UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-K

|(Mark
      One) |                                                                                                 | 
|---------------- | ----------------------------------------------------------------------------------------------- | 
|[X]              | Annual report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934     
|                 | For the fiscal
      year ended:February 2,
      2008                                          | 
|or              
|[  
      ]      | Transition report pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934 
|                 | For
      the transition period from__________________________ **to**__________________________

Commission File
      Number:
    0-21360


Shoe
      Carnival, Inc.(Exact name of registrant as specified in its
      charter)


Indiana
    
    35-1736614(State or
      other jurisdiction of
    
    (IRS
      Employer Identification Number)incorporation or organization)7500 East
      Columbia StreetEvansville, IN
    
    47715(Address of
      principal executive offices)
    
    (Zip
      code)(812)867-6471(Registrants telephone number, including area code)Securities registered pursuant to Section 12(b) of the
      Act:Common Stock, $.01 par
      value
    
    The NASDAQ Stock Market
      LLC(Title of
      Each Class)
    
    (Name of
      Each Exchange on Which Registered)Securities
      registered pursuant to Section 12(g) of the Act: None


Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities
Act.                     
      [  ]
Yes                    [X]No

Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Exchange
Act.                           
[  ]
Yes                    [X]No

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.[X]
Yes                   [ 
]No

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

|Indicate by check mark whether the registrant is a large
      accelerated filer, an accelerated filer, a non-accelerated filer or a
      smaller reporting company. See definition of "large accelerated filer",
      "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
      Exchange Act.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|[ 
      ]Large accelerated filer                                                                                                                                                                                                                                                                                    

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).                           
[ 
]Yes                   [X]No

The aggregate market value of the
voting stock held by non-affiliates of the registrant based on the last sale
price for such stock at August 4, 2007 (the last business day of the
registrants most recently completed second fiscal quarter) was approximately
$372,271,000 (assuming solely for the purposes of this calculation that all
Directors and executive officers of the registrant are "affiliates").

Number of Shares of Common Stock, $.01
par value, outstanding at April 11, 2008 was 12,615,329.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information contained in the
Definitive Proxy Statement for the Annual Meeting of Shareholders of the
Registrant to be held on June 12, 2008 is incorporated by reference into PART
III hereof.

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TABLE OF CONTENTS

|PART I   |     |                                                                                                                        | 
|-------- | --- | ---------------------------------------------------------------------------------------------------------------------- | 
|        
|Item     | 1.  | Business                                                                                                               | 
|Item     | 1A. | Risk
      Factors                                                                                                     | 
|Item     | 1B. | Unresolved Staff Comments                                                                                              | 
|Item     | 2.  | Properties                                                                                                             | 
|Item     | 3.  | Legal Proceedings                                                                                                      | 
|Item     | 4.  | Submission of
      Matters to a Vote of Security Holders                                                              | 
|        
|        
|PART II  |     |                                                                                                                        | 
|        
|Item     | 5.  | Market for the Registrants Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities | 
|Item     | 6.  | Selected
      Financial Data                                                                                          | 
|Item     | 7.  | Managements Discussion and Analysis of Financial Condition and
      Results of Operations                            | 
|Item     | 7A. | Quantitative and
      Qualitative Disclosures About Market Risk                                                       | 
|Item     | 8.  | Financial Statements and Supplementary Data                                                                            | 
|Item     | 9.  | Changes in and
      Disagreements with Accountants on Accounting and Financial
      Disclosure                       | 
|Item     | 9A. | Controls and Procedures                                                                                                | 
|Item     | 9B. | Other
      Information                                                                                                | 
|        
|        
|PART III |     |                                                                                                                        | 
|        
|Item     | 10. | Directors, Executive Officers and Corporate Governance                                                                 | 
|Item     | 11. | Executive
      Compensation                                                                                           | 
|Item     | 12. | Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters                   | 
|Item     | 13. | Certain
      Relationships and Related Transactions, and Director Independence                                        | 
|Item     | 14. | Principal Accountant Fees and Services                                                                                 | 
|        
|        
|PART IV  |     |                                                                                                                        | 
|        
|Item     | 15. | Exhibits and Financial Statement Schedules                                                                             | 

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Shoe Carnival, Inc.Evansville,
Indiana

Annual Report to Securities and Exchange
CommissionFebruary 2, 2008

PART I

ITEM 1.BUSINESS

Forward-Looking
Statements

This annual report contains
forward-looking statements, within the meaning of the Private Securities
Litigation Reform Act of 1995, that involve a number of risks and uncertainties.
A number of factors could cause our actual results, performance, achievements or
industry results to be materially different from any future results, performance
or achievements expressed or implied by these forward-looking statements. These
factors include, but are not limited to: general economic conditions in the
areas of the United States in which our stores are located; changes in the
overall retail environment and more specifically in the apparel and footwear
retail sectors; our ability to generate increased sales at our stores; the
potential impact of national and international security concerns on the retail
environment; changes in our relationships with key suppliers; the impact of
competition and pricing; changes in weather patterns, consumer buying trends and
our ability to identify and respond to emerging fashion trends; the impact of
disruptions in our distribution or information technology operations; the
effectiveness of our inventory management; the impact of hurricanes or other
natural disasters on our stores, as well as on consumer confidence and
purchasing in general; risks associated with the seasonality of the retail
industry; our ability to successfully execute our growth strategy, including the
availability of desirable store locations at acceptable lease terms, our ability
to open new stores in a timely and profitable manner and the availability of
sufficient funds to implement our growth plans; higher than anticipated costs
associated with the closing of underperforming stores; the inability of
manufacturers to deliver products in a timely manner; changes in the political
and economic environments in the Peoples Republic of China, Brazil, Spain and
East Asia, the primary manufacturers of footwear; and the continued favorable
trade relations between the United States and China and the other countries
which are the major manufacturers of footwear. See ITEM 1A. RISK FACTORS of this
report.

General

Shoe Carnival, Inc. is one of the
nations largest family footwear retailers. We offer customers a broad
assortment of moderately priced dress, casual and athletic footwear for men,
women and children with emphasis on national and regional name brands. We
differentiate ourselves from our competitors by our distinctive, highly
promotional in-store marketing effort and large stores that average 11,300
square feet, generate an average of approximately $2.4 million in annual sales
and carry an average inventory of approximately 29,000 pairs of shoes per
location. As of February 2, 2008, we operated 291 stores in 27 states primarily
in the Midwest, South and Southeast regions of the United States.

We make available free of charge
through the Investor Relations portion of our website at www.shoecarnival.com
our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current
reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as
amended, as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange Commission.

Our annual report on Form 10-K as
filed with the Securities and Exchange Commission is available without charge to
shareholders, investment professionals and securities analysts upon written
request. Requests should be directed to Investor Relations at the corporate
address.

We are an Indiana corporation that was
initially formed in Delaware in 1993 and reincorporated in Indiana in
1996.

2

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Business Strategy

Our goal is to continue to grow our net
sales and earnings by strengthening our position as the logical destination
store for our customers footwear needs. Key elements of our business strategy
are as follows.

We offer a distinctive shopping
experience.Our stores combine
competitive pricing with a highly promotional, in-store marketing effort that
encourages customer participation and creates a fun and exciting shopping
experience. We promote a high-energy retail environment by decorating with
bright lights and bold colors, and by featuring a stage and barker as the focal
point in each store. With a microphone, this barker, or "mic-person", announces
current specials, organizes contests and games, and assists and educates
customers with the features and location of merchandise. Our mic-person offers
limited-duration promotions throughout the day, encouraging the customers to
take immediate advantage of our value pricing. We believe this highly
promotional atmosphere results in various competitive advantages, including
increased multiple unit sales; the building of a loyal, repeat customer base;
the creation of word-of-mouth advertising; and enhanced sell through of
in-season goods.

We offer a broad merchandise
assortment.Our objective is to be the
destination store-of-choice for a wide range of consumers seeking moderately
priced, current season name brand and private label footwear. Our product
assortment includes dress and casual shoes, sandals, boots and a wide assortment
of athletic shoes for the entire family. The average store carries approximately
29,000 pairs of shoes in four general categories - mens, womens, childrens
and athletics. In addition to footwear, our stores carry selected accessory
items complementary to the sale of footwear. We emphasize name brand merchandise
to customers with creative signage and by prominently displaying selected brands
on end caps, focal walls and within the aisles. These displays may highlight a
product offering of a single vendor, highlight sales promotions, advertise
promotional pricing to meet or beat competitors sale prices or may make a
seasonal or lifestyle statement by highlighting similar footwear from multiple
vendors. These visual merchandising techniques make it easier for customers to
shop and focus attention on key name brands. Expenses for signage and visual
displays highlighting a particular brand will often be partially or fully
reimbursed by the vendor.

We believe that by offering a wide
selection of both athletic and non-athletic footwear, we are able to reduce our
exposure to shifts in fashion preferences between those categories. Our ability
to identify and react to fashion changes is a key factor in our sales and
earnings performance.

We offer value to our
customers.Our marketing effort targets
moderate income, value conscious consumers seeking name brand footwear for all
age groups. We believe that by offering a wide selection of popular styles of
name brand merchandise at competitive prices, we generate broad customer appeal.
Additionally, the time conscious customer appreciates the convenience of one
stop shopping for the entire family. We also believe our highly promotional
in-store shopping environment contributes to a reputation of value pricing
throughout the store.

We maintain an efficient store
level cost structure.Our cost efficient
store operations and real estate strategy enable us to price products
competitively. Low labor costs are achieved by housing merchandise directly on
the selling floor in an open stock format, enabling customers to serve
themselves, if they choose. This reduces the staffing required to assist
customers and reduces store level labor costs as a percentage of sales. We
prefer to locate stores predominantly in strip shopping centers in order to take
advantage of lower occupancy costs and maximize our exposure to value oriented
shoppers.

We rely heavily on information
technology.We have invested significant
resources in information technology. Our proprietary inventory management and
state-of-the-art point-of-sale ("POS") systems provide corporate management,
buyers and store managers with the timely information necessary to monitor and
control all phases of operations. The POS provides, in addition to other
features, full price management (including price look-up), promotion tracking
capabilities (in support of the spontaneous nature of the in-store price
promotions), real-time sales and gross margin analysis by product category at
the store level and customer tracking. Using the POS, store managers are able to
monitor sales and gross profit margins on a real-time basis throughout the day.
Reacting to sales trends, our mic-people use POS reports to choose from among a
number of product promotions supplied by our centralized merchandising
staff.

3

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Our network connects our corporate
office to our distribution center and retail stores via a wide area network,
providing up-to-date sales and inventory information as required. Our data
warehouse enables the merchandising staff to analyze sales, margin and inventory
levels by store, by day, down to the size of shoe. Using this information, our
merchandise managers meet regularly with vendors to compare their product sales,
gross margins and return on inventory investment against previously stated
objectives. We believe timely access to key business data has enabled us in the
past to drive annual comparable store sales increases, manage our markdown
activity and improve inventory turnover.

Growth Strategy and Store Location

We plan to continue to grow our store
base in order to strengthen our position as a leading specialty branded footwear
retailer. Aside from comparable store sales increases, the majority of our sales
and earnings growth is expected to be generated by the opening of new stores. In
fiscal 2008, we expect to open between 20 and 25 stores. These new stores will
be located in large and small markets in both new and existing geographic areas.
Our intention is to fill in certain under-penetrated markets with additional
stores, thereby increasing the performance of the overall market. We also intend
to enter smaller markets that we can fully penetrate with one or two stores. We
generally can advertise more effectively in these markets, which helps to create
immediate brand awareness. We have adjusted, and will continue to adjust, our
annual store growth rate based on our view of internal and external
opportunities and challenges. We intend to increase our store growth rate by 10%
to 12% in the future, subject to the availability of sufficient real estate and
the state of the U.S. economy.

Critical to the success of opening new
stores in larger markets or geographic areas is our ability to cluster stores.
In larger markets (populations greater than 400,000), clustering involves
opening two or more stores at approximately the same time, and in smaller
markets that can only support a single store, clustering involves seeking
locations in reasonably close proximity to other existing markets. This strategy
creates cost efficiencies by enabling us to leverage store expenses with respect
to advertising, distribution and management costs. We believe the advantages of
clustering stores in existing markets will lead to cost efficiencies and overall
incremental sales gains that should more than offset any adverse effect on sales
of existing stores.

The number of stores opened and closed
during fiscal years 2007, 2006 and 2005 were as follows:

Fiscal
      Year
    
    2007
    
    2006
    
    2005Stores open at beginning of year
    
    271
    
    
    263
    
    
    255Opened during
      year
    
    25
    
    
    14
    
    
    15Closed during year
    
    5
    
    
    6
    
    
    7Stores open at
      end of year
    
    291
    
    
    271
    
    
    263


On February 2, 2008, we had 291 stores
located in 27 states, primarily in the Midwest, South and Southeast regions of
the United States. We prefer strip shopping center locations where occupancy
costs are typically lower and we enjoy greater operating freedom to implement
our non-traditional retail methods. We feel that our target customers enjoy the
convenience offered by strip shopping centers as opposed to enclosed malls. Our
stores averaged approximately 11,300 square feet, ranging in size from 6,400 to
26,500 square feet. Our current store prototype utilizes between 8,000 and
12,000 square feet, depending upon, among other factors, the location of the
store and the population base the store is expected to service. The sales area
of most stores is approximately 85% of the gross store size.

All of our stores are leased rather
than owned. We believe the flexibility afforded by leasing allows us to avoid
the inherent risks of owning real estate, particularly with respect to
under-performing stores. Before entering a new market, we perform a market,
demographic and competition analysis to evaluate the suitability of the
potential market. Potential store site selection criteria include, among other
factors, market demographics, traffic counts, the tenant mix of a potential
strip shopping center, visibility within the center and from major
thoroughfares, overall retail activity of the area and proposed lease terms. The
time required to open a store after signing a lease depends primarily upon the
landlords ability to deliver the premises. After we accept the premises from
the landlord in turnkey condition, we can generally open a store within 60 days.

4

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Merchandising and
Pricing

Our merchandising strategy is designed
to provide a large selection of moderately priced footwear for the entire
family. Our stores carry an average of approximately 29,000 pairs of shoes
featuring a broad assortment of current-season name brand footwear, supplemented
with private label merchandise and select name brand closeouts. Our stores also
carry complementary accessories such as handbags, shoe care items and socks. The
mix of merchandise and the brands offered in a particular store are based upon
the demographics of each market, among other factors.

Our pricing strategy is designed to
emphasize value. By combining current season name brand product with promotional
pricing, we feel that we create a better value for customers. Initial pricing
decisions are guided by gross profit margin targets, which vary by merchandise
category and depend on whether the item is name brand or private label
merchandise. Markdowns are centrally managed by the buying staff and
communicated to the stores through information systems as needed.

The table below sets forth our
percentage of sales by product category for fiscal years 2007, 2006 and 2005.

Fiscal
      Year
    
    2007
    
    2006
    
    2005Womens
    
    27
    %
    
    27
    %
    
    25
    %Mens
    
    15
    
    
    15
    
    
    15Childrens(1)
    
    17
    
    
    17
    
    
    16Athletics(2)
    
    37
    
    
    37
    
    
    40Accessories and Miscellaneous Items
    
    4
    
    
    4
    
    
    4100
    %
    
    100
    %
    
    100
    %


|(1) |  | Childrens includes
      childrens athletic shoes.
|--- |  | ----------------------------------------------------
|(2) |  | Includes mens and
      womens sizes only.        

Womens, mens and childrens
non-athletic footwear categories are further divided into dress, casual, sport,
sandals and boots. Athletic shoes are classified by functionality, such as
running, basketball or fitness shoes. In fiscal 2007, athletic styles, including
childrens sizes, represented approximately half of our footwear sales.

One of our major goals is to improve
our operating margins. We are focused on improving our operating margins by
increasing our gross margin and to a lesser extent leveraging general and
administrative expenses against a higher sales base. An opportunity to increase
our gross margin is to increase womens non-athletic sales as a percentage of
our total business. Womens product has historically achieved the highest gross
margin. Our women's non-athletic product represented 27 percent of our total
sales in fiscal years 2007 and 2006, an increase of two percentage points from
fiscal 2005. We expect to achieve our goal of 28 to 30 percent of our total
sales being generated by women's dress and casual merchandise over the next two
years.

Advertising and
Promotion

We use various forms of media
advertising to communicate the exceptional values offered on specific shoes or
entire product categories. Approximately 58% of our total advertising budget was
directed to television and radio in fiscal 2007. Print media (including
newspaper ads, inserts and direct mail) and outdoor advertising accounted for
the balance of the budget. A special effort is made to utilize the cooperative
advertising dollars offered by vendors whenever possible. Major promotions
during grand openings and peak selling periods allow customers to win prizes
such as gift cards, merchandise or cash.

In-store promotions are a key element
in our marketing effort. By utilizing both planned and impromptu contests and
games, store managers create an environment that encourages customer interaction
with store personnel. For example, a customer is enticed to purchase additional
merchandise by winning an on-the-spot discount. Promotions of this type
exemplify our emphasis on fun and excitement in order to enhance our customers
total shopping experience.

5

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We strive to make each store opening a
major retail event. Grand openings feature contests and giveaways of cash and
prizes. We believe our grand openings help to establish the high-energy,
promotional atmosphere that develops a loyal, repeat customer base and generates
word-of-mouth advertising.

Distribution

During the fourth quarter of fiscal
2006 and the first quarter of fiscal 2007, we converted our distribution and
warehousing functions to our new 410,000 square foot distribution center,
located in Evansville, Indiana. This facility is leased from a third party and
can support the processing and distribution needs of a minimum of 460 stores to
facilitate future growth. We negotiated in our lease the right to expand into a
designated expansion area as long as we provide 120 days written notice to the
property owner. Expansion under this option would provide us the processing
capacity to support a total of approximately 650 stores.

The new distribution center is equipped
with state-of-the-art processing and product movement equipment. The facility
utilizes cross docking/store replenishment and redistribution methods to fill
store product requirements. These methods may include count verification, price
and bar code labeling of each unit (when not performed by the manufacturer),
redistribution of an order into size assortments (when not performed by the
manufacturer) and allocation of shipments to individual stores. Throughout
packing, allocating, storing and shipping, our distribution process is
essentially paperless. Merchandise is typically shipped to each store one time
per week. The majority of shipments are handled by a dedicated carrier, with
occasional use of common carriers.

In February 2006, we sold our former
200,000 square foot distribution center, located in Evansville, Indiana, to a
third party and entered into a leaseback arrangement with the landlord to
continue operations of this facility. On March 1, 2007, we relinquished all of
our rights to the facility to the landlord. See our Notes to Consolidated
Financial Statements, Note 6  "Leases" included in PART II, ITEM 8 of this
report for further details on the sale and leaseback of the facility.

Buying Operations

Maintaining fresh, fashionable
merchandise is critical to our success. Our buyers stay in touch with evolving
trends by shopping fashion-leading markets, attending national trade shows,
gathering vendor input and monitoring the current styles shown in leading
fashion and lifestyle magazines. Management of the purchasing function is the
responsibility of our Executive Vice President - General Merchandise Manager.
Store operations personnel are expected to provide input to our merchandising
staff regarding market specific fashion trends.

We purchase merchandise from over 170
footwear vendors. In fiscal 2007, two suppliers, Nike USA, Inc. and Skechers
USA, Inc., each accounted for over 10% of our net sales and together accounted
for over 28% of our net sales. A loss of any of our key suppliers in certain
product categories could have a material adverse effect on our business. As is
common in the industry, we do not have any long-term contracts with suppliers.

Competition

The retail footwear business is highly
competitive. We believe the principal competitive factors in our industry are
merchandise selection, price, fashion, quality, location, store environment and
service. We compete primarily with department stores, shoe stores, sporting
goods stores and mass merchandisers.

We compete with most department stores
and traditional shoe stores by offering lower prices. We compete with off-price
retailers, mass merchandisers and discount stores by offering a wider and deeper
selection of merchandise.

