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UNITED STATES SECURITIES AND
    EXCHANGE COMMISSION
 Washington, D.C.
    20549
    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 1934For the fiscal year ended
    January 31,  2009oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For 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

63103(Zip Code)(Address of Principal Executive
    Offices)   Registrants telephone number, including area code:
 (314) 621-0699
  Securities registered pursuant to Section 12(b) of the
    Act:
 Title of each class:
 Common Stock, par value $0.0001 per share
 Name of each exchange on which registered:
 Nasdaq Global Market
  Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-T o o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company þ(Do not check if a smaller reporting
    company)   Rule 12b-2 o þ
  Form 10-K
    DOCUMENTS
    INCORPORATED BY REFERENCE




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##### 





TABLE OF
    CONTENTS
   
 PART IItem 1.


Business


1Item 1A.


Risk Factors


21Item 1B.


Unresolved Staff Comments


21Item 2.


Properties


21Item 3.


Legal Proceedings


21Item 4.


Submission of Matters to a Vote of Security
    Holders


21PART IIItem 5.


Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities


22Item 6.


Selected Financial Data


23Item 7.


Managements Discussion and Analysis of
    Financial Condition and Results of Operations


25Item 7A.


Quantitative and Qualitative Disclosures About
    Market Risk


41Item 8.


Financial Statements and Supplementary Data


41Item 9.


Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure


41Item 9A.


Controls and Procedures


41Item 9B.


Other Information


42PART IIIItem 10.


Directors, Executive Officers and Corporate
    Governance


42Item 11.


Executive Compensation


43Item 12.


Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters


43Item 13.


Certain Relationships and Related Transactions,
    and Director Independence


44Item 14.


Principal Accounting Fees and Services


44PART IVItem 15.


Exhibits and Financial Statement Schedules


44EX-4.2 Form of Common Stock CertificateEX-23.1 Consent of Independent Registered Public Accounting FirmEX-24.1 Power of AttorneyEX-31.1 Rule 13A-14(A)/15D-14(A) CertificationEX-31.2 Rule 13A-14(A)/15D-14(A) CertificationEX-32.1 Section 1350 Certifications




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PART I  Item 1.
    Business.  General
      Form 10-K,
  Recent
    Developments




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2




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Form 10-K
  Company
    History
    (314) 621-0699. Form 10-K.
  Improving
    Comparable Store Sales
    
    We attempt to 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 young
    women into the footwear and accessory styles they desire. 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.
    We employ a test and react strategy that constantly updates our
    product mix while managing inventory risk. This strategy is
    supported by our relationships with manufacturers, which allow
    our merchandising and 3




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buying teams to negotiate short lead-times, enabling us to test
    new styles and react relatively quickly to fashion trends and
    keep fast-moving inventory in stock.  
    We also intend to improve comparable store sales increases
    through branded and private label accessories. Accessories
    accounted for 11.7% of merchandise sales in fiscal year 2008 and
    we believe that there is significant potential to expand our
    accessory sales and margins.
    Our stores sell national branded footwear and accessories
    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 presence of national branded merchandise in our product mix
    will also increase the sales of our private label merchandise.
    We continue to add sought after brands and to enhance the value
    of our private label assortment. Approximately 17.6% of our net
    shoe sales for fiscal year 2008 consisted of branded footwear.
    For fiscal year 2008, our Internet and catalog sales were
    $9.8 million. We believe our Web presence is important in
    expanding our ability to reach our target customer base and
    enhances the services we provide our customers. Furthermore, we
    believe our Internet store increases customer traffic at our
    Bakers stores and enables potential customers to locate our
    stores.  Long-Term
    Strengths
        Product
    Development and Merchandising
       4




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Product
    Mix
    Private
    Label.
        10-15%
  and/or
  National
    Brands.
  , ® ® ® ® ® ® ®
 5




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Accessories.
    Merchandise
    Mix.
  2006-2008:
  Fiscal YearCategory

