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

                                    FORM 10-Q

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

                 For The Quarterly Period Ended November 3, 2001


                         Commission File Number 1-14770

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

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


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

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

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

                                              YES   X     NO
                                                   ----       -----

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

                          Common Stock, $.01 par value
                    22,225,329 shares as of November 30, 2001


<PAGE>

                         PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

                    PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEET



<TABLE>
<CAPTION>
       (Dollars in millions)
                                                         NOVEMBER 3,       OCTOBER 28,      FEBRUARY 3,
ASSETS                                                      2001              2000              2001
------                                                   (UNAUDITED)       (UNAUDITED)       (AUDITED)
                                                         -----------       -----------       ---------
<S>                                                     <C>              <C>              <C>
Current Assets:
     Cash and cash equivalents                             $   52.7         $   18.2         $   10.4
     Merchandise inventories                                  387.3            356.5            355.6
     Current deferred income taxes                             21.0             12.1             14.9
     Other current assets                                      61.5             57.8             53.8
                                                           --------         --------         --------
        Total current assets                                  522.5            444.6            434.7

Property and Equipment:
     Land                                                       9.3              7.4              7.4
     Buildings and leasehold improvements                     802.6            766.3            782.4
     Furniture, fixtures and equipment                        384.7            325.5            343.0
     Property under capital leases                              7.3              7.3              7.3
                                                           --------         --------         --------
        Total property and equipment                        1,203.9          1,106.5          1,140.1
     Accumulated depreciation
        and amortization                                     (679.1)          (604.2)          (621.4)
                                                           --------         --------         --------
        Property and equipment, net                           524.8            502.3            518.7

Deferred income taxes                                          23.7             29.3             27.1
Other assets                                                   17.0              9.0             22.3
                                                           --------         --------         --------

        Total Assets                                       $1,088.0         $  985.2         $1,002.8
                                                           ========         ========         ========


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

Current Liabilities:
     Current maturities of long-term debt                  $   58.7         $    5.3         $   16.4
     Accounts payable and accrued expenses                    206.1            222.2            212.3
                                                           --------         --------         --------
        Total current liabilities                             264.8            227.5            228.7

Long-term debt                                                260.5            319.0            309.2
Other liabilities                                              60.9             48.3             53.1
Minority Interest                                               7.4              1.0              1.4

Total shareowners' equity                                     494.4            389.4            410.4
                                                           --------         --------         --------

        Total Liabilities and Shareowners' Equity          $1,088.0         $  985.2         $1,002.8
                                                           ========         ========         ========

</TABLE>

            See Notes to Condensed Consolidated Financial Statements.



<PAGE>



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



<TABLE>
<CAPTION>
 (Dollars and shares in millions, except per share)               13 WEEKS ENDED                           39 WEEKS ENDED
                                                       -----------------------------------      ------------------------------------
                                                       NOVEMBER 3, 2001   OCTOBER 28, 2000      NOVEMBER 3, 2001    OCTOBER 28, 2000
                                                       ----------------   ----------------      ----------------    ----------------
<S>                                                    <C>                <C>                   <C>                 <C>
Net retail sales                                           $   697.1           $   723.0           $ 2,271.4             $ 2,248.4

Cost of sales                                                  498.6               489.8             1,571.4               1,517.0

Selling, general, and administrative expenses                  170.5               172.5               550.1                 525.7

Non-recurring item                                                --                  --                  --                   8.0
                                                           ---------           ---------           ---------             ---------

Operating profit                                                28.0                60.7               149.9                 197.7

Interest expense, net                                            6.7                 7.7                22.0                  17.3
                                                           ---------           ---------           ---------             ---------

Earnings before income taxes, minority
   interest, and extraordinary loss                             21.3                53.0               127.9                 180.4

Provision for income taxes                                       8.2                20.6                49.1                  70.2
                                                           ---------           ---------           ---------             ---------

Earnings before minority interest and
   extraordinary loss                                           13.1                32.4                78.8                 110.2

Minority interest                                                0.2                  --                 0.6                    --
                                                           ---------           ---------           ---------             ---------

Earnings before extraordinary loss                              13.3                32.4                79.4                 110.2

Extraordinary loss related to early
   extinguishment of debt, net of income taxes                    --                  --                  --                   3.6
                                                           ---------           ---------           ---------             ---------

Net Earnings                                               $    13.3           $    32.4           $    79.4             $   106.6
                                                           =========           =========           =========             =========

Diluted Earnings per Share:

