly, and we may be required to mark down certain products to significantly lower prices to sell excess inventory, which
would result in lower margins.

We depend on key vendors for timely and effective sourcing and delivery of our merchandise. If these vendors are unable to timely fill orders or meet our quality standards, we
may lose customer sales and our reputation may suffer.

Our
direct business depends largely on our ability to fulfill orders on a timely basis, and our direct and retail businesses largely depend on our ability to keep appropriate levels of
inventory in our distribution center and our stores. As we grow our retail business, we may experience difficulties in obtaining sufficient manufacturing capacity from vendors to produce our
merchandise. We generally maintain non-exclusive relationships with multiple vendors that manufacture our merchandise. However, we have no contractual assurances of continued supply,
pricing or access to new products, and any vendor could discontinue selling to us at any time. If we were required to change vendors or if
a key vendor were unable to supply desired merchandise in sufficient quantities on acceptable terms, we may experience delays in filling customer orders or delivering inventory to our stores until
alternative supply arrangements are secured, which could result in lost sales and a decline in customer satisfaction.

Our increasing reliance on foreign vendors will subject us to uncertainties that could impact our cost to source merchandise and delay or prevent merchandise
shipments.

As
we expand our retail stores and our merchandise volume requirements increase, we expect to source merchandise directly from foreign vendors, particularly those located in Asia. This
will expose us to new and greater risks and uncertainties, the occurrence of which could substantially impact our ability to source merchandise through foreign vendors and to realize any perceived
cost savings. We will be subject to, among other things:



18

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We may be unable to fill customer orders efficiently, which could harm customer satisfaction.

If
we are unable to efficiently process and fill customer orders, customers may cancel or refuse to accept orders, and customer satisfaction could be harmed. We are subject to, among
other things:



We have a liberal merchandise return policy, and we may experience a greater number of returns than we anticipate.

As
part of our customer service commitment, we maintain a liberal merchandise return policy that allows customers to return any merchandise, virtually at any time and for any reason, and
regardless of condition. We make allowances in our financial statements for anticipated merchandise returns based on historical return rates and our future expectations. These allowances may be
exceeded, however, by actual merchandise returns as a result of many factors, including changes in the merchandise mix or consumer preferences or confidence. Any significant increase in merchandise
returns or merchandise returns that exceed our allowances could materially adversely affect our financial condition, results of operations and cash flows.

Our quarterly results of operations fluctuate and may be negatively impacted by a failure to predict sales trends and by seasonal influences.

Our
net sales, operating results, liquidity and cash flows have fluctuated, and will continue to fluctuate, on a quarterly basis, as well as on an annual basis, as a result of a number
of factors, including, but not limited to, the following:



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Our
results continue to depend materially on sales and profits from the November and December holiday shopping season. In anticipation of traditionally increased holiday sales activity,
we incur certain significant incremental expenses, including the hiring of a substantial number of temporary employees to supplement our existing workforce. If, for any reason, we were to realize
lower-than-expected sales or profits during the November and December holiday selling season, our financial condition, results of operations, including related gross margins,
and cash flows for the entire fiscal year would be materially adversely affected.

We face substantial competition from discount retailers in the women's apparel industry.

We
believe our customers are willing to pay slightly higher prices for our unique merchandise and superior customer service. However, we face substantial competition from discount
retailers, such as Kohl's and Target, for basic elements in our merchandise lines, and our net sales may decline if we are unable to differentiate our merchandise and shopping experience from these
discount retailers. In addition, the retail apparel industry has experienced significant price deflation over the past several years largely due to the downward pressure on retail prices caused by
discount retailers. This price deflation may make it more difficult for us to maintain our gross margins and to compete with retailers that have greater purchasing power than we have. Furthermore,
because we currently source a significant percentage of our merchandise through intermediaries and from suppliers and manufacturers located in the United States and Canada, where labor and production
costs, on average, tend to be higher, our gross margins may be lower than those of competing retailers.

Our success is dependent upon our senior management team.

Our future success depends largely on the efforts of Dennis Pence, Chairman and Chief Executive Officer; Georgia Shonk-Simmons, President and Chief Merchandising
Officer; Melvin Dick, Executive Vice President and Chief Financial Officer; and Dan Griesemer, Executive Vice President, Retail Stores. The loss of any of these individuals or other key personnel
could have a material adverse effect on our business. Furthermore, the location of our corporate headquarters in Sandpoint, Idaho may make it more difficult to replace key employees who leave us, or
to add qualified employees we will need to manage our further growth.

Prior
to joining our company, Melvin Dick, our Executive Vice President and Chief Financial Officer, served as the lead engagement partner for Arthur Andersen's audit of WorldCom's
consolidated financial statements for the fiscal year ended December 31, 2001, and its subsequent review of WorldCom's condensed consolidated financial statements for the fiscal quarter ended
March 31, 2002. The ongoing investigation of the WorldCom matter may require Mr. Dick's attention, which may impair his ability to devote his full time and attention to our company.
Further, Mr. Dick's association with the WorldCom matter may adversely affect customers' or investors' perception of our company.

Lower demand for our merchandise could reduce our gross margins and cause us to slow our retail expansion.

Our
merchandise is comprised primarily of discretionary items, and demand for our merchandise is affected by a number of factors that influence consumer spending. Lower demand may cause
us to move more full-price merchandise to clearance, which would reduce our gross margins, and could

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adversely
affect our liquidity (including compliance with our debt covenants) and, therefore, slow the pace of our retail expansion. We have maintained conservative inventory levels, which we believe
will make us less vulnerable to sales shortfalls. However, low inventory levels also carry the risk that, if demand is stronger than we anticipate, we will be forced to backorder merchandise, which
may result in lost sales and lower customer satisfaction.

Our sales tax collection policy may expose us to the risk that we may be assessed for unpaid taxes.

Many
states have attempted to require that out-of-state direct marketers and e-commerce retailers whose only contact with the taxing state are
solicitations and delivery of purchased products through the mail or the Internet collect sales taxes on sales of products shipped to their residents. The U.S. Supreme Court has held that these
states, absent congressional legislation, may not impose tax collection obligations on an out-of-state mail order or Internet company. Although we believe that we have
collected sales tax where we are required to do so under existing law, state tax authorities may disagree, and we could be subject to assessments for uncollected sales taxes, as well as penalties and
interest and demands for prospective collection of such taxes. Furthermore, if Congress enacts legislation permitting states to impose sales tax collection obligations on
out-of-state catalog or e-commerce businesses, or if we are otherwise required to collect additional sales taxes, such tax collection obligations may negatively
affect customer response and could have a material adverse effect on our financial position, results of operations and cash flows. In addition, as we open more retail stores, our tax collection
obligations will increase significantly and complying with the greater number of state and local tax regulations to which we will be subject may strain our resources.

Our stock price has fluctuated and may continue to fluctuate widely.

The market price for our common stock has fluctuated and has been and will continue to be significantly affected by, among other factors, our quarterly operating
results, changes in any earnings estimates publicly announced by us or by analysts, customer response to our merchandise offerings, the size of our catalog mailings, the timing of our retail store
openings or of important holiday seasons relative to our fiscal periods, seasonal effects on sales and various factors affecting the economy in general. The reported high and low closing sale prices
of our common stock were $11.36 per share and $5.37 per share, respectively, during the fiscal year ended February 1, 2003, and were $14.71 per share and $5.86 per share, respectively, during
our 2003 fiscal year. In addition, the Nasdaq National Market has experienced a high level of price and volume volatility and market prices for the stock of many
companies have experienced wide price fluctuations not necessarily related to the operating performance of such companies.

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Item 2. PROPERTIES

Our principal executive and administrative offices are located at One Coldwater Creek Drive, Sandpoint, Idaho 83864. Our telephone number is
(208) 263-2266. The general location, use and approximate size of our principal properties as of January 31, 2004 are set forth below:

|Facility                                                             |  | Address                                              |  | Owned/Leased |  | Approximate
Size
|-------------------------------------------------------------------- |  | ---------------------------------------------------- |  | ------------ |  | ----------------
|Corporate Offices                                                    |  | One Coldwater Creek Drive
Sandpoint, Idaho           |  | Owned        |  | 231,000 sq. ft. 
|East Coast Operations Center, including Distribution and Call Center |  | 100 Coldwater Creek Drive
Mineral Wells, W. Virginia |  | Leased       |  | 600,000 sq. ft. 
|Coeur d'Alene, Idaho Call Center                                     |  | 751 West Hanley Avenue
Coeur d'Alene, Idaho          |  | Leased       |  | 60,000 sq. ft.  
|66 Full-Line Retail Stores(a)                                        |  | Various U.S. Locations                               |  | Leased       |  | 421,000 sq. ft. 
|16 Outlet Stores(b)                                                  |  | Various U.S. Locations                               |  | Leased       |  | 102,000 sq. ft. 
|2 Resort Stores(c)                                                   |  | Sandpoint, ID and Jackson, WY                        |  | Leased       |  | 34,000 sq. ft.  

---

We
believe that our corporate offices, distribution center and call centers will meet our operational needs for the foreseeable future. Our distribution center was designed to allow us
to expand up to an aggregate of 930,000 square feet, as needed. We intend to expand capacity at our distribution center in fiscal 2005 and fiscal 2006 to support our expanding retail store base.

Item 3. LEGAL PROCEEDINGS

Legal Proceedings

We are, from time to time, involved in various legal proceedings incidental to the conduct of our business. In the opinion of management, our gross liability, if
any, and without any consideration given to the availability of insurance or other indemnification, under any pending litigation or administrative proceedings, would not materially affect our
consolidated financial position, results of operations or cash flows.

Government Regulation

Our direct business is subject to the Merchandise Mail Order Rule and related regulations promulgated by the Federal Trade Commission. While we believe we are in
material compliance with

22

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these
regulations, no assurance can be given that new laws or regulations will not be enacted or adopted which might adversely affect our operations.

We
collect sales taxes from customers transacting purchases in states in which we have physically based some portion of our retailing business. We also pay applicable corporate income,
franchise and other taxes, to states in which retail or outlet stores are physically located. Upon entering a new state, we accrue and remit the applicable taxes. As we open more retail stores, we
will be subject to an increasing number of state and local taxing jurisdictions. In addition, we accrue use taxes on catalogs used in our stores or at our corporate headquarters or sent to customers
with shipments from our distribution center. Although we believe we have properly accrued for these taxes based on our current interpretation of the tax code, state taxing authorities may challenge
our interpretation. Failure to properly determine or to timely remit these taxes may result in additional interest and related penalties being assessed.

Various
states have attempted to collect back sales and use taxes from direct marketers whose only contacts with the taxing state are solicitations through the mail or the Internet, and
whose subsequent delivery of purchased goods is by mail or interstate common carriers, and we may be subject to these attempts in states in which we have no physical presence. However, the U.S.
Supreme Court has held that these states, absent congressional legislation, may not impose tax collection obligations on an out-of-state mail order or Internet company. We
anticipate that any legislative changes regarding direct marketers, if adopted, would be applied only on a prospective basis.

Many
of our products are manufactured outside the United States and are subject to existing or potential duties, tariffs or quotas that may limit the quantity of products we are allowed
to import or increase the cost of such products. To date, we have not been restricted by quotas in the operation of our business, and customs duties have not comprised a material portion of the total
cost of most of our products. As we expand our retail operations and begin to source more merchandise overseas, however, our business may be impacted by quotas and the imposition of customs duties or
tariffs. We are also subject to foreign governmental regulation and trade restrictions, including U.S. retaliation against certain prohibited foreign activities, with respect to our product sourcing.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were brought to a vote of our stockholders in the fourth quarter of the fiscal year ended January 31, 2004.

23

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MANAGEMENT

The table below sets forth the current name, age and position of our directors and executive officers as of January 31, 2004:

|Name                        |  | Age |  | Positions held                                                           
|--------------------------- |  | --- |  | -------------------------------------------------------------------------
|Dennis C. Pence(a)          |  | 54  |  | Chairman of the Board of Directors, Secretary and Chief Executive Officer
|Georgia Shonk-Simmons       |  | 52  |  | President, Chief Merchandising Officer and Director                      
|Melvin Dick                 |  | 50  |  | Executive Vice President and Chief Financial Officer                     
|Dan Griesemer               |  | 44  |  | Executive Vice President, Retail Stores                                  
|James Brownell              |  | 46  |  | Senior Vice President and Chief Information Officer                      
|Karen Reed                  |  | 40  |  | Senior Vice President of Marketing                                       
|Duane A. Huesers            |  | 48  |  | Vice President of Finance                                                
|Ann Pence                   |  | 54  |  | Director, Vice Chairman of the Board of Directors                        
|James R. Alexander(b)(c)(e) |  | 61  |  | Director                                                                 
|Michelle Collins(b)(c)      |  | 43  |  | Director                                                                 
|Curt Hecker(a)(b)(c)(e)     |  | 43  |  | Director                                                                 
|Warren R. Hashagen(d)(e)    |  | 53  |  | Director                                                                 
|Robert H. McCall(a)(b)(e)   |  | 58  |  | Director                                                                 

---

Dennis C. Penceco-founded Coldwater Creek in 1984 and has served as a Director since our incorporation in 1988, serving as
the Board's Chairman since July 1999 and as our Vice-Chairman prior to that. Since September 26, 2002 as well as from 1984 through
December 2000, Mr. Pence has served as our Chief Executive Officer. From June 4, 2002 to September 25, 2002, he provided his executive management services to us. From
January 5, 2002 to June 3, 2002, Mr. Pence served as our Interim Chief Financial Officer and Treasurer; he was semi-retired prior to that through all of 2001.
Mr. Pence has also served as Chairman of the Board's Executive Committee since its formation on May 20, 2000 and, as Secretary since July 1998. From 1984 through 2000,
Mr. Pence also served as our President. From April 1999 to December 2000, he was also the President of our Internet Commerce Division. Prior to co-founding Coldwater
Creek, Mr. Pence was employed by Sony Corp. of America, a publicly held manufacturer of audio, video, communication, and information technology products, from 1975 to 1983, where his final
position was National Marketing ManagerConsumer Video Products. Mr. Pence also serves as a Board member of Panhandle State Bank. Dennis Pence and Ann Pence were formerly married to
each other.

Georgia Shonk-Simmonshas served as a Director, as well as our President, since January 1, 2001. Since September 26, 2002,
Ms. Shonk-Simmons has served as our Chief Merchandising Officer. From January 1, 2001 to September 25, 2002, Ms. Shonk-Simmons served as our Chief Executive Officer.

24

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From
April 1999 to December 2000, Ms. Shonk-Simmons served as President of our Catalog & Retail Sales Division. Ms. Shonk-Simmons joined us as Chief Merchant and
Vice President of Merchandising in June 1998. From 1994 to 1998, Ms. Shonk-Simmons was Executive Vice President of the Newport News Catalog Division of Spiegel, Inc., a publicly
held international retailer. Prior to that, from 1981 to 1994, Ms. Shonk-Simmons held a number of other positions of increasing responsibility with Spiegel, including Vice President of
Merchandising for Spiegel Catalog beginning in 1991. Prior to joining Spiegel, Ms. Shonk-Simmons held various buyer positions with Lytton's, Carson Pirie Scott and Hahne's.

Melvin Dickhas served as our Executive Vice President and Chief Financial Officer since June 2002. Prior to joining Coldwater
Creek, Mr. Dick was employed by and was a partner at Arthur Andersen LLP from 1975 through May 2002. While at Arthur Andersen LLP he held a number of progressively responsible positions
including serving as the global managing partner of Andersen's technology, media and communications practice and as a member of Andersen's Worldwide Board of Partners.

Dan Griesemerhas served as our Executive Vice President, Retail Stores since April 7, 2004 and, prior to that, as our Senior Vice
President of Retail since October 1, 2001. Prior to joining Coldwater Creek, from 1989 to 2000, Mr. Griesemer held a number of progressively responsible positions with, and ultimately
served as Divisional Merchandise Manager for Gap Inc. From 1983 to 1989, Mr. Griesemer worked in a variety of positions at Federated Department Stores.

James Brownellhas been our Senior Vice President and Chief Information Officer since November 2003. From November 2000
through October 2002, Mr. Brownell was Senior Vice President/Chief Information Officer for Williams-Sonoma, where he was responsible for all information technology and systems
development in the company's 450 retail stores, as well as its direct sales channel. Before joining Williams-Sonoma, Mr. Brownell served as Vice President/Information Technology for the
Gap Inc. until
March 2000. In addition, Mr. Brownell has held executive positions in information technology with J. Crew and Toys "R" Us.com.

Karen Reedhas served as our Senior Vice President of Marketing since November 2001 and, prior to that, as our Vice President of
Internet Sales since September 1999. From March 1997 to September 1999, Ms. Reed served as our Vice President of Marketing and from 1995 to 1997 as our Director of
Circulation. From 1992 to 1995, Ms. Reed served as our Circulation Manager. Prior to joining Coldwater Creek, from 1988 to 1990, Ms. Reed served as a computer programmer for Serac, a ski
clothing manufacturer. Prior to that, she worked in the accounting profession in various capacities. Ms. Reed has informed us that she intends to retire from Coldwater Creek during the second
quarter of fiscal 2004. Following her retirement, Mr. Pence will assume her reponsibilities until we hire a replacement for this position.

Duane A. Huesershas served as our Vice President of Finance since September 2002. His duties include all controllership, external
reporting and other finance related matters. Prior to joining Coldwater Creek, Mr. Huesers had a 25-year career in the retail industry, most recently with Tuesday Morning
Corporation where he served as Vice President of Finance. Prior to that, Mr. Huesers served as Vice President and Controller for the Maison Blanche department store chain, as well as Senior
Vice President and Chief Financial Officer for BOOKSTOP, Inc.

Ann Penceco-founded Coldwater Creek in 1984, and served as our Executive Creative Director until September 1, 2002
when she retired. Ms. Pence has served as a Director since our incorporation in 1988, serving as the Board's Vice Chairman since July 1999 and as our Chairman prior thereto. Prior to
co-founding Coldwater Creek, Ms. Pence had an eleven year career in retail advertising, and was employed by Macy's California from 1974 to 1982 where her final position was Copy
Director. Dennis Pence and Ann Pence were formerly married to each other.

25

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James R. Alexanderhas served as a Director since March 2000, as well as a member of the Board's Audit Committee since
July 2000, a member of the Board's Compensation Committee since November 9, 2002 and as Chairman of Board's Nominating Committee since April 2004. From July 2000 to
July 2001, Mr. Alexander also served as a member of the Board's Compensation Committee. Mr. Alexander had previously served as a Director, as well as Chairman of the Board's
Compensation Committee, from 1994 to 1998 before declining to stand for re-election due to other professional obligations. Mr. Alexander has been an independent catalog consultant
for over 20 years, serving a variety of mail order retailers of apparel, gifts and home decor. Mr. Alexander is President of Alexander & Co., LLC.

Michelle Collinshas served as a Director, as well as a member of the Board's Compensation Committee, since September 1997 and as a
member of the Board's Audit Committee since November 9,
2002. In January 1998, Ms. Collins co-founded Svoboda, Collins L.L.C, a private equity firm, for which she serves as Managing Director. Ms. Collins also serves as a
director on the boards of directors of CDW Corporation, a publicly held provider of technology solutions for businesses, government agencies and educational institutions, and Molex Incorporated, a
publicly held manufacturer of electronic, electrical and fiber optic interconnection products and systems, as well as a number of privately held companies.

Warren R. Hashagenhas served as a Director since September 2003, as a member of the Board's Audit Committee since
March 2004 and as a member of the Board's Nominating Committee since April 2004. Prior to his retirement in 2001, Mr. Hashagen was Senior Vice President, International of
Gap Inc., a position he held since 1999, and was Senior Vice President, Finance and Chief Financial Officer of Gap Inc. between 1995 and 1999. He held various other finance and
accounting positions at Gap Inc. from 1982 to 1995, including Senior Vice President, Finance between 1992 and 1995.

Curt Heckerhas served as a Director, as well as a member of the Board's Audit Committee, since August 1995 and as a member of the
Board's Nominating Committee since April 2004. Mr. Hecker has also served as Chairman of the Board's Compensation Committee and as a member of the Board's Executive Committee since
July 2001. Since October 1997, Mr. Hecker has served as President, Chief Executive Officer and a Board member of publicly held Intermountain Community Bancorp as well as Chief
Executive Officer and a Board member of Panhandle State Bank, Intermountain Community Bancorp's wholly-owned subsidiary. From August 1995 to October 2001, Mr. Hecker also served
as President of Panhandle State Bank. Prior to joining Panhandle State Bank, Mr. Hecker held various management positions with West One Bank.