2006


2007


2008Private Label Footwear


72.9
%


71.3
%


72.8
%Branded Footwear


16.1
%


16.2
%


15.5
%Accessories


11.0
%


12.5
%


11.7
%Total


100.0
%


100.0
%


100.0
%   Planning
    and Allocation.
          Clearance.
     6




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
  Stores
  Store
    Locations and Environment.
          No.StoresAlabama


1Arizona


4Arkansas


2California


38Colorado


2Connecticut


5Delaware


1Florida


19Georgia


14Idaho


1Illinois


17Indiana


2Kansas


2Kentucky


1Louisiana


4Maryland


7Massachusetts


7Michigan


9Missouri


6Nebraska


1Nevada


3New Hampshire


1New Jersey


14 7




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No.StoresNew Mexico


1New York


20North Carolina


3Ohio


6Oklahoma


2Pennsylvania


6Rhode Island


2South Carolina


2Tennessee


1Texas


23Utah


1Virginia


7Washington


2Wisconsin


2Total Stores


239
*Total States


37     *
    
    Excludes our Internet site, which is merchandised as a Bakers
    store.  Store
    Concepts.
      Bakers

Wild PairTarget customer

Women - ages 16-35

Men & women - ages 17-29Private label sales

86% - 89%

33% - 38%Branded sales

11% - 14%

62% - 67%Fashion content

Widely-accepted

Edgy, lifestyle-basedApproximate average store size

2,300 square feet

2,100 square feet   Store
    Operations.
   8




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Sourcing
    and Distribution
     9




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Information
    Systems and Technology
        Marketing
    and Advertising
        e-mail e-mail
  Competition
   10




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
    department stores (such as Bloomingdales, Macys,
    Dillards and Kohls);
    national branded wholesalers (such as 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 and Aldos);
    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, Rampage and
    Wet Seal).      History
    of Bakers Shoe Stores
    Employees
   11




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Properties
      Intellectual
    Property and Proprietary Rights
  tm ®
  Seasonality
    Cautionary
    Note Regarding Forward-Looking Statements and Risk
    Factors
  Form 10-K Form 10-K
    
    our ability to identify and respond to changing consumer fashion
    preferences;
    our susceptibility to operating losses; 12




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
    our ability to comply with the financial covenants under our
    lending arrangements;
    our ability to maintain adequate liquidity to operate our
    business as desired;
    the accuracy of our estimates regarding our capital requirements
    and needs for additional financing;
    our expectations regarding future financial results or
    performance;
    the execution of our business strategy;
    our ability to comply with the continued listing criteria of the
    Nasdaq Stock Market;
    any of our other plans, objectives, expectations and intentions
    contained in this Annual Report on
    Form 10-K
    that are not historical facts; and
    changes in general economic and business conditions.  Risk
    Factors
  Our
    failure to identify and respond to changing consumer fashion
    preferences in a timely manner would negatively impact our
    sales, profitability, liquidity and our image as a fashion
    resource for our customers.
    If our
    current positive sales trends are not maintained, we could fail
    to maintain a liquidity position adequate to support our ongoing
    operations.
   13




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The
    terms of our subordinated secured term loan contain certain
    financial covenants with respect to our performance and other
    covenants that restrict our activities. If we are unable to
    comply with these covenants, we would have to negotiate an
    amendment to the loan agreement or the lender could accelerate
    the repayment of our indebtedness and subject us to a
    cross-default under our credit facility.
        The
    report issued by our independent registered public accounting
    firm on our fiscal year 2008 financial statements contains
    language expressing substantial doubt about our ability to
    continue as a going concern.
   14




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Our
    operations could be constrained by our ability to obtain funds
    under the terms of our revolving credit facility.
    Our
    credit facility restricts our activities.
        A
    continued decline in general economic conditions could lead to
    reduced consumer demand for our footwear and accessories and
    could lead to reduced sales.
    Our
    overall profitability is highly dependent upon our fourth
    quarter results.
   15




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Our
    operations are subject to quarterly fluctuations that can impact
    our profitability and liquidity.
    
