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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934


|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended January 3,
    2004                                               
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                             

Commission file number: 000-50563

Bakers Footwear Group, Inc.

(Exact name of Registrant as Specified in Its
Charter)


|                                                                                       |  |                                            
|-------------------------------------------------------------------------------------- |  | -------------------------------------------
|Missouri                                                                               |  | 43-0577980                                 
|(State or Other Jurisdiction of
    Incorporation or Organization)                     |  | (I.R.S. Employer
    Identification Number)
|                                                                                      
|2815 Scott Avenue,
    St. Louis, Missouri(Address of Principal Executive
    Offices) |  | 63103(Zip Code)                            

Registrants telephone number, including
area code:

(314) 621-0699


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

None


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

Common Stock, par value $0.0001 per
share


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 requirements for the past
90 days.     Yes o          No þ

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.     þ

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

There is no non-voting common equity. The
Registrant consummated its initial public offering on
February 10, 2004. The aggregate market value of the common
stock held by nonaffiliates (based upon the closing price of
$11.60 for the shares on the Nasdaq National Market on
March 31, 2004) was approximately $34,096,564, as of
March 31, 2004. For this purpose, all shares held by
directors, executive officers and shareholders beneficially
holding five percent or more of the Registrants common
stock have been treated as held by affiliates. There was no
market for the Registrants common stock prior to the
initial public offering.

Immediately after the Registrant closed the sale
of 324,000 shares of common stock in connection with the
underwriters exercise of their over-allotment option,
relating to the Registrants initial public offering, on
March 12, 2004, there were 5,102,481 shares of the
Registrants common stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the
Registrants definitive proxy statement for the
Registrants 2004 Annual Meeting of Shareholders to be
filed within 120 days of the end of the Registrants
fiscal year (the 2004 Proxy Statement) are
incorporated by reference in Part III.



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TABLE OF CONTENTS

|         |  |                                                                                           |    |  |    | 
|-------- |  | ----------------------------------------------------------------------------------------- | -- |  | -- | 
|PART I   |  |                                                                                           | 2  | 
|Item 1.  |  | Business                                                                                  |    |  | 2  | 
|Item 2.  |  | Properties                                                                                |    |  | 21 | 
|Item 3.  |  | Legal Proceedings                                                                         |    |  | 22 | 
|Item 4.  |  | Submission of Matters to a
    Vote of Security Holders                                   |    |  | 22 | 
|PART II  |  |                                                                                           | 23 | 
|Item 5.  |  | Market for Registrants
    Common Equity and Related Stockholder Matters                 |    |  | 23 | 
|Item 6.  |  | Selected Financial Data                                                                   |    |  | 26 | 
|Item 7.  |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations |    |  | 28 | 
|Item 7A. |  | Quantitative and Qualitative
    Disclosures About Market Risk                            |    |  | 36 | 
|Item 8.  |  | Financial Statements and
    Supplementary Data                                           |    |  | 37 | 
|Item 9.  |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure  |    |  | 37 | 
|Item 9A. |  | Controls and Procedures                                                                   |    |  | 37 | 
|PART III |  |                                                                                           | 37 | 
|Item 10. |  | Directors and Executive
    Officers of the Registrant                                    |    |  | 37 | 
|Item 11. |  | Executive Compensation                                                                    |    |  | 39 | 
|Item 12. |  | Security Ownership of
    Certain Beneficial Owners and Management                        |    |  | 39 | 
|Item 13. |  | Certain Relationships and
    Related Transactions                                        |    |  | 40 | 
|Item 14. |  | Principal Accounting Fees
    and Services                                                |    |  | 40 | 
|PART IV  |  |                                                                                           | 40 | 
|Item 15. |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                      |    |  | 40 | 

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PART I



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

General

We are a national, mall-based, specialty retailer
of distinctive footwear and accessories targeting young women
who demand quality fashion products. We sell both private label
and national brand dress, casual and sport shoes, boots, sandals
and accessories. We strive to create a fun, exciting and fashion
oriented customer experience through an attractive store
environment and an enthusiastic, well-trained sales force. Our
Bakers stores buying teams constantly modify our product
offering to reflect widely accepted fashion trends. As of
January 3, 2004, we operated 185 of our 215 stores under
the Bakers format, which targets young women between the ages of
12 and 29. This target customer is in a fast growing demographic
segment, is extremely appearance conscious and spends a high
percentage of disposable income on footwear, accessories and
apparel. Based on our analysis of our competitors, we believe
that our Bakers stores are the only national, full service
retailer specializing in moderately priced footwear for this
segment. We also operate the Wild Pair chain, which consisted of
30 stores as of January 3, 2004 and offers edgier, faster
fashion-forward footwear that reflects the attitude and
lifestyles of both women and men between the ages of 17 and 24.
As a result of offering a greater proportion of national brands,
Wild Pair has somewhat higher average prices than our Bakers
stores.

On February 10, 2004, we sold
2,160,000 shares of our common stock in our initial public
offering. We sold an additional 324,000 shares of our
common stock on March 12, 2004 in connection with the
exercise of the over-allotment option relating to our initial
public offering. Upon consummation of our initial public
offering our previously outstanding shares of capital stock and
our subordinated convertible debentures converted into shares of
our one class of common stock. Please see the information set
forth herein under Item 5. Market for
Registrants Common Equity and Related Stockholder
Matters which is incorporated herein by this reference. In
connection with our initial public offering, we took a variety
of corporate actions. Please see the information set forth
herein under Item 4. Submission of Matters to a Vote
of Security Holders which is incorporated herein by this
reference. As of February 29, 2004, we operated 207 stores,
178 of which were Bakers stores and 29 were Wild Pair stores.

In this Annual Report on Form 10-K, we refer
to the fiscal years ended December 31, 1999,
December 30, 2000, January 5, 2002, January 4,
2003 and January 3, 2004 and the fiscal years ending
January 1, 2005 and December 31, 2005 as fiscal
year 1999, fiscal year 2000, fiscal year
2001, fiscal year 2002, fiscal year
2003, fiscal year 2004 and fiscal year
2005, respectively. For more information, please see
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations  Fiscal
Year, appearing elsewhere herein. When this report uses
the words Company, we, us or
our, these words refer to Bakers Footwear
Group, Inc., unless the context otherwise requires.

Company History

We were founded in 1926 as
Weiss-Kraemer, Inc., which was later renamed Weiss and
Neuman Shoe Co., a regional chain of footwear stores. In 1997,
we were acquired principally by our current chief executive
officer, Peter Edison, who had previously spent 12 years in
various senior management positions at Edison Brothers
Stores, Inc. In June 1999, we teamed with Bakers
existing management to purchase selected assets of the Bakers
and Wild Pair chains, including approximately 200 store
locations and merchandise inventory from Edison Brothers, which
had filed for bankruptcy protection in March 1999. We also
retained the majority of Bakers employees, including key
senior management, merchandise buyers, store operating personnel
and administrative support personnel. At the time of the
acquisition, we had approximately 60 Weiss and Neuman locations,
which we have subsequently closed or re-merchandised into the
Bakers or Wild Pair formats. In February 2001, we changed our
name to Bakers Footwear Group, Inc.

We operate as one business segment for accounting
purposes. See Item 8. Financial Statements and
Supplementary Data. We are incorporated under the laws of
the State of Missouri. Our executive offices are located at 2815
Scott Avenue, St. Louis, Missouri 63103 and our
telephone number is (314) 621-0699.

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Information on the retail website for our Bakers
stores, www.bakersshoes.com, is not part of this Annual Report
on Form 10-K.


Competitive Advantages

We believe our long operating history and
management expertise provide us several key competitive
advantages that have historically allowed us to operate our
stores to generate strong cash flow and operating margins.

Our
Reputation as a Leading Fashion Footwear Retailer for Young
Women.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We strive to be the store of choice for young
    women between the ages of 12 and 29 who seek quality,
    fashionable footwear at an affordable price. Based on our
    analysis of our competitors, we believe we are the only
    national, full service retailer specializing in serving this
    segment. We provide a high energy, fun shopping experience and
    attentive, personal service primarily in highly visible fashion
    mall locations.
|
| |  | The average retail prices of our private label
    footwear range from $39 to $65. We are able to offer these
    prices without sacrificing merchandise quality, creating a high
    perceived value, promoting multiple sale transactions, and
    allowing us to build a loyal customer base.                                                                                                                                                             
|
| |  | Our micro-merchandising strategy enables us to
    adapt our store inventories with the trends and demographics of
    individual locations. As a result, we are able to stock the
    styles our customers desire, increasing sales and customer
    loyalty.                                                                                                                                                                                               
|
| |  | Our marketing initiatives foster additional
    customer loyalty, while expanding our presence in serving our
    target market. This can be exemplified by our successful
    introduction of our Bakers Frequent Buyer Card, which our
    customers purchase to obtain a discount on all future purchases
    until the expiration of the card.                                                                                                           

A Disciplined
Management Approach.



| |   |                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We believe our senior management team combines a
    unique blend of experience with our company and other national
    specialty retailers. Our six-member senior management team
    averages approximately 24 years of individual experience in
    footwear and accessories retailing.                                                                                 
|
| |  | Our organizational structure is designed to
    respond to the changes that are inherent in our business. Our
    senior management, merchandisers and buyers work closely with
    our flexible network of manufacturing sources and efficient
    third-party distribution system to give our customers the styles
    they demand in a timely manner.                   
|
| |  | During the recent challenges in the retail
    environment, our senior management team utilized our management
    structure to effectively control overhead and our administrative
    operations. We also reacted quickly to changes in consumer
    demand and strategically reduced inventory purchases to reduce
    the need for markdowns and clearance merchandise.
|
| |  | We intend to continually focus on improving
    profitability by:                                                                                                                                                                                                                                                                                                          



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Leveraging our investment in corporate
    infrastructure. We have invested in technology, including
    integrated inventory management and logistics systems, point of
    sale systems and equipment, and planning and allocation systems.
    Because these information systems and personnel costs are
    primarily fixed, as net sales increase, our profitability should
    increase at a greater rate.
|
| |  | Improving our inventory turns through the use of
    our new planning, allocation and assortment planning systems,
    and through the increase in our mix of branded products, which
    should lead to fewer markdowns.                                                                                                                                                                                       
|
| |  | Constantly reviewing our store locations and
    proactively closing underperforming stores and remodeling older
    stores, while building new stores with attractive unit economics.                                                                                                                                                                                                                          

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Sourcing
Capabilities.

A key factor in our ability to offer our
merchandise at moderate prices and respond quickly to changes in
consumer trends is our sourcing proficiency. We rely primarily
on third party foreign manufacturers in China,
Brazil, Italy, Spain and other countries for the production
of our private label merchandise. Our buying agents have
long-term relationships with these manufacturers and have been
successful in minimizing the lead times for sourcing
merchandise. These relationships have allowed us to work very
close to our expected delivery dates and reduce our markdowns.
In addition, our test and react strategy supported
by these strong relationships with manufacturers allows our
merchandising and buying teams to test new styles and react
quickly to fashion trends, while keeping fast-moving inventory
in stock.

Advanced
Inventory Management Systems.

In fiscal year 2003, we completed the final step
in the implementation and integration of our planning,
purchasing, allocation, assortment planning and point of sale
systems. These systems allow us to better execute our
micro-merchandising strategy through more efficient management
and allocation of our store inventories to reduce further our
response times in reaction to fashion trends. Our
micro-merchandising strategy requires us to adapt the
merchandise mix by location, with different assortments
depending on store level customer demographics. We now have the
capability to constantly monitor inventory levels and purchases
by store, enabling us to manage our merchandise mix.

We believe that effective use of our systems has
allowed us to reduce markdowns, resulting in higher gross
margins. Over the last 18 months, our systems facilitated
the process of reducing inventory commitments in light of
changes in consumer demand. Our buyers and inventory management
team were able to efficiently adjust our store inventory levels
to effectively control excess inventory and markdowns.

Flexible
Store Location Strategy.

Our multiple concepts and variety of formats
within these concepts allow us to operate profitably in a wide
range of shopping malls. New and remodeled Bakers stores located
in A and B malls have been designed in a new format. 32
locations have been remodeled to feature this format and have
shown stronger sales and profits than non-remodeled stores. We
continue to operate lower cost formats in C malls which can
generate the same return on investment as the new format store.
Additionally, our Wild Pair concept, operating at a similar
return on investment, can succeed in smaller spaces than those
typically required by Bakers stores. Wild Pairs higher
sales per square foot often allow it to operate in some
higher-end malls as well. This flexibility to operate in a wide
variety of malls enhances Bakers potential to grow and
supports strong landlord relationships with the national real
estate developers.

Strategy

Our goal is to position Bakers as the fashion
footwear merchandise authority for young women. We intend to
effect this strategy through:

Opening New
Stores in Key Locations.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We plan to open new stores in a controlled and
    disciplined manner. Our strong relationships with landlords
    allow us to secure desirable locations in fashion malls. In
    selecting a specific site, we look for high traffic locations
    primarily in regional shopping malls. We evaluate proposed sites
    based on the traffic patterns, type and quality of other
    tenants, average sales per square foot achieved by neighboring
    stores, lease terms and other factors considered important with
    respect to the specific location.
|
| |  | Once we have identified a key location and
    secured a lease, we build our store in our distinctive new
    upscale contemporary format. We expect these new stores to
    average approximately $750,000 a year in store volume and
    contribute approximately $100,000 of cash flow per year. We have
    identified 200 additional locations for new format stores and
    plan to open approximately 15 new stores by the end of                                                                                                                       

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | fiscal year 2004 and an additional 30 to 35 new
    stores in fiscal year 2005. We also have identified 100 of our
    current stores for remodeling into new format stores.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | While we are not currently in negotiations, from
    time to time, we will explore acquisitions of regional chains or
    groups of stores. Historically, we have been able to acquire
    stores at prices below our cost to open new stores. For example,
    in fiscal year 2002, we spent $1.8 million to acquire 33
    former Sam & Libby locations. We spent approximately
    $360,000 to convert those 33 locations into our formats. The
    expenditures consisted mainly of minor remodeling, signage, and
    point of sale equipment and software, and averaged approximately
    $11,000, excluding inventory, for each location. These costs are
    considerably below our typical cost to open a new store of
    $200,000, and accordingly, these stores have had a substantially
    higher return on invested capital.
|
| |  | Management believes that the operating
    infrastructure we have in place is capable of integrating a
    significant number of new stores with little additional increase
    in general and administrative expenses. Virtually all of our
    senior management executives have held similar positions at
    specialty retail chains of substantially greater size. We
    believe that our buying teams have sufficient levels of
    experience to support our expected new store growth. Finally, we
    believe that our information and logistics systems are scalable
    to support significant growth.                                                                                                                                                                                                                         
|
| |  | We opened a total of 41 stores in key locations
    in fiscal year 2002, including the 33 former Sam &
    Libby stores we acquired. In fiscal year 2003, we opened three
    new stores.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Expanding
Presence of New Format Stores.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We are in the process of remodeling existing
    Bakers stores into our new format design which will provide a
    consistent look with our newly opened stores. Through
    January 3, 2004, 32 existing Bakers stores have been
    remodeled into the new store format. Sales of the remodeled
    stores showed significant increases in volume after they are
    opened in the new format. We believe the new format stores
    average higher annual sales because they feature a distinctive
    upscale contemporary format that is attractive to our customers.                                                                                                                                                                      
|
| |  | Construction costs to remodel stores into the new
    format average approximately $200,000 and the remodeling
    requires the store to be closed for four to five weeks. We plan
    to remodel existing stores into the new format in locations
    where we believe the additional investment will produce a higher
    return on investment than maintaining the current format. We
    plan to remodel approximately 17 existing stores into the new
    format during fiscal year 2004 and have identified an additional
    80 stores to be upgraded. Typically, our stores are remodeled in
    connection with a lease renewal. Construction management for the
    remodeling is provided by third party contractors for fixed fees.
|
| |  | In addition to transforming stores into the new
    concept, we are performing minor remodeling at selected stores.
    Typically, the minor remodeling is undertaken in conjunction
    with the signing of a new lease. Construction costs for the
    minor remodels average $40,000. These stores often generate
    lower sales volume but a similar return on investment. During
    fiscal year 2004, we plan to undertake minor remodeling projects
    at ten of our stores.                                                                                                                                                                                                                                                          

Continuously
Introducing New Merchandise to Maintain Inventory
Freshness.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We keep our product mix fresh and on target by
    constantly testing new fashions and actively monitoring
    sell-through rates in our stores. Our team of footwear
    retailers, in-house designers and merchants use their industry
    experience, relationships with agents and branded footwear
    producers, and their participation in industry trade shows to
    analyze, interpret and translate fashion trends affecting
    todays young women into the footwear and accessory styles
    they desire.
|
| |  | We employ a test and react strategy that
    constantly updates our product mix while minimizing inventory
    risk. This strategy is supported by our strong relationships
    with manufacturers which allow our merchandising and buying
    teams to negotiate short lead-times, enabling us to test new
    styles and react quickly to fashion trends and keep fast-moving
    inventory in stock.                                                                                                               

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| |   |                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | To complement the introduction of new
    merchandise, we view the majority of our styles as
    core fashion styles that carry over for multiple
    seasons. Our merchants make subtle changes to these styles each
    season to keep them fresh, while reducing our fashion risk
    exposure.

Increasing
the Sale of Branded Merchandise.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Approximately 17.1% of our net shoe sales for
    fiscal year 2003 consisted of branded footwear, up from 9.3% in
    fiscal year 2000. Bakers stores began to sell national branded
    footwear in fiscal year 2000 because we believe that branded
    merchandise is important to our customers, adds credibility to
    our stores and drives customer traffic, increasing our overall
    sales volume and profitability, while reducing our overall
    exposure to fashion risk.
|
| |  | We believe the further penetration of national
    branded merchandise as a percentage of our product mix will be a
    key driver of same store sales growth, as it serves to increase
    customer traffic and customer loyalty in our stores, which we
    believe will also increase the sales of our private label
    merchandise.                                                                                                                                                

Product Development and
Merchandising

Our merchants analyze, interpret and translate
current and emerging lifestyle trends into footwear and
accessories for our target customers. Our merchants and senior
management use various methods to monitor changes in culture and
fashion.

For example, we monitor current music,
television, movie and magazine themes as they relate to clothing
and footwear styles. Our buyers travel to major domestic and
international markets, such as New York, London and Milan,
to gain an understanding of fashion trends. We attend major
footwear trade shows and analyze various information services
which provide broad themes on the direction of fashion and color
for upcoming seasons.

A crucial element of our product development is
our test and react strategy, which lowers our inventory risk. We
typically buy small quantities of new footwear and deliver
merchandise to a cross-section of stores. We closely monitor
sell-through rates on test merchandise and, if the tests are
successful, quickly re-order product to be distributed to a
larger base of stores. Frequently, in as little as a week, we
can make initial determinations as to the results of a product
test.

In addition to our test and react strategy, we
can also reduce our fashion risk exposure by increasing the
national branded component of our merchandise mix. The national
brands carried by our stores tend to focus on fashion basic
merchandise supported by national advertising by the producer of
the brand, which helps generate demand from our target customer.
We believe we gain substantial brand affinity by carrying these
lines. We believe that a customer who enters our store with the
intent of shopping for national branded footwear will consider
the purchase of our lower price, higher gross margin private
label merchandise.

Product Mix

We sell both casual and dress footwear. Casual
footwear include sport shoes, sandals, athletic shoes, outdoor
footwear, casual daywear, weekend casual, casual booties and
tall-shafted boots. Dress footwear includes career footwear,
tailored shoes, dress shoes, special occasion shoes and dress
booties.

Private
Label.

Our private label merchandise, which comprised
over 82.9% of our net shoe sales in our stores for fiscal year
2003, is generally sold under the Bakers label and, in some
instances, is supplied to us on an exclusive basis. Once our
management team has arrived at a consensus on fashion themes for
the upcoming season, our buyers translate these themes into our
merchandise. We currently have two dress footwear buyers, three
casual footwear buyers and two accessory buyers.

To produce our private label footwear, we
generally begin with a shoe that our buying teams have
discovered during their travels or that is brought to us by one
of our commissioned buying agents. Working

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with our agents, we develop a prototype shoe,
which we refer to as a sample. We control the process by
focusing on key color, fabric and pattern selections, and
collaborate with our buying agents to establish production
deadlines. Once our buyers have approved the sample, our buying
agents arrange for the purchase of necessary materials and
contract with factories to manufacture the footwear to our
specifications.


We establish manufacturing deadlines in order to
ensure a consistent flow of inventory into the stores. Our
disciplined product development process has led to a reduction
in lead times. Depending upon where the shoes are produced and
where the materials are sourced, we can have shoes delivered to
our stores in four to eight weeks. For more information, please
see  Sourcing and Distribution.

Our success depends upon our customers
perception of new and fresh merchandise. Our test and react
strategy reduces our risk on new styles of footwear. We also
reduce our markdown risk by re-interpreting our core product.
Approximately one-half of our private label mix is core product,
which we define as styles that carry over for multiple seasons.
Our buyers make changes to core product which include colors,
fabrications and modified styling to create renewed interest
among our customers. We also have relationships with some
producers of national brands that, from time to time, produce
comparable versions of their branded footwear under our private
label brands.

Our information systems are designed to identify
trends by item, style, color and/or size. In response, our
merchandise team generates a key-item report to more carefully
monitor and support sales, including reordering additional units
of certain items, if available. Merchandising teams and buyers
work together to develop new styles to be presented at monthly
product review and selection meetings. These new styles
incorporate variations on existing styles in an effort to
capitalize further on the more popular silhouettes and heel
heights or entirely new styles and fabrications that respond to
emerging trends or customer preferences.

National
Brands.

In 2000, our Bakers stores began to carry
nationally recognized branded merchandise which we believe
increases the attractiveness of our product offering to our
target customers. Our branded shoe sales comprised approximately
9.3% of net shoe sales in fiscal year 2000, 13.6% in fiscal year
2001, 19.0% in fiscal year 2002, and 17.1% for fiscal year 2003.
We believe that branded merchandise is important to our
customers, adds credibility to our stores and drives customer
traffic resulting in increased customer loyalty and sales.
Important national brands in our stores include Skechers®,
Guess Sport®, Steve Madden®, Diesel®, bebe®
and Chinese Laundry®. We believe offering nationally
recognized brands is a key element to attracting appearance
conscious young women. We believe it is strategically important
to increase the branded component of our merchandise mix, which
should drive comparable store sales. Branded merchandise sells
at a higher price point than our private label merchandise. As a
result, despite a lower gross margin percentage, branded
merchandise generates greater gross profits per pair and
leverages our relatively fixed operating costs.

Accessories.

Our accessories include handbags, jewelry,
sunglasses, ear clips and earrings, hosiery, scarves and other
items. Our accessory products allow us to offer the convenience
of one-stop shopping to our customers, enabling them to
complement their seasonal ready-to-wear clothing with color
coordinated footwear and accessories. Accessories add to our
overall sales and typically generate higher gross margins than
our footwear. Our average selling price for handbags is $15, and
for all accessories, excluding handbags, the average selling
price is $5.

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Merchandise
Mix.

The following table illustrates net sales by
merchandise category as a percentage of our total net sales for
fiscal years 2000, 2001, 2002 and 2003:

|                       |       |             |      |       |   |      |      |       |   |  |      |       |   |  |      |       |  
|---------------------- | ----- | ----------- | ---- | ----- | - | ---- | ---- | ----- | - |  | ---- | ----- | - |  | ---- | ----- | -
|                       |       |            
|                       |       | Fiscal Year
|                       |       |            
|Category               |       | 2000        |      | 2001  |   | 2002 |      | 2003 
|                       |       |             |      |       |   |      |      |      
|Private Label Footwear |       |             | 84.5 | %     |   |      | 79.6 | %     |   |  | 73.0 | %     |   |  | 75.0 | %    
|Branded Footwear       |       |             | 8.7  | %     |   |      | 12.5 | %     |   |  | 17.2 | %     |   |  | 15.5 | %    
|Accessories            |       |             | 6.8  | %     |   |      | 7.9  | %     |   |  | 9.8  | %     |   |  | 9.5  | %    
|                       |       |             |      |       |   |      |      |       |   |  |      |       |   |  |      |      
|                       | Total |             |      | 100.0 | % |      |      | 100.0 | % |  |      | 100.0 | % |  |      | 100.0 | %
|                       |       |             |      |       |   |      |      |       |   |  |      |       |   |  |      |      

Planning and
Allocation.

We have developed a micro-merchandising strategy
for each of our Bakers stores through market research and sales
experience. We maintain the level and type of styles demanded by
subsets of our target customers. We have categorized each of our
Bakers stores as being predominantly a mainstream, fashion or
urban location, and if appropriate we identify subcategories for
certain stores. We have implemented a similar
micro-merchandising strategy for our Wild Pair stores.

Our micro-merchandising strategy of classifying
multiple stores and merchandising them similarly based upon
customer demographics enables our merchants to provide an
appropriate merchandise mix in order to meet that particular
stores customers casual, weekend/club, career and
special occasion needs. In determining the appropriate
merchandise mix and inventory levels for a particular store,
among other factors, for a particular stores profile, we
consider:



| |   |                                     
| | - | ------------------------------------
| |  | selling history;                    
|
| |  | importance of branded footwear;     
|
| |  | importance of accessories;          
|
| |  | importance of aggressive fashion;   
|
| |  | the stock capacity of the store; and
|
| |  | sizing trends and color preferences.

Our merchandising plan includes sales, inventory
and profitability targets for each product classification. This
plan is reconciled with our store sales plan, a compilation of
individual store sales projections that is developed biannually,
but reforecasted monthly. We also update the merchandising plan
on a monthly basis to reflect current sales and inventory
trends. The plan is then distributed throughout the
merchandising department, which analyzes trends on a weekly, and
sometimes daily, basis. We use the reforecasted merchandising
plan to adjust production orders as needed to meet inventory and
sales targets. This process keeps tight control over our
inventory levels and reduces markdowns.

Our buyers typically order merchandise 60 to
90 days in advance of anticipated delivery. Frequently, we
order merchandise 30 to 60 days in advance of delivery.
This strategy allows us to react to both the positive and
negative trends and customer preferences identified through our
information systems and other tracking procedures. Through this
purchasing strategy, we can take advantage of positive trends by
quickly replenishing our inventory of popular products. This
strategy also reduces our exposure to risk because we are less
likely to be overstocked with less desirable items. During the
recent challenging retail environment, we reacted quickly to
declining sales trends by reducing purchases and keeping
inventories in line to avoid excessive markdowns.

8



---



##### 



Clearance.

We utilize rigorous clearance and markdown
procedures to reduce our inventory of slower moving styles. Our
management carefully monitors pricing and markdowns to
facilitate the introduction of new merchandise and to maintain
the freshness of our fashion image.

We have five clearance sales each year, which
coincide with the end of a particular selling season. For more
information regarding our selling seasons, please see
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations 
Seasonality and Quarterly Fluctuations. During a clearance
sale, we instruct our stores systematically to lower the price
of the items, and if not sold, to ship them to 10 to 12 of our
stores which have special clearance sections. We believe that
our test and react strategy and our careful monitoring of
inventories and consumer buying trends help us to reduce sales
at clearance prices.

Stores

Store
Locations and Environment.

Our stores are designed to attract customers who
are intrigued by a young and contemporary lifestyle and to
create an inviting, exciting atmosphere in which it is fun for
them to shop in locations where they want to shop. Our stores
average approximately 2,400 square feet and are primarily
located in regional shopping malls. Seven of our stores, which
are located in dense urban markets such as New York City
and Chicago, have freestanding street locations.

Our stores are designed to create a clean,
upscale boutique environment, featuring contemporary finishings
and sophisticated details. Glass exteriors allow passersby to
see easily into the store from the high visibility, high traffic
locations in the malls where we have located most of our stores.
The open floor design allows customers to readily view the
majority of the merchandise on display while store fixtures
allow for the efficient display of accessories.

Following is a list of our stores by state as of
January 3, 2004:

|              |  |        |    | 
|------------- |  | ------ | -- | 
|              |  | No.   
|              |  | Stores
|              |  |       
|Alabama       |  |        | 1  | 
|Arizona       |  |        | 2  | 
|Arkansas      |  |        | 1  | 
|California    |  |        | 31 | 
|Colorado      |  |        | 4  | 
|Connecticut   |  |        | 2  | 
|Delaware      |  |        | 1  | 
|Florida       |  |        | 18 | 
|Georgia       |  |        | 15 | 
|Idaho         |  |        | 1  | 
|Illinois      |  |        | 17 | 
|Indiana       |  |        | 5  | 
|Kansas        |  |        | 2  | 
|Louisiana     |  |        | 5  | 
|Maryland      |  |        | 5  | 
|Massachusetts |  |        | 4  | 
|Michigan      |  |        | 8  | 
|Minnesota     |  |        | 2  | 
|Mississippi   |  |        | 1  | 
|Missouri      |  |        | 7  | 

9



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##### 



|               |  |        |     |  
|-------------- |  | ------ | --- | -
|               |  | No.   
|               |  | Stores
|               |  |       
|Nebraska       |  |        | 2   |  
|Nevada         |  |        | 4   |  
|New Jersey     |  |        | 9   |  
|New Mexico     |  |        | 1   |  
|New York       |  |        | 17  |  
|North Carolina |  |        | 2   |  
|Ohio           |  |        | 5   |  
|Oklahoma       |  |        | 2   |  
|Pennsylvania   |  |        | 8   |  
|Rhode Island   |  |        | 1   |  
|South Carolina |  |        | 1   |  
|Texas          |  |        | 17  |  
|Utah           |  |        | 4   |  
|Virginia       |  |        | 4   |  
|Washington     |  |        | 3   |  
|Wisconsin      |  |        | 3   |  
|               |  |        |     |  
|Total Stores   |  |        | 215 | *
|Total States   |  |        | 36  |  



---



|  |                                                                         
|- | ------------------------------------------------------------------------
|* | Excludes our Internet site, which is merchandised
    as a Bakers store.

Every three weeks, we provide the stores with
specific merchandise display directions from the corporate
office. Our in-store product presentation utilizes a variety of
different fixtures to highlight the breadth of our product line.
Various fashion themes are displayed throughout the store
utilizing combinations of styles and colors.

Store
Concepts.

We operate our stores under two different
concepts, Bakers and Wild Pair. As of January 3, 2004, 185
of our stores were Bakers stores and 30 of our stores were Wild
Pair stores.

Bakers

Our Bakers stores focus on widely-accepted,
mainstream fashion and provide a fun, high-energy shopping
environment geared toward young women between the ages of 12 and
29.

Wild
Pair

Our Wild Pair stores feature fashion-forward
merchandise for hip young women and men between the ages of 17
and 24 and are becoming recognized for reflecting the attitude
and lifestyle of this demographic niche. The Wild Pair customer
demands edgier, faster fashion that exists further towards the
leading edge than does the typical Bakers customer,
which allows us to better monitor the direction of the
fashion-forward look that our Bakers customer will be seeking.
To match the attitude of our Wild Pair merchandise, we have
created a club atmosphere and a fast, fun
environment within our Wild Pair stores.