Robert H. McCall, a Certified Public Accountant, has served as a Director since 1994, as Chairman of the Board's Audit Committee since
February 1995 and as a member of the Board's Nominating Committee since April 2004. Mr. McCall has also served as a member of the Board's Executive Committee since its formation
on May 20, 2000. From February 1995 to July 2000, Mr. McCall also served as a member of the Board's Compensation Committee. Since 1981, Mr. McCall has been President
of McCall & Landwehr, P.A., an accounting firm based in Hayden Lake, Idaho.

26

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PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Price Range of Common Stock and Dividend Policy

Our common stock has been quoted on the Nasdaq National Market under the symbol "CWTR" since our initial public offering on January 29, 1997. On
January 31, 2004, we had 153 stockholders of record and 24,166,201 shares of $0.01 par value common stock outstanding. On December 19, 2002 and on August 4, 2003, our Board of
Directors declared 50% stock dividends, each having the effect of a 3-for-2 stock split, on our issued and outstanding common stock. The new shares were distributed on
January 30, 2003 and on September 9, 2003, respectively. The stock prices below reflect the effect of these two stock dividends

The
following table sets forth certain sales price data for our common stock for the periods indicated:

|               |  | Price Range of
Common Stock
|-------------- |  | ---------------------------
|
|Fiscal 2003:   |  |                            
|First Quarter  |  | $                          
|Second Quarter |  |                            
|Third Quarter  |  |                            
|Fourth Quarter |  |                            
|Fiscal 2002:   |  |                            
|First Quarter  |  | $                          
|Second Quarter |  |                            
|Third Quarter  |  |                            
|Fourth Quarter |  |                            
|Fiscal 2001:   |  |                            
|First Quarter  |  | $                          
|Second Quarter |  |                            
|Third Quarter  |  |                            
|Fourth Quarter |  |                            

We
have never paid any cash dividends on our common stock and do not expect to declare cash dividends in the foreseeable future. Additionally, we are currently restricted from paying
cash dividends under our credit facility.

Equity Compensation Plans

The following table summarizes our equity compensation plans that have been approved by the stockholders as of January 31, 2004. We do not have any equity
compensation plans that have not been approved by the stockholders

|Plan Category                         |                                       | Number of
securities
to be issued
upon exercise of
outstanding
options |           | Weighted-
average
exercise price of
outstanding
options |   | Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected
in column (a))
|------------------------------------- | ------------------------------------- | ---------------------------------------------------------------------- | --------- | ------------------------------------------------------- | - | -------------------------------------------------------------------------------------------------------------------------------------------
|
|Equity compensation plans approved by |                                       |                                                                        |           |                                                         |   |                                                                                                                                            
|security holders:                     |                                       |                                                                        |           |                                                         |   |                                                                                                                                            
|                                      | 1996 Stock Option/Stock Issuance Plan |                                                                        | 1,720,105 |                                                         | $ | 8.99                                                                                                                                       
|                                      | Employee Stock Purchase Plan          |                                                                        | NA        |                                                         |   | NA                                                                                                                                         

27

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Item 6. SELECTED FINANCIAL AND OPERATING DATA

The selected financial and operating data in the following table sets forth (i) balance sheet data as of January 31, 2004 and February 1,
2003 and statement of operations data for the respective 12-month and 11-month periods then ended, derived from our consolidated financial statements audited by KPMG LLP,
independent auditors, which are included elsewhere in this Form 10-K Annual Report, (ii) balance sheet data as of March 2, 2002 and statement of operations data for
the fiscal year ended March 2, 2002, derived from our consolidated financial statements audited by Arthur Andersen LLP, independent auditors who have ceased operations, which are included
elsewhere in this Form 10-K Annual Report, (iii) balance sheet data as of March 3, 2001 and February 26, 2000, and statement of operations data for the fiscal
years ended and March 3, 2001 and February 26, 2000, derived from our consolidated financial statements audited by Arthur Andersen LLP which are not presented herein and
(iv) selected operating data as of and for the periods indicated. The information below should be read in conjunction with "Item 7Management's Discussion and Analysis" and "Item
8Consolidated Financial Statements" included elsewhere.

|                                                |                     | Fiscal Years Ended(a)
|----------------------------------------------- | ------------------- | ---------------------
|
|
|
|Statement of Operations Data:                   |                     |                      
|Net sales                                       |                     | $                    
|Cost of sales                                   |                     |                      
|                                                |                     |                      
|Gross profit                                    |                     |                      
|Selling, general and administrative expenses    |                     |                      
|                                                |                     |                      
|Income from operations                          |                     |                      
|Interest, net, and other                        |                     |                      
|Gain on sales of Milepost Four assets           |                     |                      
|                                                |                     |                      
|Income before provision for income taxes        |                     |                      
|Provision for income taxes                      |                     |                      
|                                                |                     |                      
|Net income                                      |                     | $                    
|                                                |                     |                      
|Net income per shareBasic(b)                   |                     | $                    
|                                                |                     |                      
|Weighted average shares outstandingBasic(b)    |                     |                      
|                                                |                     |                      
|Net income per shareDiluted(b)                 |                     | $                    
|                                                |                     |                      
|Weighted average shares outstanding
Diluted(b) |                     |                      
|                                                |                     |                      
|Selected Channel Data(c):                       |                     |                      
|Net Sales:                                      |                     |                      
|                                                | Catalog business    |                      
|                                                | E-commerce business |                      
|                                                |                     |                      

28

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|                                                   | Retail store business |   |         | 194,624 |   |         | 128,177 |   |         | 76,103 |   |         | 45,323 |   |         | 12,886
|-------------------------------------------------- | --------------------- | - | ------- | ------- | - | ------- | ------- | - | ------- | ------ | - | ------- | ------ | - | ------- | ------
|Selected Operating Data:                           |                       |   |         |         |   |         |         |   |         |        |   |         |        |   |        
|Total catalogs mailed                              |                       |   | 117,784 |         |   | 136,000 |         |   | 161,000 |        |   | 183,600 |        |   | 139,800
|Total active customers(d)                          |                       |   | 2,601   |         |   | 2,700   |         |   | 2,600   |        |   | 2,600   |        |   | 2,200  
|Number of full-line retail stores at period
end(e) |                       |   | 68      |         |   | 43      |         |   | 29      |        |   | 10      |        |   | 4      
|Average square feet per store(e)                   |                       |   | 6,700   |         |   | 7,600   |         |   | 8,200   |        |   | 10,300  |        |   | 13,500 
|Balance Sheet Data:                                |                       |   |         |         |   |         |         |   |         |        |   |         |        |   |        
|Cash and cash equivalents                          |                       | $ | 45,754  |         | $ | 26,630  |         | $ | 4,989   |        | $ | 4,600   |        | $ | 7,533  
|Working capital                                    |                       |   | 50,738  |         |   | 37,365  |         |   | 26,679  |        |   | 42,954  |        |   | 36,735 
|Total assets                                       |                       |   | 210,657 |         |   | 187,647 |         |   | 169,247 |        |   | 150,890 |        |   | 122,870
|Total debt(f)                                      |                       |   |        |         |   |        |         |   |        |        |   |        |        |   |       
|Stockholders' equity                               |                       |   | 119,797 |         |   | 105,963 |         |   | 94,928  |        |   | 96,135  |        |   | 76,570 

---

29

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

The following discussion contains various statements regarding our current strategies, financial position, results of operations, cash
flows, operating and financial trends and uncertainties, as well as certain forward-looking statements regarding our future expectations. When used in this discussion, words such as "anticipate,"
"believe," "estimate," "expect," "could," "may," "will," "should," "plan," "predict," "potential," and similar expressions are intended to identify such forward-looking statements. Our forward-
looking statements are based on our current expectations and are subject to numerous risks and uncertainties. As such, our actual future results, performance or achievements may differ materially from
the results expressed in, or implied by, our forward-looking statements. Please refer to our "Risk Factors" elsewhere in this Annual Report on Form 10-K for. We assume no future
obligation to update our forward-looking statements or to provide periodic updates or guidance.

Introduction to Management's Discussion and Analysis of Financial Condition and Results of Operations

We encourage you to read this Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with our accompanying
consolidated financial statements and their related notes.

When
we refer to a fiscal year, we mean the calendar year in which the fiscal year begins. On December 16, 2002, our Board of Directors approved a change in our fiscal year end
from the Saturday nearest February 28 to the Saturday nearest January 31, effective February 1, 2003. Accordingly, our 2002 fiscal year consisted of an 11-month
transition period. We made this decision to align our financial reporting schedule with the majority of other national retail companies.

We
currently operate in two reportable segments, our direct segment and our retail segment. Beginning in the quarter ended May 3, 2003, we reclassified our outlet store business
and phone and Internet orders that originate in our retail stores from our direct segment to our retail segment. We made these reclassifications to reflect the manner in which our segments are
currently managed. We have reclassified prior period financial statements on a consistent basis for fiscal years 2002, 2001 and 2000. These reclassifications had no impact on our consolidated net
sales, net income, retained earnings or
cash flows for any period. Due to information system limitations, we did not reclassify periods prior to fiscal 2000 because it was not practicable for us to do so. In addition, management believes
that the reclassification of these prior periods would be immaterial.

Unless
otherwise indicated, the common stock outstanding, retained earnings and net income per share amounts appearing in this report and the financial statements included herein reflect
two 50% stock dividends, each having the effect of a 3-for-2 stock split, declared by our Board of Directors on December 19, 2002 and August 4, 2003,
respectively. These stock dividends have the combined effect of a 2.25-for-1 stock split.

Coldwater Creek Profile

Coldwater Creek is a multi-channel, specialty retailer of women's apparel, accessories, jewelry and gift items. Our unique, proprietary merchandise assortment and
our retail stores, catalogs and e-commerce website are designed to appeal to women between the ages of 30 and 60, with household incomes in excess of $75,000. We reach our customers
through our direct segment, which consists of our catalog and e-commerce businesses, and our rapidly expanding base of retail stores.

Our
catalog business is a significant sales channel and acts as an efficient marketing platform to cross-promote our website and retail stores. During fiscal 2003, we mailed
117.8 million catalogs. We launched our full-scale e-commerce website,www.coldwatercreek.com, in 1999 to
cost-effectively expand

30

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our
customer base and provide another convenient shopping alternative for our customers. We currently have a database of over 2.2 million e-mail addresses to which we regularly send
customized e-mails.

We
expect our retail business, which represented approximately 38% of our total net sales in fiscal 2003, to be the key driver of our growth strategy. As of January 31, 2004, we
operated 66 full-line retail stores, 25 of which were opened in fiscal 2003, as well as two resort stores and 16 merchandise clearance outlet stores in 51 markets. We currently plan to
open 45 new stores in fiscal 2004, including two stores opened in March 2004, and 40 to 50 new stores in fiscal 2005. Over the past four years, we have been refining our retail store model and
have taken the following steps to support the growth of our retail business and realize the benefits of our multi-channel model:



Direct Segment Operations

Our direct segment includes our catalog and e-commerce businesses. Our direct channel generated $324.2 million in net sales, or 62.5% of our
total net sales, for fiscal 2003. As we continue to rollout our retail stores, we expect our direct segment to decrease as a percentage of total net sales over time. However, we expect our direct
segment to continue to be a core component of our operations and brand identity and an important vehicle to promote each of our channels and provide cash flow to support our retail store expansion.

Our Catalogs

For fiscal 2003, our catalog business generated $175.9 million in net sales, or 33.9% of total net sales. Historically, we used three catalogs, Northcountry,
SpiritandElements, to feature our entire line of full-price merchandise with
different assortments for each title to target separate sub-groups of our core demographic. In January 2004, we combined our two smaller catalogs, SpiritandElements, and re-introduced the combined catalog under the Spirittitle. Additionally, each year we assemble selected merchandise from the most popular items in our
primary merchandise lines and feature them in
a festiveGifts-to-Goholiday catalog and on our website.

Since
2000, in an effort to increase the productivity of our direct business and reduce costs, we have reduced our catalog circulation and have been actively promoting the migration of
our customers from our catalogs to our more cost-efficient e-commerce website. We have also focused on decreasing the number of mailings to prospective customers because they
have increasingly generated lower response rates and contributed fewer sales than mailings to our existing customers. In fiscal 2003, we mailed 117.8 million catalogs, down 35.8% from our peak
mailings of 183.6 million catalogs in 2000. We expect to continue to reduce our catalog circulation, particularly to prospective customers, which we believe will continue to have a positive
impact on our selling, general and administrative expenses. Although we anticipate losing some potential prospect sales, we believe that optimizing the level of our mailings to prospective customers
will have an overall positive impact on our net income.

31

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E-commerce Website

We launched our full-scale e-commerce website,www.coldwatercreek.com, in July of 1999 to
offer a convenient, user-friendly and secure online shopping option for our customers. The website features our entire full-price merchandise offering found in our catalogs and
retail stores. It also serves as an efficient promotional vehicle for the disposition of excess inventory.

In
fiscal 2003, our e-commerce net sales were $148.3 million and represented 28.6% of total net sales. As of January 31, 2004, we had over 2.2 million
opt-in e-mail addresses to which we regularly send customized e-mails to drive sales through our website and our other channels. We also participate in a net sales
commission-based program whereby numerous popular Internet search engines and consumer and charitable websites provide hotlink access to our website. This affiliate program serves as an effective tool
in prospecting for new customers.

Retail Segment Operations

Our retail segment includes our full-line retail, resort and outlet stores and catalog and Internet sales that originate in our retail stores. Our
retail channel generated $194.6 million in net sales, or 37.5% of total net sales, for fiscal 2003.

Full-Line Stores

We opened our first full-line retail store in November 1999 and have since tested and refined our store format and reduced capital expenditures
required for build-out. We believe there is an opportunity to grow to 400 to 500 stores in up to 275 to 300 identified markets nationwide over the next six to eight years. At
January 31, 2004 we operated 66 stores and we currently plan to open 45 new stores in fiscal 2004, including two stores opened in March 2004. We have identified suitable locations for
these planned stores and believe we will be able to complete our 2004 expansion plans with available working capital. In 2005, we currently plan to open 40 to 50 new stores, and are in the process of
securing appropriate sites for these stores.

After
2005 it is our current intention to continue to open new stores at our current pace, although we do not maintain a specific rollout plan beyond a two-year horizon. We
continually reassess our store rollout plans based on the overall retail environment, the performance of our retail business, our access to working capital and external financing and the availability
of suitable store locations. For example, it is possible that in any year we will increase our planned store openings, particularly if we experience strong retail sales and have access to the
necessary working capital or external financing. Likewise, we would be inclined to curtail our store rollout if we were to experience weaker retail sales or if we did not have adequate working capital
or access to financing.

Our
core new store model, which we introduced in the second half of 2002, consists of 5,000 to 6,000 square foot stores. These stores reflect improvements in our construction processes,
materials and fixtures, merchandise layout and store design and have reduced our initial capital investment per store compared to previously opened stores. This model assumes an average initial net
investment per store of approximately $560,000 and anticipates net sales per square foot of approximately $500 in the third year of operations. For fiscal 2003, our 41 full-line stores
that had been open at least 13 months averaged 7,207 square feet and net sales per square foot of $460. Most of these stores have been open for one to two years.

We
are also introducing a smaller store model of 3,000 to 4,000 square foot stores. We have designed these stores to access smaller markets and to increase our presence in larger
metropolitan markets. This model assumes an average initial net investment per store of approximately $400,000 and anticipates net sales per square foot of approximately $600 in the third year of
operations. We currently have six stores open in this model, none of which has been open for a full year.

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Outlet Stores and Resort Stores

We currently operate 16 outlet stores where we sell excess inventory. We plan to open three outlet stores in fiscal 2004. We generally locate the outlets within
clusters of our retail stores to efficiently manage our inventory and clearance activities, but far enough away to avoid significantly diminishing our full-line store sales. Unlike many
other apparel retailers, we use our outlet stores only to sell overstocked premium items from our full-line retail stores and do not have merchandise produced directly for them. We
currently operate two resort stores in Sandpoint, Idaho and Jackson Hole, Wyoming.

Results of Operations

The following table sets forth certain information regarding our costs and expenses expressed as a percentage of consolidated net sales:

Fiscal Year EndedJan. 31,
2004
(52 weeks)

Feb. 1,
2003
(48 weeks)

March 2,
2002
(52 weeks)Net sales

100.0
%
100.0
%
100.0
%Cost of sales

60.9

60.1

58.8Gross profit

39.1

39.9

41.2Selling, general and administrative expenses

35.1

36.6

40.7Income from operations

4.0

3.3

0.5Interest, net, and other

0.0

0.0

0.1Income before provision for income taxes

4.0

3.3

0.6Income tax provision

1.5

1.3

0.2Net income

2.4
%
2.0
%
0.4
%


Comparison of the Twelve-Month Period Ended January 31, 2004 with the Eleven-Month Period Ended February 1, 2003

Consolidated Results of Operations

Fiscal year 2002 was an 11-month transition period attributable to the change in our fiscal year end as of February 1, 2003. To assist the
reader, the following discussions first compare a 12-month fiscal year 2003 with an 11-month fiscal year 2002, including the amount attributed to the fact that there was one
less month in fiscal 2002. The remaining discussions compare the 12-month fiscal 2003 with the comparable 12-month period ended February 1, 2003.

33

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The
table below is provided to assist the reader in assessing differences in our overall fiscal 2003 and 2002 performance and sets forth our results of operations for the periods
indicated below:

|                                                |  | 11 Months
Ended
February 1, 2003
(1) |         | One Month
Ended
March 2, 2002
(unaudited) |   | 12 Months
Ended
February 1, 2003
(unaudited) |   | 12 Months
Ended
January 31, 2004
(1) |        
|----------------------------------------------- |  | ------------------------------------ | ------- | ----------------------------------------- | - | -------------------------------------------- | - | ------------------------------------ | -------
|
|Net sales                                       |  | $                                    | 473,172 |                                           | $ | 28,283                                       |   | $                                    | 501,455
|Cost of sales                                   |  |                                      | 284,406 |                                           |   | 18,111                                       |   |                                      | 302,517
|                                                |  |                                      |         |                                           |   |                                              |   |                                      |        
|Gross profit                                    |  |                                      | 188,766 |                                           |   | 10,172                                       |   |                                      | 198,938
|Selling, general and administrative expenses    |  |                                      | 173,330 |                                           |   | 12,617                                       |   |                                      | 185,947
|                                                |  |                                      |         |                                           |   |                                              |   |                                      |        
|Income (loss) from operations                   |  |                                      | 15,436  |                                           |   | (2,445                                       | ) |                                      | 12,991 
|Interest, net, and other                        |  |                                      | 170     |                                           |   | 18                                           |   |                                      | 188    
|                                                |  |                                      |         |                                           |   |                                              |   |                                      |        
|Income (loss) before provision for income taxes |  |                                      | 15,606  |                                           |   | (2,427                                       | ) |                                      | 13,179 
|Income tax provision (benefit)                  |  |                                      | 6,249   |                                           |   | (939                                         | ) |                                      | 5,310  
|                                                |  |                                      |         |                                           |   |                                              |   |                                      |        
|Net income (loss)                               |  | $                                    | 9,357   |                                           | $ | (1,488                                       | ) | $                                    | 7,869  
|                                                |  |                                      |         |                                           |   |                                              |   |                                      |        

---

Net Sales.Our consolidated net sales for the 12-month fiscal 2003 were $518.8 million, an increase of
$45.7 million, or 9.7%, compared with consolidated net sales of $473.2 million during the 11-month fiscal 2002. We attribute $28.3 million of the $45.7 million
increase in our consolidated net sales to the fact that there was one less month in fiscal 2002 than in fiscal 2003.

Our
consolidated net sales for the 12-month fiscal 2003 increased $17.4 million, or 3.5%, compared with consolidated net sales of $501.5 million during the
comparable 12-month period ended February 1, 2003. This increase is primarily due to incremental net sales of $47.9 million contributed by our retail expansion and, to a
lesser extent, to improved direct segment sales returns. In fiscal 2003, our direct segment sales returns expressed as a percentage of gross sales declined by 2.1 percentage points from the
comparable 12-month period ended February 1, 2003. These positive impacts were partially offset primarily by a decrease of $30.1 million, or 17.2%, in full-price
net sales by our direct segment's catalog business. Please refer to our discussions titled"Comparison of the Twelve-Month Period Ended January 31, 2004 with the
Eleven-Month Period Ended February 1, 2003Consolidated Results of OperationsOperating Segment Results"below for further details.

Gross Profit Dollars.Our consolidated gross profit dollars for the 12-month fiscal 2003 were
$202.8 million, an increase of $14.1 million, or 7.4%, compared with consolidated gross profit dollars for the 11-month fiscal 2002 of $188.8 million. We attribute
$10.2 million of the $14.1 million increase in consolidated gross profit to the fact that there was one more month in fiscal 2003 than in fiscal 2002.