    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.    We are
    subject to risks associated with leasing our stores, including
    those stores where we acquired the lease through bankruptcy
    auctions.
  debtor-in-possession,
  Our
    market share may be adversely impacted at any time by a
    significant number of competitors.
    The
    departure of members of our senior management team could
    adversely affect our business.
   16




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Our
    failure to maintain good relationships with our manufacturers
    could harm our ability to procure quality inventory in a timely
    manner.
    We
    rely on a small number of buying agents and private label
    vendors for a substantial portion our merchandise purchases, and
    our failure to maintain good relationships with any of them
    could harm our ability to source our products.
    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.
    
    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 and pirates;
    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. 17




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and/or
  Continued
    decline in the value of the United States dollar relative to
    other currencies, especially the Chinese yuan could negatively
    impact our gross margins.
    Our
    reliance on manufacturers in China exposes us to supply
    risks.
    Our
    ability to expand into some territorial and foreign
    jurisdictions under the trademarks Bakers and
    Wild Pair is restricted.
    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.
   18




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We
    would be adversely affected if our distribution operations were
    disrupted.
    We may
    be subject to liability under our registration
    statements.
    There
    is no assurance that our common stock will continue to be listed
    on the Nasdaq Stock Market.
   19




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The
    market price of our common stock may be materially adversely
    affected by market volatility.
    
    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, financing transactions, securities offerings or other
    strategic initiatives.  We are
    controlled by a small group of shareholders whose interests may
    differ from other shareholders.
      The
    public sale of our common stock by selling shareholders could
    adversely affect the price of our common stock.
    There
    is relatively limited trading in our common stock.
    Our
    charter documents and Missouri law may inhibit a takeover, which
    may cause a decline in the value of our stock.
   20




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Executive
    Officers of the Registrant
    Item 1A.
    Risk
    Factors.    Item 1B.
    Unresolved
    Staff Comments.    Item 2.
    Properties.    Item 3.
    Legal
    Proceedings.      Item 4.
    Submission
    of Matters to a Vote of Security Holders.   21




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PART II  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities.  Market
    Information and Holders
      High


Low2007First quarter (ended May 5, 2007)

$
12.80


$
8.55Second quarter (ended August 4, 2007)


9.34



6.18Third quarter (ended November 3, 2007)


6.28



2.85Fourth quarter (ended February 2, 2008)


4.00



2.022008First quarter (ended May 3, 2008)

$
3.90


$
1.30Second quarter (ended August 2, 2008)


2.19



0.86Third quarter (ended November 1, 2008)


3.67



0.75Fourth quarter (ended January 31, 2009)


1.48



0.27   Dividends
    Recent
    Sales of Unregistered Securities
    Securities
    Authorized for Issuance Under Equity Compensation
    Plans
    Purchases
    of Equity Securities by the Issuer and Affiliated
    Purchasers
   22




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Item 6.
    Selected
    Financial Data.  Form 10-K.
  Fiscal Year Ended(1)February 2,


January 31,January 1,


January 28,


February 3,


2008


20092005(2)(3)


2006(4)(5)


2007(6)(7)


(7)(8)(9)(10)(11)


(7) (10)(11)(12)(13)Net sales

$
150,514,663


$
194,780,125


$
204,753,062


$
186,279,987


$
183,661,789Gross profit


46,033,614



65,340,924



62,202,028



47,461,122



50,551,662Income (loss) before income taxes


465,533



10,502,572



(2,452,971
)


(16,965,898
)


(14,910,754
)Provision for (benefit from) income taxes


(962,468
)


3,949,282



(909,860
)


691,367



84,847Net income (loss)

$
1,428,001


$
6,553,290


$
(1,543,111
)

$
(17,657,265
)

$
(14,995,601
)Net income (loss) per common shareBasic

$
0.31


$
1.10


$
(0.24
)

$
(2.70
)

$
(2.13
)Diluted

$
0.28


$
1.04


$
(0.24
)

$
(2.70
)

$
(2.13
)Total assets

$
49,370,708


$
74,754,684


$
83,158,859


$
67,558,951


$
58,508,192Long-term debt and capital lease obligations, less current
    portion

$
679,414


$
247,671


$
57,863


$
4,000,000


$
     (1)
    