Many of our competitors are
significantly larger and have substantially greater financial and other
resources. However, we believe that our distinctive retail format, in
combination with our wide merchandise selection, competitive prices and low
operating costs, have in the past enabled us to compete effectively.

6

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Store Operations

Management of store operations is the
responsibility of our Executive Vice President - Store Operations, who is
assisted by the Senior Vice President - Store Operations, divisional managers,
regional managers and the individual store general managers. In general, each
store has a general manager and up to three assistant managers, depending on
sales volume. Store operations personnel are charged with making certain
merchandising decisions necessary to maximize sales and profits primarily
through merchandise placement, signage and timely clearance of slower selling
items. Administrative functions are centrally controlled from the corporate
headquarters. These functions include accounting, purchasing, store maintenance,
information systems, advertising, human resources, distribution and
pricing.

Employees

At February 2, 2008, we had
approximately 4,300 employees, of which approximately 2,500 were employed on a
part-time basis. The number of employees fluctuates during the year primarily
due to seasonality. None of our employees are represented by a labor
union.

We attribute a large portion of our
success in various areas of cost control to our inclusion of virtually all
management level employees in incentive compensation plans. We contribute all or
a portion of the cost of medical, disability and life insurance coverage for
those employees who are eligible to participate in company-sponsored plans.
Additionally, we sponsor a 401(k) retirement plan that is open to all employees
who have met the minimum age and workhour requirements. All employees are
eligible to receive discounts on purchases from our stores. We consider our
relationship with our employees to be satisfactory.

Seasonality

Our quarterly results of operations
have fluctuated, and are expected to continue to fluctuate in the future,
primarily as a result of seasonal variances and the timing of sales and costs
associated with opening new stores. Non-capital expenditures, such as
advertising and payroll, incurred prior to the opening of a new store are
charged to expense as incurred. Therefore, our results of operations may be
adversely affected in any quarter in which we incur pre-opening expenses related
to the opening of new stores.

We have three distinct peak selling
periods: Easter, back-to-school and Christmas.

Trademarks

We own the following federally
registered trademarks and servicemarks: Shoe Carnival®, The Carnival®,
Donna Lawrence®, Oak Meadow®, Victoria Spenser®, Via Nova®,
Innocence®, Trade Dress®, Carnival Lites® and Color Block Design®. We believe these marks are valuable and, accordingly, we
intend to maintain the marks and the related registrations. We are not aware of
any pending claims of infringement or other challenges to our right to use these
marks.

ITEM 1A. RISK FACTORS

You should carefully consider the
following risk factors and all other information contained in this annual report
before making an investment decision with respect to our common stock. Investing
in our common stock involves a high degree of risk. If any of the following
risks actually occur, we may not be able to conduct our business as currently
planned and our financial condition and operating results could be seriously
harmed. See ITEM 1. BUSINESS - "Forward-Looking Statements" of this
report.

We may not be able to
successfully execute our growth strategy, which could have a material adverse
effect on our business, financial condition and results of
operations. We intend to open new stores
as a part of our growth strategy. We may not be able to open all of the new
stores contemplated by our growth strategy and the new stores that we open may
not be as profitable as existing stores.

7

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The complexity of our operations and
management responsibilities will increase as we grow. Our growth strategy
requires that we continue to expand and improve our operating and financial
systems and to expand, train and manage our employee base. In addition, as we
open new stores, we may be unable to hire a sufficient number of qualified store
personnel or successfully integrate the new stores into our business.

The success of our growth strategy will
depend on a number of other factors, many of which are out of our control,
including, among other things:

- our ability to locate suitable store sites and
  negotiate store leases (for new stores and renewals) on favorable
  terms;
- the acceptance of the Shoe Carnival concept in new
  markets;
- the availability of financing for capital
  expenditures and working capital requirements;
- our ability to provide adequate distribution to
  support growth;
- our ability to source sufficient levels of
  inventory to meet the needs of new stores;
- particularly in new markets, our ability to open a
  sufficient number of new stores to provide the critical mass needed for
  efficient advertising and effective name recognition;
- our ability to improve costs and timing associated
  with opening new stores; and
- the impact of new stores on sales or profitability
  of existing stores in the same market.

Due to the risks involved, we may be
unable to open new stores at the rates expected. If we fail to successfully
implement our growth strategy, it could have a material adverse effect on our
business, financial condition or results of operations.

A failure to increase sales at
our existing stores may adversely affect our stock price and impact our results
of operations.A number of factors have
historically affected, and will continue to affect, our comparable store sales
results, including:

- competition;
- timing of holidays including sales tax
  holidays;
- general regional and national economic
  conditions;
- inclement weather;
- consumer trends, such as less disposable income
  due to the impact of higher gasoline prices;
- fashion trends;
- changes in our merchandise mix;
- our ability to distribute merchandise efficiently
  to our stores;
- timing and type of, and customer response to,
  sales events, promotional activities or other advertising;
- the effectiveness of our inventory
  management;
- new merchandise introductions;
  and
- our ability to execute our business strategy
  effectively.

8

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Our comparable store sales results have
fluctuated in the past, and we believe such fluctuations may continue. The
unpredictability of our comparable store sales may cause our revenue and results
of operations to vary from quarter to quarter, and an unanticipated decline in
revenues or operating income may cause our stock price to fluctuate
significantly.

We depend on our key suppliers
for merchandise and advertising support and the loss of key suppliers could
adversely affect our business.Our
business depends upon our ability to purchase fashionable, name brand and other
merchandise at competitive prices from our suppliers. In fiscal 2007, two
branded suppliers, Nike USA, Inc. and Skechers USA, Inc., collectively accounted
for over 28% of our net sales. Name brand suppliers also provide us with
cooperative advertising and visual merchandising funds. A loss of any of our key
suppliers in certain product categories or our inability to obtain name brand or
other merchandise from suppliers at competitive prices could have a material
adverse effect on our business. As is common in the industry, we do not have any
long-term contracts with our suppliers.

An increase in the cost or a
disruption in the flow of our imported goods may decrease our sales and profits.We rely on imported goods to sell in our
stores. Substantially all of the footwear product we sell is manufactured
overseas, including the merchandise we import directly from overseas
manufacturers and agents and the merchandise we purchase from domestic vendors.
The primary footwear manufacturers are located in China, Brazil, Spain and East
Asia. A disruption in the flow of imported merchandise or an increase in the
cost of those goods may decrease our sales and profits. In addition, we do not
control our vendors or their labor and business practices. The violation of
labor or other laws by one of our vendors could have an adverse affect on our
business.

If imported merchandise becomes more
expensive or unavailable, the transition to alternative sources may not occur in
time to meet our demands. Products from alternative sources may be of lesser
quality and more expensive than those we currently import. Other risks
associated with our use of imported goods include: disruptions in the flow of
imported goods because of factors such as electricity or raw material shortages,
work stoppages, strikes and political unrest; problems with oceanic shipping,
including shipping container shortages; economic crises and international
disputes; currency exchange rate fluctuations; increases in the cost of
purchasing or shipping foreign merchandise resulting from the failure to
maintain normal trade relations with source countries; import duties, import
quotas and other trade sanctions; and increases in shipping rates imposed by the
trans-Pacific shipping cartel.

Our failure to identify fashion
trends could result in lower sales, higher markdowns and lower gross profits.Our success depends upon our ability to
anticipate and react to the fashion tastes of our customers and provide
merchandise that satisfies customer demand. Our failure to anticipate, identify
or react appropriately to changes in consumer fashion preferences may result in
lower sales, higher markdowns to reduce excess inventories and lower gross
profits. Conversely, if we fail to anticipate or react to consumer demand for
our products, we may experience inventory shortages, which would result in lost
sales and could negatively impact our customer goodwill, our brand image and our
profitability. Moreover, our business relies on continuous changes in fashion
preferences. Stagnating consumer preferences could also result in lower sales
and would require us to take higher markdowns to reduce excess inventories.

Our failure to retain our
existing senior management team and to continue to attract qualified personnel
could adversely affect our business.Our
success depends to a large extent on the continued service of our executive
management team. Departures by executive officers could have a negative impact
on our business, as we may not be able to find suitable management personnel to
replace departing executives on a timely basis. Furthermore, our strategy
requires us to continue to train, motivate and manage our employees and to
attract, motivate and retain additional qualified managerial and merchandising
personnel. Competition for these types of personnel is intense, and we cannot
assure you that we will be successful in attracting, assimilating and retaining
the personnel required to grow and operate our business profitably.

We face significant competition
in our markets and we may be unable to compete favorably.The retail footwear industry is highly competitive. We compete
primarily with department stores, shoe stores, sporting goods stores and mass
merchandisers. Many of our competitors are significantly larger and have
substantially greater financial and other resources than we do. Economic
pressures on or bankruptcies of our competition could result in increased
pricing pressures. This competition could adversely affect our results of
operations and financial condition in the future.

9

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We will require significant funds
to implement our growth strategy and meet our other liquidity
needs.We cannot assure you that we will
be able to generate sufficient cash flow from operations or obtain sufficient
borrowings under our existing credit agreement to finance our growth strategy
and meet our other liquidity needs. In fiscal 2008, capital expenditures are
expected to range from $12 million to $14 million. Our actual costs may be
greater than anticipated. We also require working capital to support inventory
for our existing stores. Failure to generate or raise sufficient funds may
require us to modify, delay or abandon some of our future growth or expenditure
plans. In addition, our results could be adversely affected if interest rates
materially increase from present levels.

Poor economic conditions affect
consumer spending and may significantly harm our business.The success of our business depends to a significant extent
upon the level of consumer spending. A number of factors may affect the level of
consumer spending on merchandise that we offer, including, among other things:

- general economic, industry and weather
  conditions;
- energy costs, which affect gasoline and home
  heating prices;
- the level of consumer debt;
- consumer credit availability;
- interest rates;
- tax rates and policies;
- unemployment trends;
- war, terrorism and other hostilities;
  and
- consumer confidence in future economic
  conditions.

Adverse economic conditions and any
related decrease in consumer demand for discretionary items could have a
material adverse effect on our business, results of operations and financial
condition. The merchandise we sell generally consists of discretionary items.
Reduced consumer confidence and spending may result in reduced demand for
discretionary items and may force us to take inventory markdowns. Reduced demand
may also require increased selling and promotional expenses.

We would be adversely affected if
our distribution or information technology operations were
disrupted.We currently operate a single,
410,000 square foot distribution center in Evansville, Indiana. Virtually all
merchandise received by our stores, with the exception of a small amount of
goods shipped directly to the stores, is and will be shipped through our
distribution center. Our corporate computer network is essential to our
distribution process. If our distribution center is shut down for any reason,
such as a natural disaster, power outage or terrorist attack, or if our
information technology systems do not operate effectively, or if we are the
target of attacks or breaches, we could incur significantly higher costs and
longer lead times associated with distributing our products to our stores. Our
insurance only covers costs relating to specified, limited matters such as a
shutdown due to fire and windstorms, but does not cover other events such as
acts of war or terrorist attacks. Even in the event of a shutdown due to covered
matters, we cannot assure you that our insurance will be sufficient, or that the
insurance proceeds will be paid to us in a timely fashion. Shutdowns or
information technology disruptions could have an adverse effect on our operating
and financial performance.

In addition, our stores process debit
and credit card transactions. We believe we have established appropriate
controls to protect our customers' personal confidential information gathered
when a debit or credit card is utilized. However, in the event that such
confidential information is misused or obtained by an unauthorized third party,
we could be subject to negative publicity that could harm our business, as well
as have a material adverse effect on our financial conditions or results of
operations.

10

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Failure to maintain effective
internal control over financial reporting could result in a loss of investor
confidence in our financial reports and have a material adverse effect on our
stock price. We must continue to document, test and evaluate our
internal control over financial reporting in order to satisfy the requirements
of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual reports
by management regarding the effectiveness of our internal control over financial
reporting and a report by our independent registered public accounting firm
attesting to managements assessment and the effectiveness of our internal
controls. We have expended, and expect that we will continue to expend,
significant management time and resources documenting and testing our internal
control over financial reporting. If we conclude in future periods that our
internal control over financial reporting is not effective, it could result in
lost investor confidence in the accuracy, reliability and completeness of our
financial reports. Any such events could have a material adverse effect on our
stock price.

We are controlled by our
principal shareholder.J. Wayne Weaver,
our Chairman of the Board of Directors and principal shareholder, his spouse and
an adult child together own approximately 28.4% of our outstanding common stock.
Accordingly, Mr. Weaver is able to exert substantial influence over our
management and operations. In addition, his interests may differ from or be
opposed to the interests of our other shareholders, and his control may have the
effect of delaying or preventing a change in control that may be favored by
other shareholders.

Our stock price may be volatile
and could decline substantially.The
stock market has, from time to time, experienced extreme price and volume
fluctuations. Many factors may cause the market price for our common stock to
decline, including:

- operating results failing to meet the expectations
  of securities analysts or investors in any quarter;
- downward revisions in securities analysts
  estimates;
- material announcements by us or our competitors;
  and
- the other risk factors cited in this annual
  report.

In the past, companies that have
experienced volatility in the market price of their stock have been the subject
of securities class action litigation. If we become involved in a securities
class action litigation in the future, it could result in substantial costs and
diversion of management attention and resources, thus harming our business.

Our quarterly operating results
will fluctuate due to seasonality and other factors.Our quarterly results of operations have fluctuated in the
past and can be expected to continue to fluctuate in the future. Our quarterly
results of operations are affected by a variety of factors, including:

- fashion trends;
- calendar shifts of holiday or seasonal
  periods;
- the effectiveness of our inventory
  management;
- weather conditions;
- timing of opening of new stores;
- changes in general economic conditions and
  consumer spending patterns; and
- actions of competitors or co-tenants.

We have three distinct peak selling
periods: Easter, back-to-school and Christmas. To prepare for our peak shopping
seasons, we must order and keep in stock significantly more merchandise than we
would carry during other parts of the year. Any unanticipated decrease in demand
for our products during these peak shopping seasons could require us to sell
excess inventory at a substantial markdown, which could reduce our net sales and
gross margins and negatively impact our profitability. Our operating results
depend significantly upon the sales generated during these periods. If our
future quarterly results fail to meet the expectations of research analysts,
then the market price of our common stock could decline substantially.

11

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Provisions of our organizational
documents and Indiana law might deter acquisition bids for us. Our
Restated Articles of Incorporation and Indiana corporate laws contain provisions
that may discourage other persons from attempting to acquire control of us,
including, without limitation, a Board of Directors that has staggered terms for
its members, supermajority voting provisions, restrictions on the ability of
shareholders to call a special meeting of shareholders and procedural
requirements in connection with shareholder proposals or director nominations.
The Board of Directors has the authority to issue preferred stock in one or more
series without the approval of the holders of our common stock. Further, Indiana
corporate law contains business combination provisions that, in general,
prohibit for five years any business combination with a beneficial owner of more
than 10% or more of our common stock unless the holders acquisition of the
stock was approved in advance by our Board of Directors. Indiana corporate law
also contains control share acquisition provisions that limit the ability of
certain shareholders to vote their shares unless their control share acquisition
is approved. In certain circumstances, the fact that corporate devices are in
place that inhibit or discourage takeover attempts could reduce the market value
of our common stock.

ITEM 1B.UNRESOLVED STAFF COMMENTS

None.

ITEM 2.PROPERTIES

We lease all existing stores and intend
to lease all future stores. All leases for existing stores provide for fixed
minimum rentals and most provide for contingent rental payments based upon
various specified percentages of sales above minimum levels. Certain leases also
contain escalation clauses for increases in minimum rentals, operating costs and
taxes.

The following table identifies the
number of our stores in each state as of February 2, 2008:

State
    #
    State
    #Alabama
    11
    Missouri
    18Arkansas
    8
    Mississippi
    6Colorado
    6
    North Carolina
    13Florida
    23
    North
      Dakota
    1Georgia
    13
    Ohio
    17Idaho
    2
    Oklahoma
    6Iowa
    6
    Pennsylvania
    2Illinois
    28
    South
      Carolina
    12Indiana
    20
    South Dakota
    1Kansas
    3
    Tennessee
    17Kentucky
    12
    Texas
    32Louisiana
    11
    Virginia
    10Michigan
    6
    Wisconsin
    3West
      Virginia
    4Total Stores
    291


In February 2006, we sold our combined
distribution center and corporate headquarters for $7.2 million and recorded a
loss of approximately $55,000 including legal fees and associated selling costs.
We entered into a lease to continue operations in this combined facility on a
month-to-month basis. In March and June 2007, we relinquished our rights to the
distribution center and corporate headquarters, respectively.

In February 2006, we entered into an
operating lease with an independent third-party to lease our new distribution
center. The lease has an initial term of 15 years, commencing on December 1,
2006. We have the right to extend the initial lease term for up to three
additional periods of five years each.

In June 2006, we entered into an
operating lease with an independent third-party to lease our new corporate
headquarters for an initial term of 15 years, commencing on June 1, 2007. We
have the right to extend the initial lease term for up to three additional
periods of five years each.

12

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For additional information with respect
to our properties, see ITEM 1. BUSINESS  "Growth Strategy and Store Location"
and "Distribution" as well as PART II, ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  "Executive Summary"
of this report.

ITEM 3.LEGAL PROCEEDINGS

We are involved in various legal
proceedings incidental to the conduct of our business. While the outcome of any
legal proceeding is always uncertain, we do not currently expect that any such
proceedings will have a material adverse effect on our financial position or
results of operations.

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

We did not submit any matters to a vote
of security holders during the fourth quarter of the 2007 fiscal year.

Executive Officers

|Name               |  |    | Age |                                                                        | Position | 
|------------------ |  | -- | --- | ---------------------------------------------------------------------- | -------- | 
|J. Wayne Weaver    |  | 73 |     | Chairman of the Board and Director                                    
|Mark L. Lemond     |  | 53 |     | President, Chief Executive Officer and Director                       
|Timothy T. Baker   |  | 51 |     | Executive Vice President - Store
    Operations                       
|W. Kerry Jackson   |  | 46 |     | Executive Vice President - Chief Financial Officer and
      Treasurer
|Clifton E. Sifford |  | 54 |     | Executive Vice President - General Merchandise
      Manager          

Mr. Weaveris Shoe Carnivals largest shareholder and has served as
Chairman of the Board since March 1988. From 1978 until February 2, 1993, Mr.
Weaver had served as president and chief executive officer of Nine West Group
Inc., a designer, developer and marketer of womens footwear. He has over 40
years of experience in the footwear industry. Mr. Weaver is a former director of
Nine West Group, Inc. Mr. Weaver serves as chairman and chief executive officer
of Jacksonville Jaguars, LTD and chairman and chief executive officer of LC
Footwear, LLC.

Mr. Lemondhas been employed as President and Chief Executive Officer
since September 1996. From March 1988 to September 1996, Mr. Lemond served as
Executive Vice President, Chief Financial Officer, Treasurer and Assistant
Secretary. On February 3, 1994, Mr. Lemond was promoted to the position of Chief
Operating Officer. Mr. Lemond has served as a Director since March 1988. Prior
to March 1988, he served in similar officer capacities with Russells Shoe Biz,
Inc. Prior to joining Russells Shoe Biz, Inc. in 1987, Mr. Lemond was a partner
with a public accounting firm. He is a Certified Public Accountant.

Mr. Bakerhas been employed as Executive Vice President - Store Operations since
June 2001. From March 1994 to June 2001, Mr. Baker served as Senior Vice
President - Store Operations. From May 1992 to March 1994, Mr. Baker served as
Vice President - Store Operations. Prior to that time, he served as one of our
regional managers. From 1983 to June 1989, Mr. Baker held various retail
management positions with Payless ShoeSource.