Our
consolidated gross profit dollars for the 12-month fiscal 2003 increased $3.9 million, or 2.0%, compared with consolidated gross profit dollars of
$198.9 million during the comparable 12-month period ended February 1, 2003. The increase in our consolidated gross profit dollars was primarily attributable to the increase
in consolidated net sales.

Gross Profit Rate.Our consolidated gross profit rate for the 12-month fiscal 2003 decreased to 39.1% from 39.9%
for the 11-month fiscal 2002 and from 39.7% for the comparable 12-month period ended February 1, 2003. This decrease was primarily due to a reduction in merchandise
margins of

34

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2.3 percentage
points on full-price sales from our catalog and e-commerce businesses as we undertook promotional campaigns to reactivate customers and increase average
units per order in our direct segment. Our gross profit rate was also negatively impacted by an increase in the percentage of total net sales contributed by clearance sales compared with
full-price sales. Clearance sales comprised approximately 15% of our total net sales in fiscal 2003 and approximately 14% of our total net sales in the comparable 12-month
period ended February 1, 2003. We have discontinued many of our promotional campaigns in our direct segment. Additionally, we believe that our inventory levels are now aligned with our retail
store growth strategy and do not anticipate disposition activities beyond those typically encountered by retailers. Consequently, we expect that our gross profit rate will stabilize and we believe
that we observed this trend commence in our fiscal 2003 fourth quarter.

These
negative impacts on our gross profit rate were partially offset primarily by improved merchandise margins on clearance sales and, to a lesser extent, by improved merchandise
margins on full-price retail store sales, and by improved leveraging of retail store occupancy costs. The merchandise margins on our clearance sales improved by 8.0 percentage
points during the 12-month fiscal 2003 from the comparable 12-month period ended February 1, 2003. We attribute this positive change to our focus on identifying slow
moving merchandise more quickly. This has enabled us to offer discounted merchandise when it is more seasonally appropriate. The merchandise margins on our full-price retail store sales
increased by 1.7 percentage points during the 12-month fiscal 2003 from the comparable 12-month period ended February 1, 2003. We attribute our improved margins
on full-price retail sales to our decision to reduce the number of days merchandise is discounted before it is moved to our outlet stores. Our gross profit rate for the
12-month fiscal 2003 was positively impacted by an improvement of 1.1 percentage points in the leveraging of our full-line retail store occupancy costs from the
comparable
12-month period ended February 1, 2003. We were able to leverage our retail store occupancy costs primarily due to improved net sales at our retail stores.

We
recognized $3.1 million of vendor rebates during the 12-month fiscal 2003 versus $2.0 million in both the 11-month fiscal 2002 and the comparable
12-month period ended February 1, 2003. These rebates were credited to cost of sales as the related merchandise was sold.

Selling, General and Administrative Expenses.Our consolidated selling, general and administrative expenses for the
12-month fiscal 2003 were $182.2 million, an increase of $8.9 million, or 5.1%, over the 11-month fiscal 2002. We attribute $12.6 million in selling,
general and administrative expenses to the fact that there was one more month in fiscal 2003 than in fiscal 2002. We mailed 117.8 million catalogs during the 12-month fiscal 2003
compared with 136.2 million during the 11-month fiscal 2002.

Our
consolidated selling, general and administrative expenses for the 12-month fiscal 2003 decreased $3.7 million, or 2.0%, compared with consolidated selling, general
and administrative expenses of $185.9 million during the comparable 12-month period ended February 1, 2003. Our consolidated selling, general and administrative expenses were
positively impacted by reduced costs associated with catalog mailings of approximately $15.1 million. We decreased our catalog mailings by 19.0%, to 117.8 million in the
12-month fiscal 2003 from 145.4 million in the comparable 12-month period ended February 1, 2003. Additionally, the fiscal 2002 consolidated selling, general and
administrative expenses included costs of approximately $0.9 million associated with settling a dispute with a former merchandise vendor.

These
positive impacts were partially offset by increased personnel costs associated with our retail expansion and, to a lesser extent, an accrual of approximately $1.4 million
(pre-tax) for expected sales tax liabilities. Personnel costs impacting our consolidated selling, general and administrative expenses associated with our retail expansion increased
$12.6 million, or 37.1%, for the 12-month fiscal 2003 from the comparable 12-month period ended February 1, 2003. The personnel costs primarily included store
employee wages, administrative and technical support salaries, related taxes and employee benefits. The majority of the $1.4 million (pre-tax) sales tax accrual resulted from an
error in our

35

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Canadian
tax returns related to refunds of the Canadian Goods and Services Tax, known as the GST. Canada allows refunds for GST paid by retailers, as it imposes a value-added tax that is collected
from the consumer or user of the goods and services purchased. During the fiscal 2003 third quarter, we discovered we had included Canadian provincial sales tax in our GST refund claims. The
provincial sales taxes we were including are not refundable. Since discovering this, we have properly filed our current GST refund claims and we have accrued the amount of taxes we estimate we will
need to pay back to Canada. Also, we accrued for sales taxes we estimate are payable to certain counties in one state in which we have a retail presence but did not collect sufficient sales taxes from
our customers. This accrual is included in the $1.4 million (pre-tax) amount.

Selling, General and Administrative Expenses Expressed as a Percentage of Consolidated Net Sales.Our consolidated selling,
general and administrative expenses expressed as a percentage of our consolidated net sales decreased to 35.1% for 12-month fiscal 2003 from 36.6% for the 11-month fiscal 2002
and from 37.1% for the comparable 12-month period ended February 1, 2003. This improvement is primarily due to our strategic decision to mail more catalogs to our existing customers
relative to the total catalog mailings during fiscal 2003 compared with both the 11-month fiscal 2002 and the comparable 12-month period ended February 1, 2003. We
generally realize better response rates to mailings to our existing customers than to our prospecting catalog mailings and have observed falling response rates to our prospecting catalog mailings. The
percentage of mailings to our existing customers increased 7.8 percentage points in fiscal 2003 from the 11-month fiscal 2002. The percentage of mailings to our existing customers
increased 7.0 percentage points in fiscal 2003 from the comparable 12-month period ended February 1, 2003.

Other Operating Data.Our mailing list grew to 15.6 million names at January 31, 2004 from 14.0 million
names at February 1, 2003. Also, our proprietary e-mail address database consisted of 2.2 million names at January 31, 2004 compared with 1.8 million names at
February 1, 2003. Our active customers declined slightly to 2.6 million at January 31, 2004 from 2.7 million at February 1, 2003. Our active customers are those
customers who have purchased merchandise from us through any of our three sales channels during the preceding 12 months. Active customers do not include retail customers who have not provided
identifying information to us.

Income Tax Rate.For fiscal 2003 our consolidated provision for income taxes was $8.0 million, an increase of
$1.8 million, or 28.6%, compared with a consolidated provision for income taxes of $6.2 million for the 11-month fiscal 2002. Our effective income tax rate for fiscal 2003
decreased to 39.1% from 40.0% for the 11-month fiscal 2002. The increase in our income tax expense was primarily the result of higher pre-tax income. The decrease in our
effective income tax rate was lower because we reversed an accrual for approximately $0.2 million related to certain income taxes that we determined would not ultimately be due.

36

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Operating Segment Results

Net Sales.The table below is provided to assist the reader in assessing differences in our fiscal 2003 and 2002 net sales by
business channel and sets forth our net sales by business channel for the periods indicated below:

|         |        | 11 Months
Ended
February 1, 2003
(1) |         | One Month
Ended
March 2, 2002
(unaudited) |   | 12 Months
Ended
February 1, 2003
(unaudited) |        | 12 Months
Ended
January 31, 2004
(1)
|-------- | ------ | ------------------------------------ | ------- | ----------------------------------------- | - | -------------------------------------------- | ------ | ------------------------------------
|
|Catalog  |        | $                                    | 200,157 |                                           | $ | 11,988                                       |        | $                                   
|Internet |        |                                      | 144,838 |                                           |   | 10,224                                       |        |                                     
|         |        |                                      |         |                                           |   |                                              |        |                                     
|         | Direct |                                      |         | 344,995                                   |   |                                              | 22,212 |                                     
|Retail   |        |                                      | 128,177 |                                           |   | 6,071                                        |        |                                     
|         |        |                                      |         |                                           |   |                                              |        |                                     
|Total    |        | $                                    | 473,172 |                                           | $ | 28,283                                       |        | $                                   
|         |        |                                      |         |                                           |   |                                              |        |                                     

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The
following table summarizes our net sales by segment for the 12-month fiscal 2003 compared with the 11-month fiscal 2002:

|         |        |   |         |         |       |      |   |         |         | Change |     
|-------- | ------ | - | ------- | ------- | ----- | ---- | - | ------- | ------- | ------ | ----
|
|
|
|Catalog  |        | $ | 200,157 |         | 42.3  | %    | $ | 175,912 |         | 33.9   | %   
|Internet |        |   | 144,838 |         | 30.6  | %    |   | 148,308 |         | 28.6   | %   
|         |        |   |         |         |       |      |   |         |         |        |     
|         | Direct |   |         | 344,995 |       | 72.9 | % |         | 324,220 |        | 62.5
|Retail   |        |   | 128,177 |         | 27.1  | %    |   | 194,624 |         | 37.5   | %   
|         |        |   |         |         |       |      |   |         |         |        |     
|Total    |        | $ | 473,172 |         | 100.0 | %    | $ | 518,844 |         | 100.0  | %   
|         |        |   |         |         |       |      |   |         |         |        |     

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The
following table summarizes our net sales by segment for the 12-month fiscal 2003 compared with the comparable 12-month period ended February 1, 2003:

|         |        |   |         |         |       |      |   |         |         | Change |     
|-------- | ------ | - | ------- | ------- | ----- | ---- | - | ------- | ------- | ------ | ----
|
|
|
|Catalog  |        | $ | 212,145 |         | 42.3  | %    | $ | 175,912 |         | 33.9   | %   
|Internet |        |   | 155,062 |         | 30.9  | %    |   | 148,308 |         | 28.6   | %   
|         |        |   |         |         |       |      |   |         |         |        |     
|         | Direct |   |         | 367,207 |       | 73.2 | % |         | 324,220 |        | 62.5
|Retail   |        |   | 134,248 |         | 26.8  | %    |   | 194,624 |         | 37.5   | %   
|         |        |   |         |         |       |      |   |         |         |        |     
|Total    |        | $ | 501,455 |         | 100.0 | %    | $ | 518,844 |         | 100.0  | %   
|         |        |   |         |         |       |      |   |         |         |        |     

---

37

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Our
direct segment's net sales decreased $20.8 million, or 6.0% in the 12-month fiscal 2003 from the 11-month fiscal 2002. Our direct segment's net sales
decreased $43.0 million, or 11.7% in the 12-month fiscal 2003 from the comparable 12-month period ended February 1, 2003. We primarily attribute this decrease to
our strategic decision to mail 27.6 million, or 19.0% fewer catalogs in the 12-month fiscal 2003 from the comparable 12-month period ended February 1, 2003. Also,
we believe that our direct segment has been adversely impacted by a continuing softness in the direct mail business.

We
believe that our catalog business did not decrease proportionally with the decrease in catalogs mailed due to a higher percentage of mailings to our existing customers. The percentage
of mailings to our existing customers increased 7.0 percentage points in fiscal 2003 from the comparable 12-month period ended February 1, 2003. We believe that our
e-commerce business's net sales were not as severely impacted by the decrease in catalog mailings primarily due to our continued efforts to reduce our e-commerce business's
dependence on our catalogs as an advertising medium. For example, we continued to participate in a net sales commission-based "affiliate" website program in which numerous popular search engines and
consumer and charitable websites provide access to our website.

Our
retail segment's net sales increased $66.5 million, or 51.8%, in the 12-month fiscal 2003 from the 11-month fiscal 2002. We attribute
$6.1 million of this increase to the fact there was one less month in fiscal 2002 than in fiscal 2003. Our retail segment's net sales increased $60.4 million, or 45.0%, in the
12-month fiscal 2003 from the comparable 12-month period ended February 1, 2003. We primarily attribute this increase to net sales of $33.3 million contributed by
the 25 full-line retail stores that we opened during fiscal 2003 and, to a lesser extent, $14.6 million contributed by full-line retail stores that were opened during
only a portion of the 12-month period ended February 1, 2003, but were open during the entirety of the 12-month fiscal 2003. Collectively, these two amounts total
$47.9 million and represent the net sales contribution of our retail expansion.

Operating Contribution.The table below is provided to assist the reader in assessing differences in our fiscal 2003 and 2002
operating contribution by segment and sets forth our operating contribution by segment for the periods indicated below:

|                                    |  | 11 Months
Ended
February 1, 2003
(1) |         | One Month
Ended
March 2, 2002
(unaudited) |   | 12 Months
Ended
February 1, 2003
(unaudited) |   | 12 Months
Ended
January 31, 2004
(1) |        
|----------------------------------- |  | ------------------------------------ | ------- | ----------------------------------------- | - | -------------------------------------------- | - | ------------------------------------ | -------
|
|Direct                              |  | $                                    | 52,134  |                                           | $ | 2,165                                        |   | $                                    | 54,299 
|Retail                              |  |                                      | 8,292   |                                           |   | (674                                         | ) |                                      | 7,618  
|Corporate and other                 |  |                                      | (44,990 | )                                         |   | (3,936                                       | ) |                                      | (48,926
|                                    |  |                                      |         |                                           |   |                                              |   |                                      |        
|Consolidated income from operations |  | $                                    | 15,436  |                                           | $ | (2,445                                       | ) | $                                    | 12,991 
|                                    |  |                                      |         |                                           |   |                                              |   |                                      |        

---

The
following table summarizes our operating contribution by segment for the 12-month fiscal 2003 compared with the 11-month fiscal 2002:

|                                    |  |   |         |   |      |       |   |         |   | Change |      
|----------------------------------- |  | - | ------- | - | ---- | ----- | - | ------- | - | ------ | -----
|
|
|
|Direct                              |  | $ | 52,134  |   | 15.1 | %(1)  | $ | 49,069  |   | 15.1   | %(1) 
|Retail                              |  |   | 8,292   |   | 6.5  | %(2)  |   | 22,775  |   | 11.7   | %(2) 
|Corporate and other                 |  |   | (44,990 | ) | (9.5 | )%(3) |   | (51,236 | ) | (9.9   | )%(3)
|                                    |  |   |         |   |      |       |   |         |   |        |      
|Consolidated income from operations |  | $ | 15,436  |   | 3.3  | %(3)  | $ | 20,608  |   | 4.0    | %(3) 
|                                    |  |   |         |   |      |       |   |         |   |        |      

38

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The following table summarizes our operating contribution by segment for the 12-month fiscal 2003 compared with the comparable 12-month period
ended February 1, 2003.

|                                    |  |   |         |   |      |       |   |         |   | Change |      
|----------------------------------- |  | - | ------- | - | ---- | ----- | - | ------- | - | ------ | -----
|
|
|
|Direct                              |  | $ | 54,299  |   | 14.8 | %(1)  | $ | 49,069  |   | 15.1   | %(1) 
|Retail                              |  |   | 7,618   |   | 5.7  | %(2)  |   | 22,775  |   | 11.7   | %(2) 
|Corporate and other                 |  |   | (48,926 | ) | (9.8 | )%(3) |   | (51,236 | ) | (9.9   | )%(3)
|                                    |  |   |         |   |      |       |   |         |   |        |      
|Consolidated income from operations |  | $ | 12,991  |   | 2.6  | %(3)  | $ | 20,608  |   | 4.0    | %(3) 
|                                    |  |   |         |   |      |       |   |         |   |        |      

---

Our direct segment's operating contribution decreased $3.1 million, or 5.9%, in the 12-month fiscal 2003 from the
11-month fiscal 2002. Our direct segment's operating contribution decreased $5.2 million, or 9.6%, in the 12-month fiscal 2003 from the comparable 12-month
period ended February 1, 2003. The decrease in our direct segment's operating contribution is primarily due to a reduction in merchandise margins of 2.3 percentage points on
full-price sales from our catalog and e-commerce businesses. Our direct segment's operating contribution was also negatively impacted by an increase in the percentage of total
net sales contributed by clearance sales compared with full-price sales. Direct segment clearance sales contributed approximately 16% of our total direct segment net sales in fiscal 2003
and approximately 14% in the comparable 12-month period ended February 1, 2003. Partially offsetting these negative impacts were improved merchandise margins on clearance sales in
our direct segment and, to a lesser extent, an increase in the percentage of catalogs mailed to our existing customers compared with prospecting customers. The merchandise margins on our direct
segment clearance sales improved by 6.0 percentage points during the 12-month fiscal 2003 from the comparable 12-month period ended February 1, 2003. The
percentage of mailings to our existing customers increased 7.0 percentage points during the 12-month fiscal 2003 from the comparable 12-month period ended
February 1, 2003. We believe the increase in the percentage of mailings to our existing customers improved margins because of the generally higher response rates among existing customers
compared with prospective customers.

Our
retail segment's operating contribution increased $14.5 million, or 174.7%, in the 12-month fiscal 2003 from the 11-month fiscal 2002. Our retail
segment's operating contribution increased $15.2 million, or 199.0%, in the 12-month fiscal 2003 from the comparable 12-month period ended February 1, 2003. We
primarily attribute this increase to the opening of new stores, to increased merchandise margins on our full-price retail sales and outlet store sales and, to a lesser extent, to improved
leveraging of full-line retail store occupancy costs. Merchandise margins on full-price sales from our retail segment improved by 1.7 percentage points during the
12-month fiscal 2003 from the comparable 12-month period ended February 1, 2003. Merchandise margins on outlet store sales improved by 9.0 percentage points
during the 12-month fiscal 2003 from the comparable 12-month period ended February 1, 2003. We experienced an improvement of 1.1 percentage points in the
leveraging of our full-line retail store occupancy costs during the 12-month fiscal 2003 from the comparable 12-month period ended February 1, 2003.

39

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Partially
offsetting these positive impacts were increased outlet store clearance activity and, to a lesser extent, increased personnel costs associated with our retail expansion. The
personnel costs primarily included administrative and technical support salaries, store employee wages and related taxes and employee benefits. For the 12-month fiscal 2003, outlet store
clearance activity increased 39.1% primarily because of the increase in the number of our retail stores, and personnel costs increased $9.0 million, or 36.9%.

Our
corporate and other operating contribution for the 12-month fiscal 2003 was $(51.2) million as compared with $(45.0) million for the 11-month fiscal 2002 and
$(48.9) million for the comparable 12-month period ended February 1, 2003. The decrease in our corporate and other operating contribution was primarily due to an increase of
$3.5 million, or 20.7%, in administrative and technical support salaries associated with our retail expansion. The 12-month fiscal 2003 was also negatively impacted by an accrual of
$1.4 million for expected sales tax liabilities. These negative impacts were partially offset by decreases in other corporate expenses.

Comparison of the Eleven-Month Period Ended February 1, 2003 with the Twelve-Month Period Ended March 2, 2002:

Consolidated Results of Operations

The following discussions compare an 11-month fiscal year 2002 with a 12-month fiscal year 2001. Fiscal year 2002 is an
11-month transition period attributable to the change in our fiscal year end as of February 1, 2003.

The
following table, which sets forth our unaudited results of operations for the one-month and 12-month periods ended March 2, 2002 and the
11-month periods ended February 2, 2002 and February 2, 2003, is provided to assist the reader in assessing differences in our overall fiscal 2001 and 2002 performance.

|                                                |  | 11 Months
Ended
February 2, 2002 |         | One Month
Ended
March 2, 2002 |   | 12 Months
Ended
March 2, 2002 |   | 11 Months
Ended
February 1, 2003
|----------------------------------------------- |  | -------------------------------- | ------- | ----------------------------- | - | ----------------------------- | - | --------------------------------
|
|Net sales                                       |  | $                                | 435,741 |                               | $ | 28,283                        |   | $                               
|Cost of sales                                   |  |                                  | 254,554 |                               |   | 18,111                        |   |                                 
|                                                |  |                                  |         |                               |   |                               |   |                                 
|Gross profit                                    |  |                                  | 181,187 |                               |   | 10,172                        |   |                                 
|Selling, general and administrative expenses    |  |                                  | 176,285 |                               |   | 12,617                        |   |                                 
|                                                |  |                                  |         |                               |   |                               |   |                                 
|Income (loss) from operations                   |  |                                  | 4,902   |                               |   | (2,445                        | ) |                                 
|Interest, net, and other                        |  |                                  | 465     |                               |   | 18                            |   |                                 
|                                                |  |                                  |         |                               |   |                               |   |                                 
|Income (loss) before provision for income taxes |  |                                  | 5,367   |                               |   | (2,427                        | ) |                                 
|Income tax provision (benefit)                  |  |                                  | 2,079   |                               |   | (939                          | ) |                                 
|                                                |  |                                  |         |                               |   |                               |   |                                 
|Net income (loss)                               |  | $                                | 3,288   |                               | $ | (1,488                        | ) | $                               
|                                                |  |                                  |         |                               |   |                               |   |                                 

Our
consolidated net sales for fiscal 2002 were $473.2 million, an increase of $9.1 million, or 2.0%, compared with consolidated net sales of $464.0 million during
fiscal 2001. Our consolidated net sales increased $37.4 million, or 8.6%, from consolidated net sales of $435.7 in the comparable 11-month period in the prior year. This increase is
primarily due to incremental sales of $53.8 million contributed by our retail expansion. This positive impact was partially offset by a decrease of $28.8 million, or 11.8%, in
full-price sales by our direct segment's catalog business.