    Because of the changes in the number of stores for each period,
    our operating results for each period and future periods may not
    be comparable in some significant respects. See
    Item 7. Managements Discussion and Analysis of
    Financial Condition and Results of Operations for a
    reconciliation and discussion of certain store openings and
    closings by period. The Company currently has no plans to pay
    dividends. See the information under the caption
    Item 5. Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities  Dividends, which is incorporated
    herein by reference.(2)
    
    Through January 3, 2004, we elected S corporation status
    for Federal and state income tax purposes. Effective
    January 4, 2004, we terminated our S election and became
    taxable as a C corporation. In accordance with
    SFAS No. 109, we have reflected the net impact of the
    temporary differences between the book and tax bases of our
    assets and liabilities as of the date of conversion as a
    component of our provision for income taxes for fiscal year
    2004. This resulted in the recognition of a nonrecurring income
    tax benefit of approximately $1.2 million.(3)
    
    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 $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 used the net proceeds received from the
    initial public offering to repay $5.7 million on our
    revolving credit agreement, $0.9 million to redeem
    outstanding warrants, $0.9 million to repay subordinated
    debt and $8.0 million for capital expenditures. Immediately
    prior to our initial public offering, we 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 consummation of our initial public offering
    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 on a 1.0 for 1.0 basis, excluding fractional shares.
    Mandatory redemption rights in favor of certain holders of prior
    Class A and Class B common stock were also terminated.
    In addition, upon the consummation of our initial public
    offering, $4.9 million in aggregate principal amount of our
    subordinated convertible debentures due 2007 were 23




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automatically converted into 653,331 shares of our common
    stock. Further, 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. All
    unexercised warrants have now expired.(4)
    
    On March 10, 2005, we changed our fiscal year to the
    Saturday closest to January 31. Previously our fiscal year
    ended four weeks earlier. As a result of this change, we had a
    four week transition period ended January 29, 2005. We
    believe that the change in our fiscal year end does not impact
    the comparability of the five fiscal years presented in this
    table. For the four week transition period ended
    January 29, 2005, net sales were $9,158,759, gross profit
    was $608,547, loss before income taxes was $2,935,201, benefit
    from income taxes was $1,069,402, net loss was $1,865,799 and
    net loss per common share on both a basic and diluted basis was
    $0.37. At January 29, 2005, total assets were $46,722,870
    and long-term debt and capital lease obligations, less current
    portion was $634,413. The following unaudited information for
    the four weeks ended January 31, 2004, the comparable
    period to the four week transition period, is presented for
    comparative purposes: net sales were $8,762,538, gross profit
    was $1,871,644, loss before income taxes was $1,451,810, benefit
    from income taxes was $1,709,249, net income was $257,439, basic
    earnings per share was $0.20, and diluted earnings per share was
    $0.10. At January 31, 2004, total assets were $31,183,356
    (unaudited) and long-term debt and capital lease obligations,
    less current portion was $7,561,579 (unaudited).(5)
    
    On April 8, 2005, we sold 1,000,000 shares of common
    stock and warrants to purchase 250,000 shares of common
    stock to certain investors in a private placement for gross
    proceeds of $8,750,000. The warrants have an exercise price of
    $10.18 per share and, subject to certain conditions, expire on
    April 8, 2010. We also issued warrants to purchase
    125,000 shares of common stock at an exercise price of
    $10.18 to the placement agent. The net proceeds after placement
    fees and expenses were $7,538,419. We used the proceeds to
    finance new store expansion and remodel existing stores into our
    new format.(6)
    
    We base our fiscal year on a 52/53 week period. The fiscal
    year ended February 3, 2007 was 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.(7)
    
    On January 29, 2006, we adopted SFAS No. 123R,
    Share-Based Payment, under which we recognize
    compensation expense for stock-based compensation ratably over
    the service period related to each grant based on the grant date
    fair value. We used the modified prospective method whereby
    prior years results were not restated. Total stock based
    compensation expense for fiscal years 2006, 2007, and 2008 was
    $744,422, $529,571, and $609,901, respectively.(8)
    