Wild Pair stores carry a higher proportion of
branded merchandise, which generally sells at higher price
points than our Bakers footwear.

10



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##### 



The following table compares our Bakers and Wild
Pair formats:

|                          |  |                                                                                 |  |                                                                                                                                                                                                         
|------------------------- |  | ------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                          |  | Bakers                                                                          |  | Wild Pair                                                                                                                                                                                               
|                          |  |                                                                                 |  |                                                                                                                                                                                                         
|Target customer:          |  | Women  ages 12-29                                                              |  | Men & women  ages 17-24                                                                                                                                                                                
|Key brands:               |  | Skechers®, Guess Sport®, Steve
    Madden®, bebe®, Diesel® and Chinese Laundry® |  | Steve Madden®, Steve Madden
    Mens®, Guess Sport®, Skechers®,
    Candies®, Chinese Laundry®, Diesel Womens®,
    Diesel Mens®, Luichiny®, Rocket Dog®,
    Volatile®, Perry Ellis Mens® and Puma®
|Fashion content:          |  | Widely-accepted                                                                 |  | Edgy, lifestyle-based                                                                                                                                                                                   
|Number of stores (as of   |  |                                                                                 |  |                                                                                                                                                                                                         
|January 3, 2004):         |  | 185                                                                             |  | 30                                                                                                                                                                                                      
|Approximate average size: |  | 2,450 square feet                                                               |  | 1,800 square feet                                                                                                                                                                                       



| |                 
| | ----------------
| | Store Economics.

Our stores can operate profitably in a wide range
of mall classifications. We principally open our new stores in
malls that are considered A and B
locations. However, some of our stores are located in malls that
are less attractive and do not warrant the investment required
to fully remodel a store at its lease renewal. However, we will
continue to operate these stores as long as they meet
profitability requirements. In addition, these stores are
valuable in maintaining strong relationships with our national
landlords. Many of these stores are larger in size than our
newly designed stores, but have significantly lower per square
foot occupancy costs.

We expect new stores to average approximately
$750,000 per year in store volume and contribute
approximately $100,000 of cash flow from operating activities
per year. We typically invest approximately $200,000 in new
store construction costs.

During our transition from Weiss and Neuman to
Bakers, we closed a significant number of stores that were
either underperforming or did not meet our strategy. We closed
40 stores in fiscal year 2000, 21 in fiscal year 2001, and 10 in
fiscal year 2002. We closed 21 stores in fiscal year 2003,
primarily due to a lack of profitability. We have completed the
planned closing of an additional eight stores in fiscal year
2004 as of February 29, 2004.



| |                  
| | -----------------
| | Store Operations.

Our store operations are organized into three
divisions, east, central and west, which are subdivided into 15
regions. Each region is managed by a regional manager, who is
typically responsible for 12 to 16 stores. Each store is
typically staffed with a manager and an assistant manager, in
addition to approximately five sales associates. In some markets
where stores are more closely located, one of the store managers
may also act as an area manager for the stores in that area,
assisting the regional manager for those stores.

Our regional managers are primarily responsible
for the operation and results of the stores in their region,
including the hiring or promotion of store managers. We develop
new store managers by promoting from within and selectively
hiring from other retail organizations. Our store managers are
primarily responsible for sales results, customer service
training, hiring of store level staff, payroll control and
shortage control. Merchandise selections, inventory management
and visual merchandising strategies for each store are largely
determined at the corporate level and are communicated by email
to the stores generally on a weekly basis.

Our commitment to customer satisfaction and
service is an integral part of building customer loyalty. We
seek to instill enthusiasm and dedication in our store
management personnel and sales associates through incentive
programs and regular communication with the stores. Sales
associates receive commissions on sales with a guaranteed
minimum hourly compensation. From time to time, we run sales
contests to encourage our sales associates to maximize sales
volume. Store managers receive base compensation plus incentive

11



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##### 



compensation based on sales and inventory
control. Regional and area managers receive base compensation
plus incentive compensation based on meeting profitability
benchmarks. Each of our managers carefully controls the payroll
hours used each week in conjunction with a budget provided by
the regional manager.


We have well-established store operating policies
and procedures and use an in-store training regimen for all new
store employees. On a regular basis, our merchandising staff
provides the stores with merchandise presentation instructions,
which include diagrams and photographs of fixture presentations.
In addition, our internal newsletter provides product
descriptions, sales histories and other milestone information to
sales associates to enable them to gain familiarity with our
product offerings and our business. We offer our sales
associates a discount on our merchandise to encourage them to
wear our merchandise and to reflect our lifestyle image both on
and off the selling floor.

Our regional managers are responsible for
completing a loss prevention program in each of our stores. Our
loss prevention efforts include monitoring returns, voided
transactions, employee sales and deposits, as well as educating
our store personnel on loss prevention. We monitor inventory
through electronic receipt acknowledgment to better monitor loss
prevention factors, which allows us to identify variances and
further to reduce our losses due to damage, theft or other
reasons. Since these systems were implemented, our shrinkage has
dropped significantly. In addition to these internal control
measures, we commission an independent loss prevention audit
twice per year.

Sourcing and Distribution

We source each of our private label product lines
separately based on the individual design, styling and quality
specifications of those products. We do not own or operate any
manufacturing facilities and rely primarily on third party
foreign manufacturers in China, Brazil, Italy, Spain, and other
countries for the production of our private label merchandise.

We believe that this sourcing of footwear
products and our short lead times minimize our working capital
investment and inventory risk, and enable efficient and timely
introduction of new product designs. Although we have not
entered into any long-term manufacturing or supply contracts, we
believe that a sufficient number of alternative sources exist
for the manufacture of our products. The principal materials
used in the manufacture of our footwear and accessory
merchandise are available from any number of domestic or
international sources.

Management, or its agents, performs an array of
quality control inspection procedures at stages in the
production process, including examination and testing of:



| |   |                                                   
| | - | --------------------------------------------------
| |  | prototypes of key products prior to manufacture;  
|
| |  | samples and materials prior to
    production; and
|
| |  | final products prior to shipment.                 

All of the merchandise for our stores is
initially received, inspected, processed and distributed through
one of our two distribution centers, each of which is part of a
third-party warehousing system. Merchandise that is manufactured
in Asia is delivered to our west coast distribution center in
Los Angeles, California, and merchandise that is manufactured
elsewhere in the world is delivered to our east coast
distribution center located near Philadelphia, Pennsylvania. In
accordance with our micro-merchandising strategy, our allocation
teams determine how the product should be distributed among the
stores based on current inventory levels, sales trends, specific
product characteristics and the buyers input. Merchandise
typically is shipped to the stores as soon as possible after
receipt in our distribution center using third party carriers,
and any goods not shipped to stores are stored in warehouse
space in Sikeston, Missouri, for replenishment purposes.

Information Systems and Technology

Our information systems integrate our individual
stores, merchandising, distribution and financial systems. Daily
sales and cash deposit information is electronically collected
from the stores point of sale

12



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##### 



terminals nightly. This allows management to make
timely decisions in response to market conditions. These include
decisions about pricing, markdowns, reorders and inventory
management. Our customers use cash, checks and third-party
credit cards to purchase our products. We do not issue private
credit cards or make use of complicated financing arrangements.


Currently, our focus is the further integration
of our planning, purchasing and point of sale systems. We have
recently completed the transition to a new point of sale system
and implemented Arthur Allocation and MarketMax assortment
planning. These new systems allow us to better execute our
micro-merchandising strategy through more efficient management
and allocation of our store inventories to reduce further our
response times in reaction to fashion trends. In addition, these
systems also allow us to identify and reduce our losses due to
damage, theft or other reasons, and to improve monitoring of
employee productivity.

Marketing Through In-Store
Advertising

Our marketing consists primarily of an in-store,
high-impact, visual advertising campaign. Marketing materials
are particularly positioned to exploit our high visibility, high
traffic mall locations. Banners in our windows and signage on
our walls and tables may highlight a particular fashion story, a
seasonal theme or a featured piece of merchandise. We utilize
promotional giveaways or promotional event marketing.

To cultivate brand loyalty, we successfully
introduced our Bakers Frequent Buying Card program nationwide in
late 2001. This program allows our customers to purchase a
plastic, bar-coded card bearing our logo in order to obtain a
discount on all future purchases in our stores until the
expiration of the card. We believe that this program has
improved customer loyalty.

Competition

We believe that our Bakers stores have no direct
national competitors who specialize in full-service,
moderate-priced fashion footwear for young women. Yet, the
footwear and accessories retail industry is highly competitive
and characterized by low barriers to entry.

Competitive factors in our industry include:



| |   |                        
| | - | -----------------------
| |  | brand name recognition;
|
| |  | product styling;       
|
| |  | product quality;       
|
| |  | product presentation;  
|
| |  | product pricing;       
|
| |  | store ambiance;        
|
| |  | customer service; and  
|
| |  | convenience.           

We believe that we match or surpass our
competitors on the competitive factors that matter most to our
target customer. We offer the convenience of being located in
high-traffic, high-visibility locations within the shopping
malls in which our customer prefers to shop. We have a focused
strategy on our target customer that offers her the fun store
atmosphere, full service and style that she desires.

Several types of competitors vie for our target
customer:



| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | department stores (such as Bloomingdales,
    Dillards, Macys and May Department Stores);                   
|
| |  | national branded wholesalers (such as
    Candies, Nine West, Steve Madden and Vans);                         
|
| |  | national branded off-price retailers (such as
    DSW, Rack Room and Shoe Carnival);                           
|
| |  | national specialty retailers (such as Finish
    Line, Journeys, Naturalizer, Aldos and Parade of
    Shoes);

13



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##### 





| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | regional chains (such as Cathy Jean and Sheik);                                      
|
| |  | discount stores (such as Wal-Mart, Target and
    K-Mart); and, to a lesser extent,  
|
| |  | apparel retailers (such as bebe, Charlotte Russe,
    Express, Rampage and Wet Seal).

Department stores generally are not located
within the interior of the mall where our target customer
prefers to shop with her friends. National branded wholesalers
generally have a narrower line of footwear with higher average
price points and target a more narrowly focused customer.
Specialty retailers also cater to a different demographic than
our target customer. Regional chains generally do not offer the
depth of private label merchandise that we offer. National
branded off-price retailers and discount stores do not provide
the same level of fashion or customer service. Apparel
retailers, if they sell shoes or accessories, generally offer a
narrow line of styles, which can encourage a customer to come to
our store to purchase shoes or accessories to complement her new
outfit. Our competitors sell a broad assortment of footwear and
accessories that are similar and sometimes identical to those we
sell, and at times may be able to provide comparable merchandise
at lower prices. While each of these different distribution
channels may be able to compete with us on fashion, value or
service, we believe that none of them can successfully match or
surpass us on all three of these elements.

Our Wild Pair stores compete on most of the same
factors as Bakers. However, due to Wild Pairs market
position, it is subject to more intense competition from
national specialty retailers and national branded wholesalers.

History of Bakers Shoe Stores

Under Edison Brothers, the first Bakers shoe
store opened in Atlanta, Georgia, in 1924. Bakers grew to be one
of the nations largest womens moderately priced
specialty fashion footwear retailer. At its peak in 1988, Bakers
had grown to approximately 600 stores. At that time, it was one
of several footwear, apparel and entertainment retail specialty
chains that were owned and operated by Edison Brothers, which in
1995 had over 2,500 stores in the United States, Puerto Rico,
the Virgin Islands, Mexico and Canada. Edison Brothers filed a
petition for reorganization under Chapter 11 of the United
States Bankruptcy Code on November 3, 1995. After an
unsuccessful reorganization, Edison Brothers refiled for
bankruptcy on March 9, 1999, and immediately commenced a
liquidation of all its assets. In June 1999, we purchased
selected assets of the Bakers and Wild Pair chains,
approximately 200 store locations, from Edison Brothers
Stores, Inc., the debtor-in-possession.

Employees

As of January 3, 2004, we employed
approximately 597 full-time and 1,635 part-time
employees. As of January 3, 2004, we employed approximately
108 of our employees in general administrative functions at our
corporate offices and warehouse, and 2,124 at our store
locations. The number of part-time employees fluctuates
depending on our seasonal needs. None of our employees are
represented by a labor union, and we believe our relationship
with our employees is good.

Intellectual Property and Proprietary
Rights

We acquired the right and title to several
trademarks in connection with the Bakers acquisition, including
our trademarks BakersTM and Wild Pair®. In
addition, we currently have several applications pending with
the United States Patent and Trademark Office for additional
registrations. For more information on our trademarks, please
see  Our ability to expand into some
territorial and foreign jurisdictions under the trademarks
Bakers and Wild Pair is restricted
and  Our potential inability or failure to
register, renew or otherwise protect our trademarks could have a
negative impact on the value of our brand names below.

Cautionary Statements Regarding
Forward-Looking Statements and Certain Risks

This Form 10-K includes forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995 which involve known and unknown
risks and uncertainties or other factors that

14



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##### 



may cause our actual results, performance or
achievements to be materially different from any future results,
performance or achievements expressed or implied by these
forward-looking statements. The words believes,
anticipates, plans, expects,
intends, estimates and similar
expressions are intended to identify forward-looking statements.
You should not place undue reliance on those statements, which
speak only as of the date on which they are made. We undertake
no obligation to update any forward-looking statements to
reflect events or circumstances arising after such dates. You
should read this Form 10-K completely and with the
understanding that our actual results may be materially
different from what we expect. We qualify all of our
forward-looking statements by these cautionary statements.


These risks, uncertainties and other factors,
including the risks set forth below, may cause our actual
results, performances or achievements to be materially different
from those expressed or implied by our forward-looking
statements. Our forward-looking statements in this
Form 10-K include, but are not limited to, the following
risks including those described in more detail below:



| |   |                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our expectations regarding future financial
    results or performance contained in Item 7
    (Managements Discussion and Analysis of Financial
    Condition and Results of Operations);
|
| |  | our business strategy;                                                                                                                                                                       
|
| |  | the market opportunity for our services and
    products;                                                                                                                                    
|
| |  | our estimates regarding our capital requirements
    and needs for additional financing;                                                                                                     
|
| |  | any of our other plans, objectives, expectations
    and intentions contained in this Form 10-K that are not
    historical facts; and                                                       
|
| |  | changes in general economic and business
    conditions and the risks referred to below.                                                                                                     



| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our failure to identify and respond to
    changing consumer fashion preferences in a timely manner would
    negatively impact our sales, profitability and our image as a
    fashion resource for our customers.

The footwear industry is subject to rapidly
changing consumer fashion preferences. Our sales and net income
are sensitive to these changing preferences, which can be rapid
and dramatic. Accordingly, we must identify and interpret
fashion trends and respond in a timely manner. We continually
market new styles of footwear, but demand for and market
acceptance of these new styles are uncertain. 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 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. For example, in fiscal year 2002 and the nine
months ended October 4, 2003, changes in consumer fashion
trends, primarily a decline in demand for boots and booties and
a preference for low priced flip-flops, negatively impacted
sales and profitability. See Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations.



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A decline in general economic conditions
    could lead to reduced consumer demand for our footwear and
    accessories and could lead to reduced sales and a delay in our
    expansion plans.

In addition to consumer fashion preferences,
consumer spending habits are affected by, among other things,
prevailing economic conditions, levels of employment, salaries
and wage rates, consumer confidence and consumer perception of
economic conditions. A general slowdown in the United States
economy or an uncertain economic outlook would adversely affect
consumer spending habits, which would likely cause us to delay
or slow our expansion plans and result in lower net sales than
expected on a quarterly or annual basis.

15



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##### 





| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | We are susceptible to operating losses
    which would adversely affect our business and an investment in
    our common stock.

From time to time, we have had and in the future
we could have operating losses because of fashion preferences,
general economic conditions and other factors. For example, for
the nine months ended October 4, 2003, we incurred a net
loss of approximately $3.6 million and an operating loss of
$2.2 million. Such future losses could adversely affect our
business and an investment in our common stock.



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our failure to integrate a significant
    number of new stores could strain our resources and cause the
    performance of our existing stores to suffer.

Our growth will largely depend on our ability to
open and operate new stores successfully. We expect to open a
total of approximately 45 to 50 additional new stores by the end
of fiscal year 2005 in new and existing markets. Although we
have successfully integrated a significant number of new stores
in the past, including the former Sam & Libby stores,
that growth primarily related to acquisitions. We expect a large
portion of our future growth to occur through the development of
new stores. Our proposed expansion will place increased demands
on our operational, managerial and administrative resources.
These increased demands could cause us to operate our business
less effectively, which in turn could cause deterioration in the
financial performance of our business.

If we fail to successfully implement our growth
strategy, the opening of new stores, in new or current markets,
could be delayed or prevented, could cost more than we have
anticipated and could divert resources from other areas of our
business, any of which would have a material adverse effect on
our sales and earnings growth.



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our sales and inventory levels fluctuate on
    a seasonal basis, leaving our annual and quarterly operating
    results particularly susceptible to changes in customer shopping
    patterns.

To prepare for peak shopping seasons, we must
order and keep in stock significantly more merchandise than we
would carry during other times of the year. Any unanticipated
decrease in demand for our products during these peak seasons
could require us to sell excess inventory at a substantial
markdown, which could reduce our net sales and gross margins and
could negatively impact our profitability.

Traditionally, our sales and net income during
the second and fourth quarters of our fiscal year are
significantly higher due primarily to increased shopping during
the spring/ summer prom and wedding season and the winter
holiday season. In contrast, our sales and net income are
typically lower during the first quarter of our fiscal year due,
in part, to the traditional retail slowdown immediately
following the winter holiday season and during our third quarter
because we have two of our five clearance sales during the third
quarter. In addition to our normal seasonal fluctuations, some
events, in particular the Easter holiday, shift between fiscal
quarters due to the nature of our fiscal year. This shift will
likely affect customer shopping patterns and will influence our
quarterly comparable results.



| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | Fluctuations in our quarterly results of
    operations could cause the price of our common stock to decline
    substantially.

In addition to holiday shifts and customer
shopping patterns, our quarterly results are affected by a
variety of other factors, including:



| |   |                                                              
| | - | -------------------------------------------------------------
| |  | fashion trends;                                              
|
| |  | the effectiveness of our inventory management;               
|
| |  | changes in our merchandise mix;                              
|
| |  | weather conditions;                                          
|
| |  | changes in general economic conditions; and                  
|
| |  | actions of competitors, mall anchor stores or
    co-tenants.

16



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##### 



Due to factors such as these, our quarterly
results of operations have fluctuated in the past and can be
expected to continue to fluctuate in the future. For example,
quarterly comparable store sales for fiscal year 2003 compared
to fiscal year 2002 were: a decline of 13.5% in the first
quarter, a decline of 2.1% in the second quarter, a decline of
4.0% in the third quarter and an increase of 4.0% in the fourth
quarter. While in managements opinion sales during these
periods cannot be used as an accurate indicator of annual
results, if our future quarterly results fail to meet the
expectations of research analysts, then the market price of our
common stock could decline substantially. For more information,
please see Item 7. Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Seasonality and Quarterly
Fluctuations.



| |                                                                                                       
| | ------------------------------------------------------------------------------------------------------
| | Our market share may be adversely impacted
    at any time by a significant number of
    competitors.

We operate in a highly competitive environment
characterized by low barriers to entry. We compete against a
diverse group of competitors, including national branded
wholesalers, national specialty retailers, regional chains,
national branded off-price retailers, traditional department
stores, discounters and apparel retailers. Many of our
competitors may be larger and have substantially greater
resources than we do. Our market share and results of operations
are adversely impacted by this significant number of
competitors. For more information about our competition, please
see Business  Competition.



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

The success of our business depends upon our
senior management closely supervising all aspects of our
business, in particular the operation of our stores and the
design, procurement and allocation of our merchandise. Retention
of senior management is especially important in our business due
to the limited availability of experienced and talented retail
executives. If we were to lose the services of Peter Edison, our
Chairman and Chief Executive Officer, or Michele Bergerac, our
President, or other members of our senior management, our
business could be adversely affected if we are unable to employ
a suitable replacement in a timely manner.



| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | Our failure to maintain good relationships
    with our manufacturers could harm our ability to procure quality
    inventory in a timely manner.

Our ability to obtain attractive pricing, quick
response, ordering flexibility and other terms from our
manufacturers depends on their perception of us and our buying
agents. We do not own any production facilities or have any long
term contracts with any manufacturers, and we typically order
our inventory through purchase orders. Because of our relatively
short lead times and fast inventory turns, any disruption in our
supply chain could more quickly impact our sales compared to
other retailers. Our failure or the failure of our buying agents
to maintain good relationships with these manufacturers could
increase our exposure to changing fashion cycles, which may lead
to increased inventory markdown rates. It is possible that we
could be unable to acquire sufficient quantities or an
appropriate mix of merchandise or raw materials at acceptable
prices. Furthermore, we have received in the past, and may
receive in the future, shipments of products from manufacturers
that fail to conform to our quality control standards. In this
event, unless we are able to obtain replacement products in a
timely manner, we may lose sales.



| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on a small number of buying agents
    for our merchandise purchases, and our failure to maintain good
    relationships with any of them could harm our ability to source
    our products.

For fiscal year 2003, our top five buying agents
accounted for approximately 24% of our merchandise purchases,
with one buying agent accounting for approximately 14% of our
merchandise purchases. Our buying agents assist in developing
our private label merchandise, arrange for the purchase of
necessary materials and contract with manufacturers. We execute
nonexclusive agreements with some of our buying agents. These
agreements prohibit our buying agents from sharing commissions
with manufacturers, owning stock or holding any ownership
interest in, or being owned in any way by, any of our
manufacturers or suppliers. The agreements do not prohibit our
buying agents from acting as agents for other purchasers, which
could negatively impact our sales. If they were to disclose our
plans or designs to our competitors, our sales

17



---



##### 



may be materially adversely impacted. The loss of
any of these key buying agents or a breach by them of our buying
agent agreements could adversely affect our ability to develop
or obtain merchandise.




| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our merchandise is manufactured by foreign
    manufacturers; therefore, the availability and costs of our
    products may be negatively affected by risks associated with
    international trade.

Although all of our stores are located in the
United States, virtually all of our merchandise is produced in
China, Brazil, Italy, Spain and other foreign countries.
Therefore, we are subject to the risks associated with
international trade, which include:



| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | adverse fluctuations in currency exchange rates;                                                                                                                     
|
| |  | changes in import tariffs, duties or quotas;                                                                                                                         
|
| |  | the imposition of taxes or other charges on
    imports;                                                                                                             
|
| |  | the imposition of restrictive trade policies or
    sanctions by the United States on one or more of the countries
    from which we obtain footwear and accessories;
|
| |  | expropriation or nationalization;                                                                                                                                    
|
| |  | compliance with and changes in import
    restrictions and regulations;                                                                                              
|
| |  | exposure to different legal standards and the
    burden of complying with a variety of foreign laws and changing
    foreign government policies;                   
|
| |  | international hostilities, war or terrorism;                                                                                                                         
|
| |  | changes in foreign governments, regulations,
    political unrest, work stoppages, shipment disruption or
    delays; and                                            
|
| |  | changes in economic conditions in countries in
    which our manufacturers and suppliers are located.                                                                

For example, in fiscal year 2002 the West Coast
Longshoremens strike increased our freight costs and
adversely affected our sales and operating margin for that
fiscal year.

In addition, our imported products are subject to
United States customs duties, which make up a material portion
of the cost of the merchandise. If customs duties are
substantially increased, it would harm our profitability. The
United States and the countries in which our products are
produced may impose new quotas, duties, tariffs, or other
restrictions, or adversely adjust prevailing quota, duty, or
tariff levels, any of which could have a harmful effect on our
profitability.

Furthermore, when declaring the duties owed on
and the classifications of our imported products, we make
various good faith assumptions. We regularly employ a third
party to review our customs declarations, and we will notify the
appropriate authorities if any erroneous declarations are
revealed. However, the customs authorities retain the right to
audit our declarations, which could result in additional
tariffs, duties and/or penalties if the authorities believe that
they have discovered any errors.



| |                                                                       
| | ----------------------------------------------------------------------
| | Our reliance on manufacturers in China
    exposes us to supply risks.

Manufacturing facilities in China produce a
significant portion of our products. Generally, approximately
two-thirds, or more, of our private label footwear units are
manufactured in China and virtually all of our private label
accessories are manufactured in China each year. If there are
changes in the Chinese government or economy, or the current
tariff or duty structures or if the United States adopts trade
polices or sanctions adverse to China, it could harm our ability
to obtain inventory in a timely and cost effective manner.



| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | Our ability to expand into some territorial
    and foreign jurisdictions under the trademarks
    Bakers and Wild Pair is
    restricted.

When we acquired selected assets of the Bakers
and Wild Pair chains from Edison Brothers Stores, Inc. in a
bankruptcy auction in June 1999, we were assigned title to and
the right to use the trademarks Bakers,

18



---



##### 



The Wild Pair, Wild Pair
and other trademarks to the extent owned by Edison Brothers at
that time. Our rights to use the trademarks are subject to a
Concurrent Use Agreement which recognizes the geographical
division of the trademarks between us and a Puerto Rican
company. At approximately the same time as we acquired our
rights and title, Edison Brothers also assigned to the Puerto
Rican company title to and the right to use the trademarks,
subject to the Concurrent Use Agreement. Under the Concurrent
Use Agreement, we and the Puerto Rican company agree that the
Puerto Rican company has the exclusive right to use the
trademarks in the Commonwealth of Puerto Rico, the
U.S. Virgin Islands, Central and South America, Cuba, the
Dominican Republic, the Bahamas, the Lesser Antilles and Jamaica
and that we have the exclusive right to use the trademarks in
the United States and throughout the world, except for the
territories and jurisdictions in which the Puerto Rican company
was assigned the rights. Consequently, we do not have the right
to use the trademarks Bakers and Wild
Pair in those territories and foreign jurisdictions in
which the Puerto Rican company owns the trademark rights, which
may limit our growth.




| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our potential inability or failure to
    renew, register or otherwise protect our trademarks could have a
    negative impact on the value of our brand names.

Because the trademarks assigned to us by Edison
Brothers are subject to the Concurrent Use Agreement, the
U.S. trademark applications and registrations are jointly
owned by us and a Puerto Rican company, which could impair our
ability to renew and enforce the assigned applications and
registrations. Simultaneously with the Puerto Rican company, we
have filed separate concurrent use applications for the
Bakers and Wild Pair trademarks, and we
have requested that existing applications for the trademark
Bakers also be divided territorially. While we are
in agreement with the Puerto Rican company that confusion is not
likely to result from concurrent use of the trademarks in our
respective territories, the United States Patent and Trademark
Office may not agree with our position. If we are not able to
register or renew our trademark registrations, our ability to
prevent others from using trademarks and to capitalize on the
value of our brand names may be impaired. Further, our rights in
the trademarks could be subject to security interests granted by
the Puerto Rican company. Our potential inability or failure to
renew, register or otherwise protect our trademarks and other
intellectual property rights could negatively impact the value
of our brand names.



| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on third parties to manage the
    warehousing and distribution aspects of our business. If these
    third parties do not adequately perform these functions, our
    business would be disrupted.

The efficient operation of our stores is
dependent on our ability to distribute merchandise to locations
throughout the United States in a timely manner. We depend on
third parties to receive and distribute substantially all of our
merchandise. A third party in Los Angeles, California accepts
delivery of our merchandise from Asia, and another third party
near Philadelphia, Pennsylvania accepts delivery of our
merchandise from elsewhere. Merchandise not shipped to our
stores generally is shipped to our replenishment warehouse in
Sikeston, Missouri, where a third party provides warehousing
services. These parties have provided these services to us
pursuant to written agreements since 1999 and 2000. One of these
agreements is terminable upon 30 days notice and one
expires in 2004, but renews automatically unless notice is
provided, and terminates after a notice period in the event we
were to fail to meet our obligations under the agreement. We
also continue to operate under the terms of an expired agreement
with the remaining third party. If we need to replace one of
these service providers, our operations could be disrupted for
more than 60 days while we identify and integrate a
replacement into our system. As a result, the termination of
these agreements or the failure by any of these third parties to
respond adequately to our warehousing and distribution needs
could materially negatively impact our ability to maintain
sufficient inventory in our stores and consequently our
profitability.



| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | We are subject to risks associated with
    leasing our stores, especially those stores where we acquired
    the lease through bankruptcy auctions.

We lease all of our store locations. We acquired
most of these leases from Edison Brothers, as
debtor-in-possession, or from other bankrupt entities through
auctions in which a bankruptcy court ordered the assignment of
the debtors interest in the leases to us. As a result, we
have not separately negotiated a majority

19



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##### 



of our leases, which are generally drafted in
favor of the landlord. In addition, many of these leases contain
provisions that, while applicable to the business structure of
Edison Brothers, which had multiple wholly-owned subsidiaries
that were the tenants under the leases, would not have been
necessary for our business structure.


A number of our leases include termination and
default provisions which apply if we do not meet certain sales
levels or in other circumstances. In addition, some of these
leases contain various restrictions relating to dilutions in, or
changes of, the ownership of our company. Some of these
provisions are difficult to interpret. As of January 3,
2004, approximately 22% of our leases contained provisions which
by their terms prohibit a dilution in, or a change of, the
ownership of our company which may have been contravened by our
initial public offering and other prior ownership changes. As of
January 3, 2004, similar provisions in an additional 21% of
our leases may be construed, depending on how these provisions
are interpreted, to have been triggered by our initial public
offering and other prior ownership changes. In addition, our
leases subject us to risks relating to compliance with changing
mall rules and the exercise of discretion by our landlords on
various matters. Moreover, as of January 3, 2004,
approximately 17% of our leases were set to expire by
December 31, 2004. If one or more of our landlords decides
to terminate our leases, or to not allow us to renew, our
business could be materially and adversely affected.



| |                                                  
| | -------------------------------------------------
| | Our credit facility restricts our
    activities.

We have a $25.0 million secured revolving
credit facility with Fleet Retail Finance, Inc. The amount
outstanding under our credit facility was $2.2 million at
January 3, 2004. As of March 1, 2004, we had no
outstanding balance and had approximately $11.0 million in
availability. For fiscal year 2003, the average daily
outstanding balance was $11.9 million. Our credit facility
includes financial and other customary covenants which, among
other things, limit our capital expenditures, restrict our
business activities and our ability to incur debt, make
acquisitions and pay dividends. A change in control of our
company, including any person or group acquiring beneficial
ownership of 30% or more of our common stock or our combined
voting power (as defined in the credit facility), is also
prohibited.

In the event that we were to violate any of the
covenants in our credit facility, or if we were to violate the
provisions of any of our other lending arrangements or of more
than 10% of our leases (other than solely as a result of this
offering), the lender would have the right to accelerate
repayment of all amounts outstanding under the credit agreement,
or to commence foreclosure proceedings on our assets.