40

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Our
consolidated cost of sales for fiscal 2002 were $284.4 million, an increase of $11.7 million, or 4.3%, from $272.7 million in fiscal 2001. Our consolidated gross
profit decreased by $2.6 million, or 1.4%, to $188.8 million for fiscal 2002 from $191.4 million for fiscal 2001, and our consolidated gross margin decreased to 39.9% for fiscal
2002 from 41.2% for fiscal 2001.

The
decrease in our consolidated gross profit dollars was primarily attributable to a decrease of $10.2 million, or 5.3%, in net sales from there being one less month in fiscal
2002 than in fiscal 2001, partially offset by the increase in consolidated net sales. To a lesser extent, the decrease was mitigated by rebates received from merchandise vendors. These rebates, which
were credited to cost of sales as the related merchandise was sold, totaled $2.0 million in fiscal 2002 versus $0.8 million in fiscal 2001.

The
decrease in gross profit percentage was primarily attributable to our decision in the fiscal 2002 fourth quarter to conduct a concentrated effort to clear obsolete inventory through
our website. Our e-commerce clearance sales increased 3.6% at a 20.6 percentage point reduced margin. Our gross profit rate was also negatively impacted by a 2.3 percentage
point decrease in the leveraging of our full-line retail store occupancy costs. These negative impacts were partially offset by a 4.4 percentage point improvement on margins from
full-price sales in our retail segment.

Our
consolidated selling, general and administrative expenses for fiscal 2002 were $173.3 million, a decrease of $15.6 million, or 8.2%, from $188.9 million for
fiscal 2001. Our consolidated selling, general and administrative expenses as a percentage of our consolidated net sales decreased to 36.6% for fiscal 2002 from 40.7% for fiscal 2001.

For
fiscal 2002, our selling, general and administrative expenses were positively affected by a $13.9 million decrease in catalog cost amortization, due to our mailing of
24.8 million, or 15.4%, fewer catalogs. Additionally, our selling, general and administrative expenses were approximately $12.6 million lower due to there being one less month in fiscal
2002 compared with fiscal 2001. These positive impacts were partially offset by an increase of $7.1 million, or 45.6%, in personnel-related costs incurred in connection with the continued
development and expansion of our retail segment. These costs primarily included administrative and technical support salaries, store employee wages and related taxes and employee benefits.
Additionally, our fiscal 2002 selling, general and administrative expenses were negatively affected by costs of approximately $0.9 million associated with settling a dispute with a former
merchandise vendor. Our selling, general and administrative expenses as a percentage of net sales were positively impacted principally by improved response rates to catalogs mailed to our existing
customers of approximately 1.8%. To a lesser extent, we believe our selling, general and administrative expense rate was positively affected by our leveraging of reduced catalog production costs.
These positive impacts were partially offset by increased mailings to prospective customers of 3.0 million catalogs, or 6.8%, which resulted in lower customer response rates and lower average
order dollars.

We
maintained a conservative circulation strategy during fiscal 2002, as we did during fiscal 2001, pending indications of a sustained recovery of the U.S. economy. As a result, our
fiscal 2002 catalog mailings were 136.2 million, a decrease of 24.8 million catalogs, or 15.4%, from our 161.0 million catalog mailings in fiscal 2001. Although curtailed, our
fiscal 2002 catalog mailings resulted in our proprietary catalog mailing list growing to 14.0 million names at February 1, 2003 from 12.5 million names at March 2, 2002.
Our active customers increased slightly to 2.7 million at February 1, 2003 from 2.6 million at March 2, 2002.

As
a result of the foregoing, our consolidated income from operations was $15.4 million for fiscal 2002, an increase of $13.0 million, or 528.2%, compared with consolidated
income from operations of $2.5 million for fiscal 2001. Expressed as a percentage of net sales, our consolidated income from operations was 3.3% for fiscal 2002 compared with 0.5% for fiscal
2001.

41

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Our
consolidated net interest and other income was minimal during both fiscal 2002 and fiscal 2001 as we continued to utilize excess working capital to fund the continued expansion of
our retail segment.

For
fiscal 2002 our consolidated provision for income taxes was $6.3 million, an increase of $5.1 million, or 448.2%, compared with a consolidated provision for income
taxes of $1.1 million for fiscal 2001. Our effective income tax rate for fiscal 2002 increased to 40.0% from 38.8% for fiscal 2001. The increase in our income tax expense was primarily the
result of higher pre-tax income. The increase in our effective income tax rate was primarily the result of a 1.0 percentage point increase in our federal statutory rate and a
0.2 percentage point increase in our state income tax rate, net of federal benefits. We attribute the increase in our state income tax rate to our retail segment's expansion into and within
states with higher corporate income tax rates. To a lesser extent, the non-deductibility for tax purposes of the fair market value of the imputed salaries of Dennis Pence and Ann Pence
also negatively impacted our effective income tax rate.

We
completed fiscal 2002 realizing consolidated net income of $9.4 million (net income per basic and diluted share of $0.39) as compared with consolidated net income of
$1.8 million (net income per basic and diluted share of $.08 and $.07, respectively) in fiscal 2001, an increase of $7.6 million, or 419.8%.

Operating Segment Results

The following table, which sets forth the unaudited impact on net sales by business channel of the one-month and 12-month periods ended
March 2, 2002 and the 11-month periods ended February 2, 2002 and February 2, 2003, is provided to assist the reader in assessing differences in our net sales by
business channel.

|         |        | 11 Months
Ended
February 2, 2002 |         | One Month
Ended
March 2, 2002 |   | 12 Months
Ended
March 2, 2002 |        | 11 Months
Ended
February 1, 2003
|-------- | ------ | -------------------------------- | ------- | ----------------------------- | - | ----------------------------- | ------ | --------------------------------
|
|Catalog  |        | $                                | 234,061 |                               | $ | 11,988                        |        | $                               
|Internet |        |                                  | 131,649 |                               |   | 10,224                        |        |                                 
|         |        |                                  |         |                               |   |                               |        |                                 
|         | Direct |                                  |         | 365,709                       |   |                               | 22,212 |                                 
|Retail   |        |                                  | 70,032  |                               |   | 6,071                         |        |                                 
|         |        |                                  |         |                               |   |                               |        |                                 
|Total    |        | $                                | 435,741 |                               | $ | 28,283                        |        | $                               
|         |        |                                  |         |                               |   |                               |        |                                 

Our
direct segment contributed $345.0 million in net sales for fiscal 2002, a decrease of $42.9 million, or 11.1%, from the $387.9 million contributed in fiscal
2001. Our direct segment constituted 72.9% and 83.6% of our consolidated net sales for fiscal 2002 and 2001, respectively.

Our
direct segment's catalog business, on a stand-alone basis, contributed $200.2 million in net sales for fiscal 2002, a decrease of $45.9 million, or 18.7%, from the
$246.0 million contributed in fiscal 2001. Our catalog business constituted 42.3% and 53.0% of our consolidated net sales, and 58.0% and 63.4% of our direct segment's net sales, for fiscal 2002
and 2001, respectively.

The
above decreases in catalog and outlet store net sales primarily reflect significantly lower full-price catalog sales. We attribute the decrease primarily to our mailing
of 24.8 million, or 15.4%, fewer catalogs in 2002 than we did in 2001, and soft consumer demand for women's apparel stemming from the generally weak U.S. economy. Additionally,
$10.2 million of the decrease is attributable to there being one less month in fiscal 2002 than in fiscal 2001.

We
attribute a measure of the above decrease in catalog and outlet store net sales to our migration of full-price merchandise orders out of our catalog sales channel and into
our e-commerce

42

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sales
channel. Our ongoing efforts to promote our website in all of our catalogs and stores are intended to encourage this migration, as our e-commerce business is an efficient and
cost-effective sales channel.

Our
direct segment's e-commerce business, on a stand- alone basis, contributed $144.8 million in net sales for fiscal 2002, an increase of $3.0 million, or
2.0%, from the $141.9 million in net sales contributed in fiscal 2001. Our e-commerce business constituted 30.6% and 30.6% of our consolidated net sales, and 42.0% and 36.6% of our
direct segment's net sales, for fiscal 2002 and 2001, respectively.

We
primarily attribute the above increase in e-commerce net sales to new customers obtained through our affiliate website program. Our affiliate website program contributed
approximately $19.0 million in sales in fiscal 2002 compared with $6.3 million in fiscal 2001. We believe that our ongoing e-mail promotional efforts with existing customers
also contributed to the increase, as did the migration of catalog customers to our e-commerce site. Further, we believe that our e-commerce business is increasingly realizing
sales from customers initially obtained through our retail store openings. Another factor contributing to the increase in e-commerce net sales was e-commerce clearance sales,
which increased $1.1 million, or 3.6%, in fiscal 2002 as compared with fiscal 2001. Additionally, e-commerce sales returns declined by 1.6% in fiscal 2002 over fiscal 2001. Our
mailing of 24.8 million, or 15.4%, fewer catalogs in fiscal 2002 than in fiscal 2001 mitigated the increase in sales, as did our shorter fiscal year in 2002, which we believe had the effect of
decreasing our fiscal 2002 e-commerce net sales by approximately $6.2 million. Our proprietary e-mail address database consisted of 1.8 million names at
February 1, 2003 compared with 1.5 million names at March 2, 2002.

Our
retail segment contributed $128.2 million in net sales for fiscal 2002, an increase of $52.1 million, or 68.4%, from the $76.1 million contributed in fiscal
2001. Our retail segment constituted 27.1% and 16.4% of our consolidated net sales for fiscal 2002 and 2001, respectively.

The
above increase in retail net sales primarily reflects incremental sales of $53.8 million contributed by our retail expansion. This increase was mitigated by our shorter fiscal
year in 2002, which we believe had the effect of decreasing our fiscal 2002 retail net sales by approximately $5.4 million.

The
following table summarizes our operating contribution by segment (in thousands):

|                                    |  |   |         |   |      |       |   |         |   | Change |      
|----------------------------------- |  | - | ------- | - | ---- | ----- | - | ------- | - | ------ | -----
|
|
|Direct                              |  | $ | 52,134  |   | 15.1 | %(1)  | $ | 52,426  |   | 13.5   | %(1) 
|Retail                              |  |   | 8,292   |   | 6.5  | %(2)  |   | (6,047  | ) | (7.9   | )%(2)
|Corporate and other                 |  |   | (44,990 | ) | (9.5 | )%(3) |   | (43,922 | ) | (9.5   | )%(3)
|                                    |  |   |         |   |      |       |   |         |   |        |      
|Consolidated income from operations |  | $ | 15,436  |   | 3.3  | %(3)  | $ | 2,457   |   | 0.5    | %(3) 
|                                    |  |   |         |   |      |       |   |         |   |        |      

---

Our direct segment's operating contribution for fiscal 2002 was $52.1 million as compared with $52.4 million for fiscal 2001. We
attribute the slight decrease in our direct segment's operating contribution primarily to a 3.6% increase in e-commerce clearance sales at a margin that was 20.6 percentage points
lower than in 2001. To a lesser extent, we attribute the decrease to decreased full-price net sales, as a result of our mailing 24.8 million, or 15.4%, fewer catalogs in fiscal 2002
than in fiscal 2001. The ratio of full-price sales to total sales in our direct segment decreased 1.2 percentage

43

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points
from fiscal 2001 to fiscal 2002. These negative impacts were partially offset by reduced catalog marketing expenses of approximately $13.9 million related to the mailing of
24.8 million fewer catalogs. Additionally, our catalog and e-commerce sales returns declined by 1.2 percentage points in fiscal 2002 over fiscal 2001.

Our
retail segment's operating contribution for fiscal 2002 was $8.3 million as compared with $(6.0) million for fiscal 2001. We primarily attribute the improvement in our retail
segment's operating contribution to an improvement of 4.4 percentage points in the margins on our full-price retail segment sales and, to a lesser extent, a decrease of
$1.6 million in retail store pre-opening expenses. The decrease in retail store pre-opening expenses was due to our opening 14 stores in fiscal 2002 compared with 19
stores in fiscal 2001, combined with overall cost savings in the store pre-opening process. These positive factors were
partially offset by a 2.3 percentage point decrease in our leveraging of our full-line retail segment's occupancy costs.

Our
corporate and other operating contribution for fiscal 2002 was $(45.0) million as compared with $(43.9) million for fiscal 2001. We primarily attribute the decrease in our corporate
and other operating contribution to an increase of $2.1 million in brand marketing expenses and an accrual for $0.9 million to settle a dispute with a former merchandise vendor.
Partially offsetting these negative factors was a decrease of $2.5 million, or 13.6%, in employee expenses of which approximately $1.5 million related to the twelfth month of fiscal
2001.

Quarterly Results of Operations and Seasonal Influences

As with many apparel retailers, our net sales, operating results, liquidity and cash flows have fluctuated, and will continue to fluctuate, on a quarterly basis,
as well as an annual basis, as a result of a number of factors, including, but not limited to, the following:



We
alter the composition, magnitude and timing of our merchandise offerings based upon our understanding of prevailing consumer demand, preferences and trends. The timing of our
merchandise offerings may be further impacted by, among other factors, the performance of various third parties on which we are dependent and the day of the week on which certain important holidays
fall. Additionally,

44

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the
net sales we realize from a particular merchandise offering may impact more than one fiscal quarter and year and the amount and pattern of the sales realization may differ from that realized by a
similar merchandise offering in a prior fiscal quarter or year. The majority of net sales from a merchandise offering generally is realized within the first several weeks after its introduction with
an expected significant decline in customer demand thereafter.

Our
business materially depends on sales and profits from the November and December holiday shopping season. In anticipation of traditionally increased holiday sales activity, we incur
certain significant incremental expenses, including the hiring of a substantial number of temporary employees to supplement our existing workforce. Additionally, as gift items and accessories are more
prominently represented in our November and December holiday season merchandise offerings, we typically expect, absent offsetting factors, to realize higher consolidated gross margins in the second
half of our fiscal year. If, for any reason, we were to realize significantly lower-than-expected sales or profits during the November and December holiday selling season, our
financial condition, results of operations, including related gross margins and cash flows for the entire fiscal year will be materially adversely affected. Due to our change in fiscal year end in
fiscal 2002, the November and December holiday season falls into our fiscal fourth quarter.
Previously, the November portion of the holiday season fell into our fiscal third quarter and the December portion of the holiday season fell into our fiscal fourth quarter. Historically, our fiscal
second quarter has generally not been profitable. We expect our results for the second quarter of fiscal 2004 to be consistent with our historical results.

Quarterly Financial Data

The following tables contain selected unaudited quarterly consolidated financial data expressed as a percentage of consolidated net sales for 12-month
fiscal 2003, the comparable 12-month period ended February 1, 2003 and the 11-month fiscal 2002. In our opinion, this unaudited information has been prepared on the same
basis as the audited financial statements presented elsewhere and includes all adjustments necessary to present fairly, in all material respects, the information set forth therein on a

45

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consistent
basis. The information as to any one quarter is not necessarily indicative of results for any future period.

|                                                |  | Fiscal 2003 |  
|----------------------------------------------- |  | ----------- | -
|
|Net sales                                       |  | 100.0       | %
|Cost of sales                                   |  | 60.8        |  
|                                                |  |             |  
|Gross profit                                    |  | 39.2        |  
|Selling, general and administrative expenses    |  | 36.6        |  
|                                                |  |             |  
|Income (loss) from operations                   |  | 2.6         |  
|Interest, net, and other                        |  | 0.1         |  
|                                                |  |             |  
|Income (loss) before provision for income taxes |  | 2.8         |  
|Income tax provision (benefit)                  |  | 1.1         |  
|                                                |  |             |  
|Net income (loss)                               |  | 1.7         | %
|                                                |  |             |  

|                                                |  | 12-Months Ended February 1, 2003 |  
|----------------------------------------------- |  | -------------------------------- | -
|
|Net sales                                       |  | 100.0                            | %
|Cost of sales                                   |  | 57.7                             |  
|                                                |  |                                  |  
|Gross profit                                    |  | 42.3                             |  
|Selling, general and administrative expenses    |  | 40.1                             |  
|                                                |  |                                  |  
|Income (loss) from operations                   |  | 2.2                              |  
|Interest, net, and other                        |  | 0.0                              |  
|                                                |  |                                  |  
|Income (loss) before provision for income taxes |  | 2.3                              |  
|Income tax provision (benefit)                  |  | 0.9                              |  
|                                                |  |                                  |  
|Net income (loss)                               |  | 1.3                              | %
|                                                |  |                                  |  

|                                                |  | 11-Month Fiscal 2002 |  
|----------------------------------------------- |  | -------------------- | -
|
|Net sales                                       |  | 100.0                | %
|Cost of sales                                   |  | 56.3                 |  
|                                                |  |                      |  
|Gross profit                                    |  | 43.7                 |  
|Selling, general and administrative expenses    |  | 39.6                 |  
|                                                |  |                      |  
|Income (loss) from operations                   |  | 4.2                  |  
|Interest, net, and other                        |  | 0.0                  |  
|                                                |  |                      |  
|Income (loss) before provision for income taxes |  | 4.2                  |  
|Income tax provision (benefit)                  |  | 1.7                  |  
|                                                |  |                      |  
|Net income (loss)                               |  | 2.5                  | %
|                                                |  |                      |  

The
second and fourth quarter gross profit percentages generally have been negatively impacted by clearance activities. Our selling, general and administrative expenses expressed as a
percentage of consolidated net sales in the above tables illustrate how we have been better able to leverage these

46

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expenses
in the second half of our fiscal year. This leveraging occurs at the same time that we incur certain significant incremental expenses in the second half of our fiscal year.

Liquidity and Capital Resources

In recent fiscal years, we have financed our ongoing operations and growth initiatives primarily from cash flow generated by our operations and trade credit
arrangements. However, as we produce catalogs, open retail stores and purchase inventory in anticipation of future sales realization and as our operating cash flows and working capital experience
seasonal fluctuations, we may occasionally utilize short-term bank credit.

On
March 5, 2003, we entered into a credit agreement with a consortium of banks that provides us with a $60 million unsecured revolving line of credit. This line of credit
has a $20.0 million limit for letters of credit, a $5 million limit for same day advances and a term standby letter of credit of $0.6 million. The interest rate under the
agreement is equal to the London InterBank Offered Rate and is adjusted based on our leverage ratio.

The
agreement provides that we must satisfy certain specified EBITDA (Earnings Before Interest Taxes Depreciation and Amortization), EBITDAR (i.e., EBITDA before rental/lease expenses),
fixed charge coverage ratio, leverage ratio, current ratio and minimum net worth requirements, as defined in the agreement. The agreement also places restrictions on our ability to, among other
things, sell assets, participate in mergers, incur debt, pay dividends and make investments or guarantees. The credit facility has a maturity date of March 5, 2006. During the fiscal 2003 first
quarter, we incurred $0.5 million in financing costs associated with obtaining our new credit facility. At January 31, 2004, we had $0.3 million in outstanding letters of credit
under this agreement.

Our
operating activities generated $46.1 million, $38.4 million and $38.8 million of positive cash flow during fiscal 2003, 2002 and 2001. On a comparative
year-to-year basis, the increase in fiscal 2003 primarily reflects increased deferred rents related to our retail expansion and, to a lesser extent, increased net income and
decreased inventories. Partially offsetting these positive cash flow impacts were decreased accounts payable and increased accounts receivable. Our accounts receivables increased by
$3.3 million during fiscal 2003 primarily due to increased amounts due from landlords for tenant improvements in new stores. Compared with fiscal 2001, the slight decrease in fiscal 2002
primarily reflects the negative cash flow effects of decreased accounts payable and prepaid and deferred catalog costs and increased receivables, offset by the positive cash flow effects of
significantly improved net income and, to a lesser extent, increased income taxes payable and accrued liabilities.

Our
investing activities consumed $27.3 million, $17.8 million and $34.9 million of cash during fiscal 2003, 2002 and 2001, respectively. Cash outlays in these
periods were principally for capital expenditures.