    During fiscal year 2007, the Company completed a private
    placement of $4,000,000 in aggregate principal amount of
    subordinated convertible debentures. The Company received net
    proceeds of $3,578,752.(9)
    
    During fiscal year 2007, the Company entered into an agreement
    to terminate a long-term below market operating lease, in
    exchange for an immediate $5,050,000 cash payment and the right
    to continue occupying the space through January 8, 2009.
    The Company recognized a net gain of $4.7 million from this
    transaction in fiscal year 2007. The Company does not believe
    that it has any other operating leases which could be terminated
    on substantially similar terms.(10)
    
    During fiscal years 2007 and 2008 we recognized $3,131,169 and
    $2,609,589, respectively, in noncash charges related to the
    impairment of long-lived assets of underperforming stores.(11)
    
    During fiscal year 2007, the Companys pretax losses
    exceeded the Companys operating loss carryback potential.
    Therefore, the Company concluded that the realizability of net
    deferred tax assets was no longer more likely than not, and
    established a valuation allowance against its net deferred tax
    assets. As of February 2, 2008 the valuation allowance was
    $7,186,389, resulting in a net provision for income tax expense
    of $691,367 for fiscal year 2007. As of January 31, 2009,
    the valuation allowance had increased to $12,896,006.(12)
    
    During fiscal year 2008, the Company obtained net proceeds of
    $6.7 million from the entry into a $7.5 million
    subordinated secured term loan and the issuance of
    350,000 shares of common stock.(13)
    
    As discussed in Note 2 to the financial statements, the
    entire balance of the subordinated secured term loan and the
    subordinated convertible debentures has been classified as
    current liabilities. Scheduled principal repayments due after
    one year from January 31, 2009 for the subordinated secured
    term loan and the subordinated convertible debentures are
    $2,556,445 and $4,000,000, respectively. 24




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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
    Note Regarding Forward-Looking Statements and Risk Factors
    and Item 1. Business  Risk Factors
    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
           25




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Form 10-K
     26




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Critical
    Accounting Policies
      Merchandise
    inventories
  first-in,
  Store
    closing and impairment charges
  Accounting for the Disposal of
    Long-Lived Assets store-by-store start-up
  Stock-based
    compensation expense
  Share-Based Payment
 27




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Deferred
    income taxes
  Accounting for Income Taxes
       28




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Accounting for
    Uncertainty in Income Taxes  an interpretation of
    FASB Statement No. 109
  Fiscal
    Year
    Results
    of Operations
    Fiscal Year EndedFebruary 3,


February 2,


January 31,2007


2008


2009Net sales


100.0
%


100.0
%


100.0
%Cost of merchandise sold, occupancy and buying expense


69.6



74.5



72.5Gross profit


30.4



25.5



27.5Selling expense


22.1



25.0



23.0General and administrative expense


8.9



9.6



9.4(Gain) loss on disposal of property and equipment


0.2



(2.5
)


0.2Impairment of long-lived assets






1.7



1.4Operating loss


(0.8
)


(8.3
)


(6.5
)Other income, net


0.1



0.1



0.1Interest expense


(0.5
)


(0.9
)


(1.8
)Provision for (benefit from) income taxes


(0.4
)


0.4



Net loss


(0.8
)%


(9.5
)%


(8.2
)%  29




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##### Table of Contents



Fiscal Year EndedFebruary 3,


February 2,


January 31,2007


2008


2009Number of stores at beginning of period


235



257



249Stores opened or acquired during period


34



6



2Stores closed during period


(12
)


(14
)


(12
)Number of stores at end of period


257



249



239   Fiscal
    Year Ended January 31, 2009 Compared to Fiscal Year Ended
    February 2, 2008
  Net sales.
  Gross profit.
  Selling expense.
  General and administrative expense.
  Gain/loss on disposal of property and
    equipment.
  Impairment of long-lived assets.
  Interest expense.
 30




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##### Table of Contents



Income tax expense.
  Net loss.
  Fiscal
    Year Ended February 2, 2008 Compared to Fiscal Year Ended
    February 3, 2007
  Net sales.
  Gross profit.
  Selling expense.
  General and administrative expense.
  Gain/loss on disposal of property and
    equipment.
  Impairment of long-lived assets.
  Interest expense.
 31