 Net earnings before extraordinary loss                         0.59                1.44                3.50                  4.49
 Extraordinary Loss                                               --                  --                  --                  0.15
                                                           ---------           ---------           ---------             ---------
Diluted Earnings per Share                                 $    0.59           $    1.44           $    3.50             $    4.34
                                                           =========           =========           =========             =========

Basic Earnings per Share:
 Net earnings before extraordinary loss                         0.60                1.46                3.57                  4.54
 Extraordinary Loss                                               --                  --                  --                  0.15
                                                           ---------           ---------           ---------             ---------

Basic Earnings per Share                                   $    0.60           $    1.46           $    3.57             $    4.39
                                                           =========           =========           =========             =========

Diluted Weighted Average Shares Outstanding                     22.6                22.5                22.7                  24.6
                                                           =========           =========           =========             =========

Basic Weighted Average Shares Outstanding                       22.2                22.1                22.2                  24.3
                                                           =========           =========           =========             =========
</TABLE>

            See Notes to Condensed Consolidated Financial Statements.
<PAGE>

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

<TABLE>
<CAPTION>
(Dollars in millions)
                                                                    39 WEEKS ENDED
                                                         -----------------------------------
                                                         NOVEMBER 3, 2001   OCTOBER 28, 2000
                                                         ----------------   ----------------
<S>                                                      <C>                <C>
Operating Activities:
   Net earnings                                              $ 79.4              $106.6
   Adjustments for noncash items
   Included in net earnings:
       Extraordinary loss related to early
          extinguishment of debt                                 --                 3.6
       Depreciation and amortization                           76.8                75.4
       Amortization of unearned
          restricted stock                                      3.5                 2.2
       Deferred income taxes                                   (2.7)               (1.1)
Changes in working capital:
   Merchandise inventories                                    (31.7)               (6.8)
   Other current assets                                        (7.7)              (14.2)
   Accounts payable and accrued expenses                       (6.2)               20.4
Other assets and liabilities, net                               2.8                (0.9)
                                                             ------              ------

Total Operating Activities                                    114.2               185.2
                                                             ------              ------

Investing Activities:
   Capital expenditures                                       (92.5)              (99.6)
   Disposition of property and equipment                        9.6                 4.8
                                                             ------              ------

Total Investing Activities                                    (82.9)              (94.8)
                                                             ------              ------

Financing Activities:
   Issuance of long-term debt                                    --               400.0
   Repayment of long-term debt                                 (6.4)             (207.2)
   Payment of debt issuance costs                                --                (8.9)
   Net issuances (purchases) of common stock                   11.5              (421.3)
   Other investing activities                                   5.9                 1.0
                                                             ------              ------

Total Financing Activities                                     11.0              (236.4)
                                                             ------              ------

Increase (Decrease) in Cash and Cash Equivalents               42.3              (146.0)
Cash and Cash Equivalents, Beginning of Year                   10.4               164.2
                                                             ------              ------
Cash and Cash Equivalents, End of Period                     $ 52.7              $ 18.2
                                                             ======              ======

Cash paid during the period:
   Interest                                                  $ 24.3              $ 21.6
   Income Taxes                                                41.7                56.2
</TABLE>

            See Notes to Condensed Consolidated Financial Statements.


<PAGE>

                    PAYLESS SHOESOURCE, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1. INTERIM RESULTS. These unaudited Condensed Consolidated Financial
Statements of Payless ShoeSource, Inc. (the "Company") have been prepared in
accordance with the instructions to Form 10-Q of the United States Securities
and Exchange Commission and should be read in conjunction with the Notes to
Consolidated Financial Statements (pages 20-25) in the Company's 2000 Annual
Report. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the unaudited Condensed Consolidated
Financial Statements are fairly presented and all adjustments (consisting only
of normal recurring adjustments) necessary for a fair statement of the results
for the interim periods have been included; however, certain items are included
in these statements based upon estimates for the entire year. The results for
the three-month period and nine-month period ended November 3, 2001 are not
necessarily indicative of the results that may be expected for the fiscal year
ending February 2, 2002.

NOTE 2. INVENTORIES. Merchandise inventories are valued by the retail method and
are stated at the lower of cost, determined using the first-in, first-out (FIFO)
basis, or market.

NOTE 3. REVOLVING CREDIT LINE. As of November 3, 2001, no amounts were drawn
against the Company's $200.0 million line of credit. The availability under the
line of credit has been reduced, however, by a $14.3 million outstanding letter
of credit.