For more information about our credit facility,
please see Item 7. Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources.



| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | The market price of our common stock may be
    materially adversely affected by market
    volatility.

The market price of our common stock is expected
to be highly volatile, both because of actual and perceived
changes in our financial results and prospects and because of
general volatility in the stock market. The factors that could
cause fluctuations in our stock price may include, among other
factors discussed in this section, the following:



| |   |                                                                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | actual or anticipated variations in comparable
    store sales or operating results;                                                                            
|
| |  | changes in financial estimates by research
    analysts;                                                                                                        
|
| |  | actual or anticipated changes in the United
    States economy or the retailing environment;                                                                    
|
| |  | changes in the market valuations of other
    footwear or retail companies; and                                                                                 
|
| |  | announcements by us or our competitors of
    significant acquisitions, strategic partnerships, divestitures,
    joint ventures or other strategic initiatives.

20



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##### 





| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | We are controlled by a small group of
    shareholders whose interests may differ from other
    shareholders.

Affiliates of Peter Edison and members of his
family and our current management are our largest shareholders.
Accordingly, they will continue to have significant influence in
determining the outcome of all matters submitted to shareholders
for approval, including the election of directors and
significant corporate transactions. The interests of these
shareholders may differ from the interests of other
shareholders, and their concentration of ownership may have the
effect of delaying or preventing a change in control that may be
favored by other shareholders. As long as these people are our
principal shareholders, they will have the power to
significantly influence the election of our entire board of
directors.



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | Our charter documents and Missouri law may
    inhibit a takeover, which may cause a decline in the value of
    our stock.

Provisions of our restated articles of
incorporation, our restated bylaws and Missouri law could make
it more difficult for a third party to acquire us, even if
closing the transaction would be beneficial to our shareholders.
For example, our restated articles of incorporation provide, in
part, that directors may be removed from office by our
shareholders only for cause and by the affirmative vote of not
less than two-thirds of our outstanding shares and that
vacancies may be filled only by a majority of remaining
directors. Under our restated bylaws, shareholders must follow
detailed notice and other requirements to nominate a candidate
for director or to make shareholder proposals. In addition,
among other requirements, our restated bylaws require at least a
two-thirds vote of shareholders to call a special meeting.
Moreover, Missouri law and our bylaws provide that any action by
written consent must be unanimous. Furthermore, our bylaws may
be amended only by our board of directors. Certain amendments to
our articles of incorporation require the vote of two-thirds of
our outstanding shares in certain circumstances, including the
provisions of our articles of incorporation relating to business
combinations, directors, bylaws, limitations on director
liabilities and amendments to our articles of incorporation. We
are also generally subject to the business combination
provisions under Missouri law, which allow our board of
directors to retain discretion over the approval of certain
business combinations. In our bylaws, we have elected to not be
subject to the control shares acquisition provision under
Missouri law, which would deny an acquiror voting rights with
respect to any shares of voting stock which increase its equity
ownership to more than specified thresholds. These and other
provisions of Missouri law and our articles of incorporation and
bylaws, Peter Edisons substantial beneficial ownership
position, our boards authority to issued preferred stock
and the lack of cumulative voting in our articles may have the
effect of making it more difficult for shareholders to change
the composition of our board or otherwise to bring a matter
before shareholders without our boards consent. Such items
may reduce our vulnerability to an unsolicited takeover proposal
and may have the effect of delaying, deferring or preventing a
change in control, may discourage bids for our common stock at a
premium over its market price and may adversely affect the
market price of our common stock.

Executive Officers of the Registrant

The information set forth herein under the
caption Item 10. Directors and Executive Officers of
the Registrant  Executive Officers of the
Registrant is incorporated herein by reference.



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

Information relating to properties set forth in
Item 1 of this report under Item 1.
Business  Stores is incorporated herein by this
reference. All of our stores are located in the United States.

We lease all of our store locations. Most of our
leases have an initial term of at least ten years. A number of
our leases provide a lease termination option in specified years
of the lease if we do not meet certain sales levels. In
addition, leases for locations typically require us to pay
property taxes, utilities, repairs, maintenance, common area
maintenance and, in some instances, merchant association fees.
Some of our leases also require contingent rent based on sales.

We lease approximately 38,000 square feet
for our headquarters, located at 2815 Scott Avenue,
St. Louis, Missouri 63103. The lease has approximately
three years remaining, which we can extend for an additional

21



---



##### 



five years. We also operate an accessory and
supply warehouse at 1209 Washington Avenue in St. Louis
that occupies approximately 60,000 square feet and operates
under the terms of a lease with four years remaining.




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

From time to time, the Company is involved in
ordinary routine litigation common to companies engaged in the
Companys line of business. Currently, the Company is not
involved in any material pending legal proceedings.



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

In anticipation of our initial public offering,
on December 19, 2003, we asked our shareholders to
unanimously consent to several items of corporate action and to
become parties to certain other agreements. At the time, we had
two classes of common stock outstanding,
1,693,244.92 shares of Class A common stock and
271,910 shares of Class B common stock. We received
unanimous approval from all of our shareholders, effective
January 3, 2004, for each of the following corporate
actions:



| |   |                                                                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Amendments to Articles of
    Incorporation.The shareholders
    approved three amendments to the Companys articles of
    incorporation to facilitate the initial public offering. The
    first set of amendments made several changes, including:



| |   |                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increasing the number of shares of our authorized
    common stock;                                                                                                                                                                                                                                                      
|
| |  | creating a new class of common stock;                                                                                                                                                                                                                                                                                    
|
| |  | providing for the automatic conversion and
    reclassification of our capital structure under which each
    outstanding share of our three classes of common stock
    authorized would automatically convert, upon completion of the
    initial public offering, into one share of the new class of
    common stock;
|
| |  | increasing the size of our board of
    directors; and                                                                                                                                                                                                                                                                   
|
| |  | creating a class of preferred stock, of which no
    shares are outstanding.                                                                                                                                                                                                                                             



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The second set of amendments removed references
    to the previously authorized classes of common stock and the
    conversion. The first and second sets of amendments were
    implemented by filing with the Missouri Secretary of State.
    Subsequently, we restated our articles of incorporation to take
    into account the effects of the amendments. A copy of our
    restated articles, as currently in effect, has been filed as
    Exhibit 3.1 to this Annual Report on Form 10-K. Under
    our restated articles of incorporation, we have the authority to
    issue 45,000,000 shares of stock, including
    5,000,000 shares of preferred stock, $0.0001 par value
    per share, and 40,000,000 shares of common stock,
    $0.0001 par value per share. The third set of amendments
    would have changed our number of directors back to one and was
    only to be used if the initial public offering did not occur.
    That set of amendments has been abandoned.



| |   |                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Adoption of new incentive
    plans.The shareholders approved and
    adopted the Bakers Footwear Group, Inc. Cash Bonus Plan and
    the Bakers Footwear Group, Inc. 2003 Stock Option Plan.                                                                                                                                                                  
|
| |  | Revocation of the Companys
    S corporation status.The
    shareholders approved and consented to the revocation of our
    S corporation status, which became effective at the
    beginning of fiscal year 2004. The revocation of our
    S corporation status will result in the Company being taxed
    under Subchapter C of the Internal Revenue Code.

In connection with the amendment of our articles
of incorporation, our board of directors adopted our restated
bylaws, expanded the board of directors to six members and
nominated and appointed five additional directors effective upon
the completion of the initial public offering. In addition, all
of our shareholders prior to our initial public offering entered
into an agreement, which had the effect of terminating each of
the three shareholder agreements and the Class B
Shareholder Voting Trust Agreement in effect prior to our
initial public offering. In addition, all of our shareholders
prior to our initial public offering entered into a tax
indemnification agreement with us under which we have generally
agreed to indemnify them for any tax liabilities that may result
from the termination of our S corporation status. Further,
all of our pre-initial public

22



---



##### 



offering shareholders (including our director,
director nominees and executive officers who owned shares at the
time) and our option holders (excluding our warrant holders)
approved and executed lock-up agreements pursuant to
which each person generally agreed not to sell or otherwise
dispose of any shares of common stock of the Company for one
year after February 5, 2004. Those persons also agreed that
until February 5, 2005 if that person desires to sell any
of our securities in accordance with Rule 144 under the
Securities Act, those securities shall be sold under
Rule 144 through Ryan Beck and Co., Inc., which has
been granted a right of first refusal with respect to such sales.


PART II.



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

Market Information and Holders

The common stock of Bakers Footwear
Group, Inc. has been quoted in the Nasdaq National Market
under the symbol BKRS since February 5, 2004.
Prior to this time, there was no public market for the
Companys common stock. The initial public offering price
of the Companys common stock was $7.75 per share. The
initial public offering closed on February 10, 2004. On
March 12, 2004, we sold an additional 324,000 shares of
common stock at the same price in connection with the full
exercise of the underwriters over-allotment option. The
closing sales price of Bakers Footwear Group, Inc.s
common stock on the Nasdaq National Market was $11.60 per
share on March 31, 2004. From February 5, 2004 through
March 31, 2004, the range of the high and low sales prices
for the Companys common stock was $7.51 to $11.85. As of
March 31, 2004, there were approximately 1,000 holders of
record of the Companys common stock.

Dividends

Prior to our initial public offering, we operated
under Subchapter S of the Internal Revenue Code and comparable
provisions of some state income tax laws. By reason of our
treatment as an S corporation for Federal and state income
tax purposes, prior to our initial public offering we generally
distributed to our shareholders funds for the payment of income
taxes on our earnings. During the two most recent fiscal years,
we have declared quarterly distributions in the aggregate
consisting of amounts attributable to payment of those taxes as
follows:

|               |       |              |         |           | 
|-------------- | ----- | ------------ | ------- | --------- | 
|               |       | Distribution
|               |       |             
|Fiscal 2002:   |       |              |         |          
|First Quarter  |       | $            | 414,190 |          
|Second Quarter |       |              | 950,541 |          
|Third Quarter  |       |              | 455,278 |          
|Fourth Quarter |       |              | 163     |          
|               |       |              |         |          
|               | Total |              | $       | 1,820,172 | 
|               |       |              |         |          
|Fiscal 2003:   |       |              |         |          
|First Quarter  |       | $            | 540     |          
|Second Quarter |       |              | 409     |          
|Third Quarter  |       |              | 0       |          
|Fourth Quarter |       |              | 0       |          
|               |       |              |         |          
|               | Total |              | $       | 949       | 
|               |       |              |         |          

In connection with our initial public offering,
we revoked our S election, effective on the first day of fiscal
year 2004. As of January 3, 2004, we have accrued $75,000
as a liability for taxes payable on behalf of our shareholders,
which we expect to distribute in the next two months, as a
result of our prior S corporation status.

We currently intend to retain our earnings, if
any, for use in our business and do not anticipate paying any
cash dividends in the foreseeable future. Any future payments of
dividends will be at the discretion of our

23



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##### 



board of directors and will depend upon factors
as the board of directors deems relevant. Our revolving credit
facility prohibits the payment of dividends, except for common
stock dividends. We give no assurance that we will pay or not
pay dividends in the foreseeable future.


Recent Sales of Unregistered
Securities

In connection with the consummation of the
initial public offering on February 10, 2004, the Company
issued to Ryan Beck & Co., Inc. and BB&T
Capital Markets, a Division of Scott &
Stringfellow, Inc., the underwriters representatives
for the initial public offering, or their designees, five year
warrants to purchase up to 216,000 shares of the
Companys common stock, subject to antidilution
adjustments, at an exercise price of $12.7875 per share of
common stock. The representatives paid a purchase price of
$0.0001 per warrant, an aggregate of $21.60. The warrant
holders may exercise the warrants at any time during the
four-year period commencing February 10, 2005 and ending
February 10, 2009. In the foregoing transaction, the
Company relied on the exemption from registration for private
transactions not involving any public offering pursuant to
Section 4(2) under the Securities Act of 1933 and/or the
rules and regulations thereunder for transactions by an issuer
not involving any public offering.

In April 2002, the Company issued
$4.9 million of subordinated convertible debentures to a
group of accredited investors in an offering not involving a
public offering. Pursuant to an exchange agreement entered into
on January 2, 2004, the Company exchanged those debentures
for a new issuance of $4.9 million in subordinated
convertible debentures. The new subordinated convertible
debentures automatically converted into an aggregate of
653,331 shares of the Companys common stock at a
conversion price of $7.50 upon the consummation of the initial
public offering. For the issuance of the original debentures,
the exchange of the original debentures for the new issuance of
debentures and the issuance of the shares of common stock
underlying the new debentures the Company relied on the
exemption(s) from registration relating to offerings that did
not involve any public offering pursuant to Section 4(2)
under the Securities Act of 1933 and/or an exchange by the
issuer with its existing security holders exclusively where no
commission or other remuneration is paid or given directly or
indirectly for soliciting such exchange pursuant to
Section 3(a)(9) under the Securities Act of 1933.

In June 2003, the Company granted immediately
exercisable options to purchase 24,718 shares of
Class C common stock at an exercise price of $0.01 per
share, an aggregate of $247.18, pursuant to a written
compensation agreement to a member of the Companys
management team. For these option grants, the Company relied on
the exemption from registration pursuant to Section 3(b) of
the Securities Act of 1933 and Rule 701 promulgated
thereunder as grants pursuant to written compensatory benefit
plans. The aggregate exercise prices were less than 15% of our
total assets as of the relevant balance sheet date.

Immediately prior to consummation of the initial
public offering, the Company had three classes of common stock
authorized, Class A common stock, Class B common stock
and Class C common stock, of which only shares of
Class A and Class B common stock were outstanding.
Upon the completion of the initial public offering, in
accordance with the then existing articles of incorporation,
1,693,244.92 shares of Class A common stock and
271,910 shares of Class B common stock automatically
converted into an aggregate of 1,965,150 shares of common
stock. The conversion was on 1.0-for-1.0 basis, excluding
fractional shares. As a result, the Company now has one class of
voting common stock issued and outstanding. In addition, holders
of Class C options amended their option award agreements to
purchase Class C common stock to cover shares of the new
class of common stock. The Company relied on the exemption from
registration under the Securities Act of 1933 pursuant to
Section 3(a)(9) and/or the rules and regulations thereunder
for securities exchanged by an issuer with its existing security
holders exclusively where no commission or other remuneration is
paid or given directly or indirectly for soliciting such
exchange.

In June 1999, the Company issued a subordinated
note to Mississippi Valley Capital Company in the aggregate
principal amount of $500,000, bearing interest at 6.0% per
annum and due January 31, 2003. In connection with this
note, the Company issued a warrant exercisable for
76,907 shares of Class A common stock at an aggregate
exercise price of $76.91 to Mississippi Valley Capital Company.
In January 2003, the note and warrant held by Mississippi Valley
Capital Company were transferred to Mississippi Valley Capital,

24



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##### 



LLC, a manager-managed limited liability company.
On January 31, 2003, the note and the warrant were extended
when the Company amended and restated the note payable and
warrant. The amended and restated note bore interest at the rate
of 10% per annum and was due on March 1, 2004. The
warrant became exercisable upon completion of the initial public
offering. The amended and restated warrant was redeemable, if
not exercised, on March 1, 2004, for $850,000. The warrant
has been redeemed and the note paid in full. The note and
warrant were amended and restated in an offering not involving
any public offering pursuant to Section 4(2) under the
Securities Act of 1933.


In all the foregoing transactions in which the
Company has relied on the exemption from registration for
private transactions not involving any public offering pursuant
to Section 4(2) under the Securities Act of 1933 and/or the
rules and regulations thereunder for transactions by an issuer
not involving any public offering, sales of the securities were
without the use of an underwriter, and the certificates
evidencing the securities relating to the foregoing transactions
bore restrictive legends permitting the transfer thereof only
upon registration of such securities or an exemption under the
Securities Act. The recipients of securities in these
transactions represented their intention to acquire the
securities for investment purposes only and not with a view to
or for distribution in connection with these transactions. Each
security bore a restrictive legend and/or the recipient was a
party to an agreement restricting transfer and had adequate
access to information about us through such recipients
relationship with us or through information provided to them.

Use of Proceeds

On February 5, 2004, the Company commenced
its initial public offering. On February 10, 2004, the
Company consummated its initial public offering with the sale of
2,160,000 shares of common stock, excluding exercise of the
underwriters over-allotment option. In connection with the
Companys initial public offering, the Company also sold
216,000 warrants to purchase shares of common stock to Ryan
Beck & Co., Inc. and BB&T Capital Markets, as
the representatives of the underwriters, or their designees. On
March 12, 2004, the Company sold an additional
324,000 shares of common stock in connection with the
exercise, by the underwriters, of the full over-allotment
option. The public offering price of the common stock was
$7.75 per share. We sold the warrants for $0.0001 per
warrant.

The shares of common stock sold in the offering
and the warrants to purchase common stock were registered under
the Securities Act of 1933, as amended, on two Registration
Statements (Nos. 333-86332 and 333-112477) on Form S-1. The
Securities and Exchange Commission declared Registration
Statement No. 333-86332 effective on February 3, 2004.
Registration Statement No. 333-112477 was effective upon
filing on February 4, 2004 pursuant to Rule 462(b)
under the Securities Act of 1933. All 2,160,000 shares of
common stock sold to the public in the initial closing, plus all
324,000 shares of common stock covered by an over-allotment
option granted to the underwriters were sold at a price of
$7.75 per share. The warrants were sold to the
representatives of the underwriters at a price of
$0.0001 per warrant. Each warrant may be converted into one
share of common stock at an exercise price $12.7875. The
Registration Statements collectively registered
2,484,000 shares of common stock at a maximum aggregate
offering price of $26,772,000, 216,000 warrants at a maximum
aggregate offering price of $22, all of which common stock and
warrants were sold in the offering, and 216,000 shares of
common stock underlying the warrants at a maximum aggregate
offering price of $2,851,000.

The aggregate gross proceeds from the shares of
common stock and the warrants sold were approximately
$19.3 million. The net proceeds to the Company from the
offering were approximately $15.5 million after deducting
the underwriting discount of $1.9 million and
$1.9 million of other expenses incurred in connection with
the offering. A reasonable estimate for the amount of expenses
incurred has been provided instead of the actual amount of
expenses. None of such payments were to directors, officers, ten
percent shareholders or affiliates of the issuer.

As a result of the initial public offering
closing in fiscal year 2004, no proceeds from the initial public
offering were used during fiscal year 2003. As of April 1,
2004, the Company has used the net proceeds received from the
initial public offering for the following purposes:
$4.9 million to repay the balance on its revolving credit
agreement to Fleet Retail Finance, Inc., $1.4 million
to redeem outstanding warrants and a

25



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##### 



note payable in favor of Mississippi Valley
Capital, LLC, and $0.4 million to repay subordinated debt
in favor of the Companys prior Class B shareholders.
The credit agreement and the subordinated debt were secured, in
part, by a personal guaranty of Peter Edison, the Companys
Chairman of the Board and Chief Executive Officer. Mississippi
Valley Capital, LLC is a member managed limited liability
company, of which Mr. Baur, one of the Companys
directors, is one of the two managers. In addition,
Mr. Baurs children are three of the four members.
Mr. Baur is also a director of Marshall & Ilsley
Corporation, which is a ten percent participant in the
Companys credit facility with Fleet Retail
Finance, Inc. The Company intends to use approximately
$2.7 million of the net proceeds from the offering to open
15 new stores, all in the Companys new format, in fiscal
year 2004, and $3.6 million of the net proceeds to remodel
27 stores, including 17 in the new format, in fiscal year 2004.
The Company expects to use the remaining net proceeds for
working capital requirements and other general corporate
purposes, including the purchase of inventory in the ordinary
course of business. Pending use of the proceeds, the Company may
invest in short-term, investment-grade interest bearing
instruments. The Company projects its capital expenditure needs
in fiscal year 2004 to be approximately $6.0 million to
$7.0 million. Reasonable estimates for the amounts have
been provided instead of the actual amounts. Except as set forth
above, none of proceeds were paid to directors, officers, ten
percent shareholders or affiliates of the issuer.


Securities Authorized for Issuance Under
Equity Compensation Plans

The information set forth under the caption
Equity Compensation Plan Information in Item 12
hereof is incorporated herein by reference.

Purchases of Equity Securities by the Issuer
and Affiliated Purchasers

During 2003, the Company did not repurchase any
securities of the Company.



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

The following tables summarize certain selected
financial data for each of the fiscal years in the five year
period ended January 3, 2004. The income statement data for
the fiscal years ended December 31, 1999, December 30,
2000, January 5, 2002, January 4, 2003, and
January 3, 2004 and the selected balance sheet data as of
those dates have been derived from our audited financial
statements. Our audited financial statements for the three
fiscal years ended January 3, 2004, are included elsewhere
in this annual report on Form 10-K. The information
contained in these tables should be read in conjunction with our
financial statements and the Notes thereto, and
Managements Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in
this annual report.

|                                                                   |  |                   |            |              |  |            |             |            |  |            |             |  |  |   |             |   |  |   |             | 
|------------------------------------------------------------------ |  | ----------------- | ---------- | ------------ |  | ---------- | ----------- | ---------- |  | ---------- | ----------- |  |  | - | ----------- | - |  | - | ----------- | 
|                                                                   |  |                  
|                                                                   |  | Fiscal Year Ended
|                                                                   |  |                  
|                                                                   |  | December 31,      |            | December 30, |  | January 5, |             | January 4, |  | January 3,
|                                                                   |  | 1999(1)           |            | 2000(2)      |  | 2002       |             | 2003(5)    |  | 2004      
|                                                                   |  |                   |            |              |  |            |             |            |  |           
|Net sales                                                          |  | $                 | 87,400,591 |              |  | $          | 140,709,517 |            |  | $          | 140,841,929 |  |  | $ | 151,147,810 |   |  | $ | 148,223,553 | 
|Gross profit                                                       |  |                   | 21,448,475 |              |  |            | 38,676,442  |            |  |            | 42,594,849  |  |  |   | 45,136,057  |   |  |   | 45,166,111  | 
|Income (loss) before cumulative effect of change
    in accounting |  |                   | (3,948,773 | )            |  |            | 1,616,315   |            |  |            | 4,959,653   |  |  |   | (490,627    | ) |  |   | 1,674,894   | 
|Cumulative effect of change in accounting(3)                       |  |                   |           |              |  |            |            |            |  |            |            |  |  |   | 2,774,899   |   |  |   |            | 
|                                                                   |  |                   |            |              |  |            |             |            |  |            |             |  |  |   |             |   |  |   |             | 
|Net income (loss)(4)                                               |  | $                 | (3,948,773 | )            |  | $          | 1,616,315   |            |  | $          | 4,959,653   |  |  | $ | 2,284,272   |   |  | $ | 1,674,894   | 
|                                                                   |  |                   |            |              |  |            |             |            |  |            |             |  |  |   |             |   |  |   |             | 

26



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##### 



|                                                                                              |                                                                                     |                   |            |              |       |            |            |            |      |            |            |           |      |   |            |           |      |   |            |           |      | 
|--------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ----------------- | ---------- | ------------ | ----- | ---------- | ---------- | ---------- | ---- | ---------- | ---------- | --------- | ---- | - | ---------- | --------- | ---- | - | ---------- | --------- | ---- | 
|                                                                                              |                                                                                     |                  
|                                                                                              |                                                                                     | Fiscal Year Ended
|                                                                                              |                                                                                     |                  
|                                                                                              |                                                                                     | December 31,      |            | December 30, |       | January 5, |            | January 4, |      | January 3,
|                                                                                              |                                                                                     | 1999(1)           |            | 2000(2)      |       | 2002       |            | 2003(5)    |      | 2004      
|                                                                                              |                                                                                     |                   |            |              |       |            |            |            |      |           
|Net income (loss) per common share                                                            |                                                                                     |                   |            |              |       |            |            |            |      |            |            |           |      |   |            |           |      |   |            |          
|                                                                                              | Basic                                                                               |                   | $          | (3.14        | )     |            | $          | 1.11       |      |            | $          | 3.31      |      |   | $          | 1.50      |      |   | $          | 0.93      |     
|                                                                                              |                                                                                     |                   |            |              |       |            |            |            |      |            |            |           |      |   |            |           |      |   |            |          
|                                                                                              | Diluted                                                                             |                   | $          | (3.14        | )     |            | $          | 0.70       |      |            | $          | 2.17      |      |   | $          | 1.06      |      |   | $          | 0.79      |     
|                                                                                              |                                                                                     |                   |            |              |       |            |            |            |      |            |            |           |      |   |            |           |      |   |            |          
|Total assets                                                                                  |                                                                                     | $                 | 19,438,431 |              |       | $          | 18,986,866 |            |      | $          | 22,206,550 |           |      | $ | 29,092,117 |           |      | $ | 29,004,507 |          
|                                                                                              |                                                                                     |                   |            |              |       |            |            |            |      |            |            |           |      |   |            |           |      |   |            |          
|Long-term debt, capital lease obligations and
    redeemable securities, less current portion |                                                                                     | $                 | 3,236,388  |              |       | $          | 3,286,974  |            |      | $          | 4,532,230  |           |      | $ | 9,388,111  |           |      | $ | 7,746,548  |          
|                                                                                              |                                                                                     |                   |            |              |       |            |            |            |      |            |            |           |      |   |            |           |      |   |            |          
|Unaudited pro forma information(4):                                                           |                                                                                     |                   | (Unaudited | )            |       |            | (Unaudited | )          |      |            | (Unaudited | )         |      |   | (Unaudited | )         |      |   | (Unaudited | )        
|                                                                                              | Income (loss) before cumulative effect of change
    in accounting and income taxes |                   | $          | (4,075,505   | )     |            | $          | 1,377,635  |      |            | $          | 4,870,934 |      |   | $          | (654,272  | )    |   | $          | 1,742,713 |     
|                                                                                              | Provision for (benefit from) income taxes                                           |                   |            | (1,852,475   | )     |            |            | 273,748    |      |            |            | 1,605,055 |      |   |            | (217,178  | )    |   |            | 674,853   |     
|                                                                                              |                                                                                     |                   |            |              |       |            |            |            |      |            |            |           |      |   |            |           |      |   |            |          
|                                                                                              | Income (loss) before cumulative effect of change
    in accounting                  |                   |            | (2,223,030   | )     |            |            | 1,103,887  |      |            |            | 3,265,879 |      |   |            | (437,094  | )    |   |            | 1,067,860 |     
|                                                                                              | Cumulative effect of change in accounting(3)                                        |                   |            |             |       |            |            |           |      |            |            |          |      |   |            | 1,763,934 |      |   |            |          |     
|                                                                                              |                                                                                     |                   |            |              |       |            |            |            |      |            |            |           |      |   |            |           |      |   |            |          
|                                                                                              | Net income (loss)                                                                   |                   | $          | (2,223,030   | )     |            | $          | 1,103,887  |      |            | $          | 3,265,879 |      |   | $          | 1,326,840 |      |   | $          | 1,067,860 |     
|                                                                                              |                                                                                     |                   |            |              |       |            |            |            |      |            |            |           |      |   |            |           |      |   |            |          
|                                                                                              | Net income (loss) per common share                                                  |                   |            |              |       |            |            |            |      |            |            |           |      |   |            |           |      |   |            |           |     
|                                                                                              |                                                                                     | Basic             |            | $            | (1.78 | )          |            | $          | 0.75 |            |            | $         | 2.12 |   |            | $         | 0.83 |   |            | $         | 0.50 | 
|                                                                                              |                                                                                     |                   |            |              |       |            |            |            |      |            |            |           |      |   |            |           |      |   |            |          
|                                                                                              |                                                                                     | Diluted           |            | $            | (1.78 | )          |            | $          | 0.47 |            |            | $         | 1.44 |   |            | $         | 0.64 |   |            | $         | 0.48 | 
|                                                                                              |                                                                                     |                   |            |              |       |            |            |            |      |            |            |           |      |   |            |           |      |   |            |          



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On June 22, 1999, we acquired the assets of
    198 Bakers stores for approximately $9.0 million.
    Consequently, the results of operations for those stores are
    included in our financial statements since the acquisition date.                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(2) | Effective December 30, 2000, we changed our
    fiscal year from the calendar year ending December 31 to a
    52/53 week period. The fiscal year ended January 5,
    2002 is a 53-week period. For more information regarding our
    fiscal year, please see Item 7. Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Fiscal Year.                                                                                                                                                                                                                                                                                       
|   
|(3) | Represents the cumulative effect of adopting
    SFAS No. 142, Goodwill and Other Intangible
    Assets, and recognizing as income from the unamortized
    deferred credit related to the excess of fair value over cost
    arising from the acquisition of Bakers.                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(4) | Through January 3, 2004, we elected
    S corporation status for Federal and state income tax
    purposes. Accordingly, no provision has been made for Federal or
    certain state income taxes. Pro forma net income has been
    computed as if we had been fully subject to Federal, state and
    city taxes. Effective January 4, 2004, we terminated our S
    election and will be taxed as a C corporation. For a
    reconciliation of our historical income (loss) before cumulative
    effect of change in accounting to pro forma income (loss) before
    cumulative effect of change in accounting and income taxes,
    please see Note 12 in the financial

27



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##### 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | statements. As an S corporation, we paid
    distributions to our shareholders in amounts sufficient to allow
    them to pay income taxes related to an allocable share of our
    taxable income and did not pay traditional cash dividends per
    share. Such distributions are not comparable to dividends that
    would be paid by a C corporation. The Company currently has
    no plans to pay dividends. See the information under the caption
    Item 5. Market for Registrants Common Equity
    and Related Stockholder Matters  Dividends
    which is incorporated herein by reference.
|   
|(5) | Reflects approximately $1.7 million in
    initial public offering costs charged in fiscal year 2002 as a
    result of a delay in the initial public offering process. In the
    first quarter of fiscal year 2002, we completed the acquisition
    of 33 former Sam & Libby store locations for
    approximately $1.8 million in cash.                                                                                                                                                                                                                                                                 



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

The following Managements Discussion and
Analysis of Financial Condition and Results of Operations
contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from the
results discussed in the forward-looking statements. Factors
that might cause such a difference include, but are not limited
to, those discussed in Item 1. Business 
Cautionary Statements Regarding Forward-Looking Statements
and elsewhere in this annual report. The following section is
qualified in its entirety by this more detailed information and
our Financial Statements and the related Notes thereto, included
elsewhere in this annual report on Form 10-K.

Overview

We are a national, mall-based, specialty retailer
of distinctive footwear and accessories targeting young women
who demand quality fashion products. As of January 3, 2004,
in addition to our 185 Bakers stores, we operate the 30 store
Wild Pair chain that targets men and women between the ages of
17 and 24 who desire edgier, fashion forward footwear.