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##### Table of Contents



Income tax expense (benefit).
  Net loss.
  Seasonality
    and Quarterly Fluctuations
    Fiscal Year Ended February 3, 2007Thirteen


Thirteen


Thirteen


FourteenWeeks Ended


Weeks Ended


Weeks Ended


Weeks EndedApril 29,


July 29,


October 28,


February 3,2006


2006


2006


2007Net sales

$
49,804,913


$
47,184,870


$
46,552,522


$
61,210,757Gross profit


16,297,151



13,511,316



12,122,764



20,270,797Operating expenses


15,112,020



14,986,654



16,082,440



17,580,978Operating income (loss)


1,185,131



(1,475,338
)


(3,959,676
)


2,689,820   Fiscal Year Ended February 2, 2008(1)(2)Thirteen


Thirteen


Thirteen


ThirteenWeeks Ended


Weeks Ended


Weeks Ended


Weeks EndedMay 5,


August 4,


November 3,


February 2,2007


2007


2007


2008Net sales

$
49,255,817


$
41,984,658


$
40,293,957


$
54,745,555Gross profit


15,288,041



9,276,094



3,508,981



19,388,006Operating expenses


16,492,999



16,363,091



18,375,013



11,616,861Operating income (loss)


(1,204,958
)


(7,086,997
)


(14,866,032
)


7,771,145   Fiscal Year Ended January 31, 2009(1)Thirteen


Thirteen


Thirteen Weeks


Thirteen WeeksWeeks Ended


Weeks Ended


Ended


EndedMay 3,


August 2,


November 1,


January 31,2008


2008


2008


2009Net sales

$
43,537,503


$
43,568,099


$
41,075,064


$
55,481,123Gross profit


11,249,973



12,879,165



8,996,887



17,425,637Operating expenses


15,319,099



14,236,601



16,623,909



16,148,228Operating income (loss)


(4,069,126
)


(1,357,436
)


(7,627,022
)


1,277,409     (1)
    
    During the second and third quarters of fiscal year 2007 and the
    third quarter of fiscal year 2008 we recognized $755,672,
    $2,375,497, and $2,609,588, respectively in noncash charges
    related to the impairment of long-lived assets of
    underperforming stores.(2)
    
    During the fourth quarter of fiscal year 2007, we entered into
    an agreement to terminate a long-term below market operating
    lease, in exchange for a $5.0 million cash payment, and the
    right to continue occupying the space through January 8,
    2009. We recognized a net gain of $4.7 million from this
    transaction in the fourth quarter of fiscal year 2007, which is
    reflected as a component of operating expenses.   32




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##### Table of Contents



Liquidity
    and Capital Resources
             33




---



##### Table of Contents



February 2,


January 31,2008


2009Cash

$
159,671


$
134,676Inventories


18,061,941



20,976,352Total current assets


22,282,080



23,512,002Revolving credit facility


11,184,379



11,482,862Subordinated secured term loan






4,817,282Subordinated convertible debentures


4,000,000



4,000,000Total current liabilities


29,348,090



38,283,963Net working capital


(7,066,010
)


(14,771,961
)Property and equipment, net


43,810,776



34,029,666Total assets


67,558,951



58,508,192Total shareholders equity


24,040,100



10,449,400Unused borrowing capacity*


1,455,865



736,030     *
    
     as calculated under the terms of our revolving
    credit facility  Operating
    activities
     34




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##### Table of Contents



Investing
    activities
          Financing
    activities
   35




---



##### Table of Contents



Revolving
    Credit Facility
  (successor-by-merger
             36




---



##### Table of Contents



Subordinated
    Secured Term Loan
    re-amortized
           37




---



##### Table of Contents



Accounting for Contingencies,
  Subordinated
    Convertible Debentures
     38




---



##### Table of Contents



2005
    Private Placement of Common Stock and Warrants
        IPO
    Warrants
   39




---



##### Table of Contents



Contractual
    Obligations
    Payments Due in PeriodLess Than








More ThanContractual Obligations

Total


1 Year


1-3 Years


3-5 Years


5 YearsLong-term debt obligations(1)

$
11,714,958


$
3,776,849


$
3,745,998


$
4,192,111


$
Operating lease obligations(2)