Mr. Jacksonhas been employed as Executive Vice President - Chief
Financial Officer and Treasurer since August 2004. From June 2001 to August
2004, Mr. Jackson served as Senior Vice President  Chief Financial Officer and
Treasurer. From September 1996 to June 2001, Mr. Jackson served as Vice
President  Chief Financial Officer and Treasurer. From January 1993 to
September 1996, Mr. Jackson served as Vice President - Controller and Chief
Accounting Officer. Prior to January 1993, Mr. Jackson held various accounting
positions with us. Prior to joining us in 1988, Mr. Jackson was associated with
a public accounting firm. He is a Certified Public Accountant.

13

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Mr. Siffordhas been employed as Executive Vice President - General
Merchandise Manager since June 2001. From April 13, 1997 to June 2001, Mr.
Sifford served as Senior Vice President - General Merchandise Manager. Prior to
joining us, Mr. Sifford served as merchandise manager-shoes for Belk Store
Services, Inc.

Our executive officers serve at the
discretion of the Board of Directors. There is no family relationship between
any of our Directors or executive officers.

(Pursuant to General Instruction G (3)
of Form 10-K, the foregoing information is included as an unnumbered Item in
PART I of this annual report in lieu of being included in our Proxy Statement
for our 2008 Annual Meeting of Shareholders.)

14

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PART II

|ITEM 5. | MARKET FOR THE
      REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITYSECURITIES
|------- | ---------------------------------------------------------------------------------------------------------------------------

Market Information and Holders

Our common stock has been quoted on The
NASDAQ Stock Market, LLC under the trading symbol "SCVL" since March 16, 1993.

The quarterly high and low trading
prices for fiscal 2007 and fiscal 2006 were as follows:

Fiscal Year
      2007
    
    High
    
    LowFirst
      Quarter
    
    $
    35.26
    
    $
    29.09Second
Quarter
    
    
    30.66
    
    
    20.28Third
      Quarter
    
    
    23.18
    
    
    14.26Fourth
Quarter
    
    
    15.47
    
    
    10.54Fiscal Year 2006First Quarter
    
    $
    28.10
    
    $
    21.70Second
      Quarter
    
    
    29.12
    
    
    20.39Third Quarter
    
    
    29.24
    
    
    19.25Fourth
      Quarter
    
    
    33.28
    
    
    25.45


As of March 26, 2008, there were
approximately 213 holders of record of our common stock.

No unregistered equity securities were
sold by us during fiscal 2007.

Dividends

We have not paid, and do not currently
intend to pay, cash dividends on our common stock in the foreseeable future. The
payment of any future dividends will be at the discretion of our Board of
Directors and will depend upon, among other things, future earnings, operations,
capital requirements, our general financial condition and general business
conditions. In addition, our credit agreement contains certain limitations on
the payment of dividends.

Issuer Purchases of Equity
Securities

Throughout fiscal 2007 we issued
treasury shares to employees for the exercise of stock options and the issuance
of restricted stock awards. This included the repurchase of approximately 10,500
shares of common stock as a result of our withholding shares or allowing our
employees to deliver shares to us to cover the income taxes resulting from the
vesting of certain restricted stock awards. It is our intention to continue to
issue treasury shares to employees for the exercise of stock options and the
issuance of restricted stock awards.

15

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In fiscal 2006, our Board of Directors
authorized a $50.0 million share repurchase program, which will terminate upon
the earlier of the repurchase of the maximum amount or December 31, 2008. As of
February 2, 2008, approximately 1.2 million shares had been repurchased at an
aggregate cost of $28.1 million. The amount that remained available under the
existing repurchase authorization at February 2, 2008 was $21.9 million. The
following table summarizes repurchase activity during the fourth quarter of
fiscal 2007:

|                                          |  |                    |  |            |       |                        |                    |           | Approximate         
|----------------------------------------- |  | ------------------ |  | ---------- | ----- | ---------------------- | ------------------ | --------- | --------------------
|                                          |  |                    |  |            |       |                        | Total
      Number |           | Dollar Value        
|                                          |  |                    |  |            |       |                        | Of
      Shares    |           | of
      Shares that
|                                          |  |                    |  |            |       |                        | Purchased
      as |           | May Yet Be          
|                                          |  | Total
      Number |  | Average    |       | Part of
      Publicly |                    | Purchased
|                                          |  | of
      Shares    |  | Price Paid |       | Announced              |                    | Under the
|Period                                    |  | Purchased          |  | per Share  |       | Programs               |                    | Programs 
|November 4, 2007 to December 1, 2007      |  | 0                  |  | $          | 0.00  |                        | 0                  |           | $                   
|December 2, 2007 to
      January 5, 2008 |  | 0                  |  | $          | 0.00  |                        | 0                  |           | $                   
|January
      6, 2008 to February 2, 2008 |  | 216,307            |  | $          | 11.68 |                        | 216,307            |           | $                   
|                                          |  | 216,307            |  |            |       |                        | 216,307            |           |                     

Securities Authorized for Issuance
Under Equity Compensation Plans

The information required by this Item
concerning securities authorized for issuance under our equity plans has been
incorporated by reference into PART III, ITEM 12 of this report.

16

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ITEM 6. SELECTED FINANCIAL
DATA

The following selected financial data
should be read in conjunction with our consolidated financial statements and
notes to those statements included in PART II, ITEM 8 of this report.

(In thousands, except per share and
operating data)

|Fiscal years
    (1)                                                     |  | 2007 |         | 2006 |  | 2005 |         | 2004 |  | 2003
|------------------------------------------------------------------------ |  | ---- | ------- | ---- |  | ---- | ------- | ---- |  | ----
|Income
      Statement Data:                                             |  |      |         |      |  |      |         |      |  |     
|Net Sales                                                                |  | $    | 658,680 |      |  | $    | 681,662 |      |  | $   
|Cost of
      sales (including buying, distribution and occupancy costs) |  |      | 472,831 |      |  |      | 482,888 |      |  |     
|Gross Profit                                                             |  |      | 185,849 |      |  |      | 198,774 |      |  |     
|Selling, general and administrative expenses                             |  |      | 166,717 |      |  |      | 161,144 |      |  |     
|Operating
    income                                                     |  |      | 19,132  |      |  |      | 37,630  |      |  |     
|Interest income                                                          |  |      | (690    | )    |  |      | (1,235  | )    |  |     
|Interest
    expense                                                     |  |      | 264     |      |  |      | 152     |      |  |     
|Income
      before income taxes                                         |  |      | 19,558  |      |  |      | 38,713  |      |  |     
|Income tax
      expense                                                 |  |      | 6,751   |      |  |      | 14,949  |      |  |     
|Net
      income                                                         |  | $    | 12,807  |      |  | $    | 23,764  |      |  | $   
|                                                                        
|Net
      income per share:                                              |  |      |         |      |  |      |         |      |  |     
|Basic                                                                    |  | $    | 0.99    |      |  | $    | 1.78    |      |  | $   
|Diluted                                                                  |  | $    | 0.97    |      |  | $    | 1.73    |      |  | $   
|                                                                        
|Average
      shares outstanding                                         |  |      |         |      |  |      |         |      |  |     
|Basic                                                                    |  |      | 12,922  |      |  |      | 13,373  |      |  |     
|Diluted                                                                  |  |      | 13,158  |      |  |      | 13,744  |      |  |     
|                                                                        
|Selected Operating Data (2):                                             |  |      |         |      |  |      |         |      |  |     
|Stores open at end of
      year                                         |  |      | 291     |      |  |      | 271     |      |  |     
|Square
      footage of store space at year end (000s)                  |  |      | 3,238   |      |  |      | 3,062   |      |  |     
|Average sales per store
      (000s)                                    |  | $    | 2,364   |      |  | $    | 2,544   |      |  | $   
|Average
      sales per square foot                                      |  | $    | 209     |      |  | $    | 223     |      |  | $   
|Comparable store sales (3)                                               |  |      | (5.2    | )%   |  |      | 1.5     | %    |  |     
|Balance
      Sheet Data:                                                |  |      |         |      |  |      |         |      |  |     
|Working
    capital                                                      |  | $    | 141,455 |      |  | $    | 152,214 |      |  | $   
|Total
      assets                                                       |  | $    | 291,616 |      |  | $    | 311,162 |      |  | $   
|Long-term
debt                                                           |  | $    | 0       |      |  | $    | 0       |      |  | $   
|Total shareholders
    equity                                           |  | $    | 196,612 |      |  | $    | 209,949 |      |  | $   

|(1) |  | Our fiscal year is a
      52/53 week year ending on the Saturday closest to January 31. Unless
      otherwise stated, references to years 2007, 2006, 2005, 2004, and 2003
      relate respectively to the fiscal years ended February 2, 2008, February
      3, 2007, January 28, 2006, January 29, 2005, and January 31, 2004. Fiscal
      year 2006 consisted of 53 weeks and the other fiscal years consisted of 52
      weeks.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | Selected Operating
      Data has been adjusted to a comparable 52 week basis for fiscal
      2006.                                                                                                                                                                                                                                                                                                                                     
|(3) |  | Comparable store sales
      for the periods indicated include stores that have been open for 13 full
      months prior to the beginning of the period, including those stores that
      have been relocated or remodeled. Therefore, stores opened or closed
      during the periods indicated are not included in comparable store
      sales.                                                                                     

17

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

The following discussion of our
financial condition and results of operations should be read together with our
consolidated financial statements and notes to those statements included in PART
II, ITEM 8 of this report.

Overview of Our
Business

Shoe Carnival, Inc. is one of the
nations largest family footwear retailers. As of February 2, 2008, we operated
291 stores in 27 states primarily in the Midwest, South and Southeast regions of
the United States. We offer a distinctive shopping experience, a broad
merchandise assortment and value to our customers while maintaining an efficient
store level cost structure.

Our stores combine competitive pricing
with a highly promotional, in-store marketing effort that encourages customer
participation and creates a fun and exciting shopping experience. We believe
this highly promotional atmosphere results in various competitive advantages,
including increased multiple unit sales; the building of a loyal, repeat
customer base; the creation of word-of-mouth advertising; and enhanced sell
through of in-season goods. Our objective is to be the destination
store-of-choice for a wide range of consumers seeking moderately priced, current
season name brand and private label footwear. Our product assortment includes
dress and casual shoes, sandals, boots and a wide assortment of athletic shoes
for the entire family. We believe that by offering a wide selection of both
athletic and non-athletic footwear, we are able to reduce our exposure to shifts
in fashion preferences between those categories.

Our marketing effort targets moderate
income, value-conscious consumers seeking name brand footwear for all age
groups. We believe that by offering a wide selection of popular styles of name
brand merchandise at competitive prices, we generate broad customer appeal. Our
cost-efficient store operations and real estate strategy enable us to price
products competitively. Low labor costs are achieved by housing merchandise
directly on the selling floor in an open-stock format, enabling customers to
serve themselves, if they choose. This reduces the staffing required to assist
customers and reduces store level labor costs as a percentage of sales. We
locate stores predominantly in strip shopping centers in order to take advantage
of lower occupancy costs and maximize our exposure to value-oriented shoppers.

In fiscal 2006, our Board of Directors
authorized a $50.0 million share repurchase program, which will terminate upon
the earlier of the repurchase of the maximum amount or December 31, 2008. Share
repurchases under this authorization may be made in the open market or in
privately negotiated transactions. The timing and actual number of shares
repurchased will depend on a variety of factors including price, corporate and
regulatory requirements and other market conditions. As of February 2, 2008,
approximately 1.2 million shares had been repurchased at an aggregate cost of
$28.1 million. The amount that remained available under the existing repurchase
authorization at February 2, 2008 was $21.9 million.

Our fiscal year is a 52/53 week year
ending on the Saturday closest to January 31. Unless otherwise stated,
references to years 2007, 2006, 2005, 2004, and 2003, relate respectively to the
fiscal years ended February 2, 2008, February 3, 2007, January 28, 2006, January
29, 2005, and January 31, 2004. Fiscal year 2006 consisted of 53 weeks and the
other fiscal years consisted of 52 weeks.

The 53rd week in fiscal 2006 caused a
one-week shift forward in the start of fiscal 2007 causing our year-over-year
sales comparisons to be impacted. Our reported year-to-date comparable store
sales results for fiscal 2007, both in this annual report on Form 10-K and in
our other public reports and disclosures, have been adjusted for the above
shift. As such, changes in comparable store sales may not be consistent with
changes in net sales reported for the 2007 fiscal period. Net sales for our
52-week fiscal year ended February 2, 2008 compares to our 53-week fiscal year
ended February 3, 2007. To minimize the effect of the fiscal calendar shift on
comparable store sales, we compare our 52-week fiscal year ended February 2,
2008 to the 52-week period ended February 3, 2007.

18

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Executive Summary

Fiscal 2007 proved to be a difficult
period for us and footwear retailers in general. The challenging economic
environment continued to directly affect our targeted moderate income consumer,
and consequently, had a negative impact on both our traffic and sales throughout
the year. In addition to declining economic conditions, there were a number of
other significant factors which directly impacted our operating results for
fiscal 2007, especially in comparison to fiscal 2006:

- Lack of a compelling fashion trend- After coming off two strong fashion
  driven years in the men's and women's dress categories of footwear, our core
  customers did not respond to the style and color direction this past year.
  Additionally, the athletic industry has been unable to identify a dominant
  fashion trend in recent years and as a result, sales of athletic footwear
  retailers have declined.
- Conversion to a new distribution center and
  relocation to a new corporate headquarters It was anticipated that we would experience a deleveraging of costs
  associated with our new facilities. In addition to the one-time conversion
  costs incurred during the relocation of the distribution center, the increase
  in fixed facility operating costs precluded us from leveraging these expenses
  in the near term.
- 53 versus 52-week fiscal year- Fiscal 2006 represented a 53-week period as compared to
  the 52-week period in fiscal 2007. We earned approximately $0.05 per diluted
  share in the extra week of fiscal 2006.

Despite the challenges we faced in
fiscal 2007 there were a number of positive achievements:

- Maintained tight control over inventory levels- Our merchants did a good job of
  controlling inventories, both in terms of quantity and composition. At the end
  of each quarter, our inventories were at or below the prior year on a per
  store average and we concluded fiscal 2007 down approximately 5 percent from
  the end of the prior fiscal year.
- Continued new store growth In fiscal 2007 we opened 25 new stores. Consistent with
  our real estate strategy, these new stores are located in large and small
  markets in both new and existing geographic areas. We continued to fill in
  under-penetrated markets with additional stores in order to improve the
  performance of the overall market. We also continued to enter smaller markets
  that we can fully penetrate with one or two stores.
- Initiated a share repurchase program During fiscal 2007, approximately 1.2
  million shares were repurchased at an aggregate cost of $28.1 million. Despite
  this significant outlay of cash, we ended the fiscal year with no outstanding
  long-term debt.
- Converted to a new distribution center with
  minimal product delivery disruption While
  many in the retail sector have experienced overwhelming challenges and product
  delivery interruptions during conversion to new distribution centers, we
  experienced minimal disruption of product flow to our stores.
- Relocated to a new corporate headquarters
  without a lost work day We were able to
  relocate our corporate headquarters over a three-day holiday weekend and
  return to normal operations by the following Tuesday. Our stores experienced
  no disruption in computer services or support from our corporate
  staff.

While we anticipate that the retail
business environment in which we operate will be challenging in fiscal 2008, we
believe our strong brand name in existing markets and a cost efficient operating
model provide us with opportunities for growth and increased profitability. Our
primary focus in fiscal 2008 will be on enhancing store performance metrics and
continuing our efforts to provide long-term earnings growth to our
shareholders.

19

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To accomplish this in today's
competitive retail environment, we recognize that we must always deliver the
latest fashion, stay in stock with sizes, offer competitive pricing and provide
a start-to-finish memorable shopping experience. If our management group
executes these initiatives in fiscal 2008, we can continue building a loyal,
repeat customer base. We have undertaken the following initiatives to deliver
these expectations:

- Reducing assortments, creating more size depth in key styles and
  delivering the right shoes to the right stores We believe that the compelling fashion of our core products will be
  on target for what the consumer is seeking.We
  also believe a higher conversion rate will result by increasing the depth of
  size runs in these key fashion offerings. In order to increase size runs, we
  are strategically reducing our product assortment to keep store inventories at
  appropriate levels. With these two initiatives comes the challenge of refining
  store assortments to deliver the right product and quantities.
- Achieving incremental gains in average retail price points while
  maintaining competitive pricing Like most
  retailers, we are facing increases in the cost of product sourced from China.
  We have chosen to take this opportunity to add additional features to certain
  private label product in order to create greater intrinsic value to our
  customer. We are also working to create the same elevation in intrinsic value
  to the customer for branded product by improving key fashion and comfort
  elements. Although our intent is to pass these costs onto the customer through
  higher average retail prices, our ability to achieve this goal is largely
  dependent upon the promotional nature of the retail footwear industry over the
  course of the next year.
- Achieving growth in women's non-athletic product We believe that the improvement in key fashion and comfort
  elements of our women's dress and casual merchandise will help us achieve our
  goal of increasing these categories to 28 to 30 percent of our total sales
  over the next two years. Historically, womens non-athletic product has
  achieved the highest gross profit margin of any of our footwear
  categories.
- Refocusing our marketing strategy towards our target
  consumer Another important initiative for
  fiscal 2008 is to continue to gain an understanding of the value-based needs
  of our target consumer. This starts with qualitative as well as quantitative
  analysis involving our core customers. By better defining our customers'
  expectations, we will be in a position to not only deliver the best footwear
  to satisfy their needs, but will also be able to more effectively market to
  our core consumers.
- Enhancing the customer's in-store experience We are also challenging management throughout the chain to ensure we
  are delivering the total shopping experience the consumer is looking for. We
  believe customer service is far more than just a helpful store associate. It
  is satisfaction with every facet of the Shoe Carnival experience. We are
  committed to providing an in-store shopping experience that is not only fun
  and distinctive, but leaves the consumer knowing that we are providing
  fashionable high quality footwear for their lifestyle at a competitive
  price.

In fiscal 2008, we expect to open
between 20 and 25 stores. These new stores will be located in large and small
markets in both new and existing geographic areas. Our intention is to continue
to fill in certain under-penetrated larger markets with additional stores,
thereby increasing the performance of the overall market. We also intend to
enter smaller markets that we can fully penetrate with one or two stores. We
generally can advertise more effectively in these markets, which helps to create
immediate brand awareness. We have adjusted, and will continue to adjust, our
annual store growth rate based on our view of internal and external
opportunities and challenges. The number of new stores we open is dependent upon
the availability of desirable store locations primarily in our existing larger
markets and small markets in our current geographic footprint. Real estate
developers are beginning to show signs of a slow down as the current
macroeconomic environment is curtailing the expansion plans of many retailers,
particularly those retailers that would serve as the anchor tenant in a
desirable strip center. While we recognize that the immediate profitability of
newly opened stores will be impacted by this difficult macroeconomic
environment, we also believe that taking advantage of real estate opportunities
in a depressed retail market is a prudent long-term strategy, especially when
those store locations fill in existing under-penetrated markets.

20

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Critical Accounting Policies

It is necessary for us to include
certain judgements in our reported financial results. These judgements involve
estimates that are inherently uncertain and actual results could differ
materially from these estimates. The accounting policies that require the more
significant judgements are:

Merchandise
Inventories- Merchandise inventories are
stated at the lower of cost or market using the first-in, first-out (FIFO)
method. In determining market value, we estimate the future sales price of items
of merchandise contained in the inventory as of the balance sheet date. Factors
considered in this determination include, among others, current and recently
recorded sales prices, the length of time product has been held in inventory and
quantities of various product styles contained in inventory. The ultimate amount
realized from the sale of certain product could differ materially from our
estimates. We also estimate a shrinkage reserve for the period between the last
physical count and the balance sheet date. The estimate for the shrinkage
reserve can be affected by changes in merchandise mix and changes in actual
shrinkage trends.