Our
fiscal 2003, fiscal 2002 and fiscal 2001 capital expenditures principally reflect the cost of leasehold improvements for 25, 14 and 19 new retail stores, respectively, and, to a
substantially lesser extent, furniture and fixtures for both new and existing retail stores and various technology hardware and software additions and upgrades. We also incurred costs associated with
leasehold improvements for six new outlet stores in each of fiscal 2003 and fiscal 2002, and for the renovation of a portion of our former Sandpoint, Idaho distribution center to create additional
administrative space, including related furnishings and equipment, in fiscal 2001.

Our
financing activities provided $0.4 million and $1.1 million and used $3.5 million, of cash during fiscal 2003, fiscal 2002 and fiscal 2001, respectively. Fiscal
2003 primarily reflects $0.9 million in net proceeds from the exercise of previously granted options to purchase 175,239 shares of common stock at an average exercise price of $5.25 per share,
partially offset by $0.5 million of financing costs associated with our new credit facility. Fiscal 2002 primarily reflects $1.1 million in net proceeds from

47

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the
exercise of previously granted options to purchase 205,857 shares of common stock at an average exercise price of $5.56 per share. Fiscal 2001 primarily reflects the outlay of $4.7 million
for treasury stock repurchases, partially offset by $1.3 million in net proceeds from the exercise of previously granted options to purchase 247,968 shares of common stock at an average
exercise price of $5.11 per share.

On
March 31, 2001, our Board of Directors authorized a stock repurchase program for up to 300,000 outstanding shares of our common stock. During fiscal 2001, we repurchased
209,100 shares of our common stock at an average market price of $22.55 per share, or $10.02 on a stock dividend adjusted basis comparable with our current stock price. The 209,100 treasury shares
were not impacted by the two 50% stock dividends, each having the effect of a 3-for-2 stock split, declared by our Board of Directors on December 19, 2002 and
August 4, 2003, respectively. On July 25,
2003, we retired the 209,100 treasury shares. We currently do not anticipate any additional share repurchases.

As
a result of the foregoing, we had $50.7 million in consolidated working capital at January 31, 2004 compared with $37.4 million at February 1, 2003. Our
consolidated current ratio was 1.8 at January 31, 2004 compared with 1.5 at February 1, 2003. We had no outstanding short-term or long-term bank debt at
January 31, 2004 or February 1, 2003.

We
currently plan to open 45 new retail stores in fiscal 2004, including two stores opened in March 2004, and 40 to 50 new retail stores in fiscal 2005. We believe there is an
opportunity to open 400 to 500 stores in up to 275 to 300 identified markets nationwide over the next six to eight years. The pace, scope and size of our retail store expansion will be influenced by
the economic environment, available working capital, our ability to identify and obtain favorable terms on suitable locations for our stores and, if necessary, external financing.

We
currently estimate approximately $40.0 million in total capital expenditures for fiscal 2004, primarily for the 45 full-line retail stores we plan to open and, to a
substantially lesser extent, various technology additions and upgrades. These expenditures are expected to be funded from operating cash flows and working capital.

Our
core new store model of 5,000 to 6,000 square feet assumes an average initial net investment of $560,000 and anticipates sales per square foot of $500 in the third year of
operations. Our smaller store model of 3,000 to 4,000 square feet assumes an average initial net investment of $400,000 and anticipates sales per square foot of $600 in the third year of operations.

We
believe that our cash flow from operations and available borrowing capacity under our bank credit facility will be sufficient to fund our current operations and retail store rollout.
However, we may be required to seek additional sources of funds for continued or accelerated growth and there can be no assurance that such funds will be available on satisfactory terms or at all.
Failure to obtain such financing could delay or prevent our planned growth, which could adversely affect our business, financial position, results of operations and cash flows.

Future Outlook

Due to competition from discount retailers that has put downward pressure on retail prices for women's apparel, the apparel industry has experienced significant
retail price deflation over the past several years. We expect this trend to continue.

We
expect our retail segment to be the key driver of our growth in the future. In the near term, we do not expect growth in our catalog business as we rollout our retail strategy, and we
expect our retail and direct segments will each represent approximately 50% of net sales in fiscal 2004. We intend to further reduce our catalog circulation to maximize profitability and reduce costs.
In particular, we expect to decrease mailings to prospective customers because they are increasingly less profitable than mailings to our existing customers. At the same time, we expect to increase
mailings to our retail

48

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customers
in fiscal 2004 to promote our retail stores. As our retail business grows, we will add additional overhead. However, we expect our sales dollar growth to outpace our addition of
infrastructure expenses. Consequently, we believe that, over time, our retail expansion will increase our overall profitability.

Other Matters

Critical Accounting Policies

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make
estimates and assumptions that affect:



These
estimates and assumptions are based on our historical results as well as our future expectations. Our actual results could vary from our estimates and assumptions.

The
accounting policies discussed below are those that we believe are the most critical to a materially accurate portrayal of our financial condition and results of operations. They are
also the accounting policies that typically require our most difficult, subjective and complex judgments and estimates, often for matters that are inherently uncertain. However, with respect to our
critical accounting policies, even a relatively minor variance between our actual and expected experience can potentially have a materially favorable or unfavorable impact on our subsequent results of
operations.

Revenue Recognition and Sales Return Estimate

We recognize sales and the related cost of sales either at the time merchandise ordered from a catalog or website is shipped to the customer or at the time a sale
is consummated with a customer in a store. We reduce our sales and costs of sales, and establish and maintain a corresponding accrual, for expected sales returns based on our historical experience and
our future expectations. Our ability to reasonably estimate sales returns is made more complex by the fact that we offer our customers a return policy whereby they may return merchandise for any
reason and at any time without any restrictions as to condition or time. The actual amount of sales returns we subsequently realize may fluctuate from our estimates due to several factors, including
size and fit, actual or perceived quality, differences between the actual product and its presentation in our catalog or website, timeliness of delivery and competitive offerings. We continually track
our subsequent sales return experience, compare our findings to our previous estimates and adjust our sales return accrual and cost of sales accordingly.

Inventories

Our inventories consist of merchandise purchased for resale and are reflected, in the aggregate, on our balance sheet at the lower of cost or market. The nature
of our business requires that we make substantially all of our merchandising and marketing decisions, and corresponding inventory purchase commitments with vendors, months in advance of the time in
which a particular merchandise item is intended to be included in our merchandise offerings. These decisions and commitments are based on, among other possible considerations, historical sales with
identical or similar merchandise, our understanding of fashion trends and influences as well as our assessment of likely economic conditions and various competitive factors. We continually make
subjective assessments as to whether the carrying cost of our inventory exceeds its market value, and if so, by what dollar amount. The carrying value of our inventory is reduced to its realizable
value with a corresponding charge to our cost of sales.

49

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Catalog Costs

We accumulate all direct costs incurred in the development, production and circulation of our direct mail catalogs on our balance sheet until such time as the
related catalog is mailed, at which time, they are subsequently amortized into the marketing component of our selling, general and administrative expenses over the expected sales realization cycle,
typically several weeks. Our initial estimation of the expected sales realization cycle for a particular catalog merchandise offering is based on, among other possible considerations, our historical
sales and sell-through experience with identical or similar catalog merchandise offerings, our understanding of then prevailing fashion trends and influences, our assessment of prevailing
economic conditions and various competitive factors. We continually track our subsequent sales realization, reassess the marketplace, compare our findings to our previous estimate and adjust our
amortization going forward.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"), which sets forth the financial
accounting and reporting to be followed for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires
entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. We adopted SFAS
No. 143, effective February 2, 2003 for our fiscal 2003 consolidated financial statements with no material impact.

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which provides for a single accounting model for
assets to be disposed of, broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. We
adopted SFAS No. 144 for our fiscal 2003 consolidated financial statements with no material impact.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF No. 94-3"). SFAS No. 146 requires that
a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and initially measured at fair value. EITF No. 94-3 required that a
liability for an exit cost (as defined in EITF No. 94-3) was recognized at the date of an entity's commitment to an exit plan. The provisions of SFAS No. 146 are effective
for exit or disposal activities that are initiated after December 31, 2002. We would be impacted by SFAS No. 146 only if we were to commit to a plan for an exit or disposal activity.
Currently, we have not committed to a plan for an exit or disposal activity.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosurean amendment of FASB Statement
No. 123" ("SFAS No. 148"). This Statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used
on reported results. In fiscal 2002, we adopted the disclosure requirements of SFAS No. 148. However, at this time, we do not intend to change to the fair value based method of accounting for
stock-based employee compensation.

In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"). In
December 2003, the FASB issued a revised

50

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Interpretation
No. 46 ("FIN 46R"). The primary objectives of FIN 46R are to provide guidance on the identification of, and financial reporting for, entities for which control is achieved
through means other than through voting rights; such entities are known as variable-interest entities ("VIEs"). We adopted FIN 46R for our 2003 consolidated financial statements with no material
impact.

Off-Balance Sheet Liabilities and Other Contractual Obligations

Our off-balance sheet liabilities primarily consist of lease payment obligations incurred under operating leases, which are required to be excluded
from our consolidated balance sheet by accounting principles generally accepted in the United States. Our only individually significant operating lease is for our distribution center and call center
located in Mineral Wells, West Virginia. Our off-balance sheet liabilities also include our inventory purchase orders which represent agreements to purchase inventory that are legally
binding and that specify all significant terms. All of our other operating leases pertain to our retail and outlet stores, our Coeur d'Alene, Idaho call center and to various equipment and technology.

The
following tables summarize our minimum contractual commitments and commercial obligations as of January 31, 2004:

|                          |  | Payments Due in Period
|------------------------- |  | ----------------------
|
|
|Contractual Obligations   |  |                       
|Operating leases          |  | $                     
|Inventory purchase orders |  |                       
|                          |  |                       
|Total                     |  | $                     
|                          |  |                       

|                       |  | Payments Due in Period
|---------------------- |  | ----------------------
|
|
|Commercial Commitments |  |                       
|Letters of credit      |  | $                     
|                       |  |                       
|Total                  |  | $                     
|                       |  |                       

Subsequent
to January 31, 2004 we entered into additional retail leases with minimum lease payment requirements, excluding contingent rental payments, as follows (in thousands):

|                        |  | Payments Due in Period
|----------------------- |  | ----------------------
|
|
|Contractual Obligations |  |                       
|Operating leases        |  | $                     
|                        |  |                       
|Total                   |  | $                     
|                        |  |                       

Related Party Transactions

Incentive Based Compensation and Executive Loan Program

During fiscal 2001, 2002 and 2003, the Compensation Committee of our Board of Directors authorized compensation bonus pools that, in aggregate, currently total
$4.0 million. These bonus pools serve as additional incentives to retain certain key employees. We are accruing the related compensation expense on a straight-line basis over the
applicable retention periods based on the

51

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assumption
that the performance criteria specified in the agreements will be met. The total compensation and dates to be paid are summarized as follows:

|Description                                |  | Amount |       | Dates to be paid(1)
|------------------------------------------ |  | ------ | ----- | -------------------
|
|Five executive employees                   |  | $      | 1,725 |                    
|                                           |  |        | 450   |                    
|                                           |  |        | 150   |                    
|                                           |  |        |       |                    
|                                           |  | $      | 2,325 |                    
|Twelve non-executive employees             |  | $      | 150   |                    
|                                           |  |        | 525   |                    
|                                           |  |        | 355   |                    
|                                           |  |        | 75    |                    
|                                           |  |        |       |                    
|                                           |  | $      | 1,105 |                    
|Authorized subsequent to January 31, 2004: |  |        |       |                    
|Three non-executive employees              |  | $      | 525   |                    

---

Prior
to the enactment of the Sarbanes-Oxley Act of 2002, we maintained an Executive Loan Program under which we made, at our sole discretion and with prior approvals from our Chief
Executive Officer and the Board of Directors' Compensation Committee, secured long-term loans to key executives other than our company's founders, Dennis Pence and Ann Pence. Our Chief
Executive Officer, President and Chief Financial Officer do not have loans under this program. Each loan is secured by the executive's personal net assets, inclusive of all vested stock options in our
company, bears interest at three percent per annum, and becomes due and payable on the earlier of (i) the date 10 days before the date on which the vested stock options serving as
partial security expire or (ii) 90 days from the date on which the executive's employment with us terminates for any reason. Outstanding loans were $0.3 million and
$0.5 million at January 31, 2004 and February 1, 2003, respectively. None of the loans outstanding prior to enactment of the Sarbanes-Oxley Act have had any of their terms
modified.

Arrangements with Principal Stockholders

In fiscal 2001, we did not meet our financial goals. In response, our principal shareholders, Dennis Pence and Ann Pence, declined to accept any salaries from the
beginning of fiscal 2002 through September 26, 2002 and through September 1, 2002, respectively. As required by accounting principles generally accepted in the United States of America,
we imputed on a straight-line basis into our consolidated selling, general and administrative expenses the fair market value of salaries for Dennis Pence and Ann Pence for these periods
with corresponding offsetting credits to our consolidated additional paid-in capital. During fiscal 2002, approximately $228,000 was imputed into our consolidated selling, general and
administrative expenses.

Dennis
Pence and Ann Pence personally participate in a jet timeshare program through two entities they own. For flights by them and other corporate executives made exclusively for
official corporate purposes, we reimburse these entities for:



52

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Aggregate
expense reimbursements totaled approximately $850,000 and $725,000 for fiscal 2003 and 2002, respectively.

On
June 14, 2003, our Board of Directors approved a charitable contribution of $100,000 to the Morning Light Foundation, Inc, a not-for-profit charitable
organization. Dennis Pence, our Chairman and Chief Executive Officer, is the founder and a Board member of the Morning Light Foundation, Inc.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have not been materially impacted by fluctuations in foreign currency exchange rates as substantially all of our business is transacted in, and is expected to
continue to be transacted in, U.S. dollars or U.S. dollar-based currencies. We have only been minimally impacted by fluctuations in interest rates as a result of our relatively modest bank borrowings
in recent fiscal years. However, as any future borrowings under our new bank credit facility will be at a variable rate of interest, we could potentially be materially adversely impacted should we
require significant borrowings in the future, particularly during a period of rising interest rates. We have not used, and currently do not anticipate using, any derivative financial instruments.

53

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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                                                                     |  | Page
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|Independent Auditors' Reports                                                                                                                                        |  | 55  
|Consolidated Balance Sheets as of January 31, 2004 and February 1, 2003                                                                                              |  | 58  
|Consolidated Statements of Operations for the 12-months ended January 31, 2004, the 11-months ended February 1, 2003 and the 12-months ended March 2, 2002           |  | 59  
|Consolidated Statements of Stockholders' Equity for the 12-months ended January 31, 2004, the 11-months ended February 1, 2003 and the 12-months ended March 2, 2002 |  | 60  
|Consolidated Statements of Cash Flows for the 12-months ended January 31, 2004, the 11-months ended February 1, 2003 and the 12-months ended March 2, 2002           |  | 61  
|Notes to the Consolidated Financial Statements                                                                                                                       |  | 62  
|Independent Auditors' Report on Financial Statement Schedule                                                                                                         |  | 82  
|Schedule IIValuation and Qualifying Accounts                                                                                                                        |  | 83  

54

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Independent Auditors' Report

To
the Stockholders of Coldwater Creek Inc.:

We
have audited the accompanying consolidated balance sheets of Coldwater Creek Inc. (a Delaware corporation) and subsidiaries as of January 31, 2004 and February 1,
2003, and the related consolidated statements of operations, stockholders' equity and cash flows for the fiscal year ended January 31, 2004 and the eleven-month transition period ended
February 1, 2003. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits. The consolidated statements of operations, stockholders' equity and cash flows of Coldwater Creek Inc. and subsidiaries for the fiscal year ended March 2,
2002 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements, before the restatements described in
Note 1, Note 2, Note 10 and Note 19 to the consolidated financial statements, in their report dated April 10, 2002.

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 fiscal 2003 and 2002 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Coldwater
Creek Inc. and subsidiaries as of January 31, 2004 and February 1, 2003, and the results of their operations and their cash flows for the fiscal year ended January 31, 2004
and the eleven-month transition period ended February 1, 2003, in conformity with accounting principles generally accepted in the United States of America.

As
discussed above, the consolidated statements of operations, stockholders' equity and cash flows of Coldwater Creek Inc. and subsidiaries for the fiscal year ended
March 2, 2002 were audited by other auditors who have ceased operations. As described in Note 2 and Note 10 to the financial statements, the common stock outstanding, retained
earnings, and net income per share amounts for the year ended March 2, 2002, as well as share and per share amounts for that fiscal period in the notes to the consolidated financial statements,
have been adjusted to reflect two 50 percent stock dividends, each having the effect of a 3-for-2 stock split, declared by the Board of Directors on December 19,
2002 and August 4, 2003. Also, the segment reporting disclosures for the fiscal year ended March 2, 2002 in Note 1 and Note 19 to the consolidated financial statements have
been adjusted to reflect a change in the composition of the company's segments. In addition, adjustments have been made to include disclosure of the company's customer list rental income and customer
list rental expense for the fiscal year ended March 2, 2002 in Note 2 to the consolidated financial statements, and disclosure of the components of interest, net, and other for the
fiscal year ended March 2, 2002 in Note 2 to the consolidated financial statements. We audited the adjustments that were applied to restate the amounts and disclosures related to the
company's December 19, 2002 and August 4, 2003 stock dividends reflected in the March 2, 2002 consolidated financial statements, the adjustments that were applied to restate the
March 2, 2002 segment reporting amounts and disclosures in Note 1 and Note 19 to the consolidated financial statements, the adjustments that were applied to include disclosure of
the customer list rental income and customer list rental expense for the fiscal year ended March 2, 2002 in Note 2 to the consolidated financial statements, and the adjustments that were
applied to include disclosure of the components of interest, net, and other for the fiscal year ended March 2, 2002 in Note 2 to the consolidated financial statements. In our opinion,
such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures

55

---

to
the March 2, 2002 consolidated financial statements of Coldwater Creek Inc. and subsidiaries other than with respect to such adjustments and, accordingly, we do not express an opinion
or any other form of assurance on the March 2, 2002 financial statements taken as a whole.

/s/
KPMG LLP

Boise,
Idaho

March 5,
2004, except for the adjustments to include disclosure
    of the customer list rental income and customer list rental
    expense for the fiscal year ended March 2, 2002 in Note 2
    and to include disclosure of the components of interest, net,
    and other for the fiscal year ended March 2, 2002 in Note 2,
    as to which the date is March 30, 2004.

56

---

This is the report of Arthur Andersen LLP from the Company's fiscal year ended March 2, 2002 and this report has not been reissued.

Report of Independent Auditors

To
the Stockholders of Coldwater Creek Inc.:

We
have audited the accompanying consolidated balance sheets of Coldwater Creek Inc. (a Delaware corporation) and subsidiaries as of March 2, 2002 and March 3, 2001,
and the related consolidated statements of operations, stockholders' equity and cash flows for the fiscal years ended March 2, 2002, March 3, 2001 and February 26, 2000. These
financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the financial position of Coldwater Creek Inc. and subsidiaries as of
March 2, 2002 and March 3, 2001, and the results of their operations and their cash flows for each of the three fiscal years in the period ended March 2, 2002, in conformity with
accounting principles generally accepted in the United States.