153,371,561



25,713,736



45,543,282



38,992,003



43,122,540Purchase obligations(3)


23,277,746



23,061,746



216,000







Total

$
188,364,265


$
52,552,331


$
49,505,280


$
43,184,114


$
43,122,540     (1)
    
    Includes principal and interest payments on our subordinated
    secured term loan and our subordinated convertible debentures.
    As discussed in Note 2 to the financial statements, these
    obligations are classified as current liabilities on our balance
    sheet at January 31, 2009.(2)
    
    Includes minimum payment obligations relating to our store
    leases.(3)
    
    Includes merchandise on order and payment obligations relating
    to store construction and miscellaneous service contracts.  Off-Balance
    Sheet Arrangements
    Recent
    Accounting Pronouncements
  14-1, Accounting for Convertible Debt Instruments That May Be
    Settled in Cash upon Conversion (Including Partial Cash
    Settlement) Accounting for
    Convertible Debt and Debt issued with Stock Purchase
    Warrants 14-1
  No. 07-5, Determining Whether an Instrument (or Embedded Feature) is
    Indexed to an Entitys Own Stock (EITF 07-5) EITF 07-5 EITF 07-5
  No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based
    Payment Transactions Are Participating Securities EITF 03-6-1). EITF 03-6-1
 40




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##### Table of Contents



EITF 03-6-1 EITF 03-6-1
  Impact of
    Inflation
    Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk.    Item 8.
    Financial
    Statements and Supplementary Data.  page F-1
  Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure.    Item 9A.
    Controls
    and Procedures.  Disclosure Controls and Procedures. Rules 13a-15(e) 15d-15(e)
  Managements Annual Report on Internal Control Over
    Financial Reporting. Rules 13a-15(f) 15d-15(f)
     41




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##### Table of Contents



Changes in Internal Control Over Financial
    Reporting.
  Item 9B.
    Other
    Information.   PART III  Item 10.
    Directors,
    Executive Officers and Corporate Governance  Regulation S-K.
  Executive
    Officers of the Registrant
    Name

Age

PositionPeter A. Edison


53


Chairman of the Board, Chief Executive Officer and PresidentMark D. Ianni


48


Executive Vice President and Chief Merchandising OfficerStanley K. Tusman


62


Executive Vice President and Chief Planning OfficerJoseph R. Vander Pluym


57


Executive Vice President and Chief Operations OfficerCharles R. Daniel, III


50


Executive Vice President and Chief Financial Officer,
    Controller, Treasurer and Secretary   Peter A. Edison
  Mark D. Ianni
  Stanley K. Tusman
 42




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##### Table of Contents



Joseph R. Vander Pluym 30-year
  Charles R. Daniel, III
    Section 16(a)
    Beneficial Ownership Reporting Compliance
    Code of
    Ethics
  Form 10-K.
  Item 11.
    Executive
    Compensation.    Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters.   43




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##### Table of Contents



Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence.    Item 14.
    Principal
    Accountant Fees and Services.     PART IV  Item 15.
    Exhibits
    and Financial Statement Schedules.    Financial Statements: page F-1. page F-1
  Financial Statement Schedules:
  Exhibits: Form 10-K:
 44




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##### Table of Contents



SIGNATURES
  Form 10-K
  BAKERS FOOTWEAR GROUP, INC.By /s/  PETER
    A. EDISONPeter A. EdisonChairman of the Board, Chief Executive Officer
    and President (Principal Executive Officer)       Signature

Title

Date/s/  PETER
    A. EDISON(Peter
    A. Edison)

Chairman of the Board, Chief Executive Officer, President and
    Director
    (Principal Executive Officer)

April 24, 2009*(Charles
    R. Daniel, III)

Executive Vice President and Chief Financial Officer,
    Controller, Treasurer and Secretary (Principal Financial Officer
    and Principal Accounting Officer)

April 24, 2009*(Andrew
    N. Baur)

Director

April 24, 2009*(Timothy
    F. Finley)

Director

April 24, 2009*(Harry
    E. Rich)

Director

April 24, 2009*(Scott
    C. Schnuck)

Director

April 24, 2009     *
    
    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.  PETER
    A. EDISON
   Attorney-in-Fact
 45




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##### Table of Contents



EXHIBIT INDEX
  Exhibit No.