Valuation of Long-Lived
Assets- We review long-lived assets annually
and whenever events or circumstances indicate the carrying value of an asset may
not be recoverable. We evaluate the ongoing value of assets associated with
retail stores that have been open longer than one year. When events such as
these occur, the assets subject to impairment are adjusted to estimated fair
value and, if applicable, an impairment loss is recorded in selling, general and
administrative expenses. Our assumptions and estimates used in the evaluation of
impairment, including current and future economic trends for stores, are subject
to a high degree of judgement and if actual results or market conditions differ
from those anticipated, additional losses may be recorded.

Income Taxes- We calculate income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes 
("SFAS No. 109") and account for uncertain tax positions in accordance with
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109" ("FIN 48"). Under SFAS No. 109,
deferred tax assets and liabilities are recognized based on the difference
between the consolidated financial statement carrying amounts of existing assets
and liabilities and their respective tax basis. Deferred tax assets and
liabilities are measured using the estimated tax rates in effect in the years
when those temporary differences are expected to reverse. Under FIN 48, we are
required to make many subjective assumptions and judgements regarding our income
tax exposures. Interpretations of and guidance surrounding income tax laws and
regulations are often complex, ambiguous and change over time. As such, changes
in our subjective assumptions and judgements can materially affect amounts
recognized in the consolidated financial statements. See our Notes to
Consolidated Financial Statements, Note 7  "Income Taxes" included in PART II,
ITEM 8 of this report for further details.

Insurance Reserves -We use a combination of self-insurance and
third-party insurance for workers' compensation, employee medical and general
liability insurance. These plans have stop-loss provisions that protect us from
individual and aggregate losses over specified dollar values. When estimating
our self-insured liabilities, we consider a number of factors, including
historical claims experience, severity factors, statistical trends and, in
certain instances, valuation assistance provided by independent third-parties.
We will continue to evaluate our self-insured liabilities and the underlying
assumptions on a quarterly basis and make adjustments as needed. The ultimate
cost of these claims may be greater than or less than the established accruals.
While we believe that the recorded amounts are adequate, there can be no
assurance that changes to management's estimates will not occur due to
limitations inherent in the estimating process. In the event we determine an
accrual should be increased or reduced, we will record such adjustments in the
period in which such determination is made.

21

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Results of
Operations

The following table sets forth our
results of operations expressed as a percentage of net sales for the following
fiscal years:

|                                                                          |  | 2007  |   | 2006 |       | 2005
|------------------------------------------------------------------------- |  | ----- | - | ---- | ----- | ----
|Net
      Sales                                                           |  | 100.0 | % |      | 100.0 | %   
|Cost of sales
      (including buying, distribution, and occupancy costs) |  | 71.8  |   |      | 70.8  |     
|Gross
      profit                                                        |  | 28.2  |   |      | 29.2  |     
|Selling, general and
      administrative expenses                        |  | 25.3  |   |      | 23.7  |     
|Operating income                                                          |  | 2.9   |   |      | 5.5   |     
|Interest
    income                                                       |  | (0.1  | ) |      | (0.2  | )   
|Interest expense                                                          |  | 0.1   |   |      | 0.0   |     
|Income before income
      taxes                                          |  | 2.9   |   |      | 5.7   |     
|Income
      tax expense                                                  |  | 1.0   |   |      | 2.2   |     
|Net income                                                                |  | 1.9   | % |      | 3.5   | %   

In the regular course of business, we
offer our customers sales incentives including coupons, discounts, and free
merchandise. Sales are recorded net of such incentives and returns and
allowances. If an incentive involves free merchandise, that merchandise is
recorded as a zero sale and the cost is included in cost of sales. Comparable
store sales for the periods indicated below include stores that have been open
for 13 full months prior to the beginning of the period, including those stores
that have been relocated or remodeled. Therefore, stores opened or closed during
the periods indicated are not included in comparable store sales.

2007 Compared to 2006

Net Sales

Net sales decreased $23.0 million to
$658.7 million in fiscal 2007, a 3.4% decrease from net sales of $681.7 million
in fiscal 2006. Comparable store sales for the 52-week period ended February 2,
2008 decreased 5.2%, or approximately $34.5 million, compared to the 52-week
period ended February 3, 2007. This decrease in net sales was partially offset
by a $23.3 million increase in sales generated by the 25 stores opened in fiscal
2007 and the effect of a full year's worth of sales for the 14 stores opened in
fiscal 2006, net of the sales loss from the 11 stores which were closed during
the same periods. Additional sales of approximately $11.5 million were recorded
in the 53rd week of fiscal 2006.

We believe the constriction of the
general economy during fiscal 2007 directly affected our target customer through
higher gasoline prices, escalating food costs, housing and mortgage issues and
increased consumer debt loads. These conditions had a direct negative impact on
traffic in our stores, and consequently, resulted in lower sales for fiscal
2007. The 5.2% decline in comparable store sales was broad-based, with all
product categories experiencing a decline.

Gross Profit

Gross profit decreased $13.0 million to
$185.8 million in fiscal 2007, a 6.5% decrease from gross profit of $198.8
million in fiscal 2006. The gross profit margin for fiscal 2007 decreased to
28.2% from 29.2% in fiscal 2006. As a percentage of sales, the merchandise
margin remained unchanged compared to the prior year, while buying, distribution
and occupancy costs increased 1.0%. An increase in occupancy costs related
primarily to the operation of 28 net new stores coupled with declining sales
accounted for 0.6% of the 1.0% increase. The remaining 0.4% was primarily
related to increases in fixed distribution costs.

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Selling, General and Administrative
Expenses

Selling, general and administrative
expenses increased $5.6 million to $166.7 million in fiscal 2007 from $161.1
million in fiscal 2006. As a percentage of sales, selling, general and
administrative expenses increased to 25.3% during fiscal 2007 from 23.7% in
fiscal 2006.

Pre-opening costs were $1.0 million, or
0.2% of sales, in fiscal 2007 as compared to $494,000, or 0.1% of sales in
fiscal 2006. We opened 25 stores in fiscal 2007 as compared to 14 stores in
fiscal 2006. Pre-opening costs, such as advertising, payroll and supplies,
incurred prior to the opening of a new store are charged to expense in the
period they are incurred. Our average pre-opening costs per store were $40,000
in fiscal 2007 as compared to $35,000 in fiscal 2006. This increase was
primarily due to an increase in advertising expenditures.

The portion of store closing costs
included in selling, general and administrative expenses for fiscal 2007 was
$1.9 million, or 0.3% as a percentage of sales. These costs related to five
fiscal 2007 store closings and the impairment and acceleration of expenses
associated with management's determination to close 10 stores in fiscal 2008,
four in fiscal 2009 and one each in fiscal 2010 and 2011. In fiscal 2006, we
incurred $621,000, or 0.1% as a percentage of sales, in store closing costs
related to six fiscal 2006 store closings and an impairment charge for one
store. The timing and actual amount of expense recorded in closing a store can
vary significantly on a store-by-store basis depending, in part, on the period
in which management commits to a closing plan, the remaining basis in the fixed
assets at the store and any amounts required to be paid as part of the lease
termination.

Additional significant items associated
with this net increase in selling, general and administrative expenses included
$7.2 million of additional expense to operate and support the 28 net new stores
(stores opened since the beginning of fiscal 2006, net of store closings), which
was partially offset by $3.6 million in comparable store expense savings
primarily attributable to variable expense controls along with a $2.0 million
decrease in performance based incentive compensation expense. The increase in
costs associated with providing general and administrative services to the
corporation account for the balance of the increase in selling, general and
administrative expenses and are not materially significant as individual items.

Interest Income and Expense

Interest income decreased to $690,000
in fiscal 2007 from $1.2 million in fiscal 2006. The decrease was primarily
attributable to lower average cash and cash equivalents balances available for
investment purposes throughout fiscal 2007. Interest expense increased to
$264,000 in fiscal 2007 from $152,000 in fiscal 2006.

Income Taxes

The effective income tax rate was 34.5%
for fiscal 2007 and 38.6% in fiscal 2006. The effective income tax rate for both
years differed from the statutory rate due primarily to state and local income
taxes, net of the federal tax benefit and tax credits. In the first quarter of
fiscal 2007, we recorded $980,000 of state tax credits related to the investment
in our new distribution center, which was the primary factor in reducing the
company's effective tax rate in fiscal 2007 as compared to fiscal
2006.

2006 Compared to 2005

Net Sales

Net sales increased $26.1 million to
$681.7 million in fiscal 2006, a 4.0% increase over net sales of $655.6 million
in fiscal 2005. Fiscal 2006 consisted of 53 weeks compared to 52 weeks in fiscal
2005. Sales of approximately $11.5 million were recorded in the extra week of
fiscal 2006. Comparable store sales for the 52-week period ended January 27,
2007 increased 1.5%, or approximately $9.5 million. The remaining increase was
primarily related to sales generated by our new stores partially offset by the
sales decrease resulting from store closings.

23

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Comparable store sales for the 52-week
period ended January 27, 2007 increased 4.9% for non-athletic merchandise and
decreased 1.1% for athletic product. We attribute the sales decline in athletic
product to the current fashion trends favoring dress and casual styles over that
of traditional athletic. We made significant progress in fiscal 2006 towards our
goal of increasing womens casual and dress product as a percent of total sales.
Historically, womens non-athletic product has achieved the highest gross profit
margin of any of our footwear categories. For fiscal 2006, our women's
non-athletic product rose to 27% of total sales compared to 25% in fiscal
2005.

Gross Profit

Gross profit increased $9.1 million to
$198.8 million in fiscal 2006, a 4.8% increase from gross profit of $189.7
million in fiscal 2005. The gross profit margin for fiscal 2006 increased to
29.2% from 28.9% in fiscal 2005. As a percentage of sales, the merchandise
margin increased 0.5% while buying, distribution and occupancy costs increased
0.2%. The increase in merchandise margin, as a percentage of sales, was
primarily driven by our continued improvements in inventory management and
product assortment, which resulted in an increase in average selling price. The
increase in buying, distribution and occupancy costs, as a percentage of sales,
was due primarily to incremental expenses of approximately $900,000 associated
with the opening of a new distribution center during the fourth quarter of
fiscal 2006.

Selling, General and Administrative
Expenses

Selling, general and administrative
expenses increased $2.2 million to $161.1 million in fiscal 2006 from $158.9
million in fiscal 2005. Selling, general and administrative expenses during
fiscal 2006, as a percentage of sales, decreased to 23.7% from 24.2% in fiscal
2005. Significant changes in expenses included a $964,000 increase in
stock-based compensation and a $826,000 decrease in health care costs.
Disclosure regarding our stock-based compensation plans and the effect of the
adoption of SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS No.
123R"), is contained in the Notes to Consolidated Financial Statements contained
in PART II, ITEM 8 of this report. Health care costs incurred during fiscal 2005
were unusually high and we believe we experienced a return to a more normal
usage of benefits in fiscal 2006. Additionally, at the beginning of our third
quarter of fiscal 2006, we entered into an agreement with a new provider to
manage our self-insured health benefits plan. This resulted in year-over-year
savings on claim management fees and preferred provider discounts.

The portion of store closing costs
included in selling, general and administrative expenses for fiscal 2006 was
$621,000, or 0.1% as a percentage of sales. These costs related to six fiscal
2006 store closings and an impairment charge for one store. In fiscal 2005, we
incurred $1.5 million, or 0.2% as a percentage of sales, in store closing costs
related to seven fiscal 2005 store closings and impairment charges for three of
the stores that closed in fiscal 2006. The year-over-year decrease was primarily
attributable to the impairment charges we recorded in fiscal 2005 for the three
stores we closed in fiscal 2006. The timing and actual amount of expense
recorded in closing a store can vary significantly on a store-by-store basis
depending, in part, on the period in which management commits to a closing plan,
the remaining basis in the fixed assets at the store and any amounts required to
be paid as part of the lease termination.

Pre-opening expenses for the 14 new
stores in fiscal 2006 and the 15 new stores in fiscal 2005 were approximately
$494,000 and $753,000, respectively. Pre-opening expenses represented 0.1% of
sales for both years. Pre-opening costs, such as advertising, payroll and
supplies, incurred prior to the opening of a new store are charged to expense in
the period they are incurred. Our average pre-opening costs per store dropped by
nearly 30% in fiscal 2006 to $35,000 from $50,000 in fiscal 2005. This decrease
was primarily due to changes in the mix of advertising media selected to
advertise our openings and an increase in vendor cooperative advertising funds.

Interest Income and Expense

Interest income increased to $1.2
million in fiscal 2006 from $170,000 in fiscal 2005. The increase was
attributable to higher average cash and cash equivalents balances available for
investment purposes throughout fiscal 2006. Interest expense decreased to
$152,000 in fiscal 2006 from $524,000 in fiscal 2005. The decrease was
attributable to the effect of no direct borrowings being incurred during fiscal
2006.

24

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Income Taxes

The effective income tax rate was 38.6%
for fiscal 2006 and 38.4% in fiscal 2005. The effective income tax rate for both
years differed from the statutory rate due primarily to state and local income
taxes, net of the federal tax benefit.

Liquidity and Capital
Resources

Our sources and uses of cash are
summarized as follows:

|(000s)                                                    |  |      |         |      |  |      |         |   |  |   |         |  
|---------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|Fiscal years                                               |  | 2007 |         | 2006 |  | 2005
|Net
      income plus depreciation and amortization        |  | $    | 28,613  |      |  | $    | 38,232  |   |  | $ | 33,556  |  
|Deferred income
      taxes                                |  |      | (387    | )    |  |      | (2,383  | ) |  |   | (3,824  | )
|Lease
      incentives                                     |  |      | 663     |      |  |      | 953     |   |  |   | 874     |  
|Changes in operating
      assets and liabilities          |  |      | (11,378 | )    |  |      | (8,676  | ) |  |   | 827     |  
|Other
      operating activities                           |  |      | 2,368   |      |  |      | 1,141   |   |  |   | 2,252   |  
|Net cash provided by
      operating activities            |  |      | 19,879  |      |  |      | 29,267  |   |  |   | 33,685  |  
|Net
      cash used in investing activities                |  |      | (18,041 | )    |  |      | (17,748 | ) |  |   | (14,524 | )
|Net cash (used in)
      provided by financing activities  |  |      | (27,500 | )    |  |      | 3,016   |   |  |   | (3,746  | )
|Net
      (decrease) increase in cash and cash equivalents |  | $    | (25,662 | )    |  | $    | 14,535  |   |  | $ | 15,415  |  

Our primary sources of funds are cash
flows from operations and borrowings under our revolving credit facility. For
fiscal 2007, net cash provided by operating activities was $19.9 million
compared to net cash provided by operating activities of $29.3 million for
fiscal 2006. These amounts reflect the income from operations adjusted for
non-cash items and working capital changes. The $9.4 million decrease in cash
provided by operating activities between the two respective periods related
primarily to the decrease in net income.

Working capital decreased to $141.5
million at February 2, 2008 from $152.2 million at February 3, 2007, primarily
from lower cash and cash equivalents as a result of purchases of common stock
under our stock repurchase program. This decrease in cash and cash equivalents
was offset by an increase in merchandise inventories and other current assets
and decreases in accounts payable and accrued and other liabilities between
years. The current ratio at February 2, 2008 and February 3, 2007 was 2.8. We
had no outstanding long-term debt at February 2, 2008 or February 3,
2007.

Capital expenditures were $18.4 million
in fiscal 2007, $25.0 million in fiscal 2006 and $14.7 million in fiscal 2005.
No capital lease obligations were incurred during this three-year period. Of the
fiscal 2007 capital expenditures, approximately $7.6 million was used for new
stores, $4.4 million was used to equip the new distribution center, $2.1 million
was used for the purchase of furniture, accessories and computer equipment for
our new corporate headquarters and $1.0 million was used for store remodeling
and relocations. The remaining capital expenditures for fiscal 2007 were used
for software and information technology, in-store graphics and normal asset
replacement activities. Lease incentives received from landlords were $663,000,
$953,000 and $874,000 for fiscal years 2007, 2006 and 2005, respectively.

Capital expenditures are expected to be
$12 million to $14 million in fiscal 2008. We intend to open 20 to 25 stores at
an expected aggregate cost of between $5.5 million and $6.9 million in fiscal
2008. The remaining capital expenditures are expected to be incurred for store
remodels and various other store improvements, along with continued investments
in technology and normal asset replacement activities. The actual amount of cash
required for capital expenditures for store operations depends in part on the
number of new stores opened, the amount of lease incentives, if any, received
from landlords and the number of stores remodeled. The opening of new stores
will be dependent upon, among other things, the availability of desirable
locations, and the negotiation of acceptable lease terms and general economic
and business conditions affecting consumer spending in areas we target for
expansion.

25

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Our current store prototype uses
between 8,000 and 12,000 square feet depending upon, among other factors, the
location of the store and the population base the store is expected to service.
Capital expenditures for a new store in fiscal 2008 are expected to average
approximately $275,000. The average inventory investment in a new store is
expected to range from $350,000 to $600,000 depending on the size and sales
expectation of the store and the timing of the new store opening. Pre-opening
expenses, such as advertising, salaries and supplies, are expected to average
approximately $48,000 per store in fiscal 2008. On a per-store basis, for the 25
stores opened during fiscal 2007, the initial inventory investment averaged
$491,000, capital expenditures averaged $290,000 and lease incentives received
from landlords averaged $221,000 on the three stores for which incentives were
received.

Significant contractual obligations as
of February 2, 2008 and the fiscal years in which payments are due include:

|(000's)                             |  | Payments Due By Fiscal
Year
|----------------------------------- |  | ---------------------------
|                                    |  |                            
|Contractual
      Obligations       |  | Total                      
|Letters
      of credit             |  | $                          
|Operating
    leases                |  |                            
|Purchase commitments                |  |                            
|Deferred
      compensation         |  |                            
|FIN 48
      liabilities            |  |                            
|Total contractual
      obligations |  | $                          

Our unsecured credit facility provides
for up to $70 million in cash advances on a revolving basis and commercial
letters of credit. Borrowings under the revolving credit line are based on
eligible inventory. The agreement governing the credit facility stipulates a
minimum threshold for net worth, a maximum ratio of funded debt plus rent to
EBITDA plus rent, and a maximum of total distributions for stock repurchases and
cash dividends. We were in compliance with these requirements as of February 2,
2008. Should a default condition be reported, the lenders may preclude
additional borrowings and call all loans and accrued interest at their
discretion. The credit agreement and amendments thereto are filed as exhibits to
(or incorporated by reference in) this annual report on Form 10-K. There were no
borrowings outstanding under the credit facility and letters of credit
outstanding were $7.5 million at February 2, 2008. Estimated interest payments
on our line of credit are not included in the above table as our line of credit
is subject to frequent borrowing and/or repayment activities which does not lend
itself to reliable forecasting for disclosure purposes. As of February 2, 2008,
$62.5 million was available to us for additional borrowings under the credit
facility.

On December 15, 2006, the credit
agreement was amended to extend the maturity date to April 30, 2010 and to allow
us to repurchase shares of our outstanding common stock in an amount not to
exceed $50 million. In December 2006, the Board of Directors authorized a $50
million share repurchase program, which will terminate on the earlier of the
repurchase of the maximum amount or December 31, 2008. As of February 2, 2008,
approximately 1.2 million shares had been repurchased at an aggregate cost of
$28.1 million. The amount that remained available under the existing repurchase
authorization at February 2, 2008 was $21.9 million.

We anticipate that our existing cash
and cash flow from operations, supplemented by borrowings under our revolving
credit line, will be sufficient to fund our planned store expansion, any future
repurchase of our common stock under our current repurchase plan and other
operating cash requirements for at least the next 12 months.

See Note 5  "Long-Term Debt", Note 6 
"Leases", Note 7  "Income Taxes" and Note 8  "Employee Benefit Plans" to our
Notes to Consolidated Financial Statements contained in PART II, ITEM 8 of this
report for a further discussion of our contractual obligations.