In the first quarter of fiscal year 2002, we
completed the acquisition of 33 store locations (formerly
operated as Sam & Libby) in 15 states for
$1.8 million in cash from SLJ Retail LLC. We also acquired
the non-inventory personal property, leasehold improvements,
furniture, fixtures and equipment related to the stores. We
began operating 17 of these stores as Wild Pair stores and 16 as
Bakers stores in April 2002. Due to the similarity of the design
of the purchased stores to our stores, we did not need to spend
a material amount of money on remodeling these stores. As a
result of the Sam & Libby acquisition, our results of
operations for fiscal years 2001, 2002 and 2003 are not
comparable in some significant respects.

For comparison purposes, we classify our stores
as comparable or non-comparable. A new stores sales are
not included in comparable store sales until the thirteenth
month of operation. Sales from remodeled stores are excluded
from comparable store sales during the period of remodeling.

Critical Accounting Policies

Our financial statements are prepared in
accordance with accounting principles generally accepted in the
United States, which require us to make estimates and
assumptions about future events and their impact on amounts
reported in our financial statements and related Notes. Since
future events and their impact cannot be determined with
certainty, the actual results will inevitably differ from our
estimates. These differences could be material to the financial
statements. For more information, please see Note 1 in the
Notes to the Financial Statements.

We believe that our application of accounting
policies, and the estimates that are inherently required by
these policies, are reasonable. We believe that the following
significant accounting policies may involve a higher degree of
judgment and complexity.

Merchandise
inventories

Merchandise inventories are valued at the lower
of cost or market using the first-in first-out retail inventory
method. Permanent markdowns are recorded to reflect expected
adjustments to retail prices in

28



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##### 



accordance with the retail inventory method. The
process of determining our expected adjustments to retail prices
requires significant judgment by management. Among other
factors, management utilizes performance metrics to evaluate the
quality and freshness of inventory, including the number of
weeks of supply on hand, sell-through percentages and aging
categories of inventory by selling season, to make its best
estimate of the appropriate inventory markdowns. If market
conditions are less favorable than those projected by
management, additional inventory markdowns may be required.


Store closing
and impairment charges

At the beginning of fiscal year 2002, we adopted
SFAS No. 144, Accounting for the Disposal of
Long-Lived Assets. Based on the criteria in
SFAS No. 144, long-lived assets to be held and
used are reviewed for impairment when events or
circumstances exist that indicate the carrying amount of those
assets may not be recoverable. We regularly analyze the
operating results of our stores and assess the viability of
under-performing stores to determine whether they should be
closed or whether their associated assets, including furniture,
fixtures, equipment, and leasehold improvements, have been
impaired. Asset impairment tests are performed at least
annually, on a store-by-store basis. After allowing for an
appropriate start-up period, unusual nonrecurring events, and
favorable trends, fixed assets of stores indicated to be
impaired are written down to fair value. During the years ended
January 5, 2002, January 4, 2003 and January 3,
2004, we recorded $4,540, $120,114, and $127,133, respectively,
in noncash charges to earnings related to the impairment of
furniture, fixtures, and equipment, leasehold improvements and
goodwill.

S Corporation Income Tax Status

Through January 3, 2004, we were an
S corporation under Subchapter S of the Internal
Revenue Code and comparable state tax laws, and consequently
were not subject to income taxes on our earnings in those
jurisdictions, other than state franchise and net worth taxes.
However, we were subject to income taxes in some states in which
we conduct business which do not recognize S corporation
status. Our S corporation status was terminated effective
January 4, 2004, and for future periods we will be treated
for Federal and state income tax purposes as a corporation under
Subchapter C of the Internal Revenue Code and, as a result, will
be subject to Federal and state income taxes.

Fiscal Year

Our accounting period is based upon a traditional
retail calendar, which ends on the Saturday nearest
January 31. Our fiscal year ends four weeks prior to the
retail calendar, as a result of our Subchapter S tax status.
Fiscal years ended January 4, 2003 and January 3, 2004
were 52-week periods. The fiscal year ended January 5, 2002
was a 53-week period. The difference in the number of weeks for
our fiscal years can affect yearly comparisons. We refer to the
fiscal year ended January 5, 2002 as fiscal year
2001, to the fiscal year ended January 4, 2003 as
fiscal year 2002, and to the fiscal year ended
January 3, 2004 as fiscal year 2003.

29



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##### 



Results of Operations

The following table sets forth our operating
results, expressed as a percentage of sales, for the periods
indicated.

|                                                            |  |                   |       |            |  |            |       |   |  |  |       |  
|----------------------------------------------------------- |  | ----------------- | ----- | ---------- |  | ---------- | ----- | - |  |  | ----- | -
|                                                            |  |                  
|                                                            |  | Fiscal Year Ended
|                                                            |  |                  
|                                                            |  | January 5,        |       | January 4, |  | January 3,
|                                                            |  | 2002              |       | 2003       |  | 2004      
|                                                            |  |                   |       |            |  |           
|Net sales                                                   |  |                   | 100.0 | %          |  |            | 100.0 | % |  |  | 100.0 | %
|Cost of merchandise sold, occupancy and buying
    expense  |  |                   | 69.8  |            |  |            | 70.1  |   |  |  | 69.5  |  
|                                                            |  |                   |       |            |  |            |       |   |  |  |       |  
|Gross profit                                                |  |                   | 30.2  |            |  |            | 29.9  |   |  |  | 30.5  |  
|Selling expense                                             |  |                   | 19.2  |            |  |            | 20.4  |   |  |  | 19.9  |  
|General and administrative expense                          |  |                   | 7.2   |            |  |            | 7.5   |   |  |  | 8.0   |  
|Loss on disposal of property and equipment                  |  |                   |      |            |  |            | 0.1   |   |  |  | 0.1   |  
|Impairment and disposal of long-lived assets                |  |                   |      |            |  |            | 0.1   |   |  |  | 0.1   |  
|Write off of deferred offering costs                        |  |                   |      |            |  |            | 1.1   |   |  |  |      |  
|Amortization of excess of acquired net assets
    over cost |  |                   | (0.8  | )          |  |            |      |   |  |  |      |  
|                                                            |  |                   |       |            |  |            |       |   |  |  |       |  
|Operating income (loss)                                     |  |                   | 4.6   |            |  |            | 0.7   |   |  |  | 2.4   |  
|Other income (expense)                                      |  |                   | (0.1  | )          |  |            |      |   |  |  | (0.1  | )
|Interest expense                                            |  |                   | (0.8  | )          |  |            | (1.1  | ) |  |  | (1.1  | )
|State income tax (expense) benefit                          |  |                   | (0.2  | )          |  |            | 0.1   |   |  |  | (0.1  | )
|Cumulative effect of change in accounting                   |  |                   |      |            |  |            | 1.8   |   |  |  |      |  
|                                                            |  |                   |       |            |  |            |       |   |  |  |       |  
|Net income                                                  |  |                   | 3.5   | %          |  |            | 1.5   | % |  |  | 1.1   | %
|                                                            |  |                   |       |            |  |            |       |   |  |  |       |  

The following table sets forth our number of
stores at the beginning and end of each period indicated and the
number of stores opened, acquired and closed during each period
indicated.

|                                        |  |                   |     |            |  |            |     |   |  |  |     |  
|--------------------------------------- |  | ----------------- | --- | ---------- |  | ---------- | --- | - |  |  | --- | -
|                                        |  |                  
|                                        |  | Fiscal Year Ended
|                                        |  |                  
|                                        |  | January 5,        |     | January 4, |  | January 3,
|                                        |  | 2002              |     | 2003       |  | 2004      
|                                        |  |                   |     |            |  |           
|Number of stores at beginning of period |  |                   | 209 |            |  |            | 202 |   |  |  | 233 |  
|Stores opened or acquired during period |  |                   | 14  |            |  |            | 41  |   |  |  | 3   |  
|Stores closed during period             |  |                   | (21 | )          |  |            | (10 | ) |  |  | (21 | )
|                                        |  |                   |     |            |  |            |     |   |  |  |     |  
|Number of stores at end of period       |  |                   | 202 |            |  |            | 233 |   |  |  | 215 |  
|                                        |  |                   |     |            |  |            |     |   |  |  |     |  

Fiscal Year
Ended January 3, 2004 Compared to Fiscal Year Ended
January 4, 2003

Net sales.Net sales
decreased to $148.2 million in fiscal year 2003 from
$151.1 million in fiscal year 2002, a decrease of
$2.9 million. Net sales were negatively impacted by a weak
retail environment during the first quarter of 2003 related to
consumer concerns regarding the war in Iraq and the closure of
19 stores. In the second and third quarters of 2003, sales
were negatively impacted by teenage customer demand for low
priced flip-flops. Net sales were positively impacted by the
inclusion of sales from the 33 former Sam & Libby
stores for the full year in 2003 compared to only three quarters
of 2002 and the reemergence of fashion trends during the fourth
quarter of 2003. Our comparable store sales for fiscal year 2003
decreased by 3.2% compared to fiscal year 2002. Comparable store
sales for the fourth quarter of fiscal year 2003 increased by
4.0% compared to the fourth quarter of fiscal year 2002.

Gross profit.Gross
profit was $45.1 million in both fiscal year 2003 and
fiscal year 2002. Gross profit for the first three quarters of
2003 decreased $1.9 million compared to the first three
quarters of 2002, primarily due to increases in occupancy and
buying expenses. Gross profit in the fourth quarter of fiscal
year 2003 increased $1.9 million over the fourth quarter of
fiscal year 2002, reflecting improved markdown experience

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and shrinkage control. As a percentage of sales,
gross profit increased to 30.5% in fiscal year 2003 from 29.9%
in fiscal year 2002.


Selling expense.Selling expense decreased to $29.5 million in fiscal year
2003 from $30.8 million in fiscal year 2002, a decrease of
$1.3 million. This decrease was primarily attributable to
more effective store payroll management in fiscal year 2003,
partially offset by a $500,000 increase in depreciation and
amortization expense related to store fixtures and leaseholds.

General and administrative
expense.General and administrative
expense increased to $11.9 million in fiscal year 2003 from
$11.4 million in fiscal year 2002, an increase of $500,000.
The increase was due to increased incentive compensation
resulting from the Companys improved profitability in 2003.

Income (loss) before cumulative effect of
change in accounting.Our income
before cumulative effect of change in accounting increased to
$1.7 million for fiscal year 2003 from a loss of $500,000
in fiscal year 2002, an improvement of $2.2 million. The
change was primarily related to the nonrecurring write off of
deferred initial public offering costs of $1.7 million in
fiscal year 2002.

Net income.We had
net income of $1.7 million in fiscal year 2003 down from
net income of $2.3 million in fiscal year 2002. Net income
for 2002 reflects $2.8 million of income related to the
cumulative effect of change in accounting for goodwill. If we
had been taxed as a C corporation, our net income for
fiscal year 2003 would have been $1.1 million and our net
income for fiscal year 2002 would have been $1.3 million.
For more information regarding pro forma income taxes, please
see Note 12 of the Financial Statements.

Fiscal Year
Ended January 4, 2003 Compared to Fiscal Year Ended
January 5, 2002

Net sales.Net sales
increased to $151.1 million in fiscal year 2002 from
$140.8 million in fiscal year 2001, an increase of
$10.3 million. Net sales were positively impacted by the
additional store locations acquired. An increase in sales of
national branded products, which have higher average prices than
our private label products, was more than offset by a
significant decline in boot and bootie sales in the second half
of the year.

During fiscal year 2002, we opened 41 new stores
and closed 10 stores compared to fiscal year 2001, in which we
opened 14 new stores and closed 21 stores. Of the new stores
that we opened in fiscal year 2002, 33 were acquired from SLJ
Retail LLC. The other eight stores were new locations. Our
comparable store sales for the 52-week fiscal year 2002
decreased by 4.4% compared to the 53-week fiscal year 2001.

Gross profit.Gross
profit increased to $45.1 million in fiscal year 2002 from
$42.6 million in fiscal year 2001, an increase of
$2.5 million. As a percentage of net sales, gross profit
decreased to 29.9% in fiscal year 2002 from 30.2% in fiscal year
2001. The decline in gross profit as a percentage of net sales
was attributable to a continued increase in the national branded
component of our merchandise mix, which has a lower gross margin
percentage, but a higher average selling price, than our private
label products, and to an increase in occupancy costs due to a
decrease in same store sales.

Selling expense.Selling expense increased $3.7 million to
$30.8 million in fiscal year 2002 from $27.1 million
in fiscal year 2001. The increase in selling expense resulted
from the costs of operating an increased number of stores in
fiscal year 2002 compared to fiscal year 2001.

General and administrative
expense.General and administrative
expense increased to $11.4 million in fiscal year 2002 from
$10.1 million in fiscal year 2001, an increase of
$1.3 million, primarily as a result of an increase in
depreciation expense for new information systems and new and
remodeled stores, partially offset by reductions in management
bonuses in fiscal year 2002.

Write-off of expenses related to initial
public offering.As a result of a
delay in our initial public offering, we took a charge of
$1.7 million in initial public offering costs in fiscal
year 2002.

Interest expense.Interest expense increased to $1.6 million in fiscal year
2002 from $1.1 million in fiscal year 2001, an increase of
$500,000, primarily due to interest on the $4.9 million of
subordinated convertible

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debentures issued in April 2002, partially offset
by a decrease in the average interest rate paid on our revolving
credit facility.


Cumulative effect of change in
accounting.As a result of our
adoption of SFAS No. 142 Goodwill and Other
Intangible Assets in fiscal year 2002, the approximately
$2.8 million balance of the excess of acquired net assets
over cost related to the Bakers acquisition was recognized in
income as a cumulative effect of an accounting change in the
fiscal year 2002.

Net income.Net
income decreased to $2.3 million in fiscal year 2002 from
$5.0 million in fiscal year 2001, a decrease of
$2.7 million. If we had been taxed as a C corporation, our
net income for fiscal years 2002 and 2001 would have been
$1.3 million and $3.3 million, respectively. For more
information regarding pro forma income taxes, please see
Note 12 in the Notes to the Financial Statements.

Seasonality and Quarterly
Fluctuations

The following table sets forth our summary
operating results for the quarterly periods indicated.

|                        |  |                                   |            |        |  |       |            |        |  |   |            |   |  |   |            | 
|----------------------- |  | --------------------------------- | ---------- | ------ |  | ----- | ---------- | ------ |  | - | ---------- | - |  | - | ---------- | 
|                        |  |                                  
|                        |  | Fiscal Year Ended January 5, 2002
|                        |  |                                  
|                        |  | First                             |            | Second |  | Third |            | Fourth
|                        |  |                                   |            |        |  |       |            |       
|Net sales               |  | $                                 | 33,164,841 |        |  | $     | 37,528,409 |        |  | $ | 31,940,160 |   |  | $ | 38,208,519 | 
|Gross profit            |  |                                   | 9,023,469  |        |  |       | 12,041,029 |        |  |   | 8,720,594  |   |  |   | 12,809,757 | 
|Operating expenses      |  |                                   | 8,923,018  |        |  |       | 8,994,310  |        |  |   | 8,721,270  |   |  |   | 9,521,727  | 
|Operating income (loss) |  |                                   | 100,451    |        |  |       | 3,046,719  |        |  |   | (676       | ) |  |   | 3,288,030  | 

|                        |  |                                   |            |        |  |       |            |        |  |   |            |   |  |   |            | 
|----------------------- |  | --------------------------------- | ---------- | ------ |  | ----- | ---------- | ------ |  | - | ---------- | - |  | - | ---------- | 
|                        |  |                                  
|                        |  | Fiscal Year Ended January 4, 2003
|                        |  |                                  
|                        |  | First                             |            | Second |  | Third |            | Fourth
|                        |  |                                   |            |        |  |       |            |       
|Net sales               |  | $                                 | 32,059,325 |        |  | $     | 39,405,673 |        |  | $ | 36,259,634 |   |  | $ | 43,423,178 | 
|Gross profit            |  |                                   | 10,075,453 |        |  |       | 11,892,540 |        |  |   | 8,502,972  |   |  |   | 14,665,093 | 
|Operating expenses      |  |                                   | 9,341,152  |        |  |       | 10,932,410 |        |  |   | 11,101,821 |   |  |   | 12,681,844 | 
|Operating income (loss) |  |                                   | 734,301    |        |  |       | 960,130    |        |  |   | (2,598,850 | ) |  |   | 1,983,249  | 

|                        |  |                                   |            |        |  |       |            |        |  |   |            |   |  |   |            | 
|----------------------- |  | --------------------------------- | ---------- | ------ |  | ----- | ---------- | ------ |  | - | ---------- | - |  | - | ---------- | 
|                        |  |                                  
|                        |  | Fiscal Year Ended January 3, 2004
|                        |  |                                  
|                        |  | First                             |            | Second |  | Third |            | Fourth
|                        |  |                                   |            |        |  |       |            |       
|Net sales               |  | $                                 | 31,909,958 |        |  | $     | 38,310,685 |        |  | $ | 34,274,081 |   |  | $ | 43,728,829 | 
|Gross profit            |  |                                   | 7,718,475  |        |  |       | 11,518,141 |        |  |   | 9,348,082  |   |  |   | 16,581,413 | 
|Operating expenses      |  |                                   | 10,539,622 |        |  |       | 10,328,960 |        |  |   | 9,917,497  |   |  |   | 10,877,283 | 
|Operating income (loss) |  |                                   | (2,821,147 | )      |  |       | 1,189,181  |        |  |   | (569,415   | ) |  |   | 5,704,130  | 

Our operating results are subject to significant
seasonal variations. Our quarterly results of operations have
fluctuated, and are expected to continue to fluctuate in the
future, as a result of these seasonal variances, in particular
our principal selling seasons. We have five principal selling
seasons: transition (post-holiday), Easter, back-to-school, fall
and holiday. Sales and net income in our second and fourth
quarters are typically much stronger than in our first and third
quarters.

In addition to our normal seasonal fluctuation,
some events, in particular the Easter holiday, shift between
fiscal quarters in some years due to the nature of our fiscal
year. This shift will influence our quarterly comparable
results. For example, Easter occurred during the first quarter
of fiscal year 2002, while in most years, including fiscal years
2001 and 2003, Easter occurred during the second quarter.

Quarterly comparisons may also be affected by the
timing of sales and costs associated with opening of new stores,
including acquisitions.

Liquidity and Capital Resources

Our cash requirements are primarily for working
capital, capital expenditures and principal payments on our debt
and capital lease obligations. In connection with our prior
S corporation status, we have also made

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cash distributions to our shareholders to cover
their taxes. Historically, these needs for cash have been met by
cash flows from operations, borrowings under our revolving
credit facility and sales of our subordinated debt. At
January 3, 2004, we had negative working capital of
$771,000 and $5.6 million of unused borrowing capacity
under our revolving credit facility based upon our borrowing
base calculation.


On February 10, 2004, we consummated our
initial public offering with the sale of 2,160,000 shares
of common stock. On March 12, 2004, we sold an additional
324,000 shares in satisfaction of the underwriters
over-allotment option. We received net proceeds of approximately
$15.5 million in the offering. See
 Initial Public Offering below for more
information. We anticipate that our cash flows from operations,
borrowings under our revolving credit facility, and proceeds
from our initial public offering will be sufficient for our
operating cash requirements for at least the next 12 months
and will allow us to further execute our business plan,
including our planned expansion.

Operating
activities

For fiscal year 2003, our net cash provided by
operations was $8.8 million compared to net cash used by
operations of $500,000 in fiscal year 2002, an increase of
$9.3 million. The primary causes of this increase were
increased operating income in 2003 and a $1.5 million
reduction in inventories in 2003 compared to a $3.0 million
increase in inventories in 2002. The year-to-year inventory
changes relate primarily to changes in the number of stores open
at the end of each year.

We are committed under noncancelable operating
leases for all store and office spaces, expiring at various
dates through 2018. These leases generally provide minimum rent
plus payments for real estate taxes and operating expenses,
subject to escalations. Some of our leases also require us to
pay contingent rent based on sales. As of January 3, 2004,
our lease payment obligations under these leases totaled
$15.8 million for fiscal year 2004, and an aggregate of
$91.6 million through 2018.

Investing
activities

In fiscal year 2003, our cash used in investing
activities amounted to $2.3 million compared to
$6.6 million for fiscal year 2002. During each year, cash
used in investing activities consisted of capital expenditures
for furniture, fixtures and leasehold improvements for both new
and remodeled stores, and new information systems. In addition
to these cash expenditures, we entered into capital lease
arrangements valued at $1.0 million in 2003 and
$0.7 million in 2002 related to our point of sale system.

Our future capital expenditures will depend
primarily on the number of new stores we open, the number of
existing stores we remodel and the timing of these expenditures.
We plan to open approximately 15 new stores in fiscal year 2004
and 30 to 35 new stores in fiscal year 2005. Net capital
expenditures for a new store are expected to average
approximately $200,000, including point of sale equipment. The
average inventory investment, net of payables, for a new store
is expected to range from approximately $45,000 to $75,000,
depending on the size and sales expectation of the store and the
timing of the new store opening. Pre-opening expenses, such as
marketing, salaries, supplies and utilities are expensed as
incurred. Remodeling the average existing store into the new
format typically costs approximately $200,000. For stores that
do not warrant this level of investment, the costs to remodel
are approximately $40,000.

In connection with store openings and
remodelings, we have projected our capital expenditure needs in
fiscal year 2004 to be approximately $6.0 million to
$7.0 million.

Financing
activities

In fiscal year 2003, our net cash used by
financing activities was $5.9 million compared to net cash
provided by financing activities of $6.6 million in fiscal
year 2002. In fiscal year 2003, we used cash to reduce the
balance on our revolving notes payable by $4.9 million and
make principal payments on our capital lease and debt
obligations. In fiscal year 2002, we made net borrowings on our
revolving note payable of $4.4 million and issued
$4.9 million in subordinated debt and we used cash to make
principal payments on our capital lease

33



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and debt obligations and make $1.8 million
of distributions to our shareholders related to their
S corporation tax obligations.


As of January 3, 2004, the aggregate
payments remaining on our capital lease obligations were
approximately $3.2 million through 2008, including
$1.4 million due in fiscal year 2004.

We have a $25.0 million secured revolving
credit facility with Fleet Retail Finance, Inc. Amounts
borrowed under the facility bear interest at a rate equal to the
base rate (as defined in the agreement) plus 0.75% per
annum, which was equal to 4.75% per annum at January 3.
2004. If contingencies identified in the agreement occur, the
interest rate may be increased by an additional two percentage
points. The revolving credit agreement also allows us to apply
an interest rate of LIBOR (as defined in the agreement) plus
3.00% per annum to a designated portion of the outstanding
balance for a minimum of 30 days by entering into a basis
swap. The aggregate amount that we may borrow under the
agreement at any time is established by a formula, which is
based on our inventory level but cannot be greater than
$25.0 million. The agreement is secured by substantially
all of our assets. In connection with the administration of the
agreement, we are required to pay a facility fee of
$3,000 per month, to a maximum aggregate facility fee of
$180,000. In addition, we must pay 0.25% per annum of the
remaining unborrowed loan capacity under the agreement. If
contingencies related to early termination of the credit
facility were to occur, or if we were to request and receive an
accommodation from the lender in connection with the facility,
we may be required to pay additional fees. At January 3,
2004, we had $2.2 million outstanding under the revolving
credit facility, at a 4.28% effective interest rate per annum,
and approximately $5.6 million of unused borrowing capacity
available under the revolving credit facility, based upon our
borrowing base calculations.

In the first quarter of fiscal year 2003, we
entered into an amendment to our revolving credit agreement to
provide a sublimit facility of up to an additional
$2.0 million, subject to reductions over time and to
borrowing base restrictions as defined in the agreement. The
sublimit facility is payable in full at maturity on
February 20, 2004. The sublimit facility also provides for
a minimum EBITDA covenant (as defined in the agreement), a
minimum required availability covenant, and a limitation on
capital expenditures for fiscal year 2003. There were no amounts
outstanding under the sublimit facility at January 3, 2004.

Our credit facility includes financial and other
covenants relating to, among other things, our level of capital
expenditures, compliance with our business plan, prohibiting a
change of control, including any person or group acquiring
beneficial ownership of 30% or more of our common stock or our
combined voting power (as defined in the credit facility),
maintaining a minimum availability, maintaining a minimum net
worth, prohibiting new debt, and restricting dividends and the
repurchase of our stock. In the event that we were to violate
any of these covenants, or violate the provisions of any of our
other lending arrangements or of more than 10% of our leases,
the lender would have the right to accelerate repayment of all
amounts outstanding under the agreement, or to commence
foreclosure proceedings on our assets. The credit
facilitys maturity date is January 5, 2005. We repaid
the outstanding balance on the credit facility during the first
quarter of 2004 from the proceeds of our IPO.

We have two other long-term debt commitments
outstanding at January 3, 2004, both of which are
subordinate to our credit facility. One is a subordinated note,
which requires quarterly principal and interest payments of up
to $50,000 over the term of the loan through January 2008. This
note is secured by a security agreement and a $393,000 standby
letter of credit. The balance on this loan was approximately
$360,000 at January 3, 2004. The other long-term commitment
consists of a $500,000 secured subordinated note payable to a
venture capital institution, which is due at maturity on
March 1, 2004 and a related warrant to purchase
76,907 shares of our common stock, which is redeemable for
$850,000 on March 1, 2004. All of these obligations were
repaid during the first quarter of 2004 from the proceeds from
our IPO.

We sold $4.9 million of our subordinated
convertible debentures due 2007 in a private offering during the
first quarter of fiscal year 2002. We used the net proceeds from
the sale of the debentures to finance the Sam & Libby
acquisition, to repay a portion of the amounts borrowed under
our credit facility and to provide capital for future store
openings. On January 2, 2004, we exchanged all of our
subordinated convertible debentures for new subordinated
convertible debentures in the same aggregate principal amount.
The new subordinated convertible debentures bear interest at 9%,
increasing over time to 11.0% per annum. The new

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subordinated convertible debentures mature, if
not earlier converted, on April 4, 2007. The new
subordinated convertible debentures automatically converted into
an aggregate of 653,331 shares of our common stock at a
fixed exercise price of $7.50 upon our IPO. We have registered
the common stock issued in connection with the conversion of the
subordinated convertible debentures. The holders of these shares
have agreed not to sell these shares until June 30, 2004
without the consent of Ryan Beck & Co., Inc.


Initial
Public Offering

On February 10, 2004, we consummated our
initial public offering with the sale of 2,160,000 shares
of common stock. On March 12, 2004, we sold an additional
324,000 shares of common stock in connection with the
exercise, by the underwriters, of the full over-allotment
option. All of the shares of common stock sold to the public
were sold at a price of $7.75 per share. The aggregate
gross proceeds from the initial public offering were
approximately $19.3 million. The net proceeds to us from
the offering were approximately $15.5 million. We have used
the net proceeds received from the initial public offering to
repay $4.9 million on our revolving credit agreement,
$0.9 million to redeem outstanding warrants, and
$0.9 million to repay subordinated debt. We intend to use
approximately $2.7 million of the net proceeds from the
offering to open 15 new stores, all in our new format, in fiscal
year 2004, and $3.6 million of the net proceeds to remodel
27 stores, including 17 in the new format, in fiscal year
2004. We expect to use the remaining net proceeds for working
capital requirements and other general corporate purposes,
including the purchase of inventory in the ordinary course of
business. Pending use of the proceeds, we may invest in
short-term, investment-grade interest bearing instruments.

In connection with the closing of our initial
public offering, we sold to the representatives of the
underwriters and their designees warrants to purchase up to an
aggregate of 216,000 shares of common stock at an exercise
price equal to $12.7875 per share, subject to antidilution
adjustments, for a purchase price of $0.0001 per warrant
for the warrants. The warrants are restricted from sale,
transfer, assignment, pledge or hypothecation by any person
until February 5, 2005, except to some directors, officers,
employees and affiliates of the representatives of the
underwriters. The warrant holders may exercise the warrants as
to all or any lesser number of the underlying shares of common
stock at any time during the four-year period commencing on
February 5, 2005. In addition, we are required for a five
year period, (i) at the request of a majority of the
warrant holders, to use our best efforts to file one
registration statement, at our expense, covering the sale of the
shares of common stock underlying the warrants and (ii) at
the request of any holders of warrants, to file additional
registration statements covering the shares of common stock
underlying the warrants at the expense of those holders. We are
required to maintain the effectiveness of any demand
registration statement for up to nine consecutive months. Except
for the registration rights that we have granted to the prior
holders of our subordinated convertible debentures, we agreed
not to make any registered offering of our securities, with
limited exceptions, or to include any other shares on any such
demand registration statement, at any time that we are required
to maintain the effectiveness of a demand registration
statement, without first obtaining the consent of a majority of
the holders of warrants and warrant shares that are not then
held by the public or by us or other excepted persons who have a
relationship with us and our affiliates. In addition, we are
required to include the shares of common stock underlying the
warrants in any appropriate registration statement we file
during the six years following the consummation of the initial
public offering. We have also agreed not to offer, sell or grant
any securities convertible or exchangeable for common stock to
any of our directors, officers or employees at an exercise price
less that $7.75 per share for a period of three years after
February 5, 2004, without the prior written consent of the
representatives.

We also entered into a financial advisory
agreement with Ryan Beck, under which we have agreed to retain
Ryan Beck as our financial advisor in connection with any
strategic or financial transactions or other identified
activities that we may undertake during the two-year term of the
agreement. In exchange for these services, we have agreed to pay
Ryan Beck a percentage of the total consideration or transaction
value calculated as set forth in the agreement, related to such
possible future transactions (with some exceptions) and to
reimburse Ryan Beck for its reasonable expenses. We are not
obligated under the agreement to enter into any transaction, and
we have no current plans to do so during the term of the
agreement, which Ryan Beck may cancel at any time upon
10 days notice to us.

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Our ability to meet our current and anticipated
operating requirements will depend on our future performance,
which, in turn, will be subject to general economic conditions
and financial, business and other factors, including factors
beyond our control.

Off-Balance Sheet Arrangements

At January 3, 2004 and January 4, 2003,
we did not have any relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as
structured finance or special purpose entities or variable
interest entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes. We are, therefore, not
materially exposed to any financing, liquidity, market or credit
risk that could otherwise have arisen if we had engaged in such
relationships.