/s/
ARTHUR ANDERSEN LLP
Boise, Idaho
April 10, 2002

57

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COLDWATER CREEK INC. AND SUBSIDIARIES    CONSOLIDATED BALANCE SHEETS  (in thousands, except for share data)

|                                     |                                                                                                                   | January 31,
2004                           |        | February 1,
2003 |        
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | ---------------- | -------
|ASSETS                               |                                                                                                                  
|CURRENT ASSETS:                      |                                                                                                                   |                                            |        |                  |        
|                                     | Cash and cash equivalents                                                                                         |                                            | $      | 45,754           |        
|                                     | Receivables                                                                                                       |                                            |        | 9,457            |        
|                                     | Inventories                                                                                                       |                                            |        | 52,701           |        
|                                     | Prepaid and other                                                                                                 |                                            |        | 5,797            |        
|                                     | Prepaid and deferred catalog costs                                                                                |                                            |        | 4,219            |        
|                                     | Deferred income taxes                                                                                             |                                            |        |                 |        
|                                     |                                                                                                                   |                                            |        |                  |        
|                                     |                                                                                                                   | Total current assets                       |        |                  | 117,928
|Property and equipment, net          |                                                                                                                   |                                            | 92,232 |                  |        
|Executive loans                      |                                                                                                                   |                                            | 497    |                  |        
|                                     |                                                                                                                   |                                            |        |                  |        
|                                     |                                                                                                                   | Total assets                               |        | $                | 210,657
|                                     |                                                                                                                   |                                            |        |                  |        
|LIABILITIES AND STOCKHOLDERS' EQUITY |                                                                                                                  
|CURRENT LIABILITIES:                 |                                                                                                                   |                                            |        |                  |        
|                                     | Accounts payable                                                                                                  |                                            | $      | 38,855           |        
|                                     | Accrued liabilities                                                                                               |                                            |        | 24,246           |        
|                                     | Income taxes payable                                                                                              |                                            |        | 4,089            |        
|                                     |                                                                                                                   |                                            |        |                  |        
|                                     |                                                                                                                   | Total current liabilities                  |        |                  | 67,190 
|Deferred income taxes                |                                                                                                                   |                                            | 3,844  |                  |        
|Deferred rents                       |                                                                                                                   |                                            | 19,826 |                  |        
|                                     |                                                                                                                   |                                            |        |                  |        
|                                     |                                                                                                                   | Total liabilities                          |        |                  | 90,860 
|                                     |                                                                                                                   |                                            |        |                  |        
|Commitments and contingencies        |                                                                                                                   |                                            |        |                  |        
|STOCKHOLDERS' EQUITY:                |                                                                                                                   |                                            |        |                  |        
|                                     | Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued and outstanding                         |                                            |        |                 |        
|                                     | Common stock, $.01 par value, 60,000,000 shares authorized, 24,166,201 and 24,173,117 shares issued, respectively |                                            |        | 242              |        
|                                     | Additional paid-in capital                                                                                        |                                            |        | 47,927           |        
|                                     | Treasury shares, at cost, 209,100 shares                                                                          |                                            |        |                 |        
|                                     | Retained earnings                                                                                                 |                                            |        | 71,628           |        
|                                     |                                                                                                                   |                                            |        |                  |        
|                                     |                                                                                                                   | Total stockholders' equity                 |        |                  | 119,797
|                                     |                                                                                                                   |                                            |        |                  |        
|                                     |                                                                                                                   | Total liabilities and stockholders' equity |        | $                | 210,657
|                                     |                                                                                                                   |                                            |        |                  |        

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

58

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COLDWATER CREEK INC. AND SUBSIDIARY    CONSOLIDATED STATEMENTS OF OPERATIONS  (in thousands, except for per share data)

|                                             |                                             | 12-Months
Ended
January 31,
2004 |         | 11-Months
Ended
February 1,
2003 |   | 12-Months
Ended
March 2,
2002
|-------------------------------------------- | ------------------------------------------- | -------------------------------- | ------- | -------------------------------- | - | -----------------------------
|Net sales                                    |                                             | $                                | 518,844 |                                  | $ | 473,172                      
|Cost of sales                                |                                             |                                  | 316,026 |                                  |   | 284,406                      
|                                             |                                             |                                  |         |                                  |   |                              
|                                             | Gross profit                                |                                  |         | 202,818                          |   |                              
|Selling, general and administrative expenses |                                             |                                  | 182,210 |                                  |   | 173,330                      
|                                             |                                             |                                  |         |                                  |   |                              
|                                             | Income from operations                      |                                  |         | 20,608                           |   |                              
|Interest, net, and other                     |                                             |                                  | (93     | )                                |   | 170                          
|                                             |                                             |                                  |         |                                  |   |                              
|                                             | Income before provision for income taxes    |                                  |         | 20,515                           |   |                              
|Provision for income taxes                   |                                             |                                  | 8,037   |                                  |   | 6,249                        
|                                             |                                             |                                  |         |                                  |   |                              
|                                             | Net income                                  |                                  | $       | 12,478                           |   | $                            
|                                             |                                             |                                  |         |                                  |   |                              
|                                             | Net income per shareBasic                  |                                  | $       | 0.52                             |   | $                            
|                                             |                                             |                                  |         |                                  |   |                              
|                                             | Weighted average shares outstandingBasic   |                                  |         | 24,074                           |   |                              
|                                             | Net income per shareDiluted                |                                  | $       | 0.51                             |   | $                            
|                                             |                                             |                                  |         |                                  |   |                              
|                                             | Weighted average shares outstandingDiluted |                                  |         | 24,407                           |   |                              

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

59

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COLDWATER CREEK INC. AND SUBSIDIARIES    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY  (in thousands)

|                                                          |  | Common Stock |   |   |     |   |   |        |   |   |       
|--------------------------------------------------------- |  | ------------ | - | - | --- | - | - | ------ | - | - | ------
|
|
|Balance at March 3, 2001                                  |  | 23,718       |   | $ | 237 |   | $ | 47,905 |   | $ |      
|Net income                                                |  |             |   |   |    |   |   |       |   |   |      
|Net proceeds from exercises of stock options              |  | 249          |   |   | 3   |   |   | 1,275  |   |   |      
|Tax benefit from exercises of stock options               |  |             |   |   |    |   |   | 430    |   |   |      
|Purchase of treasury stock                                |  |             |   |   |    |   |   |       |   |   | (4,715
|                                                          |  |              |   |   |     |   |   |        |   |   |       
|Balance at March 2, 2002                                  |  | 23,967       |   | $ | 240 |   | $ | 49,610 |   | $ | (4,715
|                                                          |  |              |   |   |     |   |   |        |   |   |       
|Net income                                                |  |             |   |   |    |   |   |       |   |   |      
|Net proceeds from exercises of stock options              |  | 206          |   |   | 2   |   |   | 1,141  |   |   |      
|Tax benefit from exercises of stock options               |  |             |   |   |    |   |   | 307    |   |   |      
|Contributed services                                      |  |             |   |   |    |   |   | 228    |   |   |      
|                                                          |  |              |   |   |     |   |   |        |   |   |       
|Balance at February 1, 2003                               |  | 24,173       |   | $ | 242 |   | $ | 51,286 |   | $ | (4,715
|                                                          |  |              |   |   |     |   |   |        |   |   |       
|Net income                                                |  |             |   |   |    |   |   |       |   |   |      
|Net proceeds from exercises of stock options              |  | 176          |   |   | 2   |   |   | 920    |   |   |      
|Tax benefit from exercises of stock options               |  |             |   |   |    |   |   | 293    |   |   |      
|Retirement of treasury shares                             |  | (209         | ) |   | (2  | ) |   | (4,713 | ) |   | 4,715 
|Issuance of shares under the employee stock purchase plan |  | 26           |   |   |    |   |   | 141    |   |   |      
|                                                          |  |              |   |   |     |   |   |        |   |   |       
|Balance at January 31, 2004                               |  | 24,166       |   | $ | 242 |   | $ | 47,927 |   | $ |      
|                                                          |  |              |   |   |     |   |   |        |   |   |       

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

60

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COLDWATER CREEK INC. AND SUBSIDIARIES    CONSOLIDATED STATEMENTS OF CASH FLOWS  (in thousands)

|                                              |                                                       | 12-Months
Ended
January 31,
2004     |        | 11-Months
Ended
February 1,
2003 |        | 12-Months
Ended
March 2,
2002 |        
|--------------------------------------------- | ----------------------------------------------------- | ------------------------------------ | ------ | -------------------------------- | ------ | ----------------------------- | -------
|OPERATING ACTIVITIES:                         |                                                       |                                      |        |                                  |        |                               |        
|Net income                                    |                                                       | $                                    | 12,478 |                                  | $      | 9,357                         |        
|Non cash items:                               |                                                       |                                      |        |                                  |        |                               |        
|                                              | Depreciation and amortization                         |                                      |        | 16,942                           |        |                               | 14,037 
|                                              | Loss on asset disposition                             |                                      |        | 55                               |        |                               | 801    
|                                              | Deferred rent amortization                            |                                      |        | (1,339                           | )      |                               | (332   
|                                              | Contributed services                                  |                                      |        |                                 |        |                               | 228    
|                                              | Deferred income taxes                                 |                                      |        | 4,146                            |        |                               | (1,829 
|                                              | Tax benefit from exercises of stock options           |                                      |        | 293                              |        |                               | 307    
|                                              | Other                                                 |                                      |        |                                 |        |                               | 1      
|Net change in current assets and liabilities: |                                                       |                                      |        |                                  |        |                               |        
|                                              | Receivables                                           |                                      |        | (3,345                           | )      |                               | (1,185 
|                                              | Inventories                                           |                                      |        | 6,985                            |        |                               | 4,609  
|                                              | Prepaid and other                                     |                                      |        | (1,121                           | )      |                               | 1,483  
|                                              | Prepaid and deferred catalog costs                    |                                      |        | 2,914                            |        |                               | 637    
|                                              | Accounts payable                                      |                                      |        | (5,745                           | )      |                               | (563   
|                                              | Accrued liabilities                                   |                                      |        | 2,424                            |        |                               | 1,757  
|                                              | Income taxes payable                                  |                                      |        | 439                              |        |                               | 3,650  
|                                              | Deferred rents                                        |                                      |        | 10,932                           |        |                               | 5,408  
|                                              |                                                       |                                      |        |                                  |        |                               |        
|                                              | Net cash provided by operating activities             |                                      |        | 46,058                           |        |                               | 38,366 
|                                              |                                                       |                                      |        |                                  |        |                               |        
|INVESTING ACTIVITIES:                         |                                                       |                                      |        |                                  |        |                               |        
|                                              | Purchase of property and equipment                    |                                      |        | (27,539                          | )      |                               | (18,078
|                                              | Repayments from loans to executives                   |                                      |        | 200                              |        |                               | 263    
|                                              |                                                       |                                      |        |                                  |        |                               |        
|                                              | Net cash used in investing activities                 |                                      |        | (27,339                          | )      |                               | (17,815
|                                              |                                                       |                                      |        |                                  |        |                               |        
|FINANCING ACTIVITIES:                         |                                                       |                                      |        |                                  |        |                               |        
|                                              | Net proceeds from exercises of stock options          |                                      |        | 922                              |        |                               | 1,143  
|                                              | Common shares repurchased for treasury                |                                      |        |                                 |        |                               |       
|                                              | Other financing costs                                 |                                      |        | (517                             | )      |                               | (53    
|                                              |                                                       |                                      |        |                                  |        |                               |        
|                                              | Net cash provided by (used in) financing activities   |                                      |        | 405                              |        |                               | 1,090  
|                                              |                                                       |                                      |        |                                  |        |                               |        
|                                              | Net increase in cash and cash equivalents             |                                      |        | 19,124                           |        |                               | 21,641 
|                                              |                                                       | Cash and cash equivalents, beginning |        |                                  | 26,630 |                               |        
|                                              |                                                       |                                      |        |                                  |        |                               |        
|                                              | Cash and cash equivalents, ending                     |                                      | $      | 45,754                           |        | $                             | 26,630 
|                                              |                                                       |                                      |        |                                  |        |                               |        
|NON-CASH FINANCING ACTIVITIES:                |                                                       |                                      |        |                                  |        |                               |        
|                                              | Issuance of shares under employee stock purchase plan |                                      | $      | 141                              |        | $                             |       
|                                              | Retirement of treasury shares                         |                                      |        | 4,715                            |        |                               |       
|SUPPLEMENTAL CASH FLOW DATA:                  |                                                       |                                      |        |                                  |        |                               |        
|                                              | Cash paid for interest and fees                       |                                      | $      | 122                              |        | $                             | 3      
|                                              | Cash paid for income taxes                            |                                      |        | 4,242                            |        |                               | 1,113  

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

61

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COLDWATER CREEK INC. AND SUBSIDIARIES  NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Business and Organizational Structure

Coldwater Creek Inc., together with its wholly-owned subsidiaries (the "Company"), a Delaware corporation headquartered in Sandpoint, Idaho, is a
triple-sales channel, two-operating segment specialty retailer of women's apparel, jewelry, accessories and gift items. The Company's Retail Segment consists of its full-line
retail stores, resort stores and outlet stores. The Company's Direct Segment consists of its catalog and Internet-based e-commerce businesses. Beginning in the quarter ended May 3,
2003, the Company reclassified its outlet store business and phone and Internet orders that originate in its retail stores from its Direct Segment to its Retail Segment, to reflect the manner in which
these segments are currently managed. The Company has reclassified prior period financial statements on a consistent basis for fiscal years 2002 and 2001.

The
Company has three wholly-owned subsidiaries. Two of these subsidiaries currently have no substantive assets, liabilities, revenues or expenses. The third subsidiary, Aspenwood
Advertising, Inc., produces, designs and distributes catalogs and other advertising materials used in Coldwater Creek's business.

2. Significant Accounting Policies

Principals of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany balances and transactions have been
eliminated.

Fiscal Periods

References to a fiscal year refer to the calendar year in which such fiscal year commences. Historically, the Company's fiscal year ended on the Saturday nearest
February 28th. However, on December 16, 2002, the Company's board of directors approved a change in the Company's fiscal year end from the Saturday nearest
February 28th to the Saturday nearest January 31st, effective in 2003. As a result of this change in the Company's fiscal year end, the fiscal 2002 period
presented in this report is an 11-month transition period beginning March 3, 2002 and ending February 1, 2003. The Company made this decision to align its reporting schedule
with the majority of other national retail companies.

The
Company's floating fiscal year-end typically results in thirteen-week fiscal quarters and a fifty-two week fiscal year, but will occasionally give
rise to an additional week resulting in a fourteen-week fiscal fourth quarter and a fifty-three week fiscal year. The Company's most recently completed fiscal year ended January 31,
2004 ("fiscal 2003") and the fiscal year ended March 2, 2002 ("fiscal 2001") consisted of fifty-two (52) weeks, whereas the fiscal year ended February 1, 2003 ("fiscal 2002")
consisted of forty-eight (48) weeks, due to the change in the Company's fiscal year end.

Comprehensive Income

SFAS No. 130, "Comprehensive Income", requires the presentation of comprehensive income, in addition to the existing income statement. Comprehensive income
is defined as the change in equity during a period from transactions and other events, excluding changes resulting from investments by owners and distributions to owners. For all years presented,
there are no material items requiring separate disclosure in accordance with this statement.

62

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Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts and timing of revenue and expenses, the reported amounts and classification of assets and liabilities, and the disclosure of contingent
assets and liabilities. Examples of these estimates and assumptions are embodied in our sales returns accrual and our inventory obsolescence calculation. These estimates and assumptions are based on
the Company's historical results as well as management's future expectations. The Company's actual results could vary from its estimates and assumptions.

Reclassifications

Certain amounts in the consolidated financial statements for the prior fiscal years have been reclassified to be consistent with the current fiscal year's
presentation.

Revenue Recognition and Sales Return Estimate

The Company recognizes sales including shipping and handling income and the related cost of sales either at the time merchandise ordered from a catalog or web
site is shipped to the customer or at the time a sale is consummated with a customer in a store. The Company maintains an allowance for sales returns based on historical experience and future
expectations. Collections for unshipped orders are reflected as a component of accounts payable and are immaterial in amount. The Company's policy regarding gift certificates is to record revenue as
the certificates are redeemed for merchandise. Prior to their redemption, the certificates are recorded as a liability.

Cash and Cash Equivalents

Cash equivalents consist of highly liquid debt instruments with a maturity date of three months or less at the date of purchase.

Inventories

Inventories primarily consist of merchandise purchased for resale and are stated at the lower of first-in, first-out cost or market.

Prepaid and Deferred Catalog Costs

Catalog costs include all direct costs associated with the development, production and circulation of direct mail catalogs and are accumulated as prepaid catalog
costs until such time as the related catalog is mailed. Once mailed, these costs are reclassified as deferred catalog costs and are amortized into selling, general and administrative expenses over the
expected sales realization cycle, typically several weeks.

Property and Equipment

Property and equipment, including any major additions and improvements made to property and equipment, are recorded at cost. Minor additions and improvements, as
well as maintenance and repairs, that do not materially extend the useful life of property or equipment, are charged to

63

---

operations
as incurred. The net book value of property or equipment sold or retired is removed from the asset and related accumulated depreciation accounts with any resulting net gain or loss included
in results of operations.

Depreciation
and amortization expense is computed using the straight-line method. The estimated useful lives for buildings and land improvements are fifteen to thirty years.
The estimated useful lives for furniture and fixtures, technology hardware and software and machinery and equipment are three to seven years. Leasehold improvements are amortized over the contractual
lives of the underlying operating leases or the estimated useful lives of the improvements, currently three to twenty years, whichever is less.

Deferred Rents

Certain of the Company's operating leases contain predetermined fixed escalations of the minimum rentals during the original term of the lease. For these leases,
the Company recognizes the related rental expense on a straight-line basis over the life of the lease and records the difference between the amounts charged to operations and amounts paid
as deferred rent. Any lease incentives received by the Company are deferred and subsequently amortized on a straight-line basis over the life of the lease as a reduction of rent expense.

Deferred Income Taxes

Deferred income tax assets and liabilities are recognized for the expected future income tax benefits or consequences, based on enacted laws, of temporary
differences between tax and financial statement reporting. Deferred tax assets are then reduced, if deemed necessary, by a valuation allowance for the amount of any tax benefits that, more likely than
not based on current circumstances, are not expected to be realized.

Cost of Sales and Selling, General and Administrative Expenses

The Company's consolidated cost of sales primarily consists of merchandise acquisition costs, including related buying and freight-in costs, as well
as warehousing and distribution costs, shipping and handling costs, returned merchandise processing costs, and retail and outlet store occupancy costs.

The
Company's consolidated selling, general and administrative expenses primarily consist of selling expenses, marketing expenses, including amortization of deferred catalog costs, and
general and administrative expenses. The Company's consolidated selling, general and administrative expenses include amortized catalog costs of $68.1 million, $78.1 million and
$100.1 million for fiscal 2003, 2002 and 2001, respectively. The Company's consolidated selling, general and administrative expenses include advertising costs of $9.0 million,
$6.9 million and $5.2 million for fiscal 2003, 2002 and 2001, respectively. The Company considers commission expenses associated with its participation in a web based affiliate program
to be advertising expenses.

Store Pre-Opening Costs

The Company incurs certain preparation and training costs prior to the opening of a retail store. These pre-opening costs are expensed as incurred and
are included in selling, general and

64

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administrative
expenses. Pre-opening costs were approximately $1.1 million, $1.3 million and $2.9 million during fiscal 2003, 2002 and 2001, respectively.

List rental income (expense)

Customer list rental income is netted against selling, general and administrative expenses. An accrual for rental income and rental expense, as applicable, is
established at the time the related catalog is mailed to the names contained in the rented lists. The amounts of income netted against selling, general and administrative expense are as follows:

Fiscal Year EndedJanuary 31,
2004

February 1,
2003

March 2,
2002(in thousands)List rental expense


(1,546
)

(3,319
)

(3,699
)List rental income


2,758


2,323


2,416Net list rental income (expense)

$
1,212

$
(996
)
$
(1,283
)


Interest, net, and other

Interest, net, and other consists of the following:

|                                           |  | Fiscal Year Ended |     
|------------------------------------------ |  | ----------------- | ----
|
|
|Interest expense, including financing fees |  | $                 | (321
|Interest income                            |  |                   | 185 
|Other income                               |  |                   | 43  
|                                           |  |                   |     
|Interest, net, and other                   |  | $                 | (93 
|                                           |  |                   |     

Net Income Per Share

Basic earnings per share ("EPS") is calculated by dividing income applicable to common shareholders by the weighted average number of common shares outstanding
for the year. Diluted EPS reflects the potential dilution that could occur under the Treasury Stock Method if potentially dilutive securities, such as stock options, were exercised or converted to
common stock. Should the Company incur a net loss, potentially dilutive securities are excluded from the calculation of diluted EPS as they would be antidilutive.

On
December 19, 2002, and on August 4, 2003, the Company's Board of Directors declared two 50% stock dividends having the cumulative effect of a
2.25-for-1 stock split on its issued common stock, par value $0.01 per share (the "Common Stock"). The common stock outstanding, retained earnings and net income per share
amounts for all periods presented reflect these stock dividends.

65

---

Accounting for Stock Based Compensation

As allowed by SFAS No. 123, "Accounting for Stock-Based Compensation," the Company has retained the compensation measurement principles of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25"), and its related interpretations, for stock options. Under APB No. 25, compensation
expense is recognized based upon the difference, if any, at the measurement date between the market value of the stock and the option exercise price. The measurement date is the date at which both the
number of options and the exercise price for each option are known.

The
following table presents a reconciliation of the Company's actual net income to its pro forma net income had compensation expense for the Company's 1996 Stock Option/Stock Issuance
Plan been determined using the compensation measurement principles of SFAS No. 123:

|                      |                             | Fiscal Year Ended |  
|--------------------- | --------------------------- | ----------------- | -
|
|
|Net Income:           |                             |                   |  
|                      | As reported                 |                   | $
|                      | Impact of applying SFAS 123 |                   |  
|                      |                             |                   |  
|                      | Pro forma                   |                   | $
|                      |                             |                   |  
|Net income per share: |                             |                   |  
|                      | As reportedBasic           |                   | $
|                      | Pro formaBasic             |                   | $
|                      | As reportedDiluted         |                   | $
|                      | Pro formaDiluted           |                   | $

---

The
above effects of applying SFAS No. 123 are not indicative of future amounts. Additional awards in future years are anticipated.