Off-Balance Sheet Arrangements

We did not assign any store operating
leases to separate third parties during fiscal 2007. We remain liable on three
assignments of operating leases covering former store locations. We believe that
the likelihood of material liability being triggered under these leases is
remote, and no liability has been accrued for these contingent lease obligations
in our consolidated financial statements as of February 2, 2008. See Note 6 
"Leases" to our Notes to Consolidated Financial Statements contained in PART II,
ITEM 8 of this report for further discussion.

26

---

Except for the assignment of certain
store operating leases and operating leases entered into in the normal course of
business, we have not entered into any off-balance sheet arrangements during
fiscal 2007 or fiscal 2006, nor did we have any off-balance sheet arrangements
outstanding at February 2, 2008 or February 3, 2007.

Seasonality

Our quarterly results of operations
have fluctuated, and are expected to continue to fluctuate in the future,
primarily as a result of seasonal variances and the timing of sales and costs
associated with opening new stores. Non-capital expenditures, such as
advertising and payroll, incurred prior to the opening of a new store are
charged to expense as incurred. Therefore, our results of operations may be
adversely affected in any quarter in which we incur pre-opening expenses related
to the opening of new stores.

We have three distinct peak selling
periods: Easter, back-to-school and Christmas.

New Accounting Pronouncements

Recent accounting pronouncements
applicable to our operations are contained in Note 2  "Summary of Significant
Accounting Policies," contained in the Notes to Consolidated Financial
Statements included in PART II, ITEM 8 of this report.

ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

We are exposed to market risk in that
the interest payable on our credit facility is based on variable interest rates
and therefore is affected by changes in market rates. We do not use interest
rate derivative instruments to manage exposure to changes in market interest
rates. A 1% change in the weighted average interest rate charged under the
credit facility would have resulted in interest expense fluctuating by
approximately $20,000 in fiscal 2007. There were no borrowings on our credit
facility in fiscal 2006.

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item
appears beginning on page 29.

27

---

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

Board of Directors and
ShareholdersShoe Carnival, Inc., Evansville, Indiana

We have audited the accompanying
consolidated balance sheets of Shoe Carnival, Inc. and subsidiaries (the
Company) as of February 2, 2008 and February 3, 2007, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years ended February 2, 2008, February 3, 2007 and January 28, 2006. Our audits
also included the financial statement schedule listed in the Index at Item 15.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (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, such consolidated
financial statements present fairly, in all material respects, the financial
position of Shoe Carnival, Inc. and subsidiaries as of February 2, 2008 and
February 3, 2007, and the results of their operations and their cash flows for
the years ended February 2, 2008, February 3, 2007 and January 28, 2006, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.

As discussed in Note 2 to the
consolidated financial statements, the Company adopted Financial Accounting
Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainties in
Income Taxes in 2007 and Statement of Financial Accounting Standards No. 123
(Revised 2004), Share-Based Payment on January 29, 2006.

We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the Company's internal control over financial reporting as of February
2, 2008, based on the criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated April 14, 2008 expressed an unqualified opinion
on the Company's internal control over financial reporting.

/s/Deloitte & Touche LLP

Indianapolis, IndianaApril 14,
2008

28

---

Shoe Carnival,
Inc.Consolidated Balance
Sheets(In thousands, except per share
data)

|                                                                                                                                          |  | February 2, |         | February 3,
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | -----------
|                                                                                                                                          |  | 2008        |         | 2007       
|Assets                                                                                                                                    |  |             |         |            
|Current
    Assets:                                                                                                                       |  |             |         |            
|Cash and cash equivalents                                                                                                                 |  | $           | 9,177   |            
|Accounts receivable                                                                                                                       |  |             | 411     |            
|Merchandise inventories                                                                                                                   |  |             | 200,781 |            
|Deferred income tax benefit                                                                                                               |  |             | 2,340   |            
|Other                                                                                                                                     |  |             | 7,221   |            
|Total Current
      Assets                                                                                                                |  |             | 219,930 |            
|Property and equipment  net                                                                                                              |  |             | 71,686  |            
|Total
      Assets                                                                                                                        |  | $           | 291,616 |            
|                                                                                                                                         
|Liabilities and Shareholders Equity                                                                                                      |  |             |         |            
|Current
      Liabilities:                                                                                                                |  |             |         |            
|Accounts payable                                                                                                                          |  | $           | 67,786  |            
|Accrued and other liabilities                                                                                                             |  |             | 10,689  |            
|Total
      Current Liabilities                                                                                                           |  |             | 78,475  |            
|Deferred lease
      incentives                                                                                                           |  |             | 5,396   |            
|Accrued
      rent                                                                                                                        |  |             | 5,925   |            
|Deferred income
      taxes                                                                                                               |  |             | 399     |            
|Deferred compensation                                                                                                                     |  |             | 3,559   |            
|Other                                                                                                                                     |  |             | 1,250   |            
|Total
      Liabilities                                                                                                                   |  |             | 95,004  |            
|                                                                                                                                         
|Shareholders Equity:                                                                                                                     |  |             |         |            
|Common stock,
      $.01 par value, 50,000 shares authorized,13,670 and 13,561 shares issued atFebruary
      2, 2008and February 3, 2007 |  |             | 137     |            
|Additional paid-in capital                                                                                                                |  |             | 75,523  |            
|Retained earnings                                                                                                                         |  |             | 148,547 |            
|Treasury stock, at cost, 1,205 and 0 shares at February
      2, 2008 and February 3, 2007                                                |  |             | (27,595 | )          
|Total Shareholders
      Equity                                                                                                          |  |             | 196,612 |            
|Total
      Liabilities and Shareholders Equity                                                                                          |  | $           | 291,616 |            

See notes to consolidated financial
statements.

29

---

Shoe Carnival,
Inc.Consolidated Statements of
Income(In thousands, except per share
data)

|                                                                              |  | February 2, |         | February 3, |  | January 28,
|----------------------------------------------------------------------------- |  | ----------- | ------- | ----------- |  | -----------
|Fiscal years
      ended                                                      |  | 2008        |         | 2007        |  | 2006       
|Net
      sales                                                               |  | $           | 658,680 |             |  | $          
|Cost of sales
      (including buying,distribution and
      occupancy costs) |  |             | 472,831 |             |  |            
|                                                                             
|Gross
      profit                                                            |  |             | 185,849 |             |  |            
|Selling, general and administrative expenses                                  |  |             | 166,717 |             |  |            
|                                                                             
|Operating income                                                              |  |             | 19,132  |             |  |            
|Interest income                                                               |  |             | (690    | )           |  |            
|Interest expense                                                              |  |             | 264     |             |  |            
|                                                                             
|Income
      before income taxes                                              |  |             | 19,558  |             |  |            
|Income
      tax expense                                                      |  |             | 6,751   |             |  |            
|                                                                             
|Net
      income                                                              |  | $           | 12,807  |             |  | $          
|                                                                             
|Net
      income per share:                                                   |  |             |         |             |  |            
|Basic                                                                         |  | $           | 0.99    |             |  | $          
|Diluted                                                                       |  | $           | 0.97    |             |  | $          
|                                                                             
|Average
      shares outstanding:                                             |  |             |         |             |  |            
|Basic                                                                         |  |             | 12,922  |             |  |            
|Diluted                                                                       |  |             | 13,158  |             |  |            

See notes to consolidated financial
statements.

30

---

Shoe Carnival,
Inc.Consolidated Statements of
Shareholders Equity(In thousands)

|                                                             |  |              |  |          |        |          |  |          |     |          | Additional |        |   |              |   |         |   |  |   |         | Deferred |  |   |        |  
|------------------------------------------------------------ |  | ------------ |  | -------- | ------ | -------- |  | -------- | --- | -------- | ---------- | ------ | - | ------------ | - | ------- | - |  | - | ------- | -------- |  | - | ------ | -
|                                                             |  | Common Stock |  | Paid-In  |        | Retained |  | Treasury |     | Equity   |            |        |   |             
|                                                             |  | Issued       |  | Treasury |        | Amount   |  | Capital  |     | Earnings |            | Stock  |   | Compensation |   | Total  
|Balance
      at   January 29,
      2005                    |  | 13,363       |  |          | (509   | )        |  | $        | 134 |          | $          | 67,009 |   |              | $ | 93,300  |   |  | $ | (3,524  | )        |  | $ | 0      |  
|Stock option
      exercises                                 |  |              |  |          | 331    |          |  |          |     |          |            | 1,176  |   |              |   |         |   |  |   | 2,287   |          |  |   |        |  
|Stock-based
      compensation   income
      tax benefit    |  |              |  |          |        |          |  |          |     |          |            | 1,222  |   |              |   |         |   |  |   |         |          |  |   |        |  
|Employee stock
      purchase   plan
      purchases         |  |              |  |          | 9      |          |  |          |     |          |            | 83     |   |              |   |         |   |  |   | 64      |          |  |   |        |  
|Restricted stock awards                                      |  |              |  |          | 74     |          |  |          |     |          |            | 1,182  |   |              |   |         |   |  |   | 515     |          |  |   | (1,083 | )
|Net income                                                   |  |              |  |          |        |          |  |          |     |          |            |        |   |              |   | 18,790  |   |  |   |         |          |  |   |        |  
|                                                            
|Balance
      at   January 28,
      2006                    |  | 13,363       |  |          | (95    | )        |  |          | 134 |          |            | 70,672 |   |              |   | 112,090 |   |  |   | (658    | )        |  |   | (1,083 | )
|Stock option
      exercises                                 |  | 175          |  |          | 65     |          |  |          | 2   |          |            | 2,154  |   |              |   |         |   |  |   | 453     |          |  |   |        |  
|Stock-based
      compensation   income
      tax benefit    |  |              |  |          |        |          |  |          |     |          |            | 916    |   |              |   |         |   |  |   |         |          |  |   |        |  
|Employee stock
      purchase   plan
      purchases         |  | 8            |  |          |        |          |  |          |     |          |            | 168    |   |              |   |         |   |  |   |         |          |  |   |        |  
|Restricted stock awards                                      |  | 15           |  |          | 39     |          |  |          |     |          |            | (446   | ) |              |   |         |   |  |   | 446     |          |  |   |        |  
|Accounting change
      for   stock-based
      compensation |  |              |  |          |        |          |  |          |     |          |            | (1,083 | ) |              |   |         |   |  |   |         |          |  |   | 1,083  |  
|Common
      stock   repurchased                             |  |              |  |          | (9     | )        |  |          |     |          |            |        |   |              |   |         |   |  |   | (241    | )        |  |   |        |  
|Stock-based
      compensation   expense                     |  |              |  |          |        |          |  |          |     |          |            | 1,578  |   |              |   |         |   |  |   |         |          |  |   |        |  
|Net
      income                                             |  |              |  |          |        |          |  |          |     |          |            |        |   |              |   | 23,764  |   |  |   |         |          |  |   |        |  
|                                                            
|Balance
      at   February 3,
      2007                    |  | 13,561       |  |          | 0      |          |  |          | 136 |          |            | 73,959 |   |              |   | 135,854 |   |  |   | 0       |          |  |   | 0      |  
|Stock option
      exercises                                 |  | 24           |  |          | 15     |          |  |          |     |          |            | 116    |   |              |   |         |   |  |   | 413     |          |  |   |        |  
|Stock-based
      compensation   income
      tax benefit    |  |              |  |          |        |          |  |          |     |          |            | 404    |   |              |   |         |   |  |   |         |          |  |   |        |  
|Employee stock
      purchase   plan
      purchases         |  | 2            |  |          | 7      |          |  |          |     |          |            | (11    | ) |              |   |         |   |  |   | 182     |          |  |   |        |  
|Restricted stock awards                                      |  | 83           |  |          | 11     |          |  |          | 1   |          |            | (310   | ) |              |   |         |   |  |   | 309     |          |  |   |        |  
|Common
      stock   repurchased                             |  |              |  |          | (1,238 | )        |  |          |     |          |            |        |   |              |   |         |   |  |   | (28,499 | )        |  |   |        |  
|Stock-based
      compensation   expense                     |  |              |  |          |        |          |  |          |     |          |            | 1,365  |   |              |   |         |   |  |   |         |          |  |   |        |  
|Cumulative effect
      of   adoption of FIN
      48        |  |              |  |          |        |          |  |          |     |          |            |        |   |              |   | (114    | ) |  |   |         |          |  |   |        |  
|Net
      income                                             |  |              |  |          |        |          |  |          |     |          |            |        |   |              |   | 12,807  |   |  |   |         |          |  |   |        |  
|Balance at   February 2, 2008                                |  | 13,670       |  |          | (1,205 | )        |  | $        | 137 |          | $          | 75,523 |   |              | $ | 148,547 |   |  | $ | (27,595 | )        |  | $ | 0      |  

See notes to consolidated financial
statements.

31

---

Shoe Carnival,
Inc.Consolidated Statements of Cash
Flows(In thousands)

|                                                                                                 |  | February 2, |         | February 3, |  | January 28,
|------------------------------------------------------------------------------------------------ |  | ----------- | ------- | ----------- |  | -----------
|Fiscal years
      ended                                                                         |  | 2008        |         | 2007        |  | 2006       
|Cash
      Flows From Operating Activities                                                       |  |             |         |             |  |            
|Net
      income                                                                                 |  | $           | 12,807  |             |  | $          
|Adjustments to reconcile net income to
      net          cash provided by operating activities: |  |             |         |             |  |            
|Depreciation and amortization                                                                    |  |             | 15,806  |             |  |            
|Stock option income tax benefit                                                                  |  |             | 0       |             |  |            
|Stock-based compensation                                                                         |  |             | 1,365   |             |  |            
|Loss on retirement and impairment of assets                                                      |  |             | 1,814   |             |  |            
|Deferred income taxes                                                                            |  |             | (387    | )           |  |            
|Lease incentives                                                                                 |  |             | 663     |             |  |            
|Other                                                                                            |  |             | (811    | )           |  |            
|Changes in operating assets and liabilities:                                                     |  |             |         |             |  |            
|Accounts receivable                                                                              |  |             | 537     |             |  |            
|Merchandise inventories                                                                          |  |             | (4,119  | )           |  |            
|Accounts payable and accrued liabilities                                                         |  |             | (2,541  | )           |  |            
|Other                                                                                            |  |             | (5,255  | )           |  |            
|Net cash provided by
      operating activities                                                  |  |             | 19,879  |             |  |            
|                                                                                                
|Cash
      Flows From Investing Activities                                                       |  |             |         |             |  |            
|Purchases of property and equipment                                                              |  |             | (18,434 | )           |  |            
|Proceeds from sale of property and equipment                                                     |  |             | 387     |             |  |            
|Other                                                                                            |  |             | 6       |             |  |            
|Net
      cash used in investing activities                                                      |  |             | (18,041 | )           |  |            
|                                                                                                
|Cash
      Flow From Financing Activities                                                        |  |             |         |             |  |            
|Borrowings under line of credit                                                                  |  |             | 72,220  |             |  |            
|Payments on line of credit                                                                       |  |             | (72,220 | )           |  |            
|Payments on long-term debt                                                                       |  |             | 0       |             |  |            
|Proceeds from issuance of stock                                                                  |  |             | 700     |             |  |            
|Excess tax benefits from stock-based compensation                                                |  |             | 299     |             |  |            
|Common stock repurchased                                                                         |  |             | (28,499 | )           |  |            
|Net cash (used in)
      provided by financing activities                                        |  |             | (27,500 | )           |  |            
|Net
      (decrease) increase in cash and cash equivalents                                       |  |             | (25,662 | )           |  |            
|Cash and cash
      equivalents at beginning of year                                             |  |             | 34,839  |             |  |            
|                                                                                                
|Cash
      and Cash Equivalents at End of Year                                                   |  | $           | 9,177   |             |  | $          
|                                                                                                
|Supplemental disclosures of cash flow information:                                               |  |             |         |             |  |            
|Cash paid during year for interest                                                               |  | $           | 264     |             |  | $          
|Cash
      paid during year for income taxes                                                     |  | $           | 7,662   |             |  | $          
|Capital expenditures incurred but not yet paid                                                   |  | $           | 2,066   |             |  | $          

See notes to consolidated financial
statements.

32

---

Shoe Carnival,
Inc.Notes to Consolidated Financial
Statements

Note 1  Organization and
Description of Business

Our consolidated financial statements
include the accounts of Shoe Carnival, Inc. and its wholly-owned subsidiaries
SCHC, Inc. and Shoe Carnival Ventures, LLC, and SCLC, Inc., a wholly-owned
subsidiary of SCHC, Inc. (collectively referred to as "we", "our" or "us"). All
significant intercompany accounts and transactions have been eliminated. Our
primary activity is the sale of footwear and related products through retail
stores operated by us primarily in the Midwest, South and Southeast regions of
the United States.

Note 2  Summary of Significant
Accounting Policies

Fiscal Year

Our fiscal year is a 52/53 week year
ending on the Saturday closest to January 31. Unless otherwise stated,
references to years 2007, 2006 and 2005 relate respectively to the fiscal years
ended February 2, 2008, February 3, 2007 and January 28, 2006. Fiscal year 2006
consisted of 53 weeks and the other fiscal years consisted of 52 weeks.

Cash and Cash
Equivalents

We consider all certificates of deposit
and other short-term investments with an original maturity date of three months
or less to be cash equivalents. Additionally, credit and debit card receivables
totaling $4.1 million and $3.8 million were included in cash equivalents at
February 2, 2008 and February 3, 2007, respectively.

Fair Value of Financial Instruments

The fair value of a financial
instrument is defined as the amount at which the instrument could be exchanged
in an arms length transaction between knowledgeable, willing parties. For cash,
accounts receivable and accounts payable, the carrying amounts approximate the
fair value because of the short maturity of those instruments.

Merchandise
Inventories

Merchandise inventories are stated at
the lower of cost or market using the first-in, first-out (FIFO) method. In
determining market value, we estimate the future sales price of items of
merchandise contained in the inventory as of the balance sheet date. Factors
considered in this determination include, among others, current and recently
recorded sales prices, the length of time product has been held in inventory and
quantities of various product styles contained in inventory. The ultimate amount
realized from the sale of certain product could differ materially from our
estimates.

Property and
Equipment-Net

Property and equipment is stated at
cost. Depreciation and amortization of property, equipment and leasehold
improvements are taken on the straight-line method over the shorter of the
estimated useful lives of the assets or the applicable lease terms. Lives used
in computing depreciation and amortization range from two to 20 years.
Expenditures for maintenance and repairs are charged to expense as incurred.
Expenditures, which materially increase values, improve capacities or extend
useful lives are capitalized. Upon sale or retirement, the costs and related
accumulated depreciation or amortization are eliminated from the respective
accounts and any resulting gain or loss is included in operations.

Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that full
recoverability is questionable. Factors used in the evaluation include, but are
not limited to, our plans for future operations, recent operating results and
projected cash flows. Based upon this review, we recorded non-cash impairment
charges of $1.5 million, $100,000 and $721,000 in fiscal years 2007, 2006 and
2005, respectively.

33

---

Shoe Carnival,
Inc.Notes to Consolidated Financial
Statements - continued

Insurance Reserves

We use a combination of self-insurance
and third-party insurance for workers' compensation, employee medical and
general liability insurance. These plans have stop-loss provisions that protect
us from individual and aggregate losses over specified dollar values. When
estimating our self-insured liabilities, we consider a number of factors,
including historical claims experience, severity factors, statistical trends and
in certain instances valuation assistance provided by independent third-parties.
We evaluate our self-insured liabilities and the underlying assumptions on a
quarterly basis and make adjustments as needed. The ultimate cost of these
claims may be greater than or less than the established accruals. While we
believe that the recorded amounts are adequate, there can be no assurance that
changes to management's estimates will not occur due to limitations inherent in
the estimating process. In the event we determine an accrual should be increased
or reduced, we will record such adjustments in the period in which such
determination is made.

Deferred Lease
Incentives

All cash incentives received from
landlords for leasehold improvements and fixturing of stores are recorded as
deferred income and amortized over the life of the lease on a straight-line
basis as a reduction of rental expense.