Contractual Obligations

The following table summarizes our contractual
obligations as of January 3, 2004:

|                               |  |                        |             |           |  |           |            |           |  |         |            |  |  |   |            |  |  |   |            | 
|------------------------------ |  | ---------------------- | ----------- | --------- |  | --------- | ---------- | --------- |  | ------- | ---------- |  |  | - | ---------- |  |  | - | ---------- | 
|                               |  |                       
|                               |  | Payments Due in Period
|                               |  |                       
|                               |  |                        |             | Less Than |  |           |            | More Than
|Contractual Obligations        |  | Total                  |             | 1 Year    |  | 1-3 Years |            | 3-5 Years |  | 5 Years
|                               |  |                        |             |           |  |           |            |           |  |        
|Long-term debt obligations(1)  |  | $                      | 8,301,135   |           |  | $         | 1,961,000  |           |  | $       | 1,305,385  |  |  | $ | 5,034,750  |  |  | $ |           | 
|Capital lease obligations(2)   |  |                        | 3,200,932   |           |  |           | 1,398,052  |           |  |         | 1,471,558  |  |  |   | 331,322    |  |  |   |           | 
|Operating lease obligations(3) |  |                        | 91,604,694  |           |  |           | 15,804,333 |           |  |         | 26,630,072 |  |  |   | 19,619,058 |  |  |   | 29,551,231 | 
|Purchase obligations(4)        |  |                        | 24,382,978  |           |  |           | 24,108,330 |           |  |         | 197,584    |  |  |   | 67,548     |  |  |   | 9,516      | 
|Other long-term liabilities(5) |  |                        | 2,137,300   |           |  |           | 271,800    |           |  |         | 1,087,200  |  |  |   | 778,300    |  |  |   |           | 
|Total                          |  | $                      | 129,627,039 |           |  | $         | 43,543,515 |           |  | $       | 30,691,799 |  |  | $ | 25,830,978 |  |  | $ | 29,560,747 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes payment obligations relating to our
    subordinated debt, our subordinated convertible debentures, and
    our stock purchase warrants. Subsequent to January 4, 2003,
    the subordinated convertible debentures converted into shares of
    our common stock upon our IPO and we repaid the subordinated
    debt and redeemed the stock purchase warrants with the proceeds
    from the IPO.
|   
|(2) | Includes payment obligations relating to our
    point of sale hardware and software leases.                                                                                                                                                                                                                                                                                                                
|   
|(3) | Includes minimum payment obligations relating to
    our store leases.                                                                                                                                                                                                                                                                                                                                      
|   
|(4) | Includes merchandise on order and payment
    obligations relating to miscellaneous service contracts.                                                                                                                                                                                                                                                                                                      
|   
|(5) | Includes our obligation to redeem certain shares
    of stock. This obligation expired upon our IPO.                                                                                                                                                                                                                                                                                                        

Recent Accounting Pronouncements

In April 2002, the Financial Accounting Standards
Board (FASB) issued SFAS No. 145, Rescission
of FASB Statements No. 4, 44 and 62, Amendment of FASB
Statement No. 13, and Technical Corrections.
SFAS No. 145 requires, in most cases, gains and losses
on extinguishments of debt to be classified as income or loss
from continuing operations, rather than as extraordinary items.
The statement is effective for fiscal years beginning after
May 15, 2002. Upon adoption of SFAS No. 145, we
reclassified previously recognized extraordinary gains and
losses from the early extinguishment of debt.

In January 2003, the FASB issued Interpretation
No. 46 (FIN 46), Consolidation of Variable Interest
Entities, which clarifies the application of Accounting
Research Bulletin No. 51, Consolidated Financial
Statements, relating to consolidation of variable interest
entities (VIEs). The provisions of FIN 46 became effective
immediately for VIEs created after January 31, 2003. The
provisions of FIN 46 for VIEs created on or before
January 31, 2003 were delayed until December 31, 2003
by FASB Staff Position No. FIN 46-6, Effective Date
of FASB Interpretation No. 46, Consolidation of Variable
Interest Entities, issued in October 2003. We do not believe
FIN 46 will have a material impact on our financial
statements.

36



---



##### 





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

Our earnings and cash flows are subject to
fluctuations due to changes in interest rates. Our financing
arrangements include both fixed and variable rate debt in which
changes in interest rates will impact the fixed and variable
rate debt differently. A change in the interest rate of fixed
rate debt will impact the fair value of the debt, whereas a
change in the interest rate on the variable rate debt will
impact interest expense and cash flows. Management does not
believe that the risk associated with changing interest rates
would have a material effect on our results of operations or
financial condition.

Impact of Inflation

Overall, we do not believe that inflation has had
a material adverse impact on our business or operating results
during the periods presented. We cannot give assurance, however,
that our business will not be affected by inflation in the
future.



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

Our consolidated financial statements together
with the report of the independent auditors are set forth
beginning on page F-1 and are incorporated herein by this
reference.



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

None.



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

Disclosure Controls and
Procedures:The Companys
management, with the participation of the Companys Chief
Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of the Companys disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended
(the Exchange Act)), as of the end of the period
covered by this report. Any controls and procedures, no matter
how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives. Based on
such evaluation, the Companys Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of
such period, the Companys disclosure controls and
procedures provided reasonable assurance that the disclosure
controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information
required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act.

Internal Control Over Financial
Reporting:The Companys
management, with the participation of the Companys Chief
Executive Officer and Chief Financial Officer, also conducted an
evaluation of the Companys internal control over financial
reporting to determine whether any changes occurred during the
Companys fourth fiscal quarter ended January 3, 2004
that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over
financial reporting. Based on that evaluation, there has been no
such change during the Companys fourth fiscal quarter.

PART III.



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

Information set forth in the Companys 2004
Proxy Statement under the caption Information Regarding
Board of Directors and Committees is hereby incorporated
by reference. No other sections of the 2004 Proxy Statement are
incorporated herein by this reference. The following information
with respect to the executive officers of the Company on
March 31, 2004 is included pursuant to Instruction 3
of Item 401(b) of Regulation S-K.

37



---



##### 



Executive Officers of the Registrant

Certain information concerning the executive
officers of Bakers is set forth below:

|                         |  |     |    |          |  |                                                                               
|------------------------ |  | --- | -- | -------- |  | ------------------------------------------------------------------------------
|Name                     |  | Age |    | Position
|                         |  |     |    |         
|Peter A. Edison          |  |     | 48 |          |  | Chairman of the Board and Chief Executive Officer                             
|Michele A. Bergerac      |  |     | 48 |          |  | President and Director                                                        
|Mark D. Ianni            |  |     | 43 |          |  | Executive Vice President  General
    Merchandise Manager                    
|Lawrence L. Spanley, Jr. |  |     | 57 |          |  | Chief Financial Officer, Vice
    President  Finance, Treasurer and Secretary
|Stanley K. Tusman        |  |     | 57 |          |  | Executive Vice President  Inventory
    and Information Management           
|Joseph R. Vander Pluym   |  |     | 52 |          |  | Executive Vice President  Stores                                             

Peter A. Edisonhas
over 26 years of experience in the fashion and apparel
industry. Between 1986 and 1997, Mr. Edison served as
director and as an officer in various divisions of Edison
Brothers Stores, Inc., including serving as the Director of
Corporate Development for Edison Brothers, President of Edison
Big & Tall, and as President of Chandlers/ Sacha of
London. He also served as Director of Marketing and Merchandise
Controller, and in other capacities, for Edison Shoe Division.
Mr. Edison received his M.B.A. in 1981 from Harvard
Business School, and currently serves chairman of the board of
directors of Dave & Busters, Inc. He has served as
our Chairman of the Board and Chief Executive Officer since
October 1997.

Michele A. Bergerachas over 26 years of experience
in the junior and contemporary womens shoe business
including a 17-year career in various divisions of the May
Company and five years with Bakers. Ms. Bergerac started at
Abraham & Straus as an Assistant Buyer. Her buying and
merchandising career with the May Company included positions at
G. Fox, May Corporate, May Company California and Foleys,
where she was the Vice President of Footwear, prior to being
hired by Edison Brothers as President of Edison Footwear Group
in 1998. Ms. Bergerac has served as our President since
June 1999.

Mark D. Iannihas
over 23 combined years with Edison Brothers and Bakers as an
experienced first-cost buyer, having held various positions,
including Merchandiser, Associate Buyer, Senior Dress Shoe
Buyer, Tailored Shoe Buyer and Divisional Merchandise Manager of
Dress Shoes prior to his current position of General Merchandise
Manager. Mr. Ianni has served as our Executive Vice
President  General Merchandise Manager since June
1999.

Lawrence L.
Spanley, Jr.has over
30 years of retail accounting and finance experience.
Mr. Spanley spent much of his career at Senack Shoes, a
division of Interco. Since 1994, Mr. Spanley has served as
either our Chief Financial Officer or our Vice
President  Finance, and at various times as our
Treasurer and Secretary.

Stanley K. Tusmanhas over 30 years of financial
analysis and business experience. Mr. Tusman served as the
Vice President  Director of Planning &
Allocation for the 500-store Edison Footwear Group, the Vice
President of Retail Systems Integration for the 500-store
Genesco Retail, Director of Merchandising, Planning and
Logistics for the 180-store Journeys and the Executive
Director of Financial Planning for the 400-store Claires
Boutiques chains. Mr. Tusman has served as our Executive
Vice President  Inventory and Information Management
since June 1999.

Joseph R. Vander Pluymis a 29-year veteran of store
operations with a track record of building and motivating high
energy, high service field organizations. Mr. Vander Pluym
spent 20 years at the 700-store Merry Go Round chain, where
he served as Executive Vice President of Stores for Merry Go
Round and Boogies Diner Stores. He served as Vice
President of Stores for Edison Footwear Group for two years and
as Vice President of Stores for Lucky Brand Apparel Stores for
approximately six months prior to joining Bakers.
Mr. Vander Pluym has served as either our Vice
President  Stores or our Executive Vice
President  Stores since June 1999.

38



---



##### 



Edison Brothers Stores, Inc. filed a
petition for reorganization under Chapter 11 of the United
States Bankruptcy Code on November 3, 1995. After an
unsuccessful reorganization, Edison Brothers refiled for
bankruptcy on March 9, 1999 and immediately commenced a
liquidation of all its assets.

Each of the executive officers has entered into
an employment agreement with the Company. Information with
respect to the executive officers set forth in the
Companys 2004 Proxy Statement under the caption
Executive Compensation  Employment Contracts,
Termination of Employment and Change-in-Control
Arrangements is incorporated herein by this reference.

Section 16(a) Beneficial Ownership
Reporting Compliance

Information with respect to compliance with
Section 16(a) of the Securities Exchange Act of 1934, as
amended, set forth in the Companys 2004 Proxy Statement
under the caption Section 16(a) Beneficial Ownership
Reporting Compliance is incorporated herein by this
reference. No other sections of the 2004 Proxy Statement are
incorporated by this reference.

Code of Ethics

The Company has adopted a Code of Business
Conduct (the Code of Ethics) that applies to its
principal executive officer, principal financial officer,
principal accounting officer or controller, or persons
performing similar functions, as well as directors, officers and
employees of the Company. The Code of Ethics has been filed as
Exhibit 14.1 to this Annual Report on Form 10-K. The
information set forth under the caption Information
Regarding Board of Directors and Committees  Code of
Business Conduct in the Companys 2004 Proxy
Statement is incorporated herein by this reference. No other
sections of the 2004 Proxy Statement are incorporated by this
reference.



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

The information set forth in the Companys
2004 Proxy Statement under the captions Information
Regarding Board of Directors and Committees 
Compensation of Directors, Information Regarding
Board of Directors and Committees  Compensation
Committee Interlocks and Insider Participation and
Executive Compensation are hereby incorporated by
reference. No other sections of the 2004 Proxy Statement are
incorporated herein by this reference.



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

The information set forth in the Companys
2004 Proxy Statement under the caption Stock Ownership of
Management and Certain Beneficial Owners is hereby
incorporated by reference. No other sections of the 2004 Proxy
Statement are incorporated herein by this reference.

Equity Compensation Plan Information

We have only the Baker Footwear Group, Inc.
2003 Stock Option Plan (the 2003 Plan) under which
our equity securities are authorized for issuance to employees
or non-employee directors in exchange for goods or services. The
2003 Plan was approved by our shareholders prior to the
consummation of our initial public offering.

39



---



##### 



The following table shows for this plan the
number of shares of common stock to be issued upon exercise of
options outstanding at March 1, 2004, the weighted average
exercise price of those options, and the number of shares of
common stock remaining available for future issuance, excluding
shares to be issued upon exercise of outstanding options. We do
not have any equity compensation plans assumed by us in mergers.

Equity Compensation Plan Table

|                                                              |       |                  |         |              |  |                       |      |      |  |  |         |         | 
|------------------------------------------------------------- | ----- | ---------------- | ------- | ------------ |  | --------------------- | ---- | ---- |  |  | ------- | ------- | 
|                                                              |       | Number of        |         | Weighted-    |  | Number of Securities 
|                                                              |       | Securities to be |         | Average      |  | Remaining Available  
|                                                              |       | Issued Upon      |         | Exercise     |  | for Future Issuance  
|                                                              |       | Exercise of      |         | Price of     |  | Under Equity         
|                                                              |       | Outstanding      |         | Outstanding  |  | Compensation Plans   
|                                                              |       | Options,         |         | Options,     |  | (Excluding Securities
|                                                              |       | Warrants         |         | Warrants and |  | to be Issued Upon    
|Plan Category                                                 |       | and Rights       |         | Rights       |  | Exercise)            
|                                                              |       |                  |         |              |  |                      
|Equity compensation plans approved by security
    holders(1) |       |                  | 573,492 |              |  | $                     | 4.13 |      |  |  | 295,500 |        
|                                                              |       |                  |         |              |  |                       |      |      |  |  |         |        
|                                                              | Total |                  |         | 573,492      |  |                       | $    | 4.13 |  |  |         | 295,500 | 
|                                                              |       |                  |         |              |  |                       |      |      |  |  |         |        



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Prior to our initial public offering, we had a
    predecessor stock option plan in effect which allowed us to
    grant nonqualified stock options. Under the 2003 Plan, which was
    approved by our shareholders as of January 3, 2004, all of
    the options granted under the predecessor stock option plan are
    deemed to be covered by the 2003 Plan. All of the option holders
    under the predecessor plan also agreed to amend their option
    award agreements to have their options governed by the 2003 Plan
    on generally the same terms and conditions. At March 1,
    2004, under the 2003 Plan, there was a total of
    268,992 shares of common stock to be issued upon exercise
    of outstanding and fully exercisable options at a weighted
    average exercise price of $0.01 per share. On
    February 10, 2004, after the consummation of our initial
    public offering, we granted nonqualified stock options to
    purchase 304,500 shares of our common stock to certain of
    our employees and directors at an exercise price of
    $7.75 per share, the initial public offering price,
    pursuant to the 2003 Plan. The options vest in five equal annual
    installments beginning on the first anniversary of the date of
    grant. As a result, as of March 1, 2004, there were an
    additional 304,500 shares of common stock to be issued upon
    exercise of outstanding options granted having a weighted
    average exercise price of $7.75 per share. As of the same
    date, 295,500 shares of common stock remain available for
    future issuance (excluding shares to be issued upon exercise of
    outstanding options).

The information set forth under the caption
Executive Compensation  2003 Stock Option
Plan in the Companys Proxy Statement is incorporated
herein by reference. No other sections of the 2004 Proxy
Statement are incorporated by this reference.



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

The information set forth under the caption
Certain Other Information Regarding Management in
the Companys 2004 Proxy Statement is hereby incorporated
by reference. No other sections of the 2004 Proxy Statement are
incorporated herein by this reference.



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

The section of the 2004 Proxy Statement entitled
Principal Accounting Fees and Services is hereby
incorporated by reference. No other sections of the 2004 Proxy
Statement are incorporated herein by this reference.

40



---



##### 



PART IV



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

(a) Documents filed as part of this Report:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Financial Statements: The financial
    statements commencing on page F-1. The Index to Financial
    Statements on page F-1 is incorporated herein by reference.                                                                                                                                                                                                                                                                                                                                      
|
| | 2. Financial Statement Schedules: All
    information schedules have been omitted as the required
    information is inapplicable, not required, or other information
    is included in the financial statement notes.                                                                                                                                                                                                                                                                                   
|
| | 3. Exhibits: The list of exhibits in the
    Exhibit Index to this Report is incorporated herein by
    reference. The following exhibits are management contracts and
    compensatory plans or arrangements required to be filed as
    exhibits to this Form 10-K: Exhibits 10.1, 10.2,
    10.11, 10.15, 10.16, 10.20 through 10.29 and 10.33 through
    10.38. The exhibits will be filed with the SEC but will not be
    included in the printed version of the Annual Report to
    Shareholders.

(b) No reports on Form 8-K were filed
during the fourth quarter ended January 3, 2004.

41



---



##### 



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.



| |                            
| | ---------------------------
| | BAKERS FOOTWEAR GROUP, INC.

April 1, 2004

| |    |                    
| | -- | -------------------
| | By | /s/ PETER A. EDISON

| |                                                                                    
| | -----------------------------------------------------------------------------------
| |                                                                                    
| | Peter A. Edison                                                                    
| | Chairman of the Board and Chief Executive
    Officer (Principal Executive Officer)

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        
|                            |  |                                                                                                                                                   |  |             
|*(Peter A. Edison)          |  | Chairman of the Board and Chief Executive
    Officer, Director (Principal Executive Officer)                                                     |  | Apr. 1, 2004
|                           
|*(Lawrence L. Spanley, Jr.) |  | Chief Financial Officer, Vice
    President  Finance, Treasurer and Secretary
    (Principal Financial Officer and Principal Accounting Officer) |  | Apr. 1, 2004
|                           
|*(Andrew N. Baur)           |  | Director                                                                                                                                          |  | Apr. 1, 2004
|                           
|*(Michele Bergerac)         |  | Director                                                                                                                                          |  | Apr. 1, 2004
|                           
|*(Timothy F. Finley)        |  | Director                                                                                                                                          |  | Apr. 1, 2004
|                           
|*(Harry E. Rich)            |  | Director                                                                                                                                          |  | Apr. 1, 2004
|                           
|*(Scott C. Schnuck)         |  | Director                                                                                                                                          |  | Apr. 1, 2004



---



|  |                                                                                                                                                                                                                                                
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Peter A. Edison, by signing his name hereto, does
    sign this document on behalf of the above noted individuals,
    pursuant to powers of attorney duly executed by such individuals
    which have been filed as an Exhibit to this Report.



| |                    
| | -------------------
| | /s/ PETER A. EDISON
| |                    
| | Peter A. Edison    
| | Attorney-in-Fact   

42



---



##### 



EXHIBIT INDEX

|        |       |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------- | ----- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 3.1   |             |  | Restated Articles of Incorporation of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        | 3.2   |             |  | Restated Bylaws of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        | 4.1   |             |  | Debenture Purchase Agreement dated April 4,
    2002 by and among the Company and the persons on the attached
    signature pages (incorporated by reference to Exhibit 4.1
    of the Companys Registration Statement on Form S-1
    (File No. 333-86332), filed April 16, 2002).                                                                                                                                                                                                                                                                              
|        | 4.1.1 |             |  | Convertible Debenture Exchange Agreement dated
    January 2, 2004 by and among the Company, Special
    Situations Private Equity Fund, L.P., Special Situations
    Cayman Fund, L.P., Special Situations Fund III, L.P.,
    Julian Edison, The Crown Advisors, LLC, Crown Investment
    Partners, L.P. and SWB Holdings, Inc. (incorporated by
    reference to Exhibit 4.1.1 of Amendment No. 3 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed January 8, 2004).                                                   
|        | 4.1.2 |             |  | Form of Subordinated Convertible Debenture dated
    January 2004 (included as Exhibit A to Exhibit 4.1.1).                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        | 4.2.1 |             |  | Second Registration Rights Agreement dated
    January 2, 2004 by and among the Company, Special
    Situations Fund III, L.P., Special Situations Cayman Fund,
    L.P., Special Situations Private Equity Fund, L.P., The Crown
    Advisors LLC, Crown Investment Partners, LP, SWB
    Holdings, Inc. and Julian Edison (incorporated by reference
    to Exhibit 4.2.1 of Amendment No. 3 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed January 8, 2004).                                                          
|        | 4.2.2 |             |  | Letter to Ryan Beck & Co., Inc. and
    BB&T Capital Markets, as representatives of the
    underwriters, relating to restrictions on transferability of
    common stock underlying convertible debentures, executed by all
    holders of subordinated convertible debentures.                                                                                                                                                                                                                                                                                  
|        | 4.3   |             |  | Representatives Warrant Agreement, dated
    February 10, 2004 by and among the Company, Ryan
    Beck & Co., Inc. and BB&T Capital Markets, a
    Division of Scott & Stringfellow, Inc.                                                                                                                                                                                                                                                                                                                                                                        
|        | 4.4   |             |  | Amended and Restated Intercreditor and
    Subordination Agreement dated January 2, 2004 by and among
    Fleet Retail Finance Inc., Special Situations Private Equity
    Fund, L.P., Special Situations Cayman Fund, L.P., Special
    Situations Fund III, L.P., Julian Edison, The Crown
    Advisors, LLC, Crown Investment Partners, L.P., SWB
    Holdings, Inc. and the Company (incorporated by reference
    to Exhibit 4.4 of Amendment No. 3 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed January 8, 2004).
|        | 4.5   |             |  | Letter to Ryan Beck & Co., Inc. and
    BB&T Capital Markets, as representatives of the
    underwriters, relating to restrictions on transferability of
    common stock, executed by all directors, officers and
    shareholders prior to the initial public offering.                                                                                                                                                                                                                                                                                         
|        | 4.6   |             |  | Form of common stock certificate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 4.7   |             |  | Warrants issued by the Company to representatives
    of the underwriters, or their designees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.1  |             |  | Bakers Footwear Group, Inc. 2003 Stock
    Option Plan (incorporated by reference to Exhibit 10.1 of
    Amendment No. 3 to the Companys Registration
    Statement on Form S-1 (File No. 333-86332), filed
    January 8, 2004).                                                                                                                                                                                                                                                                                                                                
|        | 10.2  |             |  | Bakers Footwear Group, Inc. Cash Bonus Plan
    (incorporated by reference to Exhibit 10.2 of Amendment
    No. 3 to the Companys Registration Statement on
    Form S-1 (File No. 333-86332), filed January 8,
    2004).                                                                                                                                                                                                                                                                                                                                       
|        | 10.3  |             |  | Promissory Note in favor of Sanford Weiss,
    individually and as agent for the Class B Shareholders
    dated October 31, 1997 in the principal amount of
    $1,000,000 (incorporated by reference to Exhibit 10.3 of
    Amendment No. 1 to the Companys Registration
    Statement on Form S-1 (File No. 333-86332), filed
    June 4, 2002).                                                                                                                                                                                                               
|        | 10.4  |             |  | Security Agreement in favor of Sanford Weiss, as
    agent for the Class B Shareholders dated October 31,
    1997 (included as Schedule 4 to Exhibit 10.3).                                                                                                                                                                                                                                                                                                                                                                                                      

43



---



##### 



|        |        |             |  |                                                                                                                                                                                                                                                                                                                                           
|------- | ------ | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |            
|Number  |        | Description
|        |        |            
|        | 10.5   |             |  | Limited Personal Guaranty given by Peter A.
    Edison in favor of Sanford Weiss, as agent for the Class B
    Shareholders dated October 31, 1997 (included as
    Schedule 5 to Exhibit 10.3).                                                                                                                                          
|        | 10.6   |             |  | Promissory Note in favor of Southwest Bank of
    St. Louis dated June 22, 1999 in the principal amount
    of $95,000 (incorporated by reference to Exhibit 10.6 to
    the Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed April 16, 2002).                                                                
|        | 10.7   |             |  | Promissory Note in favor of Mississippi Valley
    Capital Company dated June 22, 1999 in the principal amount
    of $500,000 (incorporated by reference to Exhibit 10.7 to
    the Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed April 16, 2002).                                                        
|        | 10.7.1 |             |  | Amended and Restated Subordinated Note in favor
    of Mississippi Valley Capital, LLC dated as of January 31,
    2003 in the principal amount of $500,000 (incorporated by
    reference to Exhibit 10.7.1 of Amendment No. 2 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed December 4, 2003).
|        | 10.8   |             |  | Warrant in favor of Mississippi Valley Capital
    Corporation to purchase shares of Class A Common Stock
    (incorporated by reference to Exhibit 10.8 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed April 16, 2002).                                                                         
|        | 10.8.1 |             |  | Amended and Restated Warrant in favor of
    Mississippi Valley Capital to purchase shares of Class A
    Common Stock (incorporated by reference to Exhibit 10.8.1
    of Amendment No. 2 to the Companys Registration
    Statement on Form S-1 (File No. 333-86332), filed
    December 4, 2003).                                     
|        | 10.9   |             |  | Concurrent Use Agreement dated June 23, 1999
    between the Company and Novus, Inc. (incorporated by
    reference to Exhibit 10.9 to the Companys
    Registration Statement on Form S-1 (File
    No. 333-86332), filed April 16, 2002).                                                                                              
|        | 10.10  |             |  | Assignment of Rights dated June 23, 1999
    between the Company and Edison Brothers Stores, Inc.
    (incorporated by reference to Exhibit 10.10 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed April 16, 2002).                                                                                
|        | 10.11  |             |  | Consultant Agreement dated May 18, 2001 by
    and between the Company and Mark H. Brown & Associates,
    LLC (incorporated by reference to Exhibit 10.11 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed April 16, 2002).                                                                       
|        | 10.12  |             |  | Warehousing Service Agreement dated
    April 28, 2000 between Brown Shoe Company, Inc. and
    the Company (incorporated by reference to Exhibit 10.12 of
    Amendment No. 1 to the Companys Registration
    Statement on Form S-1 (File No. 333-86332), filed
    June 4, 2002).                                                     
|        | 10.13  |             |  | Letter of Understanding Between Transmodal
    Associates, Inc. and Cargotrans Transitarios Internacionais
    (incorporated by reference to Exhibit 10.13 of Amendment
    No. 1 to the Companys Registration Statement on
    Form S-1 (File No. 333-86332), filed June 4,
    2002).                                                  
|        | 10.14  |             |  | Motor Transportation Contract dated
    October 25, 1999 between Combined Express, Inc. and
    the Company (incorporated by reference to Exhibit 10.14 of
    Amendment No. 1 to Registration Statement on Form S-1
    (File No. 333-86332), filed June 4, 2002).                                                                       
|        | 10.15  |             |  | Employment Agreement dated January 12, 2004
    by and between the Company and Peter Edison (incorporated by
    reference to Exhibit 10.15 of Amendment No. 4 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed January 20, 2004).                                                                 
|        | 10.16  |             |  | Employment Agreement dated April 1, 2002 by
    and between the Company and Michele Bergerac (incorporated by
    reference to Exhibit 10.16 of Amendment No. 4 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed January 20, 2004).                                                                
|        | 10.17  |             |  | Amended and Restated Loan and Security Agreement
    dated June 11, 2002 by and between Fleet Retail
    Finance, Inc. and the Company (incorporated by reference to
    Exhibit 10.17 of Amendment No. 2 to the Companys
    Registration Statement on Form S-1 (File
    No. 333-86332), filed December 4, 2003).                      