NOTE 4. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. In order
to mitigate the Company's exposure to fluctuations in interest rates, the
Company has entered into a series of interest rate swap agreements whereby the
Company will receive interest at the three-month LIBOR rate on a $240.0 million
notional amount and pay a weighted average rate of 6.9%.

Effective February 4, 2001, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 133 "Accounting for Derivative Instruments and
Hedging Activities." The Company's interest rate swap agreements have been
designated as cash flow hedging instruments. Such instruments are those that
effectively convert variable interest payments on debt instruments into fixed
payments. For qualifying hedges, SFAS No. 133 allows derivative gains and losses
to offset related results on hedged items in the consolidated statement of
operations. As the critical terms of the Company's interest rate swap agreements
match those of the related hedged obligations, the Company has concluded that
there is no ineffectiveness in its hedges, and as a result, the adoption of SFAS
No. 133 has no impact on net earnings.

In connection with the adoption of SFAS No. 133, the Company recorded an
after-tax loss of $4.7 million ($7.7 million pre-tax) to other comprehensive
income as a cumulative effect of change in accounting principle during the first
quarter of 2001.

<PAGE>

Changes in the fair value of interest rate swap agreements designated as cash
flow hedging instruments are reported in accumulated other comprehensive income.
During the three months ended November 3, 2001, the Company recorded an
after-tax loss of $3.0 million ($4.8 million pre-tax) to other comprehensive
income representing the decline in fair value of its interest rate swap
agreements. At November 3, 2001, the Company had a cumulative after-tax loss of
$7.5 million ($12.1 million pre-tax) included in other accumulated comprehensive
income related to cash flow hedging instruments. The amounts are subsequently
reclassified into interest expense as a yield adjustment in the same period in
which the related interest on the floating rate debt obligations affects
earnings. During the three months ended November 3, 2001, $1.2 million of
after-tax losses ($2.0 million pre-tax) included in accumulated other
comprehensive income related to interest rate swap agreements was reclassified
to interest expense. For the year to end February 2, 2002, approximately $4.4
million of after-tax losses ($7.1 million pre-tax) in accumulated other
comprehensive income related to interest rate swap agreements are expected to be
reclassified into interest expense as a yield adjustment on the Company's
variable-rate long-term debt.

NOTE 5. COMPREHENSIVE INCOME. The following table shows the computation of
comprehensive income:

<TABLE>
<CAPTION>
    (Dollars in millions)
                                                                          13 WEEKS ENDED                 39 WEEKS ENDED
                                                                     -------------------------     --------------------------
                                                                     NOVEMBER 3,   OCTOBER 28,     NOVEMBER 3,    OCTOBER 28,
                                                                       2001           2000            2001           2000
                                                                       ----           ----            ----           ----
<S>                                                                  <C>           <C>             <C>            <C>
  Net Income                                                           $ 13.3         $ 32.4         $ 79.4         $106.6

  Other Comprehensive Loss:

       After-tax  cumulative  effect of a change in accounting
         for derivatives                                                   --             --           (4.7)            --
       Change in fair value of derivatives                               (3.0)            --           (5.0)            --
       Derivative losses reclassified into interest expense               1.2             --            2.9             --
       Foreign currency translation adjustments                          (2.2)          (1.0)          (2.8)          (1.9)
                                                                       ------         ------         ------         ------
          Total other comprehensive loss                                 (4.0)          (1.0)          (9.6)          (1.9)
                                                                       ------         ------         ------         ------
   Total Comprehensive Income                                             9.3           31.4           69.8          104.7
                                                                       ======         ======         ======         ======
</TABLE>


NOTE 6. EARNINGS PER SHARE. Basic earnings per share are computed by dividing
net earnings by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share include the effect of
conversions of stock options.

NOTE 7. RECLASSIFICATIONS. Certain reclassifications have been made to prior
year balances to conform to the current year presentation.

NOTE 8. FOREIGN CURRENCY TRANSLATION. Local currencies are the functional
currencies for all subsidiaries. Accordingly, assets and liabilities of foreign
subsidiaries are translated at the rate of exchange at the balance sheet date.
Income and expense items of these subsidiaries are translated at average rates
of exchange.

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

The following discussion summarizes the significant factors affecting operating
results for the quarters ended November 3, 2001 (2001) and October 28, 2000
(2000). This discussion and analysis should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes to the Condensed
Consolidated Financial Statements included in this Form 10-Q.