Accrued Rent

We are party to various lease
agreements which require scheduled rent increases over the initial lease term.
Rent expense for such leases is recognized on a straight-line basis over the
initial lease term beginning the earlier of the start date of the lease or when
we take possession of the property. The difference between rent based upon
scheduled monthly payments and rent expense recognized on a straight-line basis
is recorded as accrued rent.

Revenue Recognition

Revenue from sales of our merchandise
is recognized at the time of sale, net of sales tax. In the regular course of
business, we offer our customers sales incentives including coupons, discounts,
and free merchandise. Sales are recorded net of such incentives and returns and
allowances. If an incentive involves free merchandise, that merchandise is
recorded as a zero sale and the cost is included in cost of sales. Gift card
revenue is recognized at the time of redemption.

Cash Consideration Received From a
Vendor

Cash consideration is primarily
received from merchandise vendors. Cash consideration is either recorded as a
reduction of the price paid for the vendors products and recorded as a
reduction of our cost of sales or if the cash consideration represents a
reimbursement of a specific, incremental and identifiable cost then it is
recorded as an offset to the same financial statement line item.

Cash consideration received from our
vendors includes co-operative advertising/promotion, margin assistance, damage
allowances and rebates earned for a specific level of purchases over a defined
time period. Cash consideration principally takes the form of credits that we
can apply against trade amounts owed.

Cash consideration received after the
related merchandise has been sold is recorded as an offset to cost of sales in
the period negotiations are finalized. For cash consideration received on
merchandise still in inventory, the allowance is recorded as a reduction to the
cost of on-hand inventory and recorded as a reduction of our cost of sales at
the time of sale. Allowances received from vendors representing a reimbursement
of specific, incremental and identifiable costs are offset to the same financial
statement line item. Should the allowances received exceed the incremental cost
then the excess consideration is recorded as a reduction to the cost of on-hand
inventory and allocated to cost of sales in future periods utilizing an average
inventory turn rate.

34

---

Shoe Carnival,
Inc.Notes to Consolidated Financial
Statements - continued

Store Opening and Start-up
Costs

Non-capital expenditures, such as
advertising, payroll and supplies, incurred prior to the opening of a new store
are charged to expense in the period they are incurred. Start-up costs
associated with the new distribution center were incurred in the first quarter
and charged to expense.

Advertising Costs

Print, radio and television
communication costs are generally expensed when incurred. Internal production
costs are expensed when incurred and external production costs are expensed in
the period the advertisement first takes place. Advertising expenses included in
selling, general and administrative expenses were $34.9 million, $32.8 million
and $32.0 million in fiscal years 2007, 2006 and 2005, respectively.

Segments of an Enterprise and
Related Information

We have identified each retail store as
individual operating segments, which have been aggregated into one reportable
business segment that offers the same principal product and service throughout
the Midwest, South and Southeast regions of the United States.

Income Taxes

We compute income taxes using the asset
and liability method, under which deferred income taxes are provided for the
temporary differences between the financial reporting basis and the tax basis of
our assets and liabilities.

We account for uncertain tax positions
in accordance with Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109" ("FIN 48") and report a
liability for unrecognized tax benefits resulting from uncertain tax positions
taken or expected to be taken in a tax return. We recognize interest expense and
penalties, if any, related to uncertain tax positions in income tax expense.

Net Income Per Share

Net income per share of common stock is
based on the weighted average number of shares and common share equivalents
outstanding during the year. The following table presents a reconciliation of
our basic and diluted weighted average common shares outstanding as required by
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share":

(000s)Fiscal
      years
    
    2007
    
    2006
    
    2005Basic
      shares
    
    12,922
    
    13,373
    
    13,128Dilutive effect of
      stock-based awards
    
    236
    
    371
    
    329Diluted
      shares
    
    13,158
    
    13,744
    
    13,457


For fiscal 2007 and 2006, there were no
anti-dilutive shares. Options to purchase 3,100 shares of common stock in fiscal
2005 were not included in the computation of diluted shares because the options
exercise prices were greater than the average market price for the period.

Stock-Based Compensation

Effective January 29, 2006, we adopted
the fair value recognition provisions of SFAS No. 123 (revised 2004),
"Share-Based Payment" ("SFAS No. 123R"), using the modified prospective
transition method and began recognizing compensation expense for stock-based
awards based on the fair value of the awards. Stock-based awards include stock
option grants, restricted stock grants and certain transactions under our other
stock-based compensation plans.

35

---

Shoe Carnival,
Inc.Notes to Consolidated Financial
Statements - continued

SFAS No. 123R requires share-based
compensation expense recognized beginning in the first quarter of fiscal 2006 to
be based on the following: a) grant date fair value estimated in accordance with
the original provisions of SFAS No. 123 for unvested stock-based awards granted
prior to the adoption date; b) grant date fair value estimated in accordance
with the provisions of SFAS No. 123R for all stock-based awards granted
subsequent to the adoption date; and c) the discount on shares sold to employees
subsequent to the adoption date, which represents the difference between the
grant date fair value and the employee purchase price. Stock-based compensation
expense is included in selling, general and administrative expense.

SFAS No. 123R requires us to apply an
estimated forfeiture rate in calculating the period expense as opposed to
recognizing forfeitures as an expense reduction as they occur, which was the
method used prior to adoption. Forfeiture estimates are adjusted periodically
based on the extent to which actual forfeitures differ, or are expected to
differ, from previous estimates. SFAS No. 123R also requires the benefit of tax
deductions in excess of the compensation cost recognized for exercised options
and restricted stock that vests to be classified as financing cash inflows
rather than operating cash inflows. This amount is shown as "Excess tax benefits
from stock-based compensation" on the consolidated statement of cash flows in
accordance with SFAS No. 123R.

Prior to the adoption of SFAS No. 123R
and in accordance with the provisions of SFAS No. 123, we had followed the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, no compensation cost was recognized for our stock
option and incentive plans other than for awards of restricted shares during
fiscal 2005. Pro forma information regarding net income and earnings per share
was required by SFAS No. 123, and was determined as if we had accounted for our
stock options under the Black-Scholes fair value method described in that
statement. The following table presents our net income and net income per share
had we applied the fair value method of SFAS No. 123 for fiscal year 2005 (in
thousands, except per share data):

2005Net
      income as reported
    
    $
    18,790Add: Stock-based compensation
      expenseincluded in reported net income, net ofrelated tax effects
    
    
    379Deduct: Stock-basedcompensation expense determined underfair value based method for
      all awards,net of related tax
      effects
    
    
    (1,059
    )Pro forma net
      income
    
    $
    18,110Basic
      net income per shareAs
      reported
    
    $
    1.43Pro forma
    
    $
    1.38Diluted
      net income per shareAs
      reported
    
    $
    1.40Pro forma
    
    $
    1.35


36

---

Shoe Carnival,
Inc.Notes to Consolidated Financial
Statements - continued

The weighted-average fair value of
options granted was $8.56 during fiscal 2005. The fair value of these options
was estimated at grant date using a Black-Scholes option-pricing model with the
following weighted-average assumptions for fiscal year 2005:

2005Risk
      free interest rate
    
    4.3%Expected dividend
      yield
    
    0.0%Expected volatility
    
    53.17%Expected term
    
    5
    Years


The risk free interest rate was based
on the U.S. Treasury yield curve in effect at the time of the grant. We had not
paid and did not anticipate paying cash dividends; therefore, the expected
dividend yield was assumed to be zero. Expected volatility was based on the
historical volatility of our stock. The expected term of the options was based
on our historical option exercise data taking into consideration the exercise
patterns of the option holders during the options life.

New Accounting Pronouncements

In July 2006, the Financial Accounting
Standards Board (the "FASB") issued FIN 48, an interpretation of SFAS No. 109,
Accounting for Income Taxes ("SFAS No. 109"). FIN 48 clarifies the accounting
for the uncertainty in income taxes recognized by prescribing a recognition
threshold that a tax position is required to meet before being recognized in the
financial statements. Additionally, FIN 48 provides guidance on measurement,
derecognition, classification, accounting in interim periods and disclosure
requirements for uncertain tax positions. We adopted the provisions of FIN 48 on
February 4, 2007. See Note 7  "Income Taxes", in this annual report on Form
10-K for additional information, including the effects of adoption of this
interpretation on our consolidated financial statements.

In September 2006, the FASB issued SFAS
No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
The provisions of SFAS No. 157 are effective for fiscal years beginning after
November 15, 2007. In February 2008, the FASB deferred the implementation of
SFAS No. 157 for certain non-financial assets and liabilities for fiscal years
beginning after November 15, 2008. We do not believe the adoption of SFAS No.
157 will have a material impact on our consolidated financial
statements.

In September 2006, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 108, "Considering the
Effects of Prior Year Misstatements when Quantifying the Misstatements in
Current Year Financial Statements" ("SAB 108") which provides interpretive
guidance on how the effects of the carryover or reversal of prior year
misstatements should be considered in quantifying a current year misstatement.
We adopted SAB 108 as of the beginning of fiscal 2007. SAB 108 has not had a
material impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS
No. 159, "The Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an Amendment of FASB Statement No. 115" ("SFAS No. 159").
SFAS No. 159 allows companies the choice to measure many financial instruments
and certain other items at fair value. This gives companies the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The provisions of SFAS No. 159 will be effective for fiscal years
beginning after November 15, 2007. We are currently evaluating the impact the
adoption of SFAS No. 159 will have on our consolidated financial statements.

37

---

Shoe Carnival,
Inc.Notes to Consolidated Financial
Statements - continued

In December 2007, the FASB issued SFAS
No. 141R, "Business Combinations" ("SFAS No. 141R"). SFAS No. 141R requires an
acquirer to recognize the assets acquired, the liabilities assumed, and any
non-controlling interest in the acquired business at the acquisition date,
measured at their full fair values as of that date. SFAS No. 141R is effective
for business combinations occurring after December 31, 2008. We do not believe
the adoption of SFAS No. 141R will have a material impact on our consolidated
financial statements.

In December 2007, the FASB issued SFAS
No. 160, "Noncontrolling Interests in Consolidated Financial Statements  an
amendment of ARB No. 51" ("SFAS No. 160"). SFAS No. 160 establishes accounting
and reporting standards that require (i) noncontrolling interests to be reported
as a component of equity, (ii) changes in a parents ownership interest while
the parent retains its controlling interest to be accounted for as equity
transactions, and (iii) any retained noncontrolling equity investment upon the
deconsolidation of a subsidiary to be initially measured at fair value. SFAS No.
160 is effective for fiscal years and interim periods within those fiscal years,
beginning on or after December 15, 2008, with early adoption prohibited. We do
not believe the adoption of SFAS No. 160 will have a material impact on our
consolidated financial statements.

Use of Management
Estimates

The preparation of financial statements
in conformity with accounting principles generally accepted in the United States
requires that we make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements. The reported amounts of
revenues and expenses during the reporting period may be affected by the
estimates and assumptions we are required to make. Actual results could differ
from those estimates.

Note 3  Property and Equipment-Net

The following is a summary of property
and equipment:

February 2,
    
    February 3,(000s)
    
    2008
    
    2007Furniture, fixtures and equipment
    
    $
    103,107
    
    
    $
    100,148Leasehold
      improvements
    
    
    57,976
    
    
    
    55,743Total
    
    
    161,083
    
    
    
    155,891Less accumulated
      depreciation and amortization
    
    
    (89,397
    )
    
    
    (81,871
    )Property and equipment  net
    
    $
    71,686
    
    
    $
    74,020


Note 4  Accrued and Other
Liabilities

Accrued and other liabilities consisted
of the following:

February 2,
    
    February 3,(000s)
    
    2008
    
    2007Employee compensation and benefits
    
    $
    3,239
    
    $
    4,147Property and
      equipment
    
    
    1,040
    
    
    4,582Sales
      and use tax
    
    
    1,909
    
    
    2,143Other
    
    
    4,501
    
    
    3,704Total
      accrued and other liabilities
    
    $
    10,689
    
    $
    14,576


38

---

Shoe Carnival,
Inc.Notes to Consolidated Financial
Statements - continued

Note 5  Long-Term
Debt

We have an unsecured credit agreement
(the "Credit Agreement") with a bank group, which allows for both cash advances
and the issuance of letters of credit. The maximum amount available under the
credit facility is $70 million. On December 15, 2006, the Credit Agreement was
amended to extend the maturity date to April 30, 2010.

Borrowings under the revolving credit
line are based on eligible inventory. The Credit Agreement governing the credit
facility stipulates a minimum threshold for net worth, a maximum ratio of funded
debt plus rent to EBITDA plus rent, and a maximum of total distributions for
stock repurchases and cash dividends. We were in compliance with these
requirements as of February 2, 2008. Should a default condition be reported, the
lenders may preclude additional borrowings and call all loans and accrued
interest at their discretion.

The credit facility bears interest, at
our option, at the agent banks prime rate (6.00% at February 2, 2008) minus
0.5% or LIBOR plus from 0.75% to 1.5%, depending on our achievement of certain
performance criteria. A commitment fee is charged, at our option, at 0.3% per
annum on the unused portion of the bank groups commitment or 0.15% per annum of
the total commitment. We had no outstanding long-term debt at February 2, 2008
or February 3, 2007. At February 2, 2008, we had $7.5 million of outstanding
letters of credit and $62.5 million was available to us for additional
borrowings under the credit facility.

Note 6  Leases

We lease all of our retail locations
and certain equipment under operating leases expiring at various dates through
fiscal 2022. Various of these lease agreements require scheduled rent increases
over the initial lease term. Rent expense for such leases is recognized on a
straight-line basis over the initial lease term beginning the earlier of the
start date of the lease or when we take possession of the property. The
difference between rent based upon scheduled monthly payments and rent expense
recognized on a straight-line basis is recorded as accrued rent. All cash
incentives received from landlords for leasehold improvements and fixturing of
stores are recorded as deferred income and amortized over the life of the lease
on a straight-line basis as a reduction of rental expense.

Certain leases provide for contingent
rents that are not measurable at inception. These contingent rents are primarily
based on a percentage of sales that are in excess of a predetermined level.
These amounts are excluded from minimum rent and are included in the
determination of total rent expense when it is probable that the expense has
been incurred and the amount is reasonably estimable. Certain leases also
contain escalation clauses for increases in operating costs and
taxes.

We did not assign any store operating
leases to separate third parties during fiscal 2007. We remain liable on three
assignments of operating leases covering former store locations. These operating
leases were assigned to third parties in prior years. The assignments require us
to make payments under the lease agreements in certain events of default. The
maximum potential amount of future payments (undiscounted) that we could be
required to make under all assignments is approximately $2.9 million at February
2, 2008. One assignment remains in effect until the lease expires in fiscal
2011. Two of the assignments remain in effect until the leases expire in fiscal
year 2013. We believe that the likelihood of material liability being triggered
under these leases is remote, and no liability has been accrued for these
contingent lease obligations in our consolidated financial statements as of
February 2, 2008.

In February 2006, we sold our combined
distribution center and corporate headquarters for $7.2 million and recorded a
loss of approximately $55,000 including legal fees and associated selling costs.
We entered into a lease to continue operations in this combined facility, the
initial term of which expired on January 31, 2007. The lease provided an option
that allowed us to continue our occupancy until January 31, 2008. We exercised
this option during fiscal 2006 and leased the combined facility on a
month-to-month basis. In March and June 2007, we relinquished our rights to the
distribution center and corporate headquarters, respectively.

39

---

Shoe Carnival, Inc.Notes to Consolidated Financial
Statements - continued

In February 2006, we entered into an
operating lease with an independent third-party to lease our new distribution
center. The lease has an initial term of 15 years, commencing on December 1,
2006. We have the right to extend the initial lease term for up to three
additional, successive periods of five years each.

In June 2006, we entered into an
operating lease with an independent third-party to lease our new corporate
headquarters for an initial term of 15 years, commencing on June 1, 2007. We
have the right to extend the initial lease term for up to three additional,
successive periods of five years each.

Rental expense for our operating leases
consisted of:

(000s)Fiscal
      years
    
    2007
    
    2006
    
    2005Rentals for real property
    
    $
    43,800
    
    $
    40,643
    
    $
    38,290Contingent
      rent
    
    
    22
    
    
    74
    
    
    44Equipment rentals
    
    
    452
    
    
    502
    
    
    584Total
    
    $
    44,274
    
    $
    41,219
    
    $
    38,918


Future minimum lease payments at
February 2, 2008 are as follows:

(000s)
    
    OperatingFiscal
      years
    
    Leases2008
    
    $
    44,1012009
    
    
    41,0852010
    
    
    35,8312011
    
    
    30,6922012
    
    
    26,642Thereafter to
      2022
    
    
    81,231Total
    
    $
    259,582


Note 7  Income Taxes

The provision for income taxes
consisted of:

(000s)Fiscal
      years
    
    2007
    
    2006
    
    2005Current:Federal
    
    $
    6,992
    
    
    $
    15,801
    
    
    $
    14,228State
    
    
    146
    
    
    
    1,531
    
    
    
    1,288Total
      current
    
    
    7,138
    
    
    
    17,332
    
    
    
    15,516Deferred:Federal
    
    
    (147
    )
    
    
    (2,188
    )
    
    
    (3,559
    )State
    
    
    (240
    )
    
    
    (195
    )
    
    
    (265
    )Total deferred
    
    
    (387
    )
    
    
    (2,383
    )
    
    
    (3,824
    )Total provision
    
    $
    6,751
    
    
    $
    14,949
    
    
    $
    11,692


40

---

Shoe Carnival, Inc.Notes to Consolidated Financial
Statements - continued

We realized a tax benefit of $404,000,
$916,000 and $1,222,000 in fiscal years 2007, 2006 and 2005, respectively, as a
result of the exercise of stock options and the vesting of restricted stock,
which is recorded in shareholders equity.

Reconciliation between the statutory
federal income tax rate and the effective income tax rate is as follows:

Fiscal
      years
    
    2007
    
    2006
    
    2005U.S. Federal statutory tax rate
    
    35.0
    %
    
    35.0
    %
    
    35.0
    %State and local income taxes,Net of
      federal tax benefit
    
    (0.5
    )
    
    3.4
    
    
    2.9Other
    
    0.0
    
    
    0.2
    
    
    0.5Effective income
      tax rate
    
    34.5
    %
    
    38.6
    %
    
    38.4
    %


In the first quarter of fiscal 2007 we
recorded $980,000 of state tax credits related to the investment in our new
distribution center which had the effect of reducing the company's effective tax
rate in fiscal 2007 as compared to fiscal 2006 and 2005.

Deferred income taxes are the result of
temporary differences in the recognition of revenue and expense for tax and
financial reporting purposes. The sources of these differences and the tax
effect of each are as follows:

February 2,
    
    February 3,(000s)
    
    2008
    
    2007Deferred tax assets:Accrued rent
    
    $
    2,281
    
    
    $
    2,410Accrued compensation
    
    
    1,768
    
    
    
    1,453Accrued employee benefits
    
    
    925
    
    
    
    816Inventory
    
    
    860
    
    
    
    725Unrecognized tax benefits
    
    
    357
    
    
    
    0State bonus depreciation addback
    
    
    121
    
    
    
    159Other
    
    
    360
    
    
    
    77Total deferred tax assets
    
    
    6,672
    
    
    
    5,640Deferred tax liabilities:Depreciation
    
    
    3,511
    
    
    
    3,493Lease incentives
    
    
    321
    
    
    
    241Capitalized costs
    
    
    899
    
    
    
    599Total deferred tax liabilities
    
    
    4,731
    
    
    
    4,333Net deferred tax
      liability
    
    
    1,941
    
    
    
    1,307Less current deferred income tax benefit
    
    
    (2,340
    )
    
    
    (2,088
    )Long-term
      deferred income taxes
    
    $
    (399
    )
    
    $
    (781
    )


As of February 2, 2008, we had
available state tax credits of $200,000 that can be carried forward for nine
years.