44



---



##### 



|        |         |             |  |                                                                                                                                                                                                                                                                                                                                                         
|------- | ------- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |         |            
|Number  |         | Description
|        |         |            
|        | 10.17.1 |             |  | First Amendment to Amended and Restated Loan and
    Security Agreement dated February 20, 2003 by and between
    Fleet Retail Finance, Inc. and the Company (incorporated by
    reference to Exhibit 10.17.1 of Amendment No. 2 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed December 4, 2003).           
|        | 10.17.2 |             |  | Amended & Restated Intercreditor
    Subordination Agreement among the Company, Mississippi Valley
    Capital, LLC and Fleet Retail Finance Inc. dated April 8,
    2003 (included in Exhibit 10.17.1).                                                                                                                                                
|        | 10.17.3 |             |  | Security Agreement in favor of Mississippi Valley
    Capital, LLC dated January 31, 2003, (included in
    Exhibit 10.17.1).                                                                                                                                                                                                                           
|        | 10.17.4 |             |  | Second Amendment to Amended and Restated Loan and
    Security Agreement dated as of November 26, 2003 by and
    between Fleet Retail Finance, Inc. and the Company
    (incorporated by reference to Exhibit 10.17.4 of Amendment
    No. 2 to the Companys Registration Statement on
    Form S-1 (File No. 333-86332), filed December 4,
    2003).
|        | 10.17.5 |             |  | Third Amendment and Waiver and Consent Agreement
    dated January 2, 2004 by and between Fleet Retail
    Finance, Inc. and the Company (incorporated by reference to
    Exhibit 10.17.5 of Amendment No. 3 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed January 8, 2004).                                 
|        | 10.17.6 |             |  | Limited Guaranty of Collection by Peter Edison in
    favor of Fleet Retail Finance, Inc. dated as of
    January 18, 2000 (incorporated by reference to
    Exhibit 10.17.6 of Amendment No. 5 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed January 30, 2004).                                              
|        | 10.17.7 |             |  | Fourth Amendment and Waiver and Consent Agreement
    dated January 28, 2004 by and between Fleet Retail
    Finance, Inc. and the Company (incorporated by reference to
    Exhibit 10.17.7 of Amendment No. 5 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed January 30, 2004).                              
|        | 10.17.8 |             |  | Form of Revolving Credit Note in favor of Fleet
    Retail Finance, Inc. dated as of January 18, 2000
    (included in Exhibit 10.17).                                                                                                                                                                                                                  
|        | 10.17.9 |             |  | Confirmation and Release of Guaranty Agreement by
    Peter Edison dated as of June 11, 2002 (included in
    Exhibit 10.17).                                                                                                                                                                                                                           
|        | 10.18   |             |  | Tax Indemnification Agreement among the Company
    and its shareholders dated January 3, 2004.                                                                                                                                                                                                                                                         
|        | 10.19   |             |  | Software License Agreement dated June 3,
    1999 by and between JDA Software, Inc. and the Company
    (incorporated by reference to Exhibit 10.19 of Amendment
    No. 4 to the Companys Registration Statement on
    Form S-1 (File No. 333-86332), filed January 20,
    2004).                                                                   
|        | 10.20   |             |  | Employment Agreement dated September 16,
    2002 by and between the Company and Stanley K. Tusman
    (incorporated by reference to Exhibit 10.20 of Amendment
    No. 4 to the Companys Registration Statement on
    Form S-1 (File No. 333-86332), filed January 20,
    2004).                                                                    
|        | 10.21   |             |  | Employment Agreement dated December 12, 2003
    by and between the Company and Joe Vander Pluym (incorporated by
    reference to Exhibit 10.21 of Amendment No. 4 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed January 20, 2004).                                                                          
|        | 10.22   |             |  | Employment Agreement dated December 12, 2003
    by and between the Company and Mark Ianni (incorporated by
    reference to Exhibit 10.22 of Amendment No. 4 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed January 20, 2004).                                                                                
|        | 10.23   |             |  | Employment Agreement dated December 17, 2003
    by and between the Company and Lawrence Spanley, Jr.
    (incorporated by reference to Exhibit 10.23 of Amendment
    No. 4 to the Companys Registration Statement on
    Form S-1 (File No. 333-86332), filed January 20,
    2004).                                                                 
|        | 10.24   |             |  | Letter to Peter Edison from Peter Edison dated
    March 5, 2003 outlining the 2003 bonus levels (incorporated
    by reference to Exhibit 10.24 of Amendment No. 3 to
    Registration Statement on Form S-1 (File
    No. 333-86332), filed January 8, 2004).                                                                                         

45



---



##### 



|        |       |             |  |                                                                                                                                                                                                                                                                                                                                  
|------- | ----- | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | Description
|        |       |            
|        | 10.25 |             |  | Letter to Michele Bergerac from Peter Edison
    dated March 5, 2003 outlining the 2003 bonus levels
    (incorporated by reference to Exhibit 10.25 of Amendment
    No. 3 to Registration Statement on Form S-1 (File
    No. 333-86332), filed January 8, 2004).                                                              
|        | 10.26 |             |  | Letter to Mark Ianni from Peter Edison dated
    March 5, 2003 outlining the 2003 bonus levels (incorporated
    by reference to Exhibit 10.26 of Amendment No. 3 to
    the Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed January 8, 2004).                                                      
|        | 10.27 |             |  | Letter to Stan Tusman from Peter Edison dated
    March 5, 2003 outlining the 2003 bonus levels (incorporated
    by reference to Exhibit 10.27 of Amendment No. 3 to
    the Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed January 8, 2004).                                                     
|        | 10.28 |             |  | Letter to Joe Vander Pluym from Peter Edison
    dated March 5, 2003 outlining the 2003 bonus levels
    (incorporated by reference to Exhibit 10.28 of Amendment
    No. 3 to the Companys Registration Statement on
    Form S-1 (File No. 333-86332), filed January 8,
    2004).                                            
|        | 10.29 |             |  | Letter to Larry Spanley from Peter Edison dated
    March 5, 2003 outlining the 2003 bonus levels (incorporated
    by reference to Exhibit 10.29 of Amendment No. 3 to
    the Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed January 8, 2004).                                                   
|        | 10.30 |             |  | Amendment to Software License Agreement and
    Software Support Agreement dated June 4, 1999 by and
    between JDA Software, Inc. and the Company (incorporated by
    reference to Exhibit 10.30 of Amendment No. 4 to the
    Companys Registration Statement on Form S-1 (File
    No. 333-86332), filed January 20, 2004).
|        | 10.31 |             |  | Financial Advisor Agreement, dated
    February 4, 2004, by and between Ryan Beck &
    Co., Inc. and the Company.                                                                                                                                                                                                               
|        | 10.32 |             |  | Underwriting Agreement, dated February 4,
    2004, by and among the Company, Ryan Beck & Co. Inc.
    and BB&T Capital Markets, a Division of Scott &
    Stringfellow Inc., as representatives of the underwriters named
    therein.                                                                                          
|        | 10.33 |             |  | Letter to Peter Edison from Peter Edison dated
    March 1, 2004 outlining the 2004 bonus levels.                                                                                                                                                                                                                                
|        | 10.34 |             |  | Letter to Michele Bergerac from Peter Edison
    dated March 1, 2004 outlining the 2004 bonus levels.                                                                                                                                                                                                                            
|        | 10.35 |             |  | Letter to Mark Ianni from Peter Edison dated
    March 1, 2004 outlining the 2004 bonus levels.                                                                                                                                                                                                                                  
|        | 10.36 |             |  | Letter to Stan Tusman from Peter Edison dated
    March 1, 2004 outlining the 2004 bonus levels.                                                                                                                                                                                                                                 
|        | 10.37 |             |  | Letter to Joe Vander Pluym from Peter Edison
    dated March 1, 2004 outlining the 2004 bonus levels.                                                                                                                                                                                                                            
|        | 10.38 |             |  | Letter to Larry Spanley from Peter Edison dated
    March 1, 2004 outlining the 2004 bonus levels.                                                                                                                                                                                                                               
|        | 11.1  |             |  | Statement regarding computation of per share
    earnings (incorporated by reference from Note 14 of the
    Financial Statements).                                                                                                                                                                                              
|        | 14.1  |             |  | Code of Business Conduct.                                                                                                                                                                                                                                                                                                        
|        | 24.1  |             |  | Power of Attorney.                                                                                                                                                                                                                                                                                                               
|        | 31.1  |             |  | Rule 13a-14(a)/15d-14(a) Certification
    (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
    executed by Chief Executive Officer).                                                                                                                                                                                 
|        | 31.2  |             |  | Rule 13a-14(a)/15d-14(a) Certification
    (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002,
    executed by Chief Financial Officer).                                                                                                                                                                                 
|        | 32.1  |             |  | Section 1350 Certifications (pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002, executed by
    Chief Executive Officer and the Chief Financial Officer).                                                                                                                                                            

46



---



##### 



INDEX TO FINANCIAL STATEMENTS

Years Ended January 4, 2003 and
January 3, 2004


Contents

|                                                 |  |  |     | 
|------------------------------------------------ |  |  | --- | 
|Report of Independent
    Auditors               |  |  | F-2 | 
|Balance Sheets                                   |  |  | F-3 | 
|Statements of Operations                         |  |  | F-4 | 
|Statements of
    Shareholders Equity (Deficit) |  |  | F-5 | 
|Statements of Cash Flows                         |  |  | F-6 | 
|Notes to Financial
    Statements                |  |  | F-7 | 

F-1



---



##### 



Report of Independent Auditors

The Board of Directors and Shareholders

Bakers Footwear Group, Inc.


We have audited the accompanying balance sheets
of Bakers Footwear Group, Inc. (the Company) as of
January 3, 2004 and January 4, 2003 and the related
statements of operations, shareholders equity (deficit),
and cash flows for each of the three years in the period ended
January 3, 2004. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Bakers Footwear Group, Inc. at January 3,
2004 and January 4, 2003 and the results of its operations
and its cash flows for each of the three years in the period
ended January 3, 2004 in conformity with accounting
principles generally accepted in the United States.

As discussed in Note 1 to the financial
statements, in 2002 the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

St. Louis, Missouri

March 4, 2004, except for


paragraph 2 of
Note 18, as to


which the date is
March 12, 2004


F-2



---



##### 



BAKERS FOOTWEAR GROUP, INC.



BALANCE SHEETS


|                                                              |                                                                                                    |            |            |            |   |   |            |            |  
|------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ---------- | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                                              |                                                                                                    | January 4, |            | January 3,
|                                                              |                                                                                                    | 2003       |            | 2004      
|                                                              |                                                                                                    |            |            |           
|ASSETS                                                       
|Current assets:                                               |                                                                                                    |            |            |            |   |   |            |           
|                                                              | Cash and cash equivalents                                                                          |            | $          |           |   |   | $          | 574,475    |  
|                                                              | Accounts receivable                                                                                |            |            | 573,898    |   |   |            | 1,051,854  |  
|                                                              | Other receivables                                                                                  |            |            | 420,358    |   |   |            | 186,011    |  
|                                                              | Inventories                                                                                        |            |            | 14,279,602 |   |   |            | 12,780,256 |  
|                                                              | Prepaid expenses and other current assets                                                          |            |            | 630,784    |   |   |            | 1,029,908  |  
|                                                              |                                                                                                    |            |            |            |   |   |            |           
|Total current assets                                          |                                                                                                    |            | 15,904,642 |            |   |   | 15,622,504 |           
|Property and equipment, net                                   |                                                                                                    |            | 12,249,993 |            |   |   | 12,459,178 |           
|Other assets                                                  |                                                                                                    |            | 937,482    |            |   |   | 922,825    |           
|                                                              |                                                                                                    |            |            |            |   |   |            |           
|Total assets                                                  |                                                                                                    | $          | 29,092,117 |            |   | $ | 29,004,507 |           
|                                                              |                                                                                                    |            |            |            |   |   |            |           
|                                                             
|LIABILITIES AND SHAREHOLDERS
    EQUITY                     
|Current liabilities:                                          |                                                                                                    |            |            |            |   |   |            |           
|                                                              | Accounts payable                                                                                   |            | $          | 2,966,940  |   |   | $          | 3,529,652  |  
|                                                              | Accrued expenses                                                                                   |            |            | 4,328,533  |   |   |            | 5,986,873  |  
|                                                              | Sales tax payable                                                                                  |            |            | 1,035,316  |   |   |            | 1,257,294  |  
|                                                              | Deferred income                                                                                    |            |            | 463,253    |   |   |            | 809,122    |  
|                                                              | Revolving credit agreement                                                                         |            |            | 7,043,218  |   |   |            | 2,169,474  |  
|                                                              | Class A stock purchase warrants                                                                    |            |            |           |   |   |            | 837,500    |  
|                                                              | Class A stock redemption obligation                                                                |            |            |           |   |   |            | 210,799    |  
|                                                              | Current maturities of capital lease obligations                                                    |            |            | 709,574    |   |   |            | 947,332    |  
|                                                              | Current maturities of long-term subordinated debt                                                  |            |            | 219,901    |   |   |            | 645,501    |  
|                                                              |                                                                                                    |            |            |            |   |   |            |           
|Total current liabilities                                     |                                                                                                    |            | 16,766,735 |            |   |   | 16,393,547 |           
|Long-term subordinated debt, less current
    maturities      |                                                                                                    |            | 847,463    |            |   |   | 214,409    |           
|Obligations under capital leases, less current
    maturities |                                                                                                    |            | 1,407,592  |            |   |   | 1,347,112  |           
|Other liabilities                                             |                                                                                                    |            | 889,156    |            |   |   | 1,291,286  |           
|Class A stock purchase warrants                               |                                                                                                    |            | 686,860    |            |   |   |           |           
|Class A stock redemption obligation                           |                                                                                                    |            | 1,262,696  |            |   |   | 1,178,527  |           
|Class B stock redemption obligation                           |                                                                                                    |            | 283,500    |            |   |   | 506,500    |           
|Subordinated convertible debentures                           |                                                                                                    |            | 4,900,000  |            |   |   | 4,500,000  |           
|Shareholders equity:                                         |                                                                                                    |            |            |            |   |   |            |           
|                                                              | Class A stock, $0.001 par value;
    3,000,000 shares authorized, 1,426,188 shares
    outstanding |            |            | 1,426      |   |   |            | 1,426      |  
|                                                              | Class B stock, $0.001 par value;
    500,000 shares authorized                                     |            |            |           |   |   |            |           |  
|                                                              | Class C stock, $0.001 par value;
    1,500,000 shares authorized                                   |            |            |           |   |   |            |           |  
|                                                              | Deferred stock compensation                                                                        |            |            | (127,621   | ) |   |            |           |  
|                                                              | Additional paid-in capital                                                                         |            |            | 3,608,740  |   |   |            | 3,756,814  |  
|                                                              | Accumulated deficit                                                                                |            |            | (1,434,430 | ) |   |            | (185,114   | )
|                                                              |                                                                                                    |            |            |            |   |   |            |           
|Total shareholders equity                                    |                                                                                                    |            | 2,048,115  |            |   |   | 3,573,126  |           
|                                                              |                                                                                                    |            |            |            |   |   |            |           
|Total liabilities and shareholders equity                    |                                                                                                    | $          | 29,092,117 |            |   | $ | 29,004,507 |           
|                                                              |                                                                                                    |            |            |            |   |   |            |           

See accompanying notes.

F-3



---



##### 



BAKERS FOOTWEAR GROUP, INC.



STATEMENTS OF OPERATIONS


|                                                                                               |                                                                                     |            |             |            |   |            |             |            |   |   |             |            |  
|---------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ---------- | ----------- | ---------- | - | ---------- | ----------- | ---------- | - | - | ----------- | ---------- | -
|                                                                                               |                                                                                     | Year Ended |             | Year Ended |   | Year Ended
|                                                                                               |                                                                                     | January 5, |             | January 4, |   | January 3,
|                                                                                               |                                                                                     | 2002       |             | 2003       |   | 2004      
|                                                                                               |                                                                                     |            |             |            |   |           
|Net sales                                                                                      |                                                                                     | $          | 140,841,929 |            |   | $          | 151,147,810 |            |   | $ | 148,223,553 |           
|Cost of merchandise sold, occupancy, and buying
    expenses                                   |                                                                                     |            | 98,247,080  |            |   |            | 106,011,753 |            |   |   | 103,057,442 |           
|                                                                                               |                                                                                     |            |             |            |   |            |             |            |   |   |             |           
|Gross profit                                                                                   |                                                                                     |            | 42,594,849  |            |   |            | 45,136,057  |            |   |   | 45,166,111  |           
|Operating expenses:                                                                            |                                                                                     |            |             |            |   |            |             |            |   |   |             |           
|                                                                                               | Selling                                                                             |            |             | 27,097,515 |   |            |             | 30,774,478 |   |   |             | 29,491,123 |  
|                                                                                               | General and administrative                                                          |            |             | 10,145,847 |   |            |             | 11,358,384 |   |   |             | 11,856,477 |  
|                                                                                               | Loss on disposal of property and equipment                                          |            |             | 24,997     |   |            |             | 95,785     |   |   |             | 188,629    |  
|                                                                                               | Impairment of long-lived assets                                                     |            |             | 4,540      |   |            |             | 120,114    |   |   |             | 127,133    |  
|                                                                                               | Write-off of deferred initial public offering
    costs                             |            |             |           |   |            |             | 1,708,466  |   |   |             |           |  
|                                                                                               | Amortization of excess of acquired net assets
    over cost                         |            |             | (1,112,574 | ) |            |             |           |   |   |             |           |  
|                                                                                               |                                                                                     |            |             |            |   |            |             |            |   |   |             |           
|Operating income                                                                               |                                                                                     |            | 6,434,524   |            |   |            | 1,078,830   |            |   |   | 3,502,749   |           
|Other income (expense):                                                                        |                                                                                     |            |             |            |   |            |             |            |   |   |             |           
|                                                                                               | Interest expense                                                                    |            |             | (1,086,729 | ) |            |             | (1,626,306 | ) |   |             | (1,671,739 | )
|                                                                                               | State income tax (expense) benefit                                                  |            |             | (315,667   | ) |            |             | 163,645    |   |   |             | (67,819    | )
|                                                                                               | Other income                                                                        |            |             | 61,015     |   |            |             | 2,833      |   |   |             | 113,371    |  
|                                                                                               | Other expense                                                                       |            |             | (133,490   | ) |            |             | (109,629   | ) |   |             | (201,668   | )
|                                                                                               |                                                                                     |            |             |            |   |            |             |            |   |   |             |           
|Income (loss) before cumulative effect of change
    in accounting                             |                                                                                     |            | 4,959,653   |            |   |            | (490,627    | )          |   |   | 1,674,894   |           
|Cumulative effect of change in accounting                                                      |                                                                                     |            |            |            |   |            | 2,774,899   |            |   |   |            |           
|                                                                                               |                                                                                     |            |             |            |   |            |             |            |   |   |             |           
|Net income                                                                                     |                                                                                     | $          | 4,959,653   |            |   | $          | 2,284,272   |            |   | $ | 1,674,894   |           
|                                                                                               |                                                                                     |            |             |            |   |            |             |            |   |   |             |           
|Basic earnings per share                                                                       |                                                                                     | $          | 3.31        |            |   | $          | 1.50        |            |   | $ | 0.93        |           
|                                                                                               |                                                                                     |            |             |            |   |            |             |            |   |   |             |           
|Diluted earnings per share                                                                     |                                                                                     | $          | 2.17        |            |   | $          | 1.06        |            |   | $ | 0.79        |           
|                                                                                               |                                                                                     |            |             |            |   |            |             |            |   |   |             |           
|Pro forma amounts assuming SFAS No. 142
    had been adopted as of December 31, 2000 (Note 1): |                                                                                     |            |             |            |   |            |             |            |   |   |             |           
|                                                                                               | Income (loss) before cumulative effect of change
    in accounting                  |            | $           | 3,847,079  |   |            | $           | (490,627   | ) |   | $           | 1,674,894  |  
|                                                                                               | Cumulative effect of change in accounting                                           |            |             | 3,885,787  |   |            |             |           |   |   |             |           |  
|                                                                                               |                                                                                     |            |             |            |   |            |             |            |   |   |             |           
|                                                                                               | Net income (loss)                                                                   |            | $           | 7,732,866  |   |            | $           | (490,627   | ) |   | $           | 1,674,894  |  
|                                                                                               |                                                                                     |            |             |            |   |            |             |            |   |   |             |           
|Unaudited pro forma income tax information
    (Note 12):                                      |                                                                                     |            |             |            |   |            |             |            |   |   |             |           
|                                                                                               | Income (loss) before cumulative effect of change
    in accounting and income taxes |            | $           | 4,870,934  |   |            | $           | (654,272   | ) |   | $           | 1,742,713  |  
|                                                                                               | Provision for (benefit from) income taxes                                           |            |             | 1,605,055  |   |            |             | (217,178   | ) |   |             | 674,853    |  
|                                                                                               |                                                                                     |            |             |            |   |            |             |            |   |   |             |           
|Income (loss) before cumulative effect of change
    in accounting                             |                                                                                     |            | 3,265,879   |            |   |            | (437,094    | )          |   |   | 1,067,860   |           
|Cumulative effect of change in accounting, net of
    taxes                                    |                                                                                     |            |            |            |   |            | 1,763,934   |            |   |   |            |           
|                                                                                               |                                                                                     |            |             |            |   |            |             |            |   |   |             |           
|Net income                                                                                     |                                                                                     | $          | 3,265,879   |            |   | $          | 1,326,840   |            |   | $ | 1,067,860   |           
|                                                                                               |                                                                                     |            |             |            |   |            |             |            |   |   |             |           
|Net income per common share:                                                                   |                                                                                     |            |             |            |   |            |             |            |   |   |             |           
|                                                                                               | Basic                                                                               |            | $           | 2.12       |   |            | $           | 0.83       |   |   | $           | 0.50       |  
|                                                                                               |                                                                                     |            |             |            |   |            |             |            |   |   |             |           
|                                                                                               | Diluted                                                                             |            | $           | 1.44       |   |            | $           | 0.64       |   |   | $           | 0.48       |  
|                                                                                               |                                                                                     |            |             |            |   |            |             |            |   |   |             |           

See accompanying notes.

F-4



---



##### 



BAKERS FOOTWEAR GROUP, INC.



STATEMENTS OF SHAREHOLDERS EQUITY
(DEFICIT)


|                             |                                                                                       |                |           |        |  |            |       |                |  |             |           |         |  |   |          |         |  |   |            |            |  
|---------------------------- | ------------------------------------------------------------------------------------- | -------------- | --------- | ------ |  | ---------- | ----- | -------------- |  | ----------- | --------- | ------- |  | - | -------- | ------- |  | - | ---------- | ---------- | -
|                             |                                                                                       |                |           |        |  |            |       |               
|                             |                                                                                       | Class A Voting |           |        |  |            |       |               
|                             |                                                                                       | Common Stock   |           |        |  |            |       |               
|                             |                                                                                       |                |           |        |  |            |       |               
|                             |                                                                                       | Shares         |           |        |  | Additional |       |                |  |            
|                             |                                                                                       | Issued and     |           |        |  | Paid-In    |       | Deferred Stock |  | Accumulated
|                             |                                                                                       | Outstanding    |           | Amount |  | Capital    |       | Compensation   |  | Deficit    
|                             |                                                                                       |                |           |        |  |            |       |                |  |            
|Balance at December 30, 2000 |                                                                                       |                | 1,408,988 |        |  | $          | 1,409 |                |  | $           | 3,538,851 |         |  | $ | (440,909 | )       |  | $ | (4,304,510 | )         
|                             | Distributions to shareholders                                                         |                |           |       |  |            |       |               |  |             |           |        |  |   |          |        |  |   |            | (2,167,191 | )
|                             | Impact of the termination of put options
    associated with Class A redeemable stock |                |           | 17,200 |  |            |       | 17             |  |             |           | 69,889  |  |   |          |        |  |   |            | (47,868    | )
|                             | Compensation cost from stock option grants                                            |                |           |       |  |            |       |               |  |             |           |        |  |   |          | 69,623  |  |   |            |           |  
|                             | Accretion of Class B redeemable stock                                                 |                |           |       |  |            |       |               |  |             |           |        |  |   |          |        |  |   |            | (193,900   | )
|                             | Net income                                                                            |                |           |       |  |            |       |               |  |             |           |        |  |   |          |        |  |   |            | 4,959,653  |  
|                             |                                                                                       |                |           |        |  |            |       |                |  |             |           |         |  |   |          |         |  |   |            |           
|Balance at January 5, 2002   |                                                                                       |                | 1,426,188 |        |  |            | 1,426 |                |  |             | 3,608,740 |         |  |   | (371,286 | )       |  |   | (1,753,816 | )         
|                             | Distributions to shareholders                                                         |                |           |       |  |            |       |               |  |             |           |        |  |   |          |        |  |   |            | (1,820,172 | )
|                             | Compensation cost from stock option grants                                            |                |           |       |  |            |       |               |  |             |           |        |  |   |          | 243,665 |  |   |            |           |  
|                             | Accretion of Class A redeemable stock                                                 |                |           |       |  |            |       |               |  |             |           |        |  |   |          |        |  |   |            | (55,114    | )
|                             | Accretion of Class B redeemable stock                                                 |                |           |       |  |            |       |               |  |             |           |        |  |   |          |        |  |   |            | (89,600    | )
|                             | Net income                                                                            |                |           |       |  |            |       |               |  |             |           |        |  |   |          |        |  |   |            | 2,284,272  |  
|                             |                                                                                       |                |           |        |  |            |       |                |  |             |           |         |  |   |          |         |  |   |            |           
|Balance at January 4, 2003   |                                                                                       |                | 1,426,188 |        |  |            | 1,426 |                |  |             | 3,608,740 |         |  |   | (127,621 | )       |  |   | (1,434,430 | )         
|                             | Distributions to shareholders                                                         |                |           |       |  |            |       |               |  |             |           |        |  |   |          |        |  |   |            | (75,949    | )
|                             | Compensation cost from stock option grants                                            |                |           |       |  |            |       |               |  |             |           | 148,074 |  |   |          | 127,621 |  |   |            |           |  
|                             | Accretion of Class A redeemable stock                                                 |                |           |       |  |            |       |               |  |             |           |        |  |   |          |        |  |   |            | (126,629   | )
|                             | Accretion of Class B redeemable stock                                                 |                |           |       |  |            |       |               |  |             |           |        |  |   |          |        |  |   |            | (223,000   | )
|                             | Net income                                                                            |                |           |       |  |            |       |               |  |             |           |        |  |   |          |        |  |   |            | 1,674,894  |  
|                             |                                                                                       |                |           |        |  |            |       |                |  |             |           |         |  |   |          |         |  |   |            |           
|Balance at January 3, 2004   |                                                                                       |                | 1,426,188 |        |  | $          | 1,426 |                |  | $           | 3,756,814 |         |  | $ |         |         |  | $ | (185,114   | )         
|                             |                                                                                       |                |           |        |  |            |       |                |  |             |           |         |  |   |          |         |  |   |            |           

See accompanying notes.

F-5



---



##### 



BAKERS FOOTWEAR GROUP, INC.



STATEMENTS OF CASH FLOWS


|                                                                                                |                                                             |                                           |            |            |           |            |            |            |            |   |            |           |           |  
|----------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ----------------------------------------- | ---------- | ---------- | --------- | ---------- | ---------- | ---------- | ---------- | - | ---------- | --------- | --------- | -
|                                                                                                |                                                             | Year Ended                                |            | Year Ended |           | Year Ended
|                                                                                                |                                                             | January 5,                                |            | January 4, |           | January 3,
|                                                                                                |                                                             | 2002                                      |            | 2003       |           | 2004      
|                                                                                                |                                                             |                                           |            |            |           |           
|Operating activities                                                                            |                                                             |                                           |            |            |           |            |            |            |            |   |            |          
|Net income                                                                                      |                                                             | $                                         | 4,959,653  |            |           | $          | 2,284,272  |            |            | $ | 1,674,894  |          
|Adjustments to reconcile net income to net cash
    provided by (used in) operating activities: |                                                             |                                           |            |            |           |            |            |            |            |   |            |          
|                                                                                                | Cumulative effect of change in accounting                   |                                           |            |           |           |            |            | (2,774,899 | )          |   |            |          |          
|                                                                                                | Depreciation and amortization                               |                                           |            | 1,395,148  |           |            |            | 2,533,782  |            |   |            | 2,833,143 |          
|                                                                                                | Amortization of goodwill                                    |                                           |            | 7,920      |           |            |            |           |            |   |            |          |          
|                                                                                                | Amortization of deferred debt issuance costs                |                                           |            | 26,400     |           |            |            | 92,286     |            |   |            | 20,415    |          
|                                                                                                | Stock-based compensation expense                            |                                           |            | 69,623     |           |            |            | 243,665    |            |   |            | 275,695   |          
|                                                                                                | Amortization of excess of acquired net assets
    over cost |                                           |            | (1,112,574 | )         |            |            |           |            |   |            |          |          
|                                                                                                | Amortization of debt discount                               |                                           |            | 86,424     |           |            |            | 124,160    |            |   |            | 12,447    |          
|                                                                                                | Accretion of stock warrants                                 |                                           |            | 111,520    |           |            |            | 140,094    |            |   |            | 150,640   |          
|                                                                                                | Impairment of long-lived assets                             |                                           |            | 4,540      |           |            |            | 120,114    |            |   |            | 127,133   |          
|                                                                                                | Loss on disposal of property and equipment                  |                                           |            | 24,997     |           |            |            | 95,785     |            |   |            | 188,629   |          
|                                                                                                | Changes in operating assets and liabilities:                |                                           |            |            |           |            |            |            |            |   |            |           |          
|                                                                                                |                                                             | Accounts receivable                       |            |            | (401,419  | )          |            |            | 233,175    |   |            |           | (243,609  | )
|                                                                                                |                                                             | Inventories                               |            |            | 1,262,026 |            |            |            | (2,989,356 | ) |            |           | 1,499,346 |  
|                                                                                                |                                                             | Prepaid expenses and other current assets |            |            | (209,941  | )          |            |            | (48,630    | ) |            |           | (399,124  | )
|                                                                                                |                                                             | Other assets                              |            |            | (419,118  | )          |            |            | (90,853    | ) |            |           | (454,483  | )
|                                                                                                |                                                             | Accounts payable                          |            |            | (914,222  | )          |            |            | (41,264    | ) |            |           | 562,712   |  
|                                                                                                |                                                             | Accrued expenses and deferred income      |            |            | 1,327,539 |            |            |            | (618,421   | ) |            |           | 2,151,187 |  
|                                                                                                |                                                             | Other liabilities                         |            |            | 226,938   |            |            |            | 193,707    |   |            |           | 402,130   |  
|                                                                                                |                                                             |                                           |            |            |           |            |            |            |            |   |            |          
|Net cash provided by (used in) operating
    activities                                         |                                                             |                                           | 6,445,454  |            |           |            | (502,383   | )          |            |   | 8,801,155  |          
|Investing activities                                                                            |                                                             |                                           |            |            |           |            |            |            |            |   |            |          
|Purchase of property and equipment                                                              |                                                             |                                           | (3,335,831 | )          |           |            | (6,610,161 | )          |            |   | (2,290,777 | )        
|Proceeds from sale of property and equipment                                                    |                                                             |                                           | 1,825      |            |           |            | 1,793      |            |            |   | 2,914      |          
|                                                                                                |                                                             |                                           |            |            |           |            |            |            |            |   |            |          
|Net cash used in investing activities                                                           |                                                             |                                           | (3,334,006 | )          |           |            | (6,608,368 | )          |            |   | (2,287,863 | )        
|Financing activities                                                                            |                                                             |                                           |            |            |           |            |            |            |            |   |            |          
|Net advances (repayments) under revolving
    notes payable                                     |                                                             |                                           | (777,452   | )          |           |            | 4,391,942  |            |            |   | (4,873,744 | )        
|Proceeds from issuance of subordinated
    convertible debentures                               |                                                             |                                           |           |            |           |            | 4,900,000  |            |            |   |           |          
|Principal payments under capital lease obligations                                              |                                                             |                                           | (326,553   | )          |           |            | (591,000   | )          |            |   | (844,223   | )        
|Principal payments of subordinated debt                                                         |                                                             |                                           | (573,696   | )          |           |            | (265,321   | )          |            |   | (219,901   | )        
|Cash distributions to shareholders                                                              |                                                             |                                           | (2,167,191 | )          |           |            | (1,820,172 | )          |            |   | (949       | )        
|                                                                                                |                                                             |                                           |            |            |           |            |            |            |            |   |            |          
|Net cash provided by (used in) financing
    activities                                         |                                                             |                                           | (3,844,892 | )          |           |            | 6,615,449  |            |            |   | (5,938,817 | )        
|                                                                                                |                                                             |                                           |            |            |           |            |            |            |            |   |            |          
|Net increase (decrease) in cash and cash
    equivalents                                        |                                                             |                                           | (733,444   | )          |           |            | (495,302   | )          |            |   | 574,475    |          
|Cash and cash equivalents at beginning of period                                                |                                                             |                                           | 1,228,746  |            |           |            | 495,302    |            |            |   |           |          
|                                                                                                |                                                             |                                           |            |            |           |            |            |            |            |   |            |          
|Cash and cash equivalents at end of period                                                      |                                                             | $                                         | 495,302    |            |           | $          |           |            |            | $ | 574,475    |          
|                                                                                                |                                                             |                                           |            |            |           |            |            |            |            |   |            |          
|Supplemental disclosures of cash flow
    information                                           |                                                             |                                           |            |            |           |            |            |            |            |   |            |          
|Cash paid for state income taxes                                                                |                                                             | $                                         | 243,095    |            |           | $          | 106,685    |            |            | $ | 31,126     |          
|                                                                                                |                                                             |                                           |            |            |           |            |            |            |            |   |            |          
|Cash paid for interest                                                                          |                                                             | $                                         | 874,024    |            |           | $          | 1,019,404  |            |            | $ | 1,650,270  |          
|                                                                                                |                                                             |                                           |            |            |           |            |            |            |            |   |            |          
|Noncash investing and financing
    transactions                                                |                                                             |                                           |            |            |           |            |            |            |            |   |            |          
|Capital lease obligations                                                                       |                                                             | $                                         | 2,315,915  |            |           | $          | 718,804    |            |            | $ | 1,021,500  |          
|                                                                                                |                                                             |                                           |            |            |           |            |            |            |            |   |            |          

See accompanying notes.

F-6



---



##### 



BAKERS FOOTWEAR GROUP, INC.



NOTES TO FINANCIAL STATEMENTS


January 3, 2004



|   |                                               
|-- | ----------------------------------------------
|1. | Summary of Significant Accounting
    Policies



| |           
| | ----------
| | Operations

Bakers Footwear Group, Inc., formerly Weiss
and Neuman Shoe Co., (the Company) was incorporated in 1926 and
is engaged in the sale of shoes and accessories through over 200
retail stores throughout the United States under the Bakers and
Wild Pair names. The Company is a national full-service retailer
specializing in moderately priced fashion footwear. The
Companys products include private-label and national brand
dress, casual, and sport shoes, boots, and sandals.