REVIEW OF OPERATIONS

NET EARNINGS

Net earnings totaled $13.3 million in the third quarter of 2001 compared with
$32.4 million in the third quarter of 2000. For the first nine months of 2001
net earnings were $79.4 million, compared with $106.6 million in the 2000
period. Excluding the non-recurring item and extraordinary loss, net income for
the first nine months of 2000 would have been $115.1 million.

The following table presents the components of costs and expenses, as a percent
of revenues, for the third quarter of 2001 and 2000.
<PAGE>

<TABLE>
<CAPTION>
                                                        THIRD QUARTER              FIRST NINE MONTHS
                                                      ------------------          ------------------
                                                      2001          2000          2001          2000
                                                      ----          ----          ----          ----
<S>                                                  <C>           <C>           <C>           <C>
 Cost of sales                                        71.5%         67.8%         69.2%         67.5%

 Selling, general, and administrative expense         24.5          23.9          24.2          23.4


 Non-recurring item                                     --            --            --           0.4
                                                      ----          ----          ----          ----
 Operating profit                                      4.0           8.3           6.6           8.7

 Interest expense, net                                 0.9           1.0           1.0           0.7
                                                      ----          ----          ----          ----

 Earnings before income taxes, minority
    interest, and extraordinary loss                   3.1           7.3           5.6           8.0

 Effective income tax rate*                           38.4%         38.9%         38.4%         38.9%
                                                      ----          ----          ----          ----


Earnings before minority interest and
    extraordinary loss                                 1.9           4.5           3.5           4.9

 Minority interest                                      --            --            --            --
                                                      ----          ----          ----          ----
 Earnings before extraordinary loss                    1.9           4.5           3.5           4.9

 Extraordinary loss, net of income tax                  --            --            --           0.2
                                                      ----          ----          ----          ----
 Net Earnings                                          1.9%          4.5%          3.5%          4.7%
                                                      ====          ====          ====          ====
</TABLE>

 * Percent of pre-tax earnings

NET RETAIL SALES

Net retail sales represent the sales of stores operating during the period.
Same-store sales represent sales of stores open during comparable periods.
During the third quarter of 2001 total sales decreased 3.6% over the third
quarter of 2000, consisting of a 5.2% decrease in unit volume and a 1.7%
increase in average selling prices. For the first nine months of 2001 total
sales increased 1.0% over the same period in 2000, consisting of a 2.6% decrease
in unit volume and a 3.7% increase in average selling prices. Sales percent
increases (decreases) are as follows:

<TABLE>
<CAPTION>
                                                          THIRD QUARTER                    FIRST NINE MONTHS
                                                       -------------------               ---------------------
                                                       2001           2000               2001             2000
                                                       ----           ----               ----             ----
<S>                                                 <C>             <C>                <C>              <C>
                    Net Retail Sales                  (3.6)%          8.0%               1.0%             5.7%
                    Same-Store Sales                  (6.3)%          4.1%              (2.1)%            2.6%
</TABLE>

COST OF SALES

Cost of sales includes cost of merchandise sold, buying and occupancy costs.
Cost of sales was $498.6 million in the 2001 third quarter, up 1.8% from $489.8
million in the 2000 third quarter. For the first nine months of 2001, cost of
sales was $1,571.4, a 3.6% increase from $1,517.0 million in the 2000 period.

As a percentage of net retail sales, cost of sales was 71.5% in the third
quarter of 2001, compared with 67.8% in the third quarter of 2000. The increase
in cost of sales as a percentage of net retail sales during the third quarter of
2001 is due to increased markdowns and the related write-down of $16 million,
pre-tax, in aged inventory and negative leverage of buying and occupancy costs
as a result of a decline in same-store sales. For the first nine months of 2001,
as a percentage of net retail sales, cost of sales was 69.2%, compared with
67.5% in the 2000 period. The increase in cost of sales as a percentage of net
retail sales for the first nine months of 2001 is due to an increase in
markdowns and the related write-down of $16 million, pre-tax, in aged inventory;
higher occupancy costs including utilities, particularly in the first half of
the year; and negative leverage of buying and occupancy costs as a result of a
decline in same-store sales. The Company anticipates negative mid-single digit
same-store sales for the remainder of the year. This will create continued
pressure on cost of sales as a percentage of sales due to negative leverage of
buying and occupancy costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses were $170.5 million in the third
quarter of 2001, down 1.2% from $172.5 million in the third quarter of 2000. For
the first nine months of 2001, selling, general and administrative expenses were
$550.1, compared with $525.7 million in the 2000 period, a 4.6% increase.