On February 4, 2007, we adopted the
provisions of FIN 48. This interpretation of SFAS No. 109 clarifies the
accounting for the uncertainty in income taxes recognized by prescribing a
recognition threshold that a tax position is required to meet before being
recognized in the financial statements. FIN 48 also provides guidance on
derecognition of tax benefits, classification on the balance sheet, interest and
penalties, accounting in interim periods, disclosure, and transition. The total
effect of the adoption on our consolidated balance sheet as of February 4, 2007
was a $361,000 increase in tax liability including penalties and interest and a
$247,000 increase in deferred income tax benefits. This resulted in a $114,000
net reduction to retained earnings. After recording these entries, we had a
liability for unrecognized tax benefits, including interest and penalties, of
$775,000 at February 4, 2007.

41

---

Shoe Carnival, Inc.Notes to Consolidated Financial
Statements - continued

Our liability for unrecognized tax
benefits is related to tax years encompassing our fiscal years 1999 through
2007, the tax years which remain subject to examination by major tax
jurisdictions as of February 2, 2008.

A reconciliation of the beginning and
ending amount of unrecognized tax benefits, including interest and penalties,
for the fiscal year ended February 2, 2008 is as follows.

(000's)
    2007Balance at February 4, 2007
    $
    775Additions based on tax positions related to the current
      fiscal year
    
    161Additions for tax positions of prior years
    
    429Reductions for tax positions of prior years
    
    0Settlements
    
    0Balance at
      February 2, 2008
    $
    1,365


The liability for unrecognized tax
benefits as of February 2, 2008 includes $1,029,000 related to unrecognized tax
positions and $336,000 in accrued interest and penalties. Of this amount,
$1,250,000 was classified as an Other liability on our consolidated balance
sheet as of February 2, 2008. If our uncertain tax positions become
recognizable, the amount would reduce our effective tax rate.

We file state and local income tax
returns with multiple states and localities. Within the next twelve months we
may settle an uncertain tax position with a certain locality for $65,000,
excluding penalties and interest. The anticipated settlement relates to
deductions taken on local income tax returns that could be disallowed due to tax
nexus that we may have with the locality. Other than this anticipated
settlement, we do not expect the amount of the liability for unrecognized tax
benefits, excluding interest and penalties, will change significantly within the
next 12 months.

Prior to the adoption of FIN 48, we
recorded interest expense related to uncertain tax positions as a component of
interest expense. Upon adoption of FIN 48, we changed this policy to record such
interest expense as a component of income tax expense in the consolidated
statement of income. Penalties have historically been included as a component of
income tax expense and will continue to be recorded in this manner with the
adoption of FIN 48. During fiscal 2007, we recorded $127,000 of interest expense
related to uncertain tax positions.

Note 8  Employee Benefit
Plans

Retirement Savings
Plan

On February 24, 1994, our Board of
Directors approved the Shoe Carnival Retirement Savings Plan (the "Retirement
Plan"). The Retirement Plan is open to all employees who have been employed for
one year, are at least 21 years of age and who work at least 1,000 hours in a
defined year. The primary savings mechanism under the Retirement Plan is a
401(k) plan under which an employee may contribute up to 20% of earnings with us
matching the first 4% at a rate of 50%.

Our contributions to the participants
accounts become fully vested when the participant reaches their third
anniversary of employment with us. Contributions charged to expense were
$447,000, $482,000 and $427,000 in fiscal years 2007, 2006 and 2005,
respectively.

42

---

Shoe Carnival, Inc.Notes to Consolidated Financial
Statements - continued

Stock Purchase Plan

On May 11, 1995, our shareholders
approved the Shoe Carnival, Inc. Employee Stock Purchase Plan (the "Stock
Purchase Plan") as adopted by our Board of Directors on February 9, 1995. The
Stock Purchase Plan reserves 300,000 shares of our common stock (subject to
adjustment for any subsequent stock splits, stock dividends and certain other
changes in the common stock) for issuance and sale to any employee who has been
employed for more than a year at the beginning of the calendar year, and who is
not a 10% owner of our stock, at 85% of the then fair market value up to a
maximum of $5,000 in any calendar year. Under the plan, 9,200, 7,700 and 9,200
shares of common stock were purchased by participants in the plan and proceeds
to us for the sale of those shares were approximately $171,000, $168,000 and
$147,000 for fiscal years 2007, 2006 and 2005, respectively. At February 2,
2008, 143,730 shares of unissued common stock were reserved for future purchase
under the Stock Purchase Plan.

The following table summarizes
information regarding stock-based compensation expense recognized for the
employee stock purchase plan during the fiscal years ended February 2, 2008 and
February 3, 2007:

|(000's)                                     |  | 2007(1) |    | 2006
|------------------------------------------- |  | ------- | -- | ----
|Stock-based compensation expense before     |  |         |    |     
|the recognized income
      tax benefit (2) |  | $       | 30 |     
|Income tax
      benefit                    |  | $       | 12 |     

|(1) |  | Income tax benefit was
      calculated using an adjusted effective tax rate. The adjusted rate removes
      the tax effect of a reduction in state income taxes from state incentives
      related to the investment in our new distribution center.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Amounts are
      representative of the 15% discount employees are provided for purchases
      under the employee stock purchase plan.                                                                                                                

Deferred Compensation Plan

In fiscal 2000, we established a
non-qualified deferred compensation plan for certain key employees who, due to
Internal Revenue Service guidelines, cannot take full advantage of the employer
sponsored 401(k) plan. Participants in the plan elect on an annual basis to
defer, on a pre-tax basis, portions of their current compensation until
retirement, or earlier if so elected. While not required to, we can match a
portion of the employees contributions, which would be subject to vesting
requirements. The compensation deferred under this plan is credited with
earnings or losses measured by the mirrored rate of return on investments
elected by plan participants. The plan is currently unfunded. Compensation
expense for our match and earnings on the deferred amounts were $269,000,
$409,000 and $433,000 for fiscal years 2007, 2006 and 2005, respectively. Total
deferred compensation liability at February 2, 2008 and February 3, 2007 was
$3,559,000 and $3,149,000, respectively.

Note 9  Stock Based
Compensation

Compensation Plan Summaries

We have three stock-based compensation
plans: the 1993 Stock Option and Incentive Plan (the "1993 Plan"), the Outside
Directors Stock Option Plan (the "Directors Plan") and the 2000 Stock Option and
Incentive Plan (the "2000 Plan").

The 1993 Plan was approved by our Board
of Directors and shareholders effective January 15, 1993, and amended at the
1997 annual meeting of shareholders. The 1993 Plan reserved 1,500,000 shares of
common stock for stock option grants (subject to adjustment for subsequent stock
splits, stock dividends and certain other changes in the common stock). On
January 14, 2003, the 1993 Plan expired. Previously issued stock options can be
exercised for up to 10 years from their date of grant. At February 2, 2008, all
outstanding stock options granted under the 1993 Plan were fully vested.

43

---

Shoe Carnival, Inc.Notes to Consolidated Financial
Statements - continued

The Directors Plan was approved by our
Board of Directors on March 4, 1999. The plan reserves for issuance 25,000
shares of common stock (subject to adjustment for stock splits, stock dividends
and certain other changes to the common stock). No grants were made under this
plan in fiscal years 2005, 2006 or 2007, and it is currently the intention of
the Board of Directors not to grant stock options under this plan in the future.
At February 2, 2008, 9,000 shares of unissued common stock were reserved for
possible future grants under the Directors Plan. At February 2, 2008, all
outstanding stock options granted under the Directors Plan were fully vested.

The 2000 Plan was approved by our Board
of Directors and shareholders effective June 8, 2000. The 2000 Plan initially
reserved 1,000,000 shares of common stock for stock option and restricted stock
grants, but on June 11, 2004, the 2000 Plan was amended to increase the number
of shares reserved for issuance to 1,500,000 (subject to adjustment for
subsequent stock splits, stock dividends and certain other changes in the common
stock). On June 14, 2005, the 2000 Plan was further amended to include our
non-employee Directors as individuals eligible to receive awards; to stipulate
that the exercise price of all options granted may not be less than the fair
market value of our common stock on the date the option is granted; and to
delete the provision permitting loans to participants. At February 2, 2008,
367,947 shares of unissued common stock were reserved for future grants under
the 2000 Plan.

Stock options currently outstanding
under the 2000 Plan typically were granted such that one-third of the shares
underlying the stock options granted would vest and become fully exercisable on
each of the first three anniversaries of the date of the grant and were assigned
a 10-year term from the date of grant. Restricted stock awards issued to
employees under the 2000 Plan typically vest upon the achievement of specified
levels of annual earnings per diluted share during a six-year period starting
from the grant date. Should these criteria not be met within the six-year period
from the grant date, any shares still restricted will be forfeited. All
restricted stock awards issued to date to non-employee Directors vested one year
from the date of the grant.

Plan Specific Activity and End of
Period Balance Summaries

Stock Options

The following table summarizes the
stock option transactions pursuant to the stock-based compensation plans for the
year ended February 2, 2008:

|                                               |  |           |   |                |   | Weighted-    |  |                
|---------------------------------------------- |  | --------- | - | -------------- | - | ------------ |  | ---------------
|                                               |  |           |   |                |   | Average      |  | Aggregate      
|                                               |  |           |   | Weighted-      |   | Remaining    |  | Intrinsic      
|                                               |  | Number of |   | Average        |   | Contractual  |  | Value
      (in
|                                               |  | Shares    |   | Exercise Price |   | Term (Years) |  | thousands)     
|Outstanding at February 3, 2007                |  | 652,946   |   |                | $ | 12.51        |  |                
|Granted                                        |  | 30,000    |   |                |   | 11.49        |  |                
|Forfeited or expired                           |  | (6,301    | ) |                |   | 11.99        |  |                
|Exercised                                      |  | (38,936   | ) |                |   | 13.59        |  |                
|Outstanding at February 2, 2008                |  | 637,709   |   |                | $ | 12.40        |  | 3.91           
|Options
      outstanding at February 2, 2008, |  |           |   |                |   |              |  |                
|net of estimated forfeitures                   |  | 633,529   |   |                | $ | 12.41        |  | 3.87           
|Exercisable at February 2, 2008                |  | 606,041   |   |                | $ | 12.45        |  | 3.61           

44

---

Shoe Carnival, Inc.Notes to Consolidated Financial
Statements - continued

The weighted-average fair value of
options granted was $4.90 during fiscal 2007. No stock options were granted
during fiscal 2006. The fair value of options granted during fiscal 2007 was
estimated at grant date using a Black-Scholes option-pricing model with the
following weighted-average assumptions for fiscal year 2007:

Risk free interest rate
    2.8
    %Expected
      dividend yield
    0.0
    %Expected volatility
    43.91
    %Expected
      term
    5
      Years


The risk free interest rate was based
on the U.S. Treasury yield curve in effect at the time of the grant. We had not
paid and did not anticipate paying cash dividends; therefore, the expected
dividend yield was assumed to be zero. Expected volatility was based on the
historical volatility of our stock. The expected term of the options was based
on our historical option exercise data taking into consideration the exercise
and forfeiture patterns of the class of option holders during the options life.

The following table summarizes
information regarding options exercised during the fiscal years ended February
2, 2008, February 3, 2007 and January 28, 2006:

(000's)
    
    2007
    
    2006
    
    2005Total intrinsic value (1)
    
    $
    578
    
    $
    3,169
    
    $
    3,382Total cash
      received
    
    $
    529
    
    $
    2,609
    
    $
    3,463Associated excess income tax benefits recorded
    
    $
    203
    
    $
    839
    
    $
    1,222


|(1) |  | Defined as the
      difference between the market value at exercise and the grant price of
      stock options exercised.
|--- |  | --------------------------------------------------------------------------------------------------------------------------

The following table summarizes
information regarding outstanding and exercisable options at February 2, 2008:

|               |                     |                  | Options Outstanding |                | Options Exercisable
|-------------- | ------------------- | ---------------- | ------------------- | -------------- | -------------------
|               |                     |                  | Number              |                | Weighted           
|Range of       |                     | of
      Options |                     | Average        |                    
|Exercise Price |                     | Outstanding      |                     | Remaining Life |                    
|$              | 4.38 - 5.75         |                  | 61,162              |                | 2.83               
|$              | 8.56 -
      11.88  |                  | 207,125             |                | 2.57               
|$              | 12.14 - 15.54       |                  | 205,302             |                | 5.37               
|$              | 16.10 -
      17.12 |                  | 164,120             |                | 4.19               

45

---

Shoe Carnival, Inc.Notes to Consolidated Financial
Statements - continued

The following table summarizes
information regarding stock-based compensation expense for non-vested options
recognized during the fiscal years ended February 2, 2008 and February 3, 2007:

|(000's)                                                                         |  | 2007(1) |    | 2006
|------------------------------------------------------------------------------- |  | ------- | -- | ----
|Stock-based compensation expense before the recognized income tax
      benefit |  | $       | 67 |     
|Income tax
      benefit                                                        |  | $       | 26 |     

|(1) |  | Income tax benefit was calculated
      using an adjusted effective tax rate. The adjusted rate removes the tax
      effect of a reduction in state income taxes from state incentives related
      to the investment in our new distribution
center.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of February 2, 2008, there was
approximately $156,000 of unrecognized compensation related to non-vested stock
options. This cost is expected to be recognized over a weighted-average period
of approximately 3.0 years.

Restricted Stock
Awards

Restricted stock awards issued to
employees under the 2000 Plan typically vest upon the achievement of specified
levels of annual earnings per diluted share during a six-year period subsequent
to the grant date. Should these criteria not be met within the six-year period
from the grant date, any shares still restricted will be forfeited. All
restricted stock awards issued to date to non-employee Directors vested 12
months from the date of the grant. The fair value of restricted stock awards is
determined based on the number of shares granted and the quoted closing price of
our common stock on the date of grant.

The following table summarizes the
restricted share transactions pursuant to the 2000 Plan for fiscal 2007:

Weighted-Number of
    
    Average GrantShares
    
    Date Fair ValueNon-vested at February 3, 2007
    79,517
    
    
    $
    21.58Granted
    99,000
    
    
    
    29.24Vested
    (42,928
    )
    
    
    20.30Forfeited
    (5,435
    )
    
    
    26.66Non-vested at February 2, 2008
    130,154
    
    
    $
    27.61


The total fair value at grant date of
previously non-vested stock awards that vested during fiscal 2007 and fiscal
2006 was $871,000 and $859,000, respectively. The weighted-average grant date
fair value of stock awards granted during fiscal 2006 and fiscal 2005 was $23.30
and $17.50, respectively.

The following table summarizes
information regarding stock-based compensation for restricted stock awards
recognized during the fiscal years ended February 2, 2008 and February 3, 2007:

|(000's)                                                                              |  | 2007 (1) |       | 2006
|------------------------------------------------------------------------------------ |  | -------- | ----- | ----
|Stock-based compensation expense
      beforethe recognized income tax
      benefit |  | $        | 1,268 |     
|Income tax benefit                                                                   |  | $        | 492   |     

|(1) |  | Income tax benefit was calculated
      using an adjusted effective tax rate. The adjusted rate removes the tax
      effect of a reduction in state income taxes from state incentives related
      to the investment in our new distribution
center.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

46

---

Shoe Carnival, Inc.Notes to Consolidated Financial
Statements - continued

As of February 2, 2008, there was
approximately $2.3 million of unrecognized compensation remaining related to
non-vested stock awards. The cost is expected to be recognized over a weighted
average period of approximately 2.5 years incorporating the current assumptions
of the estimated requisite service period required to achieve the designated
performance conditions for performance-based stock awards.

Note 10  Business
Risk

We purchase merchandise from over 170
footwear vendors. In fiscal 2007, two suppliers each accounted for approximately
10%, or more, of our purchases and together accounted for over 31% of our
purchases. A loss of any of our key suppliers in certain product categories
could have a material adverse effect on our business. As is common in the
industry, we do not have any long-term contracts with suppliers.

Note 11 
Contingencies

We are involved in various legal
proceedings incidental to the conduct of our business. While the outcome of any
legal proceeding is always uncertain, we do not currently expect that any such
proceedings will have a material adverse effect on our financial position or
results of operations.

Note 12  Other Related Party
Transactions

Our Chairman and principal shareholder
and his son are members of LC Footwear, LLC. They also were shareholders of PL
Footwear, Inc., which during December 2007 became a wholly owned subsidiary of
LC Footwear, LLC. We purchase name brand merchandise from LC Footwear, LLC, and
PL Footwear, Inc. serves as an import agent for us. PL Footwear, Inc. represents
us on a commission basis in dealings with shoe factories in mainland China,
where most of our private label shoes are manufactured.

Purchases made from LC Footwear, LLC in
fiscal 2007 were $56,000. There were no purchases made from LC Footwear, LLC in
fiscal 2006 or fiscal 2005. Commissions paid to PL Footwear, Inc. were $892,000,
$1.2 million and $951,000 in fiscal years 2007, 2006 and 2005,
respectively.

47

---

Shoe Carnival, Inc.Notes to Consolidated Financial
Statements - continued

Note 13  Quarterly Results
(Unaudited)

Quarterly results are determined in
accordance with the accounting policies used for annual data and include certain
items based upon estimates for the entire year. All fiscal quarters in 2007 and
2006 include results for 13 weeks except for the fourth quarter of 2006 which
includes results for 14 weeks. The following table summarizes results for fiscal
2007 and fiscal 2006:

(In thousands, except per share data)

|                                     | First   |         | Second  |   | Third   |  | Fourth 
|------------------------------------ | ------- | ------- | ------- | - | ------- |  | -------
|2007                                 | Quarter |         | Quarter |   | Quarter |  | Quarter
|Net sales                            | $       | 165,653 |         | $ | 154,805 |  | $      
|Gross
      profit                   |         | 49,791  |         |   | 40,247  |  |        
|Operating income                     |         | 10,466  |         |   | 129     |  |        
|Net
      income                     |         | 7,327   |         |   | 167     |  |        
|Net income per share  Basic         | $       | 0.54    |         | $ | 0.01    |  | $      
|Net income per
      share - Diluted | $       | 0.53    |         | $ | 0.01    |  | $      
|                                    
|                                    
|                                     | First   |         | Second  |   | Third   |  | Fourth 
|2006                                 | Quarter |         | Quarter |   | Quarter |  | Quarter
|Net sales                            | $       | 168,469 |         | $ | 146,886 |  | $      
|Gross
      profit                   |         | 51,450  |         |   | 40,841  |  |        
|Operating income                     |         | 11,816  |         |   | 4,420   |  |        
|Net
      income                     |         | 7,400   |         |   | 2,862   |  |        
|Net income per share  Basic         | $       | .56     |         | $ | .21     |  | $      
|Net income per
      share - Diluted | $       | .54     |         | $ | .21     |  | $      

48

---

SHOE CARNIVAL, INC.SCHEDULE II - VALUATION AND QUALIFYING
ACCOUNTS

|                                         | Balance at |       | Charged to     |   | Credited to     |  | Balance at  
|---------------------------------------- | ---------- | ----- | -------------- | - | --------------- |  | ------------
|Descriptions                             | Beginning  |       | Cost
      and |   | Costs
      and |  | End
      of
|(In
      thousands)                     | of Period  |       | Expenses       |   | Expenses        |  | Period      
|Year ended January 28, 2006              |            |       |                |   |                 |  |             
|Reserve for sales returns and allowances | $          | 88    |                | $ | 54,663          |  | $           
|Inventory reserve                        | $          | 3,150 |                | $ | 600             |  | $           
|                                        
|Year ended February 3, 2007              |            |       |                |   |                 |  |             
|Reserve for sales returns and allowances | $          | 144   |                | $ | 59,461          |  | $           
|Inventory reserve                        | $          | 3,300 |                | $ | 700             |  | $           
|                                        
|Year ended February 2, 2008              |            |       |                |   |                 |  |             
|Reserve for sales returns and allowances | $          | 90    |                | $ | 60,940          |  | $           
|Inventory reserve                        | $          | 3,450 |                | $ | 950             |  | $           

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

There have been no changes in or
disagreements with our independent registered public accounting firm on
accounting or financial disclosures.