In
calculating the preceding, the fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted average
assumptions:

|                         |  | Fiscal Year Ended |  
|------------------------ |  | ----------------- | -
|
|Risk free interest rate  |  | 2.5               | %
|Expected volatility      |  | 78.8              | %
|Expected life (in years) |  | 4                 |  
|Expected dividends       |  | None              |  

66

---

Fair Value of Financial Instruments

The Company's financial instruments primarily consist of cash and cash equivalents, receivables and payables and loans to executives for which the carrying
amounts materially approximate their fair values.

Accounting for Rebates Given by Vendors

The Company accounts for rebates received from its merchandise vendors as an adjustment to the prices of the vendor's products. This adjustment is characterized
as a reduction of the carrying amount of the Company's inventory and, when sold, as cost of sales. The Company recorded rebates from merchandise vendors of $3.1 million, $2.0 million and
$0.8 million in fiscal 2003, 2002 and 2001, respectively.

Accounting for Revenue Arrangements with Multiple Deliverables

The Company periodically offers its customers coupons that entitle them to receive a specified dollar amount off of future purchases. The customers are required
to meet certain purchasing criteria in order to receive the coupons. The Company accounts for this arrangement by deferring a proportional amount of revenue to the period that the coupon is expected
to be redeemed. The Company had balances in deferred revenue related to coupon arrangements of $0.4 million, $1.0 million and $0.0 million at January 31 2004,
February 1, 2003 and March 2, 2002, respectively.

Recently Adopted Accounting Standards

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"), which sets forth the financial
accounting and reporting to be followed for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires
entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The Company adopted SFAS
No. 143, effective February 2, 2003 for its fiscal 2003 consolidated financial statements with no material impact.

In
August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which provides for a single accounting model for
assets to be disposed of, broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. The
Company adopted SFAS No. 144 for its fiscal 2003 consolidated financial statements with no material impact.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" ("EITF No. 94-3"). SFAS No. 146 requires that
a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and initially measured at fair value. EITF No. 94-3 required that a
liability for an exit cost (as defined in EITF No. 94-3) was recognized at the date of an entity's commitment to an exit plan. The provisions of SFAS No. 146 are effective
for exit or disposal activities that are initiated after

67

---

December 31,
2002. The Company would be impacted by SFAS No. 146 only if the Company were to commit to a plan for an exit or disposal activity. Currently, the Company has not committed
to a plan for an exit or disposal activity.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based CompensationTransition and Disclosurean amendment of FASB Statement
No. 123" ("SFAS No. 148"). This Statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used
on reported results. In fiscal 2002, the Company adopted the disclosure requirements of SFAS No. 148. However, at this time, the Company does not intend to change to the fair value based method
of accounting for stock-based employee compensation.

In
January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"). In
December 2003, the FASB issued a revised Interpretation No. 46 ("FIN 46R"). The primary objectives of FIN 46R are to provide guidance on the identification of, and financial reporting
for, entities for which control is achieved through means other than through voting rights; such entities are known as variable-interest entities ("VIEs"). The Company adopted FIN 46R for its 2003
consolidated financial statements with no material impact.

3. Fiscal Year Change

On December 16, 2002, the Company's board of directors approved a change in the Company's fiscal year end from the Saturday nearest
February 28th to the Saturday nearest January 31st, effective February 1, 2003. The Company made this decision to align its reporting schedule with the
majority of other national retail companies. The table below summarizes selected unaudited financial data for the one-month period ended March 2, 2002.

|                                             |  | March 2,
2002
(unaudited) |       
|-------------------------------------------- |  | ------------------------- | ------
|
|Net sales                                    |  | $                         | 28,283
|Cost of sales                                |  |                           | 18,111
|                                             |  |                           |       
|Gross profit                                 |  |                           | 10,172
|Selling, general and administrative expenses |  |                           | 12,617
|                                             |  |                           |       
|Loss from operations                         |  |                           | (2,445
|Interest, net, and other                     |  |                           | 18    
|                                             |  |                           |       
|Loss before income tax benefit               |  |                           | (2,427
|income tax benefit                           |  |                           | (939  
|                                             |  |                           |       
|Net loss                                     |  | $                         | (1,488
|                                             |  |                           |       

68

---

4. Receivables

Receivables consist of the following:

January 31,
2004

February 1,
2003(in thousands)Trade

$
3,305

$
4,469Tenant improvement


3,728


1,031Customer list rental


1,037


549Income tax refund


767


Other


620


63$
9,457

$
6,112


The
Company evaluates the credit risk associated with its receivables. At January 31, 2004 and February 1, 2003 no reserve was recorded.

5. Property and Equipment, net

Property and equipment, net, consists of the following:

|                                                |  | January 31,
2004 |         | February 1,
2003 |  
|----------------------------------------------- |  | ---------------- | ------- | ---------------- | -
|
|Land                                            |  | $                | 152     |                  | $
|Building and land improvements                  |  |                  | 16,785  |                  |  
|Leasehold improvements                          |  |                  | 62,124  |                  |  
|Furniture and fixtures                          |  |                  | 22,018  |                  |  
|Technology hardware and software                |  |                  | 49,604  |                  |  
|Machinery and equipment                         |  |                  | 9,129   |                  |  
|Construction in progress                        |  |                  | 2,321   |                  |  
|                                                |  |                  |         |                  |  
|                                                |  |                  | 162,133 |                  |  
|Less: accumulated depreciation and amortization |  |                  | (69,901 | )                |  
|                                                |  |                  |         |                  |  
|                                                |  | $                | 92,232  |                  | $
|                                                |  |                  |         |                  |  

Construction
in progress is primarily comprised of leasehold improvement costs and furniture and fixtures related to new, unopened retail stores. The Company had a balance of
construction costs incurred for which a liability was established of $0.8 million and $0.4 million at January 31, 2004 and February 1, 2003, respectively.

69

---



6. Accrued Liabilities

Accrued liabilities consist of the following:

January 31,
2004

February 1,
2003(in thousands)Gift certificate/card liability

$
7,063

$
4,711Accrued payroll, related taxes and benefits


5,755


5,077Other


4,817


4,610Accrued sales returns


3,960


4,521Current portion of deferred rents


2,651


1,351$
24,246

$
20,270


7. Revolving Line of Credit

On March 5, 2003, the Company entered into a credit agreement (the "Agreement") with a consortium of banks that provides it with a $60.0 million
unsecured revolving line of credit. This line of credit has a $20.0 million limit for letters of credit, a $5.0 million limit for same day advances and a term standby letter of credit of
$0.6 million. The interest rate under the Agreement is the London InterBank Offered Rate and is adjusted based on the Company's leverage ratio.

The
Agreement provides that the Company must satisfy certain specified EBITDA (Earnings Before Interest Taxes Depreciation and Amortization), EBITDAR (i.e., EBITDA before rental/lease
expenses), fixed charge coverage ratio, leverage ratio, current ratio and minimum net worth requirements, as defined in the Agreement. The Agreement also places restrictions on the Company's ability
to, among other things, sell assets, participate in mergers, incur debt, pay dividends, and make investments or guarantees. The Agreement has a maturity date of March 5, 2006. During the fiscal
2003 first quarter, the company incurred $0.5 million in financing costs associated with obtaining its new credit facility. The Company incurred commitment fees of $459,000, $213,000 and
$216,000 fiscal 2003, 2002 and 2001, respectively.

The
Company had $0.3 million and $0.7 million in outstanding letters of credit at January 31, 2004 and February 1, 2003, respectively.

70

---

8. Income Taxes

The Company's deferred tax assets and liabilities, representing the tax effects of temporary differences, are as follows:

|                               |                                    | January 31, 2004                      |        | February 1, 2003 |      
|------------------------------ | ---------------------------------- | ------------------------------------- | ------ | ---------------- | -----
|
|
|Deferred tax assets:           |                                    |                                       |        |                  |      
|                               | Inventories                        |                                       | $      |                 |      
|                               | Accrued sales returns              |                                       |        | 1,133            |      
|                               | Accrued employee benefits          |                                       |        | 880              |      
|                               | Tenant improvement                 |                                       |        |                 |      
|                               | Other                              |                                       |        | 231              |      
|                               |                                    |                                       |        |                  |      
|                               |                                    | Total deferred tax assets             |        | $                | 2,244
|                               |                                    |                                       |        |                  |      
|Deferred tax liabilities:      |                                    |                                       |        |                  |      
|                               | Inventory                          |                                       | $      | (616             | )    
|                               | Prepaid and deferred catalog costs |                                       |        | (1,646           | )    
|                               | Tax basis depreciation             |                                       |        |                 |      
|                               |                                    |                                       |        |                  |      
|Total deferred tax liabilities |                                    | $                                     | (2,262 | )                | $    
|                               |                                    |                                       |        |                  |      
|                               |                                    | Net deferred tax assets (liabilities) |        | $                | (18  
|                               |                                    |                                       |        |                  |      

The
Company's income tax provision includes the following:

|                                         |         | Fiscal Year Ended |      
|---------------------------------------- | ------- | ----------------- | -----
|
|
|Current income tax provision:            |         |                   |      
|                                         | Federal |                   | $    
|                                         | State   |                   |      
|Deferred income tax provision (benefit): |         |                   |      
|                                         | Federal |                   |      
|                                         | State   |                   |      
|                                         |         |                   |      
|                                         |         | $                 | 8,037
|                                         |         |                   |      

Reconciliations
of the statutory U.S. federal income tax rates to the Company's effective income tax rates are as follows:

|                                           |  | Fiscal Year Ended |  
|------------------------------------------ |  | ----------------- | -
|
|Statutory income tax rate                  |  | 35.0              | %
|State income taxes, net of federal benefit |  | 4.2               | %
|                                           |  |                   |  
|                                           |  | 39.2              | %
|                                           |  |                   |  

71

---

The
Company received investment tax credits from the States of West Virginia and Idaho, which are reflected in the state income taxes, net of federal benefit line item of the foregoing
reconciliation. The West Virginia tax credits, which are available through 2012, subject to annual limitations of 80% of the Company's West Virginia income tax liability, are recognized by the Company
in the year in which they
are used. The Company utilized $147,000, $129,000 and $42,000 of these investment tax credits to offset its West Virginia income tax liability during fiscal 2003, 2002 and 2001, respectively. The
Idaho tax credits are limited to 50% of the current year's state income tax liability. The Company utilized $146,000, $119,000 and $40,000 of the Idaho tax credits to offset its Idaho state income tax
liability during fiscal 2003, 2002 and 2001, respectively.

9. Retirement of Treasury Shares

On March 31, 2001, the Company's Board of Directors approved a stock repurchase program pursuant to which the Company was authorized to repurchase in the
open market up to 300,000 outstanding shares of its common stock to be held in treasury. During fiscal 2001, the Company repurchased 209,100 common shares at an average market price of $22.55 per
share. The 209,100 common shares repurchased were not impacted by the two 50% stock dividends, each having the effect of a 3-for-2 stock split, declared by the Company's board
of directors on December 19, 2002 and August 4, 2003. On July 25, 2003, the Company retired the 209,100 shares held in treasury. The Company currently does not anticipate any
additional share repurchases.

10. Net Income Per Share

The following is a reconciliation of net income and the number of common shares used in the computations of net income per basic and diluted common share:

|                                                                                                         |  | Fiscal Year Ended
|-------------------------------------------------------------------------------------------------------- |  | -----------------
|
|
|Net income                                                                                               |  | $                
|                                                                                                         |  |                  
|Average shares outstanding used to determine net income per basic common share(2)                        |  |                  
|Net effect of dilutive stock options based on the treasury stock method using average market price(1)(2) |  |                  
|                                                                                                         |  |                  
|Average shares used to determine net income per diluted common share(2)                                  |  |                  
|                                                                                                         |  |                  

---

72

---

11. 1996 Stock Option/Stock Issuance Plan

The Company's 1996 Stock Option/Stock Issuance Plan (the "1996 Plan") was adopted by the Board of Directors and approved by a majority of stockholders on
March 4, 1996. The total number of shares authorized for issuance under the 1996 Plan is 4,189,157 common shares. The 1996 Plan will terminate on March 3, 2006, unless sooner terminated
by the Board of Directors.

The
1996 Plan is divided into three separate components: (i) the Discretionary Option Grant Program under which eligible individuals, including officers and key employees,
non-employee
directors and consultants, and other independent advisors, may, at the discretion of the Plan Administrator, be granted options to purchase shares of the Company's common stock at an exercise price
not less than 85% of the then fair market value of the Company's common stock for non-statutory options and 100% of the then fair market value of the Company's common stock for incentive
options, (ii) the Stock Issuance Program under which such individuals may, at the Plan Administrator's discretion, be directly sold or issued, as a bonus tied to the performance of services
and/or achievement of performance goals, shares of the Company's common stock at a price not less than 100% of the then fair market value and (iii) the Automatic Option Grant Program under
which option grants will automatically be made at periodic intervals to eligible non-employee members of the Board of Directors to purchase shares of the Company's common stock at an
exercise price equal to 100% of the then fair market value on the date of grant.

Under
the Discretionary Option Grant Program component of the 1996 Plan, employees have been granted options which remain outstanding at January 31, 2004 to purchase 1,408,187
shares of the Company's common stock. Under the Automatic Option Grant Program component of the 1996 Plan, present and former non-employee members of the Board of Directors have been
granted options which remain outstanding at January 31, 2004 to purchase 311,918 shares of the Company's common stock. At January 31, 2004, 630,116 options remain available for future
grant. Options granted under the Discretionary Option Grant Program to employees vest and become exercisable on a pro rata basis over either four or five years, as specified. The initial and
subsequent annual allotments of options granted under the Automatic Option Grant Program to non-employee members of the Board of Directors are immediately exercisable and vest on a pro
rata basis over three years and one year, respectively. The options expire ten years from date of issue under the Discretionary Option Grant Program, subject to earlier expiration for vested options
not exercised following termination of employment, and have a maximum term of ten years under the Automatic Option Grant Program, subject to earlier expiration for vested options not exercised two
years following the optionee's cessation of Board service.

73

---

A
summary of the status of the Company's stock options as of January 31, 2004, February 1, 2003 and March 2, 2002 and the changes during the fiscal years then ended,
is presented below:

|                                   |  | January 31, 2004
|---------------------------------- |  | ----------------
|
|Outstanding at beginning of period |  | 1,782,459       
|Granted                            |  | 328,096         
|Exercised                          |  | (175,239        
|Forfeited                          |  | (215,211        
|                                   |  |                 
|Outstanding at end of period       |  | 1,720,105       
|                                   |  |                 
|Exercisable                        |  | 1,113,041       
|                                   |  |                 

|                                   |  | February 1, 2003
|---------------------------------- |  | ----------------
|
|Outstanding at beginning of period |  | 2,093,876       
|Granted                            |  | 101,250         
|Exercised                          |  | (205,857        
|Forfeited                          |  | (206,810        
|                                   |  |                 
|Outstanding at end of period       |  | 1,782,459       
|                                   |  |                 
|Exercisable                        |  | 1,148,499       
|                                   |  |                 

|                                   |  | March 2, 2002
|---------------------------------- |  | -------------
|
|Outstanding at beginning of period |  | 2,243,912    
|Granted                            |  | 311,064      
|Exercised                          |  | (247,968     
|Forfeited                          |  | (213,132     
|                                   |  |              
|Outstanding at end of period       |  | 2,093,876    
|                                   |  |              
|Exercisable                        |  | 1,195,056    
|                                   |  |              

74

---

The
following table provides summarized information about stock options outstanding at January 31, 2004:

|              |  | Options Outstanding |  | Options Exercisable
|------------- |  | ------------------- |  | -------------------
|
|$2.93$6.66   |  | 411,564             |  | 6.6                
|$6.67$9.99   |  | 699,904             |  | 6.0                
|$10.00$13.33 |  | 453,050             |  | 7.3                
|$13.34$16.66 |  | 117,899             |  | 5.6                
|$16.67$18.44 |  | 37,688              |  | 4.4                

12. Employee Stock Purchase Plan

The Company's Employee Stock Purchase Plan (the "ESPP") was adopted by the Board of Directors and approved by a majority of stockholders on January 28,
1996. Under the ESPP, eligible employees may purchase shares of the Company's common stock at six-month intervals at the lesser of 85% of the fair market value on the first day of each
six-month purchase interval or last day of each six-month purchase interval. The maximum number of shares that an employee may purchase on any one purchase date may not exceed
2,250 shares. The Company's employees purchased 51,000, 45,000 and 36,000 shares during fiscal 2003, 2002 and 2001, respectively. The average share price for these purchases was $5.19, $5.81 and
$6.57, for fiscal 2003, 2002 and 2001, respectively.

13. Retirement Plan

Effective October 1, 1988, and as amended from time to time, the Company adopted a tax-qualified employee savings, retirement and profit
sharing plan qualified under Section 401(k) of the Internal Revenue Code (the "401(k) Plan") under which eligible employees may elect to defer a portion of their current compensation, up to
certain statutorily prescribed annual limits, and make corresponding periodic contributions into the 401(k) Plan. Contributions to the 401(k) Plan, as well as any income earned thereon, are not
taxable to the employee until withdrawn from the 401(k) Plan. All employees twenty-one years of age and older with 1,000 hours of service who have been employed by the Company for
at least one year are eligible to participate in the 401(k) Plan. The Company matches a certain percentage of the employees' overall contribution and may make a discretionary profit sharing
contribution based on the overall profitability of the Company. The
Company recognized contribution expense of $635,000, $701,000 and $431,000 for fiscal 2003, 2002 and 2001, respectively.

14. Executive Loan Program

Prior to the enactment of the Sarbanes-Oxley Act ("the Act"), the Company maintained an Executive Loan Program under which the Company made, at its sole
discretion and with prior approvals from the Chief Executive Officer and the Board of Directors' Compensation Committee, secured long-term loans to key executives other than the Company's
founders, Dennis Pence and Ann Pence. The Company's Chief Executive Officer, President and Chief Financial Officer do not have loans under this program. Each loan is secured by the executive's
personal net assets, inclusive of all vested stock options in the Company, bears interest at three percent per annum, and becomes due and

75

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payable
on the earlier of (i) the date ten days before the date on which the vested stock options serving as partial security expire or (ii) ninety days from the date on which the
executive's employment with the Company terminates for any reason. Outstanding loans were $0.3 million and $0.5 million at January 31, 2004 and February 1, 2003,
respectively. None of the loans outstanding prior to enactment of the Act have had any of their terms modified.

15. Deferred Compensation Program

During fiscal 2001, 2002 and 2003, the Compensation Committee of the Company's Board of Directors authorized compensation bonus pools that, in aggregate,
currently total $4.0 million. These bonus pools serve as additional incentives to retain certain key employees. The Company is accruing the related compensation expense to each employee on a
straight-line basis over the retention periods based on the assumption that the performance criteria specified in the agreements will be met. The total compensation and dates to be paid
are summarized as follows:

Description

Amount

Dates to be paid(1)(in thousands)Five executive employees

$
1,725

Sep-05450

Apr-06150

Feb-07$
2,325Twelve non-executive employees

$
150

Oct-05525

Apr-06355

Jul-0675

Feb-07$
1,105Authorized subsequent to January 31, 2004:Three non-executive employees

$
525

May-07


---

16. Arrangements with Principal Shareholders

In fiscal 2001, the Company did not meet its financial goals. In response, the Company's principal shareholders, Dennis Pence and Ann Pence, declined to accept
any salaries from the beginning of fiscal 2002 through September 26, 2002 and through September 1, 2002, respectively. As required by accounting principles generally accepted in the
United States of America, the Company imputed on a straight-line basis into its consolidated selling, general and administrative expenses the fair market value of salaries for Dennis Pence
and Ann Pence for these periods with corresponding offsetting credits to its consolidated additional paid-in capital. During fiscal 2002, approximately $228,000 was imputed into the
Company's consolidated selling, general and administrative expenses.

76

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Dennis
Pence and Ann Pence personally participate in a jet timeshare program through two entities they own. For flights by them and other corporate executives made exclusively for
official corporate purposes, the Company reimburses these entities for:



Aggregate
expense reimbursements totaled approximately $850,000 and $725,000 for fiscal 2003 and 2002, respectively.

On
June 14, 2003, the Company's Board of Directors approved a charitable contribution of $100,000 to the Morning Light Foundation, Inc, a not-for-profit
chartible
organization. Dennis Pence, the Company's Chairman and Chief Executive Officer is the founder and a Board member of the Morning Light Foundation, Inc.