<PAGE>


As a percentage of net retail sales, selling, general and administrative
expenses were 24.5% during the third quarter of 2001 compared with 23.9% in the
third quarter of 2000. The increase, as a percentage of net retail sales, during
the third quarter of 2001 was primarily attributed to decreased leverage due to
decreased sales. For the first nine months of 2001, selling, general and
administrative expenses as a percentage of net retail sales were 24.2% in 2001,
compared with 23.4% in 2000. The increase, as a percentage of net retail sales,
during the first nine months of 2001 was primarily attributed to increases in
store payroll wage rates exceeding the increase in sales.

INTEREST EXPENSE, NET

Interest expense decreased to $6.7 million in the third quarter of 2001 from
$7.7 million in the third quarter of 2000. The decrease is the result of lower
interest rates. For the first nine months of 2001, interest expense increased to
$22.0 million in 2001 from $17.3 million in the same period in 2000. The
increase in the first nine months of 2001 is the result of additional long-term
debt issued during the first quarter of 2000 and short-term borrowings in the
first quarter of 2001 under the revolving line of credit partially offset by
lower interest rates.

EFFECTIVE INCOME TAX RATE

The Company's effective income tax rate declined to 38.4% in the third quarter
of 2001 from 38.9% in the third quarter of 2000. The decrease reflects benefits
related to the previously implemented tax planning strategies.

RESTRUCTURING ACTIONS

On November 13, 2001, the Company announced a restructuring of its senior
management team. The action is an important step in the Company's plan to
improve the alignment among key business functions, accelerate decision-making,
and reduce operating expenses. As part of the restructuring and alignment plan,
the Company intends to centralize all domestic retail operations functions in
Topeka, Kansas. Four division offices in Atlanta, Baltimore, Chicago, and Dallas
will be closed by February 3, 2002, when the transition is complete. As a result
of these actions, approximately 81 positions, including nine senior management
positions, have been eliminated to date, reducing the Company's administrative
expenses by $10 million annually.

The Company is continuing its restructuring studies and anticipates making
further reductions of its operating expenses. The Company estimates it will take
an $18 to $20 million charge against earnings in the fourth quarter as part of
this effort.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW

Cash flow from operations during the nine months ended November 3, 2001 was
$114.2 million. This figure represented 5.0% of net sales in the first nine
months of 2001 compared with 8.2% in the first nine months of 2000. The
reduction in cash flow in the first nine months of 2001 was due to the decrease
in net earnings, an increase in inventory as a result of third quarter 2001
sales results below expectations, and a decrease in accounts payable and accrued
expenses due to the timing of inventory receipts and fewer new store and store
remodeling projects in process. Internally generated funds and continued
investment from the Company's joint venture partners are expected to continue to
be the most important component of the Company's capital resources; however, the
Company may from time to time draw on its revolving credit line to fund seasonal
cash flow needs.

CAPITAL EXPENDITURES

Capital expenditures during the first nine months of 2001 totaled $92.5 million.
The Company expects total capital expenditures during fiscal 2001 to be in the
range of $100 to $105 million, which is net of a $5 million investment in the
Company's Central American operations by its joint venture partners. The Company
anticipates that cash flow from operations, the revolving credit line, and its
joint venture partners will be sufficient to finance projected capital
expenditures.

<PAGE>



FINANCING ACTIVITIES

As of November 3, 2001, no amounts were drawn against the Company's $200.0
million line of credit. The availability under the line of credit has been
reduced, however, by a $14.3 million outstanding letter of credit.

FINANCIAL CONDITION RATIOS

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

<TABLE>
<CAPTION>
                                                NOVEMBER 3,       OCTOBER 28,    FEBRUARY 3,
                                                   2001             2000           2001
                                                   ----             ----           ----
<S>                                             <C>              <C>            <C>
                  Current Ratio                     2.0              2.0            2.0
                  Debt-Capitalization Ratio*       39.2%            45.4%          44.2%
                  Fixed Charge Coverage**           2.4x            3.2x           3.0x
</TABLE>


*   Debt-to-capitalization has been computed by dividing total debt, which
    includes current and long-term capital lease obligations, by capitalization,
    which includes current and long-term capital lease obligations, non-current
    deferred income taxes and equity. The debt-to-capitalization ratio,
    including the present value of future minimum rental payments under
    operating leases as debt and capitalization, would be 70.1%, 75.1% and 74.1%
    respectively, for the periods referred to above. The decrease in the debt to
    capitalization ratio at November 3, 2001 is the result of the increase in
    the Company's shareowners' equity, primarily from the Company's net
    earnings.