ITEM 9A.CONTROLS AND PROCEDURES

Managements Report on Internal
Control Over Financial Reporting

The company's management is responsible
for establishing and maintaining adequate internal control over financial
reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934. Internal control over financial reporting is a process designed by, or
under the supervision of, the companys principal executive and principal
financial officers and effected by the companys board of directors, management
and other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:

- Pertain to the maintenance of records that in
  reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the
  company;
- Provide reasonable assurance that transactions are
  recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
  principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
  management and directors of the company;
  and
- Provide reasonable assurance regarding prevention
  or timely detection of unauthorized acquisition, use or disposition of the companys assets that could have a
  material effect on the financial statements.

Because of inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risks that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.

49

---

Management assessed the effectiveness
of the company's internal control over financial reporting as of February 2,
2008. In making this assessment, management used the criteria set forth by the
Committee of Sponsoring Organizations ("COSO") of the Treadway Commission in
Internal Control-Integrated Framework. Based on its assessment, management
believes that the company's internal control over financial reporting was
effective as of February 2, 2008.

The company's internal control over
financial reporting as of February 2, 2008 has been audited by its independent
registered public accounting firm, Deloitte & Touche LLP, as stated in their
report which is included herein.

Conclusion Regarding the
Effectiveness of Disclosure Controls and Procedures and Changes in Internal
Control over Financial Reporting

Our Chief Executive Officer and Chief
Financial Officer have concluded, based on their evaluation as of February 2,
2008, that our disclosure controls and procedures are effective to ensure that
information required to be disclosed by us in the reports filed or submitted by
us under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms, and include controls and
procedures designed to ensure that information required to be disclosed by us in
such reports is accumulated and communicated to our management, including the
Chief Executive Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.

There have been no changes in our
internal control over financial reporting that occurred during the fourth
quarter ended February 2, 2008, that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.

50

---

REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Shoe Carnival, Inc., Evansville, Indiana

We have audited the internal control
over financial reporting of Shoe Carnival, Inc. and subsidiaries (the Company)
as of February 2, 2008, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the
Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.

A company's internal control over
financial reporting is a process designed by, or under the supervision of, the
company's principal executive and principal financial officers, or persons
performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. A company's internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the financial statements.

Because of the inherent limitations of
internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over
financial reporting to future periods are subject to the risk that the controls
may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as
of February 2, 2008, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.

We have also audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements and financial statement schedule
as of and for the year ended February 2, 2008 of the Company and our report
dated April 14, 2008, expressed an unqualified opinion on those financial
statements and financial statement schedule and included an explanatory
paragraph regarding the Companys adoption of Financial Accounting Standards
Board (FASB) Interpretation No. 48, Accounting for Uncertainties in Income Taxes
and Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment.

/s/ Deloitte & Touche LLP

Indianapolis, Indiana April 14,
2008

51

---

ITEM 9B.OTHER INFORMATION

None.

52

---

PART III

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this Item
concerning our Directors, nominees for Director, Code of Ethics, designation of
the Audit Committee financial expert and identification of the Audit Committee,
and concerning any disclosure of delinquent filers under Section 16(a) of the
Exchange Act, is incorporated herein by reference to our definitive Proxy
Statement for the 2008 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A within 120 days
after the end of our last fiscal year. Information concerning our executive
officers is included under the caption "Executive Officers of the Company" at
the end of PART I of this annual report. Such information is incorporated herein
by reference, in accordance with General Instruction G(3) to Form 10-K and
Instruction 3 to Item 401(b) of Regulation S-K.

We have adopted a Code of Business
Conduct and Ethics (the "Code") that applies to all of our Directors, officers
and employees, including our principal executive officer, principal financial
officer, principal accounting officer and controller. The Code is posted on our
website at www.shoecarnival.com. We intend to disclose any amendments to the
Code by posting such amendments on our website. In addition, any waivers of the
Code for our Directors or executive officers will be disclosed in a report on
Form 8-K.

ITEM 11.EXECUTIVE COMPENSATION

The information required by this Item
concerning remuneration of our officers and Directors and information concerning
material transactions involving such officers and Directors and Compensation
Committee interlocks, including the Compensation Committee Report and the
Compensation Discussion and Analysis, is incorporated herein by reference to our
definitive Proxy Statement for the 2008 Annual Meeting of Shareholders which
will be filed pursuant to Regulation 14A within 120 days after the end of our
last fiscal year.

|ITEM
      12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
|-------------- |  | ----------------------------------------------------------------------------------------------------

The information required by this Item
concerning the stock ownership of management, five percent beneficial owners and
securities authorized for issuance under equity compensation plans is
incorporated herein by reference to our definitive Proxy Statement for the 2008
Annual Meeting of Shareholders which will be filed pursuant to Regulation 14A
within 120 days after the end of our last fiscal year.

|ITEM
      13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
|-------------- |  | -------------------------------------------------------------------------------

The information required by this Item
concerning certain relationships and related transactions and the independence
of our Directors is incorporated herein by reference to our definitive Proxy
Statement for the 2008 Annual Meeting of Shareholders which will be filed
pursuant to Regulation 14A within 120 days after the end of our last fiscal
year.

ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item
concerning principal accountant fees and services is incorporated herein by
reference to our definitive Proxy Statement for the 2008 Annual Meeting of
Shareholders which will be filed pursuant to Regulation 14A within 120 days
after the end of our last fiscal year.

53

---

PART IV

ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

| | 1. |  | Financial Statements:                                                                                                                                                                                 
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |  |                                                                                                                                                                                                       
| |    |  | The following financial statements of Shoe Carnival,
      Inc. are set forth in PART II, ITEM 8 of this report:                                                                                      
| |    |  |                                                                                                                                                                                                       
| |    |  | Report of Independent Registered Public Accounting
      Firm                                                                                                                                         
| |    |  |                                                                                                                                                                                                       
| |    |  | Consolidated Balance Sheets at February 2, 2008 and
      February 3, 2007                                                                                                                            
| |    |  |                                                                                                                                                                                                       
| |    |  | Consolidated Statements of Income for the years ended
      February 2, 2008, February 3, 2007 and January 28, 2006                                                                                   
| |    |  |                                                                                                                                                                                                       
| |    |  | Consolidated Statements of Shareholders Equity for the
      years ended February 2, 2008, February 3, 2007 and January 28,
    2006                                                                 
| |    |  |                                                                                                                                                                                                       
| |    |  | Consolidated Statements of Cash Flows for the years
      ended February 2, 2008, February 3, 2007 and January 28, 2006                                                                               
| |    |  |                                                                                                                                                                                                       
| |    |  | Notes to Consolidated Financial Statements                                                                                                                                                            
| |    |  |                                                                                                                                                                                                       
| | 2. |  | Financial Statement Schedule:                                                                                                                                                                         
| |    |  |                                                                                                                                                                                                       
| |    |  | The following financial statement schedule of Shoe
      Carnival, Inc. is set forth in PART II, ITEM 8 of this
report.                                                                               
| |    |  |                                                                                                                                                                                                       
| |    |  | Schedule II Valuation and Qualifying
  Accounts                                                                                                                                                       
| |    |  |                                                                                                                                                                                                       
| | 3. |  | Exhibits:                                                                                                                                                                                             
| |    |  |                                                                                                                                                                                                       
| |    |  | A list of exhibits required to be filed as part of this
      report is set forth in the Index to Exhibits, which immediately precedes
      such exhibits, and is incorporated herein by
  reference.

54

---

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.

|Shoe Carnival, Inc.     
|------------------------
|                        
|Date:     April 17, 2008
|                        
|                        

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

|Signature                |  | **Title**                                                              |  | **Date**      
|------------------------ |  | ---------------------------------------------------------------------- |  | --------------
|/s/ J. Wayne Weaver      |  | Chairman of the Board
      and Director                               |  | April 17, 2008
|J. Wayne
      Weaver    |  |                                                                        |  |               
|                        
|/s/ Mark L. Lemond       |  | President, Chief
      Executive Officer and Director                  |  | April 17, 2008
|Mark L.
      Lemond     |  | (Principal Executive
      Officer)                                    |  |               
|                        
|/s/ William E. Bindley   |  | Director                                                               |  | April 17, 2008
|William E.
      Bindley |  |                                                                        |  |               
|                        
|/s/ Gerald W. Schoor     |  | Director                                                               |  | April 17, 2008
|Gerald W.
      Schoor   |  |                                                                        |  |               
|                        
|/s/ Kent A. Kleeberger   |  | Director                                                               |  | April 17, 2008
|Kent A.
      Kleeberger |  |                                                                        |  |               
|                        
|/s/ W. Kerry Jackson     |  | Executive Vice
      President - Chief Financial Officer and Treasurer |  | April 17, 2008
|W. Kerry
      Jackson   |  | (Principal Financial and
      Accounting Officer)                     |  |               

55

---

INDEX TO EXHIBITS

|Exhibit |      |                                                                                                                                                                                                                                                                                                                        
|------- | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.     |      | Description                                                                                                                                                                                                                                                                                                            
|3-A     | (1)  | Restated Articles of
      Incorporation of Registrant                                                                                                                                                                                                                                                                 
|       
|3-B     | (2)  | By-laws of Registrant,
      as amended to date                                                                                                                                                                                                                                                                        
|       
|4       | (3)  | (i) Amended and
      Restated Credit Agreement and Promissory Notes dated April 16, 1999,
      between Registrant and Mercantile Bank National Association, First Union
      National Bank and Old National Bank                                                                                                    
|       
|        | (4)  | (ii) Amendment to
      Amended and Restated Credit Agreement and Promissory Notes dated March 24,
      2000, between Registrant and Mercantile Bank National Association, First
      Union National Bank and Old National Bank                                                                                      
|       
|        | (5)  | (iii) Second Amendment
      to Amended and Restated Credit Agreement and Promissory Notes dated
      November 8, 2000, between Registrant and Firstar Bank N.A., First Union
      National Bank, Old National Bank and LaSalle Bank National
      Association                                                      
|       
|        | (1)  | (iv) Third Amendment
      to Amended and Restated Credit Agreement and Promissory Notes dated March
      18, 2002, between Registrant and U.S. Bank National Association, First
      Union National Bank, Old National Bank and LaSalle Bank National
      Association                                             
|       
|        | (6)  | (v) Fourth Amendment
      to Amended and Restated Credit Agreement and Promissory Notes dated March
      12, 2003, between Registrant and U.S. Bank National Association, Wachovia
      Bank National Association, Old National Bank and LaSalle Bank National
      Association                                    
|       
|        | (7)  | (vi) Fifth Amendment
      to Amended and Restated Credit Agreement and Promissory Notes dated April
      5, 2004, between Registrant and U.S. Bank National Association, Wachovia
      Bank National Association, Old National Bank and LaSalle Bank National
      Association                                     
|       
|        | (8)  | (vii) Assignment
      Agreement dated June 1, 2004 among LaSalle Bank National Association as
      Assignor, Fifth Third Bank (Southern Indiana) as Assignee, Registrant as
      Borrower and U.S. Bank National Association as Agent relating to the
      Amended and Restated Credit Agreement as further amended
|       
|        | (9)  | (viii) Sixth Amendment
      to Amended and Restated Credit Agreement and Notes dated April 5, 2005,
      between Registrant and U.S. Bank National Association, Wachovia Bank
      National Association, Fifth Third Bank (Southern Indiana) and Old National
      Bank                                            
|       
|        | (10) | (ix) Seventh Amendment
      to Amended and Restated Credit Agreement and Notes dated March 31, 2006,
      between Registrant and U.S. Bank National Association, Wachovia Bank,
      National Association and Fifth Third Bank                                                                                      
|       
|        | (11) | (x) Eighth Amendment
      to Amended and Restated Credit Agreement and Notes dated December 15,
      2006, between Registrant and U.S. Bank National Association, Wachovia
      Bank, National Association and Fifth Third Bank                                                                                     
|       
|10-A    | (12) | Lease, dated as of
      February 8, 2006, by and between the Registrant and Big-Shoe Properties,
      LLC                                                                                                                                                                                                            
|       
|10-B*   | (13) | 2006 Executive
      Incentive Compensation Plan                                                                                                                                                                                                                                                                       
|       
|10-C*   | (14) | Form of Award
      Agreement for restricted stock granted under the Shoe Carnival, Inc. 2000
      Stock Option and Incentive Plan                                                                                                                                                                                    

56

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INDEX TO EXHIBITS -
Continued

|Exhibit |      |                                                                                                                                                                                                             
|------- | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.     |      | Description                                                                                                                                                                                                 
|10-D    | (15) | Lease, dated as of
      June 22, 2006, by and between Shoe Carnival, Inc. and Outback Holdings,
      LLC                                                                                                  
|        |      |                                                                                                                                                                                                             
|10-E*   | (17) | 1993 Stock Option and
      Incentive Plan of Registrant, as amended                                                                                                                                        
|        |      |                                                                                                                                                                                                             
|10-G*   | (18) | Outside Directors
      Stock Option Plan                                                                                                                                                                   
|        |      |                                                                                                                                                                                                             
|10-H*   |      | Summary Compensation
      Sheet                                                                                                                                                                            
|        |      |                                                                                                                                                                                                             
|10-I    | (16) | Non-competition
      Agreement dated as of January 15, 1993, between Registrant and J. Wayne
      Weaver                                                                                                  
|        |      |                                                                                                                                                                                                             
|10-L*   | (17) | Employee Stock
      Purchase Plan of Registrant, as amended                                                                                                                                                
|        |      |                                                                                                                                                                                                             
|10-M*   | (21) | Form of Notice of
      Grant of Stock Options and Option Agreement for incentive stock options
      granted under the Companys 2000 Stock Option and Incentive
  Plan                                    
|        |      |                                                                                                                                                                                                             
|10-N*   | (22) | Form of Notice of
      Grant of Stock Options and Option Agreement for non-qualified stock
      options granted under the Companys 2000 Stock Option and Incentive
      Plan                            
|        |      |                                                                                                                                                                                                             
|10-O*   | (19) | 2000 Stock Option and
      Incentive Plan of Registrant, as amended                                                                                                                                        
|        |      |                                                                                                                                                                                                             
|10-S*   | (20) | Employment and
      Noncompetition agreement dated December 31, 2006, between Registrant and
      Mark L. Lemond                                                                                          
|        |      |                                                                                                                                                                                                             
|10-T*   | (20) | Employment and
      Noncompetition agreement dated December 31, 2006, between Registrant and
      Timothy Baker                                                                                           
|        |      |                                                                                                                                                                                                             
|10-U*   | (20) | Employment and
      Noncompetition agreement dated December 31, 2006, between Registrant and
      Clifton E. Sifford                                                                                      
|        |      |                                                                                                                                                                                                             
|10-V*   | (20) | Employment and
      Noncompetition agreement dated December 31, 2006, between Registrant and
      W. Kerry Jackson                                                                                        
|        |      |                                                                                                                                                                                                             
|21      |      | A list of subsidiaries of Shoe
      Carnival, Inc.                                                                                                                                                         
|        |      |                                                                                                                                                                                                             
|23      |      | Written consent of Deloitte &
      Touche LLP                                                                                                                                                              
|        |      |                                                                                                                                                                                                             
|31.1    |      | Certification of Chief Executive
      Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
      Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002
|        |      |                                                                                                                                                                                                             
|31.2    |      | Certification of Chief Financial
      Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange
      Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002
|        |      |                                                                                                                                                                                                             
|32.1    |      | Certification of Chief Executive
      Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002                                               
|        |      |                                                                                                                                                                                                             
|32.2    |      | Certification of Chief Financial
      Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
      906 of the Sarbanes-Oxley Act of 2002                                               
|        |      |                                                                                                                                                                                                             
|*       |      | The indicated exhibit is a
      management contract, compensatory plan or arrangement required to filed by
      Item 601 of Regulation S-K.                                                               

57

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INDEX TO EXHIBITS -
Continued

|(1)  |  | The copy of this exhibit filed as
      the same exhibit number to our Annual Report on Form 10-K for the year
      ended February 2, 2002 is incorporated herein by reference.          
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(2)  |  | The copy of this exhibit filed as
      the same exhibit number to our Current Report on Form 8-K filed on March
      19, 2007 is incorporated herein by reference.                      
|    
|(3)  |  | The copy of this exhibit filed as
      exhibit 4(I) to our Annual Report on Form 10-K for the year ended January
      30, 1999 is incorporated herein by reference.                     
|    
|(4)  |  | The copy of this exhibit filed as
      the same exhibit number to our Annual Report on Form 10-K for the year
      ended January 29, 2000 is incorporated herein by reference.          
|    
|(5)  |  | The copy of this exhibit filed as
      the same exhibit number to our Quarterly Report on Form 10-Q for the
      quarter ended October 28, 2000 is incorporated herein by
    reference.
|    
|(6)  |  | The copy of this exhibit filed as
      the same exhibit number to our Annual Report on Form 10-K for the year
      ended February 1, 2003 is incorporated herein by reference.          
|    
|(7)  |  | The copy of this exhibit filed as
      the same exhibit number to our Annual Report on Form 10-K for the year
      ended January 31, 2004 is incorporated herein by reference.          
|    
|(8)  |  | The copy of this exhibit filed as
      the same exhibit number to our Quarterly Report on Form 10-Q for the
      quarter ended May 1, 2004 is incorporated herein by
reference.         
|    
|(9)  |  | The copy of this exhibit filed as
      the same exhibit number to our Current Report on Form 8-K filed on April
      11, 2005 is incorporated herein by reference.                      
|    
|(10) |  | The copy of this exhibit filed as
      the same exhibit number to our Current Report on Form 8-K filed on April
      4, 2006 is incorporated herein by reference.                       
|    
|(11) |  | The copy of this exhibit filed as
      the same exhibit number to our Current Report on Form 8-K filed on
      December 15, 2006 is incorporated herein by reference.                   
|    
|(12) |  | The copy of this exhibit filed as
      the same exhibit number to our Annual Report on Form 10-K for the year
      ended January 28, 2006 is incorporated herein by reference.          
|    
|(13) |  | The copy of this exhibit filed as
      the same exhibit number to our Current Report on Form 8-K filed on June
      15, 2006 is incorporated herein by reference.                       
|    
|(14) |  | The copy of this exhibit filed as
      the same exhibit number to our Current Report on Form 8-K filed on March
      24, 2005 is incorporated herein by reference.                      
|    
|(15) |  | The copy of this exhibit filed as
      the same exhibit number to our Current Report on Form 8-K filed on June
      28, 2006 is incorporated herein by reference.                       
|    
|(16) |  | The copy of this exhibit filed as
      the same exhibit number to our Registration Statement on Form S-1
      (Registration No. 33-57902) is incorporated herein by
  reference.        
|    
|(17) |  | The copy of this exhibit filed as
      the same exhibit number to our Quarterly Report on Form 10-Q for the
      quarter ended August 2, 1997 is incorporated herein by
  reference.    
|    
|(18) |  | The copy of this exhibit filed as
      exhibit number 4.4 to our Registration Statement on Form S-8 (Registration
      No. 333-82819) is incorporated herein by
reference.              

58

---

INDEX TO EXHIBITS -
Continued

|(19) |  | The copy of this exhibit filed as
      the same exhibit number to our Current Report on Form 8-K filed on June
      17, 2005 is incorporated herein by reference.  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(20) |  | The copy of this exhibit filed as
      the same exhibit number to our Current Report on Form 8-K filed on January
      5, 2007 is incorporated herein by reference.
|    
|(21) |  | The copy of this exhibit filed as
      exhibit number 10-A to our Current Report on Form 8-K filed on September
      2, 2004 is incorporated herein by reference.  
|    
|(22) |  | The copy of this exhibit filed as
      exhibit number 10-B to our Current Report on Form 8-K filed on September
      2, 2004 is incorporated herein by reference.  

59

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