17. Commitments

The Company leases its East Coast Distribution Center, Coeur d'Alene, Idaho Call Center, retail and outlet store space as well as certain other property and
equipment under operating leases. Certain lease agreements are noncancellable with aggregate minimum lease payment requirements, contain escalation clauses and renewal options, and set forth
incremental rental payments based on store sales above specified minimums ("contingent rental payments"). The Company incurred aggregate rent expense under its operating leases of $20,432,000,
$15,152,000 and $9,837,000 including contingent rent expense of $99,000, $82,000 and $44,000 for fiscal 2003, 2002 and 2001, respectively.

As
of January 31, 2004 the Company's minimum lease payment requirements, excluding contingent rental payments, are as follows (in thousands):

|Fiscal 2004 |  | $ | 20,373 
|----------- |  | - | -------
|Fiscal 2005 |  |   | 21,545 
|Fiscal 2006 |  |   | 21,449 
|Fiscal 2007 |  |   | 20,889 
|Fiscal 2008 |  |   | 19,777 
|Thereafter  |  |   | 85,794 
|            |  |  
|Total       |  | $ | 189,827
|            |  |  

77

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Subsequent
to January 31, 2004 the Company entered into additional retail leases with minimum lease payment requirements, excluding contingent rental payments, as follows (in
thousands):

|Fiscal 2004 |  | $ | 312  
|----------- |  | - | -----
|Fiscal 2005 |  |   | 441  
|Fiscal 2006 |  |   | 441  
|Fiscal 2007 |  |   | 441  
|Fiscal 2008 |  |   | 441  
|Thereafter  |  |   | 2,452
|            |  |  
|Total       |  | $ | 4,528
|            |  |  

Additionally,
the Company had inventory purchase commitments of approximately $73.6 million and $84.0 million at January 31, 2004 and February 1, 2003,
respectively.

18. Contingencies

The Company and its subsidiaries are periodically involved in litigation and administrative proceedings primarily arising in the normal course of its business. In
the opinion of management, the Company's gross liability, if any, and without any consideration given to the availability of insurance or other indemnification, under any pending litigation or
administrative proceedings would not materially affect its consolidated financial position, results of operations or cash flows.

The
Company collects sales taxes from customers transacting purchases in states in which the Company has physically based some portion of its business. The Company also pays applicable
corporate income, franchise and other taxes, to states in which retail or outlet stores are physically located. Upon entering a new state, the Company accrues and remits the applicable taxes. The
Company has accrued for these
taxes based on its current interpretation of the tax code as written. Failure to properly determine or to timely remit these taxes may result in interest and related penalties being assessed.

19. Segment Reporting

The Company's executive management, being its chief operating decision makers, work together to allocate resources to and assess the performance of the Company's
business. The Company's executive management manages the Company as two distinct operating segments, Direct and Retail. Although offering customers substantially similar merchandise, the Company's
Direct and Retail operating segments have distinct management, marketing and operating strategies and processes.

Beginning
in the fiscal 2003 first quarter, the Company reclassified its outlet store business and phone and Internet orders that originate in retail stores from its Direct Segment to
its Retail Segment. The Company made these reclassifications to reflect the manner in which its segments are currently managed. The Company has reclassified prior period financial statements on a
consistent basis for all periods presented. These reclassifications had no impact on the Company's consolidated net sales, net income, retained earnings or cash flows for any period.

The
Company's executive management assesses the performance of each operating segment based on an "operating contribution" measure, which is defined as net sales less merchandise
acquisition costs

78

---

and
certain directly identifiable and allocable operating costs, as described below. For the Direct Segment, these operating costs primarily consist of catalog development, production, and circulation
costs, e-commerce advertising costs and order processing costs. For the Retail Segment, these operating costs primarily consist of store selling and occupancy costs. Operating contribution
less corporate and other expenses is equal to income before interest and taxes. Corporate and other expenses consist of unallocated shared-service costs and general and administrative expenses.
Unallocated shared-service costs include merchandising, inventory planning and quality assurance costs as well as corporate occupancy costs. General and administrative expenses include costs
associated with general corporate management and shared departmental services (e.g., finance, accounting, data processing and human resources).

Operating
segment assets are those directly used in or clearly allocable to an operating segment's operations. For the Direct Segment, these assets primarily include inventory and
prepaid and deferred catalog costs. For the Retail Segment, these assets primarily include inventory, fixtures and leasehold improvements. Corporate and other assets include corporate headquarters,
merchandise distribution and shared technology infrastructure as well as corporate cash and cash equivalents and prepaid expenses. Operating segment depreciation and amortization and capital
expenditures are correspondingly allocated to each operating segment. Corporate and other depreciation and amortization and capital expenditures are related to corporate headquarters, merchandise
distribution, and technology infrastructure.

79

---

The
following tables provide certain financial data for the Company's Direct and Retail Segments as well as reconciliations to the Company's consolidated financial statements. The
accounting policies of the operating segments are the same as those described in Note 2"Significant Accounting Policies".

|                               |                            | Fiscal Years Ended                         |        
|------------------------------ | -------------------------- | ------------------------------------------ | -------
|
|
|Net sales(1):                  |                            |                                            |        
|                               | Direct(2)                  |                                            | $      
|                               | Retail                     |                                            |        
|                               |                            |                                            |        
|                               |                            | Consolidated net sales                     |        
|                               |                            |                                            |        
|Operating contribution:        |                            |                                            |        
|                               | Direct                     |                                            | $      
|                               | Retail                     |                                            |        
|                               |                            |                                            |        
|                               |                            | Total operating contribution               |        
|Corporate and other            |                            |                                            | (51,236
|                               |                            |                                            |        
|                               |                            | Consolidated income from operations        |        
|                               |                            |                                            |        
|Depreciation and amortization: |                            |                                            |        
|                               | Direct                     |                                            | $      
|                               | Retail                     |                                            |        
|                               | Corporate and other        |                                            |        
|                               |                            |                                            |        
|                               |                            | Consolidated depreciation and amortization |        
|                               |                            |                                            |        
|Total assets:                  |                            |                                            |        
|                               | Direct                     |                                            | $      
|                               | Retail                     |                                            |        
|                               | Corporate and other assets |                                            |        
|                               |                            |                                            |        
|                               |                            | Consolidated total assets                  |        
|                               |                            |                                            |        
|Capital expenditures:          |                            |                                            |        
|                               | Direct                     |                                            | $      
|                               | Retail                     |                                            |        
|                               | Corporate and other        |                                            |        
|                               |                            |                                            |        
|                               |                            | Consolidated capital expenditures          |        
|                               |                            |                                            |        

---

80

---

The
Company's products are principally marketed to individuals within the United States. Net sales realized from other geographic markets, primarily Canada and Japan, have collectively
been less than 5% of consolidated net sales in each reported period. No single customer accounts for ten percent or more of consolidated net sales. Apparel sales have constituted approximately
three-quarters of the Company's consolidated net sales during fiscal 2003, 2002 and 2001, with sales of jewelry, accessories and gift items constituting the respective balances.

20. Quarterly Results of Operations (unaudited)

The following tables contain selected quarterly consolidated financial data for the 12-month fiscal 2003 and the 11-month fiscal 2002 that
has been prepared on the same basis as the accompanying audited consolidated financial statements and includes all adjustments necessary to present fairly, in all material respects, the information
set forth therein on a consistent basis.

|                                             |  | Fiscal 2003
|-------------------------------------------- |  | -----------
|
|
|Net sales                                    |  | $          
|Cost of sales                                |  |            
|Gross profit                                 |  |            
|Selling, general and administrative expenses |  |            
|Income (loss) from operations                |  |            
|Provision for (benefit from) income taxes    |  |            
|Net income (loss)                            |  | $          
|Net income (loss) per sharebasic            |  | $          
|Net income (loss) per sharediluted          |  | $          

|                                             |  | Fiscal 2002
|-------------------------------------------- |  | -----------
|
|
|Net sales                                    |  | $          
|Cost of sales                                |  |            
|Gross profit                                 |  |            
|Selling, general and administrative expenses |  |            
|Income (loss) from operations                |  |            
|Provision for (benefit from) income taxes    |  |            
|Net income (loss)                            |  | $          
|Net income (loss) per sharebasic            |  | $          
|Net income (loss) per sharediluted          |  | $          

Note:
The aggregate of certain of the above quarterly amounts may differ from that reported for the full fiscal year due to the effects of rounding.

81

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Independent Auditors' Report on Financial Statement Schedule

To
the Stockholders of Coldwater Creek Inc.:

Under
the date of March 5, 2004, except for the adjustments to include disclosure of the customer list rental income and customer list rental expense for the fiscal year ended
March 2, 2002 in Note 2 and to include disclosure of the components of interest, net, and other for the fiscal year ended March 2, 2002 in Note 2, as to which the date is
March 30, 2004, we reported on the consolidated balance sheets of Coldwater Creek Inc. and subsidiaries as of January 31, 2004 and February 1, 2003, and the related
consolidated statements of operations, stockholders' equity and cash flows for the fiscal year ended January 31, 2004 and the eleven-month transition period ended February 1, 2003, which
are included herein. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related information for the fiscal year ended January 31, 2004
and the eleven-month transition period ended February 1, 2003 included in the consolidated financial statement schedule herein. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on the information for the fiscal year ended January 31, 2004 and the eleven-month transition period ended February 1,
2003 included in the consolidated financial statement schedule based on our audits. The consolidated statements of operations, stockholders' equity and cash flows for Coldwater Creek Inc. and
subsidiaries as of March 2, 2002 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements, before
the restatements described in Note 1, Note 2, Note 10 and Note 19 to the consolidated financial statements, in their report dated April 10, 2002.

In
our opinion, the information for the fiscal year ended January 31, 2004 and the eleven-month transition period ended February 1, 2003 included in the consolidated
financial statement schedule, when considered in relation to the basic consolidated financial statements as of January 31, 2004 and February 1, 2003 and for the periods then ended, taken
as a whole, present fairly, in all material respects, the information set forth therein.

/s/
KPMG LLP
Boise, Idaho
March 5, 2004

82

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Schedule II

Valuation and Qualifying Accounts

|Allowance for sales returns
(included in accrued liabilities) |  | Balance at
beginning
of period |       | Amounts
charged to
net income |   | Write-offs
against
reserve |  | Balance at
end of
period
|------------------------------------------------------------- |  | ------------------------------ | ----- | ----------------------------- | - | -------------------------- |  | ------------------------
|
|Fiscal year ended:                                            |  |                                |       |                               |   |                            |  |                         
|March 2, 2002 (unaudited)                                     |  | $                              | 8,783 |                               | $ | 102,351                    |  | $                       
|February 1, 2003 (audited)                                    |  |                                | 7,408 |                               |   | 79,537                     |  |                         
|January 31, 2004 (audited)                                    |  |                                | 4,521 |                               |   | 60,964                     |  |                         

83

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

None.

Item 9A. CONTROLS AND PROCEDURES

(a)   Evaluation
of disclosure controls and procedures: Under the direction of our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)), and have concluded that, as of January 31, 2004, our
disclosure controls and procedures were effective.

(b)   Changes
in internal control over financial reporting: In connection with the evaluation of our internal control over financial reporting (required by
paragraph (d) of Exchange Act Rule 13a-15), we have made no changes in, nor taken any corrective actions regarding, our internal control over financial reporting during the
fourth quarter ended January 31, 2004, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

For information with respect to the executive officers of the Registrant, See Item 4"Directors and Executive Officers" at the end of Part I of
this report. The other information required by this Item is incorporated herein by reference to the Company's Proxy Statement for its Annual Meeting of Stockholders to be held on June 12, 2004
to be filed with the Commission no later than 120 days after January 31, 2004, pursuant to Regulation 14A.

The
Company has a Code of Ethics for its principal executive officer, its principal financial officer and its principal accounting officer. A copy of this Code of Ethics is available on
the Company's Investor Relations website at http://www.coldwatercreek.com. Any future changes or amendments to this Code of Ethics, and any waiver that applies to the Company's principal executive
officer, principal financial officer, or principal accounting officer, will also be posted on http://www.coldwatercreek.com.

Item 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated herein by reference to the Company's Proxy Statement for its Annual Meeting of Stockholders to be held on
June 12, 2004, to be filed with the Commission no later than 120 days after January 31, 2004, pursuant to Regulation 14A.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item is incorporated herein by reference to the Company's Proxy Statement for its Annual Meeting of Stockholders to be held on
June 12, 2004, to be filed with the Commission no later than 120 days after January 31, 2004, pursuant to Regulation 14A.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item is incorporated herein by reference to the Company's Proxy Statement for its Annual Meeting of Stockholders to be held on
June 12, 2004, to be filed with the Commission no later than 120 days after January 31, 2004, pursuant to Regulation 14A.

84

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Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item is incorporated herein by reference to the Company's Proxy Statement for its Annual Meeting of Stockholders to be held on
June 12, 2004, to be filed with the Commission no later than 120 days after January 31, 2004, pursuant to Regulation 14A.

PART IV

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



| |  | Index to financial statement schedules                       |  | Page
| |  | ------------------------------------------------------------ |  | ----
| |  | Independent Auditors' Report on Financial Statement Schedule |  | 82  
| |  | Schedule IIValuation and Qualifying Accounts                |  | 83  

|Date              |  | Item Reported On                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|----------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|November 19, 2003 |  | The Company furnished to the Securities and Exchange Commission a copy of a press release reporting its financial results for its fiscal quarter and first nine-months ended November 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|December 4, 2003  |  | The Company filed a Form 8-K containing (i) an updated description of its business, risk factors and management's discussion and analysis of financial condition and results of operations, (ii) its audited consolidated balance sheets as of
February 1, 2003 and March 2, 2002, and the related consolidated statements of operations, stockholders' equity and cash flows for the 11-month period ended February 1, 2003, and for the years ended March 2, 2002 and March 3,
2001 and (iii) a press release dated December 4, 2003, announcing that it had filed a registration statement with the Securities and Exchange Commission for a proposed public offering of common stock.
|February 27, 2004 |  | The Company filed a Form 8-K/A to amend the description of its business, risk factors and managements' discussion and analysis and results of operations contained in the Form 8-K filed on December 4, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|March 10, 2004    |  | The Company furnished to the Securities and Exchange Commission a copy of a press release reporting its financial results for its fiscal quarter and year ended January 31, 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

85

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|Exhibit
Number |  |   |  | Description of Document                                                                                                                                                                                                                              
|-------------- |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | * |  | Amended and Restated Certificate of Incorporation (filed with the Company's S-1, file No. 333-16651)                                                                                                                                                 
|3.1.1          |  | * |  | Certificate of Amendment of Amended and Restated Certificate of Incorporation                                                                                                                                                                        
|3.2            |  | * |  | Amended and Restated Bylaws (filed with the Company's S-1, file No. 333-16651)                                                                                                                                                                       
|3.2.1          |  | * |  | Amendment to Amended and Restated Bylaws (filed with the Company's fiscal 2003 Second Quarter Report on Form 10-Q)                                                                                                                                   
|4.1            |  | * |  | Specimen of Stock Certificate (filed with the Company's S-1/A, file No. 333-16651)                                                                                                                                                                   
|10.1           |  | * |  | Form of Indemnity Agreement between the Registrant and each of its Directors (filed with the Company's S-1, file No. 333-16651)                                                                                                                      
|10.1.1         |  |   |  | Amended and Restated Form of Indemnity Agreement between the Registrant and each of its Directors                                                                                                                                                    
|10.2           |  | * |  | Form of Agreement for Distribution of Retained Earnings and Tax Indemnification between the Company and Dennis Pence and Ann Pence (filed with the Company's S-1/A, file No. 333-16651)                                                              
|10.3           |  | * |  | Credit Agreement dated March 5, 2003 between the Company, Wells Fargo Bank, National Association and various other financial institutions (filed with the Company's Fiscal 2002 Annual Report on Form 10-K)                                          
|10.3.1         |  |   |  | First Amendment to the Credit Agreement dated March 5, 2003 2003 between the Company, Wells Fargo Bank, National Association and various other financial institutions.                                                                               
|10.4           |  | * |  | 1996 Stock Option/Stock Issuance PlanAmended and Restated as of June 14, 2003 (filed with the Company's fiscal 2002 Proxy Statement)                                                                                                                
|10.5           |  | * |  | Form of Stock Option Agreement under 1996 Stock Option/Stock Issuance Plan (filed with the Company's S-1, file No. 333-16651)                                                                                                                        
|10.6           |  | * |  | 1997 Employee Stock Purchase Plan (filed with the Company's Fiscal 1997 Second Quarter Report on Form 10-Q)                                                                                                                                          
|10.7           |  | * |  | Form of Executive Loan Agreement (filed with the Company's Fiscal 1997 Second Quarter Report on Form 10-Q)                                                                                                                                           
|10.8           |  | * |  | Parkersburg Distribution Center Operating Lease (filed with the Company's Fiscal 1998 First Quarter Report on Form 10-Q)                                                                                                                             
|10.9           |  | * |  | Three-year Employee Retention Compensation Agreements (filed with the Company's Fiscal 2002 Annual Report on Form 10-K                                                                                                                               
|16.1           |  | * |  | Letter from Arthur Andersen LLP to the Securities and Exchange Commission dated May 6, 2002 (filed with the Company's Fiscal 2001 Annual Report on Form 10-K)                                                                                        
|23             |  |   |  | Consent of Independent Auditors                                                                                                                                                                                                                      
|24.1           |  | * |  | Power of Attorney (included on the signature page to S-1, file No. 333-16651)                                                                                                                                                                        
|31.1           |  |   |  | Certification by Dennis C. Pence of annual report pursuant to Rule 13a-14(a) or Rule 15d-14(a)                                                                                                                                                       
|31.2           |  |   |  | Certification by Melvin Dick of annual report pursuant to Rule 13a-14(a) or Rule 15d-14(a)                                                                                                                                                           
|32.1           |  |   |  | Certification by Dennis C. Pence and Melvin Dick pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                            
|99             |  | * |  | Letter from Coldwater Creek Inc. to the Securities and Exchange Commission relating to the receipt of Arthur Andersen LLP's letter regarding compliance with professional standards (filed with the Company's Fiscal 2001
Annual Report on Form 10-K)

---

86

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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, in the City of Sandpoint, State of Idaho, on this 12th day of April 2004.

| |  | COLDWATER CREEK INC.
| |  | --------------------
| |  | By:                 

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

|Signature                                     |  | Title                                                                                        |  | Date          
|--------------------------------------------- |  | -------------------------------------------------------------------------------------------- |  | --------------
|                                              |  |                                                                                              |  |               
|/s/DENNIS C. PENCEDennis C. Pence             |  | Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) |  | April 12, 2004
|/s/MELVIN DICKMelvin Dick                     |  | Executive Vice President and Chief Financial Officer (Principal Financial Officer)           |  | April 12, 2004
|/s/DUANE A. HUESERSDuane A. Huesers           |  | Vice President of Finance (Principal Accounting Officer)                                     |  | April 12, 2004
|/s/ANN PENCEAnn Pence                         |  | Director, Vice Chairman of the Board of Directors                                            |  | April 12, 2004
|/s/JAMES R. ALEXANDERJames R. Alexander       |  | Director                                                                                     |  | April 12, 2004
|/s/MICHELLE COLLINSMichelle Collins           |  | Director                                                                                     |  | April 12, 2004
|/s/WARREN R. HASHAGENWarren R. Hashagen       |  | Director                                                                                     |  | April 12, 2004
|/s/CURT HECKERCurt Hecker                     |  | Director                                                                                     |  | April 12, 2004
|/s/ROBERT H. MCCALLRobert H. McCall           |  | Director                                                                                     |  | April 12, 2004
|/s/GEORGIA SHONK-SIMMONSGeorgia Shonk-Simmons |  | President, Chief Merchandising Officer and Director                                          |  | April 12, 2004

87

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EXHIBIT INDEX

|Exhibit
Number |  | Description of Document                                                                                                                                              
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1.1         |  | Amended and Restated Form of Indemnity Agreement between the Registrant and each of its Directors                                                                    
|10.3.1         |  | First Amendment to the Credit Agreement dated March 5, 2003 2003 between the Company, Wells Fargo Bank, National Association and various other financial institutions
|23             |  | Consent of Independent Auditors                                                                                                                                      
|31.1           |  | Certification by Dennis C. Pence of annual report pursuant to Rule 13a-14(a) or Rule 15d-14(a)                                                                       
|31.2           |  | Certification by Melvin Dick of annual report pursuant to Rule 13a-14(a) or Rule 15d-14(a)                                                                           
|32.1           |  | Certification by Dennis C. Pence and Melvin Dick pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002            

88

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