**  Fixed charge coverage, which is presented for the trailing 52 weeks in each
    period ended above, is defined as earnings before income taxes, gross
    interest expense, and the interest component of rent expense, divided by
    gross interest expense and the interest component of rent expense. The
    decrease in the fixed charge coverage ratio at November 3, 2001 is primarily
    the result of the increase in interest expense resulting from the additional
    debt issued in April 2000 and the reduction in net earnings during the first
    nine months of 2001.

STORE ACTIVITY

At the end of the third quarter of 2001, the Company operated 4,964 stores
offering quality family footwear and accessories in 50 states, Canada, Costa
Rica, the Dominican Republic, El Salvador, Guam, Guatemala, Puerto Rico, Saipan,
Trinidad & Tobago, and the U.S. Virgin Islands. The following table presents the
change in store count for the third quarter of 2001 and 2000.

<TABLE>
<CAPTION>
                                             THIRD QUARTER                  FIRST NINE MONTHS
                                         ----------------------          ----------------------
                                          2001            2000            2001            2000
                                         ------          ------          ------          ------
<S>                                     <C>             <C>             <C>             <C>
            Beginning of quarter          4,918           4,868           4,912           4,712
            Stores opened                    96              97             213             418
            Stores closed                   (50)            (75)           (161)           (240)
                                         ------          ------          ------          ------

            Ending store count            4,964           4,890           4,964           4,890
                                         ======          ======          ======          ======
</TABLE>

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

Interest on the Company's Credit Facility is based on the London Interbank
Offered Rate ("LIBOR") plus a variable margin as defined in the credit
agreement. Therefore, the Company's future borrowing costs may fluctuate
depending upon the volatility of LIBOR. The Company currently mitigates a
portion of its interest rate risk through the use of interest rate swap
agreements, whereby the Company has agreed to exchange, at specific intervals,
the difference between fixed and variable interest amounts calculated by
reference to an agreed-upon notional amount.


<PAGE>


FORWARD-LOOKING STATEMENTS

This report contains, and from time to time the Company may publish,
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products,
future store openings and international expansion, possible strategic
alternatives and new business concepts and similar matters. Statements including
the words "expects," "anticipates," "intends," "plans," "believes," "seeks," or
variations of such words and similar expressions are forward-looking statements.
The Company notes that a variety of factors could cause its actual results and
experience to differ materially from the anticipated results or other
expectations expressed in its forward-looking statements. The risks and
uncertainties that may affect the operations, performance, development and
results of the Company's business include, but are not limited to, the
following: changes in consumer spending patterns; changes in consumer
preferences and overall economic conditions; the impact of competition and
pricing; changes in weather patterns; the financial condition of the suppliers
and manufacturers from whom the Company sources its merchandise; changes in
existing or potential duties, tariffs or quotas; changes in relationships
between the United States and foreign countries; changes in relationships
between Canada and foreign countries; economic and political instability in
foreign countries or restrictive actions by the governments of foreign countries
in which suppliers and manufacturers from whom the Company sources are located
or in which the Company operates stores; changes in trade and/or tax laws;
fluctuations in currency exchange rates; availability of suitable store
locations on appropriate terms; the ability to hire, train and retain
associates; general economic, business and social conditions in the countries
from which the Company sources products, supplies or has or intends to open
stores; the performance of our partners in joint ventures; the ability to comply
with local laws in foreign countries; and threats or acts of terrorism. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these cautionary statements. The Company does not undertake any
obligation to release publicly any revisions to such forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.

PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

There are no material pending legal proceedings other than ordinary routine
litigation incidental to the business to which registrant or any of its
subsidiaries is a party or of which any of their property is the subject.

ITEM 5 - OTHER INFORMATION

None.

ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:
                     NUMBER                           DESCRIPTION
                     ------                           ------------
                     11.1               Computation of Net Earnings Per Share*

    * Filed herewith

(b) Reports on Form 8-K

    None.


<PAGE>

SIGNATURES

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


                                                      PAYLESS SHOESOURCE, INC.


          Date: 12/14/01                     By: /s/ Steven J. Douglass
                                                 -------------------------------
                                             Steven J. Douglass
                                             Chairman of the Board and
                                             Chief Executive Officer



          Date: 12/14/01                     By: /s/ Ullrich E. Porzig
                                                 -------------------------------
                                             Ullrich E. Porzig
                                             Senior Vice President
                                             Chief Financial Officer
                                             and Treasurer