As discussed in Note 18, on
February 10, 2004, the Company completed an initial public
offering (IPO).



| |                  
| | -----------------
| | Accounting Period

The Companys accounting period is based
upon a retail calendar, ending on the Saturday nearest
January 31. The Companys fiscal year ends four weeks
prior to a retail calendar, as a result of its Subchapter S tax
status. The fiscal year ended January 5, 2002 was a 53-week
period. The fiscal years ended January 4, 2003 and
January 3, 2004 were 52-week periods.



| |                 
| | ----------------
| | Use of Estimates

The preparation of the financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect reported amounts in the financial statements and
accompanying notes. Actual results could differ from those
estimates.



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

Certain reclassifications of prior year
presentations have been made to conform to the current year
presentation.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

The Company considers all highly liquid financial
instruments with a maturity of three months or less at the time
of purchase to be cash equivalents. Substantially all cash is
held in depository accounts where disbursements are restricted
to payments on the revolving credit agreement. The
Companys disbursing accounts are funded through draws on
the revolving credit agreement.



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

Merchandise inventories are valued at the lower
of cost or market. Cost is determined using the first-in,
first-out retail inventory method. Consideration received from
vendors relating to inventory purchases is recorded as a
reduction of cost of merchandise sold, occupancy, and buying
expenses. Permanent markdowns are recorded to reflect expected
adjustments to retail prices in accordance with the retail
inventory method. In determining permanent markdowns, management
considers current and recently recorded sales prices, the length
of time product is held in inventory, and quantities of various
product styles contained in inventory, among other factors. The
ultimate amount realized from the sale of certain products could
differ materially from managements estimates.



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

Property and equipment are stated at cost. Costs
related to software developed for internal use, including
internal payroll costs, are capitalized in accordance with the
American Institute of Certified Public

F-7



---



##### 



BAKERS FOOTWEAR GROUP, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Accountants Statement of Position 98-1,
Accounting for the Costs of Computer Software Developed for
or Obtained for Internal Use. Depreciation and amortization
is calculated using the straight-line method over the estimated
useful lives ranging from three years to ten years. Leasehold
improvements are amortized over the lesser of the related lease
term or the useful life of the assets. Costs of repair and
maintenance are charged to expense as incurred.



| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

Periodically, management determines whether any
property or equipment or any other assets have been impaired
based on the criteria established in Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. Based on
these criteria, long-lived assets to be held and
used are reviewed for impairment when events or
circumstances exist that indicate the carrying amount of those
assets may not be recoverable.

The Company determines the fair value of these
assets using the present value of the estimated future cash
flows over the remaining store lease period. During the years
ended January 5, 2002, January 4, 2003, and
January 3, 2004, the Company recorded $4,540, $120,114, and
$127,133, respectively, in noncash charges to earnings related
to the impairment of furniture, fixtures, and equipment,
leasehold improvements, and other assets.



| |                    
| | -------------------
| | Revenue Recognition

Retail sales are recognized at the point of sale
and are recorded net of returns and exclude sales tax. Non-store
sales through the Companys Web site are recognized as
revenue at the point when title passes. Title passes to the
customer at the time the product is shipped to the customer on
an FOB shipping point basis. The Company does not record an
allowance for sales returns due to immateriality.



| |                         
| | ------------------------
| | Cost of Merchandise Sold

Cost of merchandise sold includes the cost of
merchandise, buying costs, and occupancy costs.



| |                 
| | ----------------
| | Operating Leases

The Company leases its store premises and its
headquarters facilities under operating leases. Many leases
entered into by the Company include options under which the
Company may extend the lease term beyond the initial commitment
period, subject to terms agreed to at lease inception. Some
leases also include early termination options which can be
exercised under specific conditions.

For leases that have predetermined fixed
escalations of the minimum rentals, the Company recognizes the
related rental expense on a straight-line basis and records the
difference between the recognized rental expense and amounts
payable under the leases as accrued rent, which is reflected as
a component of other liabilities on the accompanying balance
sheets.

Many of the leases covering retail stores require
contingent rentals in addition to the minimum monthly rental
charge, based on retail sales volume. The Company records
expense for contingent rentals during the period in which the
retail sales volume exceeded the respective targets.



| |                         
| | ------------------------
| | Stock-Based Compensation

The Financial Accounting Standards Boards
(FASB) SFAS No. 123, Accounting for Stock-Based
Compensation, establishes the use of the fair value-based
method of accounting for all stock-based compensation
arrangements. SFAS No. 123 permits companies to use
the intrinsic value accounting method specified in Accounting
Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees,

F-8



---



##### 



BAKERS FOOTWEAR GROUP, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

and related interpretations to account for
stock-based employee compensation arrangements. The Company uses
the intrinsic value-based method to account for stock-based
employee compensation arrangements and complies with the
disclosure provisions of SFAS No. 123.

The Company recorded compensation expense of
$69,623, $243,665, and $275,695 for the years ended
January 5, 2002, January 4, 2003, and January 3,
2004, respectively, which represents the difference between the
estimated fair value of the stock on the date of grant compared
to the $0.01 exercise price per option. For pro forma purposes,
had the compensation expense been determined in accordance with
SFAS No. 123, net income and earnings per share for
the years ended January 5, 2002, January 4, 2003, and
January 3, 2004 would not have been materially different
from the amounts reported.

The effect of applying SFAS No. 123 on
pro forma net income is not necessarily representative of the
effects on reported net income for future periods due to, among
other things, the vesting period of the stock options and the
fair value of additional stock options in future years.

Marketing Expense

The Company expenses costs of marketing and
advertising, including the cost of newspaper and magazine
advertising, promotional materials, in-store displays, and
point-of-sale marketing as advertising expense, when incurred.
Consideration received from vendors in connection with the
promotion of their products is netted against advertising
expense. Marketing and advertising expense totaled $791,521,
$927,044, and $469,242 for the years ended January 5, 2002,
January 4, 2003, and January 3, 2004, respectively.

Offering Costs

The Company initiated its efforts to file a
registration statement with the Securities and Exchange
Commission relating to an IPO in April 2002. The Company
determined that it would delay the IPO for a period in excess of
90 days and, as a result, during the year ended
January 4, 2003, wrote off $1,708,466 of costs initially
deferred in connection with the registration process.

At January 3, 2004 the Company had deferred
$733,933 of costs incurred to date, included in other assets in
the accompanying balance sheet, related to the resumption of the
IPO process. See Note 18 for discussion of the completion
of the IPO.

Earnings per Share

Basic earnings per common share are computed
using the weighted average number of common shares outstanding
during the year. Diluted earnings per common share are computed
using the weighted average number of common shares and potential
dilutive securities that were outstanding during the period.
Potential dilutive securities consist of outstanding stock
options, warrants, convertible debentures, and the effect of
treating the redeemable Class A and Class B stock as
permanent capital (see Note 13).

Income Taxes

The Company elected, by the consent of its
shareholders, to be taxed under the provisions of Subchapter S
of the Internal Revenue Code (the Code). Under the Subchapter S
provisions of the Code, the shareholders include the
Companys operating results in their personal income tax
returns. Accordingly, through January 3, 2004, the Company
was not subject to federal and certain state corporate income
tax. However, the Company was subject to income taxes in certain
states in which it conducts business.

As discussed in Note 18, in connection with
the IPO, effective January 4, 2004, the Company elected, by
the consent of its shareholders, to revoke its status as an
S corporation and become subject to taxation as a C
corporation.

F-9



---



##### 



BAKERS FOOTWEAR GROUP, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

The unaudited pro forma information on the
accompanying statements of operations pertaining to income
(loss) before cumulative effect of change in accounting and
income taxes has been adjusted to reflect a reduction in other
income (expense) for these state income tax expenses. The
unaudited pro forma information also includes adjustments
resulting from applying purchase accounting as a C corporation
to the Bakers acquisition (see Note 2), which results in a
decrease to the excess of acquired net assets over cost of
$2,021,930 as of the acquisition date.

The unaudited pro forma income tax information
included in the statements of operations and Note 12 is
presented in accordance with SFAS No. 109,
Accounting for Income Taxes,as if the Company was a C
corporation and thus subject to federal and certain state income
taxes.

Distributions to Shareholders

Through January 3, 2004, the Company was an
S Corporation and the shareholders, rather than the
Company, were responsible for federal and most state and local
income tax liabilities related to the taxable income generated
by the Company. The Companys policy is to make periodic
distributions to its shareholders in amounts estimated to be
sufficient to allow the shareholders to pay the income taxes on
their proportionate share of the Companys taxable income.
In certain states where the Company has operations, the Company
makes such shareholder distributions in connection with filing
composite income tax returns on behalf of the shareholders.
Total distributions to shareholders were $2,167,191, $1,820,172,
and $75,949 for the years ended January 5, 2002,
January 4, 2003, and January 3, 2004, respectively.
The distributions for the year ended January 3, 2004
include accrued distributions of $75,000 at January 3, 2004
related to composite state income tax returns that will be filed
for the year then ended.

Store Lease Acquisitions

During the year ended January 5, 2002, the
Company completed the acquisition of eight store leases through
two separate transactions totaling $260,000. The assets
purchased consisted of all of the sellers leasehold
interests relating to the eight stores, as well as all
furniture, fixtures, and equipment located in the respective
stores. Approximately $36,000 of the total consideration paid
was allocated to the furniture, fixtures, and equipment
acquired, with the remaining $224,000 being allocated to the
individual leases acquired. The consideration allocated to these
leases is being amortized over the remaining lives of the
individual underlying leases acquired.

In March 2002, the Company acquired 33 store
leases from SLJ Retail LLC (SLJ) for a purchase price of
$1,800,000 (see Note 2).

Deferred Income

The Company has a frequent buying program where
customers can purchase a frequent buying card entitling them to
a 10% discount on all purchases for a 12-month period. The
Company ratably recognizes the revenue from the sale of the card
over the 12-month life of the card and records the related
discounts at the point of sale when the card is used.

The Company recognized income of $32,659,
$597,118, and $1,144,210 for the years ended January 5,
2002, January 4, 2003, and January 3, 2004,
respectively, related to the amortization of deferred income for
the frequent buying card program, as a component of net sales.
Total discounts given to customers under the frequent buying
program were $107,060, $791,114, and $1,489,160 for the years
ended January 5, 2002, January 4, 2003, and
January 3, 2004, respectively.

F-10



---



##### 



BAKERS FOOTWEAR GROUP, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Business Segments

The Company has one business segment that offers
the same principal product and service in various locations
throughout the United States.

Shipping and Handling Costs

The Company incurs shipping and handling costs to
ship merchandise to its customers primarily related to sales
orders received from the Companys Internet Web site.
Shipping and handling costs are recorded as a component of cost
of merchandise sold, occupancy, and buying expenses. Amounts
paid to the Company by customers are recorded in net sales.
Amounts paid to the Company for shipping and handling costs were
$7,751, $70,151, and $93,017 for the years ended January 5,
2002, January 4, 2003, and January 3, 2004,
respectively.

Goodwill

In June 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets, which is effective
for fiscal years beginning after December 15, 2001. Upon
adoption, the Company recorded as income its unamortized
deferred credit related to the excess fair value over cost of
$2,774,899 related to the Companys acquisition of 198
Bakers locations as a cumulative effect of a change in
accounting principle during 2002.

Pro forma income before cumulative effect of
change in accounting, adjusted to exclude the amortization of
excess of acquired net assets over cost and goodwill
amortization, is as follows:

|                                                            |  |            |            |  
|----------------------------------------------------------- |  | ---------- | ---------- | -
|                                                            |  | Year Ended
|                                                            |  | January 5,
|                                                            |  | 2002      
|                                                            |  |           
|Reported net income                                         |  | $          | 4,959,653  |  
|Amortization of goodwill                                    |  |            | 7,920      |  
|Amortization of excess of acquired net assets
    over cost |  |            | (1,112,574 | )
|                                                            |  |            |            |  
|Adjusted net income                                         |  | $          | 3,854,999  |  
|                                                            |  |            |            |  
|Basic earnings per share  as reported                      |  | $          | 3.31       |  
|                                                            |  |            |            |  
|Diluted earnings per share  as reported                    |  | $          | 2.17       |  
|                                                            |  |            |            |  
|Basic earnings per share  as adjusted                      |  | $          | 2.53       |  
|                                                            |  |            |            |  
|Diluted earnings per share  as adjusted                    |  | $          | 1.70       |  
|                                                            |  |            |            |  



|   |             
|-- | ------------
|2. | Acquisitions

On June 22, 1999, the Company acquired the
assets, primarily inventory and furniture, fixtures, and
equipment, of 198 Bakers locations (including Leeds and Wild
Pair stores) located throughout the United States from Edison
Brothers Stores, Inc. for $8,977,098 in cash and the
assumption of $353,000 in liabilities. The acquisition was
accounted for using the purchase method. Accordingly, the assets
acquired were adjusted to their fair values as of the
acquisition date. Because the fair values of the assets acquired
exceeded the consideration paid, including $118,000 in
acquisition-related expenses, the value of all noncurrent assets
was reduced to zero, and the Company recorded a deferred credit
of $5,562,568 representing the excess of fair value of assets
acquired over the cost of the acquisition.

F-11



---



##### 



BAKERS FOOTWEAR GROUP, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

The following summarizes the allocation of the
purchase price:

|                                              |  |   |            |  
|--------------------------------------------- |  | - | ---------- | -
|Inventory                                     |  | $ | 14,892,666 |  
|Accrued vacation liability                    |  |   | (353,000   | )
|Excess of assets acquired over purchase price |  |   | (5,562,568 | )
|                                              |  |   |            |  
|Total purchase price                          |  | $ | 8,977,098  |  
|                                              |  |   |            |  

The excess of acquired net assets over cost was
amortized using the straight-line method over a period of five
years until the adoption of SFAS No. 142 in 2002. The
Company recorded as income its unamortized deferred credit of
$2,774,899 in 2002 as a cumulative effect of a change in
accounting principle.

If the Company had been a C corporation at the
acquisition date, the Company would have recorded a deferred tax
liability and a reduction to the excess of acquired net assets
over cost of $2,156,070. As a result, the unaudited pro forma
information on the accompanying statements of operations
pertaining to income (loss) before cumulative effect of change
in accounting and income taxes has been adjusted to reflect a
reduction in the amount of amortization of $404,386 for each of
the years ended December 30, 2000 and January 5, 2002.

In March 2002, the Company completed the
acquisition of 33 store leases from SLJ for a purchase price of
$1,800,000. The assets purchased consisted of all of the
sellers leasehold interests relating to the 33 stores, as
well as all furniture, fixtures, and equipment located in the
respective stores. The total consideration paid was allocated to
leasehold improvements and fixtures.



|   |                       
|-- | ----------------------
|3. | Property and Equipment

Property and equipment consist of the following:

|                                               |  |                  |                |            |  |            |            |  |  |   |            | 
|---------------------------------------------- |  | ---------------- | -------------- | ---------- |  | ---------- | ---------- |  |  | - | ---------- | 
|                                               |  | Estimated Useful |                | January 4, |  | January 3,
|                                               |  | Lives            |                | 2003       |  | 2004      
|                                               |  |                  |                |            |  |           
|Furniture, fixtures, and equipment             |  |                  | 3-6 years      |            |  | $          | 8,001,073  |  |  | $ | 9,876,056  | 
|Leasehold improvements                         |  |                  | up to 10 years |            |  |            | 7,068,662  |  |  |   | 7,957,242  | 
|Computer equipment and software                |  |                  | 3 years        |            |  |            | 2,559,968  |  |  |   | 2,616,003  | 
|                                               |  |                  |                |            |  |            |            |  |  |   |            | 
|                                               |  |                  |                |            |  |            | 17,629,703 |  |  |   | 20,449,301 | 
|Less accumulated depreciation and amortization |  |                  |                |            |  |            | 5,379,710  |  |  |   | 7,990,123  | 
|                                               |  |                  |                |            |  |            |            |  |  |   |            | 
|                                               |  |                  |                |            |  | $          | 12,249,993 |  |  | $ | 12,459,178 | 
|                                               |  |                  |                |            |  |            |            |  |  |   |            | 

Depreciation and amortization of property and
equipment was $1,395,148, $2,533,782, and $2,833,144 for the
years ended January 5, 2002, January 4, 2003, and
January 3, 2004, respectively.



|   |                 
|-- | ----------------
|4. | Accrued Expenses

Accrued expenses consist of the following:

|                                   |  |            |           |            |  |   |           | 
|---------------------------------- |  | ---------- | --------- | ---------- |  | - | --------- | 
|                                   |  | January 4, |           | January 3,
|                                   |  | 2003       |           | 2004      
|                                   |  |            |           |           
|Employee compensation and benefits |  | $          | 2,197,046 |            |  | $ | 2,884,291 | 
|Accrued rent                       |  |            | 591,633   |            |  |   | 414,234   | 
|Other                              |  |            | 1,539,854 |            |  |   | 2,688,348 | 
|                                   |  |            |           |            |  |   |           | 
|                                   |  | $          | 4,328,533 |            |  | $ | 5,986,873 | 
|                                   |  |            |           |            |  |   |           | 

F-12



---



##### 



BAKERS FOOTWEAR GROUP, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)



|   |                          
|-- | -------------------------
|5. | Capital Lease Obligations

Assets under capital leases totaling $3,060,015
and $4,218,660 at January 4, 2003 and January 3, 2004,
respectively relate primarily to equipment obtained to support
the Companys integrated point of sale system
and are included as a component of property and equipment.
Accumulated amortization on assets capitalized under capital
leases totals $703,427 and $1,463,335 for the years ended
January 4, 2003 and January 3, 2004, respectively.

Obligations under capital leases were $2,117,166
and $2,294,444 at January 4, 2003 and January 3, 2004,
respectively.

Future minimum lease payments at January 3,
2004 under capital leases are as follows:

|                                                                                    |      |   |           |           | 
|----------------------------------------------------------------------------------- | ---- | - | --------- | --------- | 
|Fiscal year:                                                                        |      |   |           |          
|                                                                                    | 2004 |   | $         | 1,398,052 | 
|                                                                                    | 2005 |   |           | 935,051   | 
|                                                                                    | 2006 |   |           | 536,507   | 
|                                                                                    | 2007 |   |           | 256,299   | 
|                                                                                    | 2008 |   |           | 75,023    | 
|                                                                                    |      |   |           |          
|Total minimum lease payments                                                        |      |   | 3,200,932 |          
|Less amount representing interest                                                   |      |   | 906,488   |          
|                                                                                    |      |   |           |          
|Present value of minimum lease payments
    (including current portion of $947,332) |      | $ | 2,294,444 |          
|                                                                                    |      |   |           |          



|   |                 
|-- | ----------------
|6. | Operating Leases

The Company leases property and equipment under
noncancelable operating leases expiring at various dates through
2018. Certain leases have scheduled future rent increases,
escalation clauses, or renewal options. Future minimum lease
payments, excluding executory costs, at January 3, 2004 are
as follows:

|             |            |   |            |            | 
|------------ | ---------- | - | ---------- | ---------- | 
|Fiscal year: |            |   |            |           
|             | 2004       |   | $          | 15,804,333 | 
|             | 2005       |   |            | 14,519,551 | 
|             | 2006       |   |            | 12,110,521 | 
|             | 2007       |   |            | 10,280,145 | 
|             | 2008       |   |            | 9,338,913  | 
|             | Thereafter |   |            | 29,551,213 | 
|             |            |   |            |           
|             |            | $ | 91,604,676 |           
|             |            |   |            |           

Rent expense, including occupancy costs, was
$18,893,180, $24,797,828, and $25,792,969 for the years ended
January 5, 2002, January 4, 2003, and January 3,
2004, respectively. Certain leases provide for contingent rent
based on sales. Contingent rent was $525,590, $343,716, and
$225,964 for the years ended January 5, 2002,
January 4, 2003, and January 3, 2004, respectively.



|   |                           
|-- | --------------------------
|7. | Revolving Credit Agreement

The Company has a revolving credit agreement with
a commercial bank. This agreement calls for a maximum line of
credit of $25,000,000 subject to the calculated borrowing base
as defined in the agreement. The revolving credit agreement
matures on January 5, 2005 and is secured by substantially
all assets of the Company and a $500,000 personal guarantee by
the Companys principal shareholder. Interest is payable

F-13



---



##### 



BAKERS FOOTWEAR GROUP, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

monthly at the banks base rate plus 0.75%
(4.75% per annum at January 3, 2004). The weighted
average interest rate approximated 8.16% in 2001, 5.42% in 2002,
and 4.87% in 2003. An unused line fee of 0.25% per annum is
payable monthly based on the difference between $25,000,000 and
the average loan balance.

The revolving credit agreement also allows the
Company to apply the LIBOR (London Interbank Offered Rate) plus
3.00% to a designated portion of the outstanding balance for a
minimum of 30 days by entering into a basis swap. The
Company periodically enters into such basis swaps to modify the
interest payments under the revolving credit agreement from the
banks base rate plus 0.75% to LIBOR plus 3.00%. Such basis
swaps do not meet the criteria for hedge accounting, and
accordingly, changes in the fair value of the swaps are included
in current results of operations. The basis swaps entered into
during 2002 and 2003 did not have a material effect on the
financial statements.

The Company received an overadvance of $2,500,000
on its revolving credit agreement during 2002 to provide interim
funding for the Companys acquisition of 33 store leases
from SLJ. At January 4, 2003, there were no outstanding
borrowings on the overadvance. The overadvance matured in
February 2003.

On February 20, 2003, the Company amended
its revolving credit agreement to provide a Sublimit Facility up
to an additional $2,000,000, subject to certain borrowing base
restrictions as defined. The Sublimit Facility is payable in
full at maturity on February 20, 2004. Amounts outstanding
under the Sublimit Facility cannot exceed $1,500,000 at
December 1, 2003, $1,000,000 at January 1, 2004, and
$500,000 at February 1, 2004. The Sublimit Facility also
provides for a minimum EBITDA covenant, a minimum required
availability covenant, and a limitation on capital expenditures
for 2003. There were no amounts outstanding under the Sublimit
Facility at January 3, 2004.

The agreement contains a restrictive financial
covenant limiting capital expenditures and other nonfinancial
covenants. At January 3, 2004, the Company has $5,579,468
of unused borrowing available under the revolving credit
agreement, including availability under the Companys
Sublimit Facility, based upon the Companys borrowing base
calculation.

The agreement allows up to $10,000,000 of letters
of credit to be outstanding, subject to the overall line limits.
At January 4, 2003 and January 3, 2004, the Company
had no outstanding letters of credit.

F-14



---



##### 



BAKERS FOOTWEAR GROUP, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)



|   |                  
|-- | -----------------
|8. | Subordinated Debt

The following notes payable are subordinate to
the revolving credit agreement and are secured by substantially
all assets of the Company:

|                                                                                                                                                                                                                                                                                                                             |                         |            |           |            |  |   |         |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | ---------- | --------- | ---------- |  | - | ------- | ------- | 
|                                                                                                                                                                                                                                                                                                                             |                         | January 4, |           | January 3,
|                                                                                                                                                                                                                                                                                                                             |                         | 2003       |           | 2004      
|                                                                                                                                                                                                                                                                                                                             |                         |            |           |           
|Subordinated note payable to Class B
    shareholders, principal and interest payable in quarterly
    installments of $30,000 up to $50,000 over the term of the loan,
    at 8% per annum through January 2008. Secured by a $393,000
    standby letter of credit and personal guarantee of the principal
    shareholder |                         | $          | 484,811   |            |  | $ | 359,910 |        
|Subordinated note payable, principal and
    interest, at 9% per annum, due January 31, 2003                                                                                                                                                                                                                                 |                         |            | 95,000    |            |  |   |        |        
|Subordinated note payable to financial
    institution, due March 1, 2004, issued at a discount
    (Note 13).Interest of $12,500 is payable quarterly.
    Note accretes to the original face amount of $500,000 at
    January 31, 2003                                                                                    |                         |            | 487,553   |            |  |   | 500,000 |        
|                                                                                                                                                                                                                                                                                                                             |                         |            |           |            |  |   |         |        
|                                                                                                                                                                                                                                                                                                                             |                         |            | 1,067,364 |            |  |   | 859,910 |        
|                                                                                                                                                                                                                                                                                                                             | Less current maturities |            |           | 219,901    |  |   |         | 645,501 | 
|                                                                                                                                                                                                                                                                                                                             |                         |            |           |            |  |   |         |        
|                                                                                                                                                                                                                                                                                                                             |                         | $          | 847,463   |            |  | $ | 214,409 |        
|                                                                                                                                                                                                                                                                                                                             |                         |            |           |            |  |   |         |        

On April 8, 2003, the Company entered into
an amended and restated subordinated note agreement and an
amended and restated warrant agreement which extended the
maturity date of the subordinated note payable and the
Class A stock purchase warrants to March 1, 2004. At
January 4, 2003, the subordinated note payable and the
Class A stock purchase warrants had balances of $487,553
and $686,860, respectively. The subordinated note payable, with
a face amount of $500,000, bears interest at 10% per annum,
payable quarterly. The face amount of the note is payable at
maturity. The amended and restated warrant agreement provides
for an increase in the minimum repurchase amount of $150,000.
The warrants are accreted as interest expense, using the
effective interest method to the revised minimum repurchase
amount of $850,000 over the remaining term of the note. The
revised minimum purchase amount of $850,000 is payable at
maturity.

As of January 3, 2004, the scheduled
maturities of subordinated debt are as follows:

|             |      |   |         |         | 
|------------ | ---- | - | ------- | ------- | 
|Fiscal year: |      |   |         |        
|             | 2004 |   | $       | 645,501 | 
|             | 2005 |   |         | 167,799 | 
|             | 2006 |   |         | 46,610  | 
|             |      |   |         |        
|             |      | $ | 859,910 |        
|             |      |   |         |        



|   |                                    
|-- | -----------------------------------
|9. | Subordinated Convertible Debentures

On April 4, 2002, the Company issued
$4,900,000 of subordinated convertible debentures. Interest
accrues on the unpaid principal amount, beginning
January 1, 2003, at 7%, increasing to 9% on January 1,
2004 and 11% on January 1, 2005, and is payable quarterly,
in arrears. Principal is due and payable on April 4, 2007
(the maturity date). The debentures convert only upon a
qualified IPO, as defined, into an aggregate of
448,302 shares of common stock. In the event of a
nonqualifying IPO, as defined, the debentures could be converted
into a variable amount of shares at the option of the holder.

F-15



---



##### 



BAKERS FOOTWEAR GROUP, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Effective January 2, 2004, the Company
exchanged its $4,900,000 principal subordinated convertible
debentures (existing convertible debentures) for $4,900,000
principal subordinated convertible debentures (new convertible
debentures). The new convertible debentures were recorded at
fair value, or $4,500,000. In connection with the extinguishment
of the existing convertible debentures, the Company wrote off
the related unamortized debt issuance costs and recognized an
immaterial gain.

The new convertible debentures bear interest at
7%, increasing to 9% on January 1, 2004 and 11% on
January 1, 2005. Interest is payable quarterly, in arrears.
Principal is due and payable on April 4, 2007 (the maturity
date). The debentures automatically convert upon an IPO, into
the fixed number of 653,331 shares of common stock. In the
event that an IPO is not consummated prior to maturity,
principal is due and payable at the maturity date. The new
convertible debentures also provide for certain registration
rights in the event of an IPO. In addition, the new convertible
debentures are mandatorily redeemable upon certain events, such
as a merger, reorganization, stock sale, sale of substantially
all assets of the Company, or similar transaction. The maturity
or mandatory redemption amount shall be the greater of
(i) the unpaid principal balance or (ii) the fair
value of the shares to which the debenture holder would have
been entitled on a converted basis.

The Companys periodic interest cost is
determined using the interest method assuming an April 4,
2007 maturity of the debentures.



|    |                      
|--- | ---------------------
|10. | Employee Benefit Plan

The Company established a 401(k) savings plan
effective July 1, 2000, which allows full-time employees
age 21 or over with at least one year of service to make
tax-deferred contributions of 1% of compensation up to a maximum
amount allowed under Internal Revenue Service guidelines. The
plan provides for Company matching of employee contributions on
a discretionary basis. The Company contributed $64,991, $0, and
$35,000 for the years ended January 5, 2002,
January 4, 2003, and January 3, 2004, respectively.



|    |                              
|--- | -----------------------------
|11. | Commitments and Contingencies

The Company has certain contingent liabilities
resulting from litigation and claims incident to the ordinary
course of business. Management believes the probable resolution
of such contingencies will not materially affect the financial
position or results of operations of the Company.



|    |                                       
|--- | --------------------------------------
|12. | Pro Forma Income Taxes 
    Unaudited

Effective January 4, 2004, the Company
revoked its S corporation status and therefore will be
subject to corporate federal and state income taxes as a C
corporation. Because the Company was an S corporation
through the year ended January 3, 2004, deferred taxes have
not been reflected in the financial statements. The Company is
not responsible for these income taxes until the revocation of
the S corporation status. For informational purposes, the
statements of operations include a pro forma adjustment for
income taxes that would have been recorded if the Company was a
C corporation, calculated in accordance with
SFAS No. 109, Accounting for Income Taxes.

The differences between pro forma income taxes at
the statutory U.S. federal income tax rate of 34% and those
reported in the statements of operations relate to the impact of
state and local taxes and, in periods prior to the adoption of
SFAS No. 142, the amortization of excess of acquired
net assets over cost.

F-16



---



##### 



BAKERS FOOTWEAR GROUP, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

The following table reconciles the Companys
historical income (loss) before cumulative effect of change in
accounting to pro forma income (loss) before cumulative effect
of change in accounting and income taxes.

|                                                                                              |                                                                                                 |            |           |            |   |            |          |   |  |   |           |   | 
|--------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | ---------- | --------- | ---------- | - | ---------- | -------- | - |  | - | --------- | - | 
|                                                                                              |                                                                                                 | Year Ended |           | Year Ended |   | Year Ended
|                                                                                              |                                                                                                 | January 5, |           | January 4, |   | January 3,
|                                                                                              |                                                                                                 | 2002       |           | 2003       |   | 2004      
|                                                                                              |                                                                                                 |            |           |            |   |           
|Historical income (loss) before cumulative effect
    of change in accounting                 |                                                                                                 | $          | 4,959,653 |            |   | $          | (490,627 | ) |  | $ | 1,674,894 |  
|State income tax expense (benefit)                                                            |                                                                                                 |            | 315,667   |            |   |            | (163,645 | ) |  |   | 67,819    |  
|                                                                                              | Reduction of amortization of excess of acquired
    net assets over cost assuming C corporation |            |           | (404,386   | ) |            |          |  |  |   |           |  | 
|                                                                                              |                                                                                                 |            |           |            |   |            |          |   |  |   |           |  
|Pro forma income (loss) before cumulative effect
    of change in accounting and income taxes |                                                                                                 | $          | 4,870,934 |            |   | $          | (654,272 | ) |  | $ | 1,742,713 |  
|                                                                                              |                                                                                                 |            |           |            |   |            |          |   |  |   |           |  

Significant components of the pro forma provision
for (benefit from) income taxes on income (loss) before
cumulative effect of change in accounting are as follows:

|                                     |                 |            |           |            |  |            |          |          |   |   |          |          |  
|------------------------------------ | --------------- | ---------- | --------- | ---------- |  | ---------- | -------- | -------- | - | - | -------- | -------- | -
|                                     |                 | January 5, |           | January 4, |  | January 3,
|                                     |                 | 2002       |           | 2003       |  | 2004      
|                                     |                 |            |           |            |  |           
|Current:                             |                 |            |           |            |  |            |          |          |   |   |          |         
|                                     | Federal         |            | $         | 1,420,414  |  |            | $        | (352,771 | ) |   | $        | 801,763  |  
|                                     | State and local |            |           | 167,107    |  |            |          | (41,503  | ) |   |          | 94,325   |  
|                                     |                 |            |           |            |  |            |          |          |   |   |          |         
|Total current                        |                 |            | 1,587,521 |            |  |            | (394,274 | )        |   |   | 896,088  |         
|Deferred:                            |                 |            |           |            |  |            |          |          |   |   |          |         
|                                     | Federal         |            |           | 15,688     |  |            |          | 158,454  |   |   |          | (197,947 | )
|                                     | State and local |            |           | 1,846      |  |            |          | 18,642   |   |   |          | (23,288  | )
|                                     |                 |            |           |            |  |            |          |          |   |   |          |         
|Total deferred (credit)              |                 |            | 17,534    |            |  |            | 177,096  |          |   |   | (221,235 | )       
|                                     |                 |            |           |            |  |            |          |          |   |   |          |         
|Total income tax (benefit) provision |                 | $          | 1,605,055 |            |  | $          | (217,178 | )        |   | $ | 674,853  |         
|                                     |                 |            |           |            |  |            |          |          |   |   |          |         

The differences between the pro forma provision
for (benefit from) income taxes at the statutory
U.S. federal income tax rate of 34% and those reported in
the statements of operations are as follows:

|                                                              |  |            |       |            |  |            |        |    |  |  |       |  
|------------------------------------------------------------- |  | ---------- | ----- | ---------- |  | ---------- | ------ | -- |  |  | ----- | -
|                                                              |  | January 5, |       | January 4, |  | January 3,
|                                                              |  | 2002       |       | 2003       |  | 2004      
|                                                              |  |            |       |            |  |           
|Statutory federal income tax rate                             |  |            | 34.00 | %          |  |            | (34.00 | )% |  |  | 34.00 | %
|State and local income taxes, net of federal
    income taxes |  |            | 4.00  | %          |  |            | (4.00  | )% |  |  | 4.00  | %
|Permanent differences                                         |  |            | (5.05 | )%         |  |            | 4.81   | %  |  |  | 0.72  | %
|Valuation allowance                                           |  |            |      |            |  |            |       |    |  |  |      |  
|                                                              |  |            |       |            |  |            |        |    |  |  |       |  
|Effective tax rate                                            |  |            | 32.95 | %          |  |            | (33.19 | )% |  |  | 38.72 | %
|                                                              |  |            |       |            |  |            |        |    |  |  |       |  

Deferred income taxes arise from temporary
differences in the recognition of income and expense for income
tax purposes. Pro forma deferred income taxes were computed
using the liability method and reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial statement purposes and the amounts
used for income tax purposes as if the Company was a C
corporation.

F-17



---



##### 



BAKERS FOOTWEAR GROUP, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

Components of the Companys pro forma
deferred tax assets and liabilities are as follows:

|                               |                                            |            |           |            |  |   |           |         | 
|------------------------------ | ------------------------------------------ | ---------- | --------- | ---------- |  | - | --------- | ------- | 
|                               |                                            | January 4, |           | January 3,
|                               |                                            | 2003       |           | 2004      
|                               |                                            |            |           |           
|Deferred tax assets:           |                                            |            |           |            |  |   |           |        
|                               | Vacation accrual                           |            | $         | 256,367    |  |   | $         | 230,768 | 
|                               | Inventory                                  |            |           | 717,833    |  |   |           | 693,424 | 
|                               | Stock-based and accrued bonus compensation |            |           | 255,732    |  |   |           | 536,834 | 
|                               | Accrued rent                               |            |           | 340,351    |  |   |           | 490,689 | 
|                               | Other                                      |            |           | 34,010     |  |   |           | 21,660  | 
|                               |                                            |            |           |            |  |   |           |        
|Total deferred tax assets      |                                            |            | 1,604,293 |            |  |   | 1,973,375 |        
|Deferred tax liabilities:      |                                            |            |           |            |  |   |           |        
|                               | Property and equipment                     |            |           | 808,017    |  |   |           | 955,864 | 
|                               |                                            |            |           |            |  |   |           |        
|Total deferred tax liabilities |                                            |            | 808,017   |            |  |   | 955,864   |        
|                               |                                            |            |           |            |  |   |           |        
|Net deferred tax assets        |                                            | $          | 796,276   |            |  | $ | 1,017,511 |        
|                               |                                            |            |           |            |  |   |           |        



|    |                     
|--- | --------------------
|13. | Shareholders Equity

As discussed in Note 18, effective
February 10, 2004 the Company completed its IPO. In
connection with the IPO, all Class A, Class B and
Class C common stock was converted into the Companys
new common stock. The following discussion of Class A,
Class B and Class C common stock relates to their
rights and privileges as of January 3, 2004.

As of January 3, 2004, the Company has three
classes of common stock: Class A, Class B, and
Class C. All voting rights are vested with the Class A
and Class C common stock. The Articles of Incorporation
provide that all classes of common stock have equal rights with
respect to distributions and liquidation preference.



| |              
| | -------------
| | Class A Stock

All Class A shares are subject to a
shareholder agreement which limits the shareholders
ability to sell stock and provides the Company the right to
purchase stock from the shareholders at a price based on net
book value in certain circumstances defined in the agreement or
at a price based on the appraised value of the Company in the
event of the death of a Class A shareholder. The
shareholder agreement provides for certain registration rights
and co-sale rights in connection with an IPO.

During fiscal 1999, the Company sold
605,595 shares of Class A stock for $2,418,116, net of
issuance costs. Of the total amount sold, 284,257 shares
contained put options, and these shares are classified as a
Class A stock redemption obligation in the accompanying
balance sheets. These options give the option holders the right
to cause the Company to redeem all, but not less than all,
shares held by the individuals in June 2004 or June 2005. The
purchase price for such redemption is to be equal to the greater
of (a) the book value of the shares as defined in the
agreement or (b) a variable minimum redemption amount based
upon timeframes specified in the agreement. The difference
between the minimum redemption amount and the original issue
price of the shares holding put options is being accreted over
the redemption period.

In January 2001, 17,200 of the Class A
shares were sold among shareholders at the original issue price.
Under the purchase agreement, put options attached to certain of
these shares did not transfer to the new shareholders and were
therefore terminated. Accordingly, the original value of $69,906
associated with these shares was transferred from temporary
capital into permanent paid-in capital at that time. In
addition, this

F-18



---



##### 



BAKERS FOOTWEAR GROUP, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

transaction decreased the minimum redemption
amount, which is accounted for as a change in accounting
estimate and thus impacts the periodic accretion charges on a
prospective basis with no adjustment to prior periods.

The Class A stock redemption obligation is
$1,262,696, and $1,389,326 at January 4, 2003, and
January 3, 2004, respectively. If the put options are
exercised, the Class A stock redemption obligation would be
payable in 36 equal monthly installments of principal plus
interest at a rate of 8% beginning in the month the options are
exercised.



| |              
| | -------------
| | Class B Stock

Beginning after October 31, 2007 (ten years
from the date of original issuance), the Company has the option
to purchase all, but not less than all, of the 271,910
Class B shares held by the respective Class B
shareholders, which represents all issued and outstanding
shares. In the event the Company fails to exercise its purchase
option, the principal Class A shareholder shall then have
the option to purchase all, but not less than all, of the
outstanding Class B shares. If the Company or the principal
Class A shareholder exercises the respective right, the
purchase price per share shall be an amount determined by an
external appraiser selected by the parties in accordance with
the agreement.

Upon the death of a Class B shareholder, the
Company and the principal Class A shareholder have
generally the same repurchase rights and at the same price as
those in place after October 31, 2007.

The Class B shareholders also have the right
to cause the Company to redeem all 271,910 Class B shares
upon the Companys final principal payment related to the
outstanding subordinated note payable with these shareholders in
January 2008 (see Note 8). The Class B shareholders
could cause such redemption to occur earlier upon the occurrence
of certain events, as defined in the agreement. The purchase
price upon the redemption of the Class B shares is based on
net book value per share in accordance with the agreement.

Periodic changes in the redemption value are
recognized immediately by the Company as they occur. Thus, the
carrying value of the Class B shares is adjusted to equal
the redemption amount at the end of each reporting period
through an offset to retained earnings. The value of the
Class B stock redemption obligation was $283,500 and
$506,500 as of January 4, 2003 and January 3, 2004,
respectively.

F-19



---



##### 



BAKERS FOOTWEAR GROUP, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)



| |                  
| | -----------------
| | Stock Option Plan

The Company has a stock option plan (the Plan)
under which non-qualified options to purchase up to
1,500,000 shares of Class C stock are available to be
granted to employees at an option price determined by the Board
of Directors, which administers the Plan. No option can be for a
term of more than 14 years from the date of grant. In
general, options vest at 25% per year on each annual
anniversary date of the optionees employment with the
Company. At January 4, 2003, approximately 183,206 options
were exercisable. At January 3, 2004, all 268,992 options
issued were exercisable. No options have been exercised since
the inception of the Plan.

Stock option activity under the Plan during the
years ended January 5, 2002, January 4, 2003, and
January 3, 2004 is as follows:

|                                 |           |           |         |                  |   |   |      |      | 
|-------------------------------- | --------- | --------- | ------- | ---------------- | - | - | ---- | ---- | 
|                                 |           | Number of |         | Weighted Average
|                                 |           | Options   |         | Exercise Price  
|                                 |           |           |         |                 
|Outstanding at December 30, 2000 |           |           | 360,595 |                  |   | $ | 0.01 |     
|                                 | Granted   |           |         |                 |   |   |      |     | 
|                                 | Exercised |           |         |                 |   |   |      |     | 
|                                 | Cancelled |           |         | (116,321         | ) |   |      | 0.01 | 
|                                 |           |           |         |                  |   |   |      |     
|Outstanding at January 5, 2002   |           |           | 244,274 |                  |   |   | 0.01 |     
|                                 | Granted   |           |         |                 |   |   |      |     | 
|                                 | Exercised |           |         |                 |   |   |      |     | 
|                                 | Cancelled |           |         |                 |   |   |      |     | 
|                                 |           |           |         |                  |   |   |      |     
|Outstanding at January 4, 2003   |           |           | 244,274 |                  |   |   | 0.01 |     
|                                 | Granted   |           |         | 24,718           |   |   |      | 0.01 | 
|                                 | Exercised |           |         |                 |   |   |      |     | 
|                                 | Cancelled |           |         |                 |   |   |      |     | 
|                                 |           |           |         |                  |   |   |      |     
|Outstanding at January 3, 2004   |           |           | 268,992 |                  |   | $ | 0.01 |     
|                                 |           |           |         |                  |   |   |      |     

The Company has elected to follow APB No. 25
and related interpretations in accounting for its stock options
and the disclosure-only provisions of SFAS No. 123. Under
APB No. 25, compensation expense is recognized over the
vesting period based on the amount by which the fair value of
the underlying common stock exceeds the exercise price of stock
options at the date of grant. In 2003, the Company issued 24,718
options with an estimated grant-date fair value of
$6.00 per share which vested immediately and were included
in compensation expense.

Pro forma information regarding results of
operations is required by SFAS No. 123 as if the Company
had accounted for its stock-based awards under the fair value
method. The fair value of the Companys stock-based awards
to employees has been estimated using the minimum value option
pricing model, which does not consider stock price volatility.
Because the Company does not have actively traded equity
securities, volatility is not considered in determining the fair
value of the stock-based awards.

For the year ended January 3, 2004, the fair
value of the Companys stock-based awards was estimated
using the following weighted average assumptions:

|                                  |  |  |     |  
|--------------------------------- |  |  | --- | -
|Expected life of options in years |  |  | 4   |  
|Risk-free interest rate           |  |  | 4.0 | %
|Expected dividend yield           |  |  | 0.0 | %

F-20



---



##### 



BAKERS FOOTWEAR GROUP, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

The weighted average remaining contractual life
of the stock options outstanding at January 3, 2004 is
approximately 10 years.

Stock Purchase Warrants

The Company issued warrants that entitle the note
holder to acquire 76,907 shares of Class A common
stock at an exercise price of $0.001 per share. The note
holder may also put the warrants to the Company on the maturity
date of the related subordinated note, which is March 1,
2004. The minimum stated repurchase obligation for the warrants
on that date is $850,000 and could be higher based on the
Companys financial results. At the date of issuance in
fiscal 1999, the Company determined the fair value of the
subordinated note payable and allocated the proceeds received
between the note and warrants based on their respective fair
values at the time of issuance. The value allocated to the
warrants, of $307,551, was recorded as a debt discount to be
charged to interest expense over the life of the notes using the
effective interest method. Interest expense recorded with
respect to the amortization of the debt discount was $86,424,
$124,160, and $12,447 for the years ended January 5, 2002,
January 4, 2003, and January 3, 2004, respectively.

The warrants are being accreted, using the
effective interest method, to the minimum repurchase amount of
$850,000 over the term of the note as interest expense, which
was $111,520, $140,094, and $150,640 for the years ended
January 5, 2002, January 4, 2003, and January 3,
2004, respectively.

F-21



---



##### 



BAKERS FOOTWEAR GROUP, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)



|    |                   
|--- | ------------------
|14. | Earnings per Share

The following table sets forth the computation of
basic and diluted earnings per share:

|                                                                                                              |                                                                        |                         |           |            |         |            |           |           |         |   |           |           |         | 
|------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ----------------------- | --------- | ---------- | ------- | ---------- | --------- | --------- | ------- | - | --------- | --------- | ------- | 
|                                                                                                              |                                                                        | Year Ended              |           | Year Ended |         | Year Ended
|                                                                                                              |                                                                        | January 5,              |           | January 4, |         | January 3,
|                                                                                                              |                                                                        | 2002                    |           | 2003       |         | 2004      
|                                                                                                              |                                                                        |                         |           |            |         |           
|Numerator:                                                                                                    |                                                                        |                         |           |            |         |            |           |           |         |   |           |          
|                                                                                                              | Income (loss) before cumulative effect of change
    in accounting     |                         | $         | 4,959,653  |         |            | $         | (490,627  | )       |   | $         | 1,674,894 |        
|                                                                                                              | Cumulative effect of change in accounting                              |                         |           |           |         |            |           | 2,774,899 |         |   |           |          |        
|                                                                                                              |                                                                        |                         |           |            |         |            |           |           |         |   |           |          
|                                                                                                              | Net income                                                             |                         |           | 4,959,653  |         |            |           | 2,284,272 |         |   |           | 1,674,894 |        
|                                                                                                              | Accretion on redeemable stock                                          |                         |           | (241,768   | )       |            |           | (144,714  | )       |   |           | (349,629  | )      
|                                                                                                              |                                                                        |                         |           |            |         |            |           |           |         |   |           |          
|Numerator for basic earnings per share                                                                        |                                                                        |                         | 4,717,885 |            |         |            | 2,139,558 |           |         |   | 1,325,265 |          
|Add accretion on redeemable stock                                                                             |                                                                        |                         | 241,768   |            |         |            | 144,714   |           |         |   | 349,629   |          
|Interest expense related to warrants                                                                          |                                                                        |                         | 111,520   |            |         |            | 140,094   |           |         |   | 150,640   |          
|                                                                                                              |                                                                        |                         |           |            |         |            |           |           |         |   |           |          
|Numerator for diluted earnings per share                                                                      |                                                                        | $                       | 5,071,173 |            |         | $          | 2,424,366 |           |         | $ | 1,825,534 |          
|                                                                                                              |                                                                        |                         |           |            |         |            |           |           |         |   |           |          
|Denominator:                                                                                                  |                                                                        |                         |           |            |         |            |           |           |         |   |           |          
|                                                                                                              | Denominator for basic earnings per
    share  weighted average shares |                         |           | 1,426,188  |         |            |           | 1,426,188 |         |   |           | 1,426,188 |        
|                                                                                                              | Effect of dilutive securities:                                         |                         |           |            |         |            |           |           |         |   |           |           |        
|                                                                                                              |                                                                        | Stock options           |           |            | 295,797 |            |           |           | 243,663 |   |           |           | 258,218 | 
|                                                                                                              |                                                                        | Stock purchase warrants |           |            | 76,888  |            |           |           | 76,888  |   |           |           | 76,897  | 
|                                                                                                              |                                                                        | Redeemable securities   |           |            | 538,967 |            |           |           | 538,967 |   |           |           | 538,967 | 
|                                                                                                              |                                                                        |                         |           |            |         |            |           |           |         |   |           |          
|Denominator for diluted earnings per
    share  adjusted weighted average shares and assumed
    conversions |                                                                        |                         | 2,337,840 |            |         |            | 2,285,706 |           |         |   | 2,300,270 |          
|                                                                                                              |                                                                        |                         |           |            |         |            |           |           |         |   |           |          
|Basic earnings per share                                                                                      |                                                                        |                         |           |            |         |            |           |           |         |   |           |          
|Income (loss) before cumulative effect of change
    in accounting                                            |                                                                        | $                       | 3.48      |            |         | $          | (0.34     | )         |         | $ | 1.17      |          
|Cumulative effect of change in accounting                                                                     |                                                                        |                         |          |            |         |            | 1.94      |           |         |   |          |          
|                                                                                                              |                                                                        |                         |           |            |         |            |           |           |         |   |           |          
|Net income                                                                                                    |                                                                        |                         | 3.48      |            |         |            | 1.60      |           |         |   | 1.17      |          
|Accretion on Class A and Class B
    redeemable stock                                                         |                                                                        |                         | (0.17     | )          |         |            | (0.10     | )         |         |   | (0.24     | )        
|                                                                                                              |                                                                        |                         |           |            |         |            |           |           |         |   |           |          
|Net income allocable to common shareholders                                                                   |                                                                        | $                       | 3.31      |            |         | $          | 1.50      |           |         | $ | 0.93      |          
|                                                                                                              |                                                                        |                         |           |            |         |            |           |           |         |   |           |          
|Diluted earnings per share                                                                                    |                                                                        |                         |           |            |         |            |           |           |         |   |           |          
|Income (loss) before cumulative effect of change
    in accounting                                            |                                                                        | $                       | 2.12      |            |         | $          | (0.21     | )         |         | $ | 0.73      |          
|Cumulative effect of change in accounting                                                                     |                                                                        |                         |          |            |         |            | 1.21      |           |         |   |          |          
|                                                                                                              |                                                                        |                         |           |            |         |            |           |           |         |   |           |          
|Net income                                                                                                    |                                                                        |                         | 2.12      |            |         |            | 1.00      |           |         |   | 0.73      |          
|Interest expense related to Class A stock
    purchase warrants                                               |                                                                        |                         | 0.05      |            |         |            | 0.06      |           |         |   | 0.06      |          
|                                                                                                              |                                                                        |                         |           |            |         |            |           |           |         |   |           |          
|Net income allocable to common shareholders                                                                   |                                                                        | $                       | 2.17      |            |         | $          | 1.06      |           |         | $ | 0.79      |          
|                                                                                                              |                                                                        |                         |           |            |         |            |           |           |         |   |           |          

F-22



---



##### 



BAKERS FOOTWEAR GROUP, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)

The following table sets forth the earnings per
share for the unaudited pro forma income tax information on the
accompanying statements of operations (see Note 12):

|                                                                   |  |            |       |            |  |            |       |   |  |   |       |  
|------------------------------------------------------------------ |  | ---------- | ----- | ---------- |  | ---------- | ----- | - |  | - | ----- | -
|                                                                   |  | Year Ended |       | Year Ended |  | Year Ended
|                                                                   |  | January 5, |       | January 4, |  | January 3,
|                                                                   |  | 2002       |       | 2003       |  | 2004      
|                                                                   |  |            |       |            |  |           
|Basic earnings per share                                           |  |            |       |            |  |            |       |   |  |   |       |  
|Income (loss) before cumulative effect of change
    in accounting |  | $          | 2.29  |            |  | $          | (0.31 | ) |  | $ | 0.75  |  
|Cumulative effect of change in accounting, net of
    taxes        |  |            |      |            |  |            | 1.23  |   |  |   |      |  
|                                                                   |  |            |       |            |  |            |       |   |  |   |       |  
|Net income                                                         |  |            | 2.29  |            |  |            | 0.92  |   |  |   | 0.75  |  
|Accretion on Class A and Class B
    redeemable stock              |  |            | (0.17 | )          |  |            | (0.09 | ) |  |   | (0.25 | )
|                                                                   |  |            |       |            |  |            |       |   |  |   |       |  
|Net income allocable to common shareholders                        |  | $          | 2.12  |            |  | $          | 0.83  |   |  | $ | 0.50  |  
|                                                                   |  |            |       |            |  |            |       |   |  |   |       |  
|Diluted earnings per share                                         |  |            |       |            |  |            |       |   |  |   |       |  
|Income (loss) before cumulative effect of change
    in accounting |  | $          | 1.40  |            |  | $          | (0.19 | ) |  | $ | 0.48  |  
|Cumulative effect of change in accounting, net of
    taxes        |  |            |      |            |  |            | 0.77  |   |  |   |      |  
|                                                                   |  |            |       |            |  |            |       |   |  |   |       |  
|Net income                                                         |  |            | 1.40  |            |  |            | 0.58  |   |  |   | 0.48  |  
|Interest expense related to Class A stock
    purchase warrants    |  |            | 0.04  |            |  |            | 0.06  |   |  |   |      |  
|                                                                   |  |            |       |            |  |            |       |   |  |   |       |  
|Net income allocable to common shareholders(1)                     |  | $          | 1.44  |            |  | $          | 0.64  |   |  | $ | 0.48  |  
|                                                                   |  |            |       |            |  |            |       |   |  |   |       |  



---



|    |                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The diluted earnings per share calculation for
    the year ended January 3, 2004 excludes incremental shares
    of 76,897 and interest expense, net of tax, of $93,397 related
    to the outstanding stock purchase warrants because they are
    antidilutive.



|    |                                    
|--- | -----------------------------------
|15. | Fair Value of Financial Instruments

The carrying values and fair values of the
Companys financial instruments are as follows:

|                                                                                          |  |                 |           |                 |  |                 |           |            |  |   |           |  |  |   |           | 
|----------------------------------------------------------------------------------------- |  | --------------- | --------- | --------------- |  | --------------- | --------- | ---------- |  | - | --------- |  |  | - | --------- | 
|                                                                                          |  |                 |           |                
|                                                                                          |  | January 4, 2003 |           | January 3, 2004
|                                                                                          |  |                 |           |                
|                                                                                          |  | Carrying Amount |           | Fair Value      |  | Carrying Amount |           | Fair Value
|                                                                                          |  |                 |           |                 |  |                 |           |           
|Cash and cash equivalents                                                                 |  | $               |          |                 |  | $               |          |            |  | $ | 574,475   |  |  | $ | 574,475   | 
|Revolving notes payable and long-term
    subordinated debt, including current maturities |  |                 | 8,110,582 |                 |  |                 | 8,146,591 |            |  |   | 3,029,384 |  |  |   | 3,060,885 | 
|Subordinated convertible debentures                                                       |  |                 | 4,900,000 |                 |  |                 | 5,742,448 |            |  |   | 4,500,000 |  |  |   | 4,500,000 | 
|Capital lease obligations, including current
    maturities                               |  |                 | 2,117,166 |                 |  |                 | 2,400,791 |            |  |   | 2,294,444 |  |  |   | 3,002,054 | 
|Stock purchase warrants                                                                   |  |                 | 686,860   |                 |  |                 | 697,421   |            |  |   | 837,500   |  |  |   | 843,465   | 

The carrying amount of cash equivalents
approximates fair value because of the short maturity of those
instruments. The fair values of long-term debt and capital lease
obligations have been estimated based on current rates offered
to the Company for debt of the same maturities. The fair value
of stock purchase warrants is estimated based upon the minimum
repurchase amount discounted based on current rates offered to
the Company for debt of the same maturity.

F-23



---



##### 



BAKERS FOOTWEAR GROUP, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)



|    |                           
|--- | --------------------------
|16. | Related Party Transactions

The Company purchases merchandise inventory from
a vendor affiliated with the Company through common ownership.
Such purchases were approximately $1,200,000, $865,000 and
$733,000 during the years ended January 5, 2002,
January 4, 2003, and January 3, 2004, respectively.
Accounts payable related to such purchases were approximately
$102,000 and $85,000 at January 4, 2003 and January 3,
2004, respectively.

Holders of $918,368 of the $4,500,000 outstanding
subordinated convertible debentures are related parties,
including a relative of the principal shareholder and an entity
affiliated with the Company through a common director.

In addition, the Company maintains certain of its
cash and cash equivalents with a financial institution also
affiliated with the Company through common ownership. A portion
of the Companys credit facility, long-term subordinated
debt and Class A stock purchase warrants are payable to
this affiliated financial institution. The transactions with
this affiliate are executed in the normal course of business.



|    |                                         
|--- | ----------------------------------------
|17. | Quarterly Financial Data 
    Unaudited

|                  |                                                                    |       |   |            |   |       |   |            |  |  |   |            |   |  |   |            | 
|----------------- | ------------------------------------------------------------------ | ----- | - | ---------- | - | ----- | - | ---------- |  |  | - | ---------- | - |  | - | ---------- | 
|                  |                                                                    | First |   | Second     |   | Third |   | Fourth    
|                  |                                                                    |       |   |            |   |       |   |           
|Fiscal year 2002: |                                                                    |       |   |            |   |       |   |            |  |  |   |            |   |  |   |           
|                  | Net sales                                                          |       | $ | 32,059,325 |   |       | $ | 39,405,673 |  |  | $ | 36,259,634 |   |  | $ | 43,423,178 | 
|                  | Gross profit                                                       |       |   | 10,075,453 |   |       |   | 11,892,540 |  |  |   | 8,502,972  |   |  |   | 14,665,092 | 
|                  | Income (loss) before cumulative effect of change
    in accounting |       |   | 437,625    |   |       |   | 457,565    |  |  |   | (3,096,201 | ) |  |   | 1,710,384  | 
|                  | Net income (loss)                                                  |       |   | 3,212,524  |   |       |   | 457,565    |  |  |   | (3,096,201 | ) |  |   | 1,710,384  | 
|                  | Basic earnings (loss) per share                                    |       |   | 1.99       |   |       |   | 0.35       |  |  |   | (1.88      | ) |  |   | 1.04       | 
|                  | Diluted earnings (loss) per share                                  |       |   | 1.42       |   |       |   | 0.22       |  |  |   | (1.88      | ) |  |   | 0.76       | 
|Fiscal year 2003: |                                                                    |       |   |            |   |       |   |            |  |  |   |            |   |  |   |           
|                  | Net sales                                                          |       | $ | 31,909,958 |   |       | $ | 38,310,685 |  |  | $ | 34,274,081 |   |  | $ | 43,728,829 | 
|                  | Gross profit                                                       |       |   | 7,718,475  |   |       |   | 11,518,141 |  |  |   | 9,348,082  |   |  |   | 16,581,413 | 
|                  | Net income (loss)                                                  |       |   | (3,254,643 | ) |       |   | 722,408    |  |  |   | (1,032,935 | ) |  |   | 5,240,064  | 
|                  | Basic earnings (loss) per share                                    |       |   | (2.09      | ) |       |   | 0.50       |  |  |   | (0.73      | ) |  |   | 3.26       | 
|                  | Diluted earnings (loss) per share                                  |       |   | (2.09      | ) |       |   | 0.30       |  |  |   | (0.73      | ) |  |   | 2.28       | 



|    |                  
|--- | -----------------
|18. | Subsequent Events



| |                     
| | --------------------
| | Change in Tax Status

Effective January 4, 2004, the Company
elected, by the consent of its shareholders, to revoke its
status as an S corporation and become subject to taxation
as a C corporation. As a result of this change in tax status,
the Company will recognize deferred tax assets and liabilities
for the temporary differences between the book and tax basis of
assets and liabilities at the time of conversion, and will be
subject to federal, state and local income taxes at the
corporate level.



| |                        
| | -----------------------
| | Initial Public Offering

On February 10, 2004, the Company completed
its IPO and sold 2,160,000 shares of common stock at
$7.75 per share. On March 12, 2004, the Company sold
an additional 324,000 shares of common stock at
$7.75 per share when the underwriters exercised their
over-allotment option. The net proceeds to the Company from the
IPO were approximately $15,500,000 after deducting the
underwriting discount and other expenses incurred in connection
with the IPO.

F-24



---



##### 



BAKERS FOOTWEAR GROUP, INC.


NOTES TO FINANCIAL STATEMENTS 
(Continued)



| |                
| | ---------------
| | Use of Proceeds

The Company used the proceeds from the IPO to
repay the balance on the revolving credit agreement, described
in Note 7, repay approximately $850,000 of subordinated
debt, described in Note 8, and repurchase stock warrants,
described in Note 13, for $850,000. The Company used the
remaining proceeds for working capital purposes, primarily for
the purchase of inventory in the ordinary course of business,
and investments in short-term, investment-grade, interest
bearing instruments.



| |                           
| | --------------------------
| | Conversion of Common Stock

Effective with the IPO, all shares of the
Companys existing Class A, Class B, and
Class C common stock were exchanged for shares of new
common stock on a one to one basis and the Companys
related repurchase obligations were terminated.



| |                                        
| | ---------------------------------------
| | Issuance of Stock Purchase
    Warrants

Effective with the IPO, the Company issued stock
purchase warrants covering 216,000 share of common stock
with an exercise price of $12.7875 per share, subject to
antidilution adjustments, to representatives of the
underwriters. The warrants become exercisable on
February 5, 2005 and expire on February 5, 2009.



| |                          
| | -------------------------
| | Issuance of Stock Options

Effective with the IPO, the Company issued
304,500 stock options to its employees at an exercise price of
$7.75 per share. These options vest over five years and
expire after ten years.



| |                                                      
| | -----------------------------------------------------
| | Conversion of Convertible Subordinated
    Debentures

Effective with the IPO, the subordinated
convertible debentures were converted into 653,331 shares
of common stock at a conversion rate of $7.50 per share.
The Company will recognize a beneficial conversion expense of
approximately $163,000 for the difference between the $7.75
offering price and the $7.50 conversion price.

F-25