Description3
.1

Restated Articles of Incorporation of the Company (incorporated
    by reference to Exhibit 3.1 to the Companys Annual
    Report on
    Form 10-K
    for the fiscal year ended January 3, 2004 filed on
    April 2, 2004 (File
    No. 000-50563)).3
.2

Restated Bylaws of the Company (incorporated by reference to
    Exhibit 3.2 to the Companys Annual Report on
    Form 10-K
    for the fiscal year ended January 3, 2004 filed on
    April 2, 2004
    (File No. 000-50563)).4
.1

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. (incorporated by reference to
    Exhibit 4.3 to the Companys Annual Report on
    Form 10-K
    for the fiscal year ended January 3, 2004 filed on
    April 2, 2004 (File
    No. 000-50563)).4
.2

Form of common stock certificate.4
.3

Warrants issued by the Company to representatives of the
    underwriters, or their designees (incorporated by reference to
    Exhibit 4.7 to the Companys Annual Report on
    Form 10-K
    for the fiscal year ended January 3, 2004 filed on
    April 2, 2004 (File
    No. 000-50563)).4
.4

Purchase Agreement dated March 31, 2005 by and among the
    Company and the Investors named therein (incorporated by
    reference to Exhibit 4.1 to the Companys Current
    Report on
    Form 8-K
    filed on April 13, 2005 (File
    No. 000-50563)).4
.5

Registration Rights Agreement dated April 8, 2005 by and
    among the Company, the Investors named therein and Ryan
    Beck & Co., Inc. (incorporated by reference to
    Exhibit 4.2 to the Companys Current Report on
    Form 8-K
    filed on April 13, 2005 (File
    No. 000-50563)).4
.6

Form of Warrants issued by the Company to the Investors on
    April 8, 2005 (incorporated by reference to
    Exhibit 4.3 to the Companys Current Report on
    Form 8-K
    filed on April 13, 2005 (File
    No. 000-50563)).4
.7

Form of Warrants issued by the Company to Ryan Beck &
    Co., Inc. or its designees on April 8, 2005 (incorporated
    by reference to Exhibit 4.4 to the Companys Current
    Report on
    Form 8-K
    filed on April 13, 2005 (File
    No. 000-50563)).4
.8

Subordinated Convertible Debenture Purchase Agreement dated
    June 13, 2007 by and among the Company and the Investors
    named therein (incorporated by reference to Exhibit 4.1 to
    the Companys Current Report on
    Form 8-K
    filed on July 2, 2007 (File
    No. 000-50563)).4
.9

9.5% Subordinated Convertible Debentures issued by the
    Company to Investors on June 26, 2007 (incorporated by
    reference to Exhibit 4.2 to the Companys Current
    Report on
    Form 8-K
    filed on July 2, 2007 (File
    No. 000-50563)).4
.10

Subordination Agreement dated June 26, 2007 by and among
    the Company, the Investors named therein and Bank of America,
    N.A. (incorporated by reference to Exhibit 4.3 to the
    Companys Current Report on
    Form 8-K
    filed on July 2, 2007 (File
    No. 000-50563)).4
.11

Registration Rights Agreement dated June 26, 2007 by and
    among the Company and the Investors named therein (incorporated
    by reference to Exhibit 4.5 to the Companys Current
    Report on
    Form 8-K
    filed on July 2, 2007 (File
    No. 000-50563)).4
.12

Second Lien Credit Agreement dated February 1, 2008
    (Loan Agreement) by and among the Company, and
    Private Equity Management Group, Inc. and the Lender named
    therein (incorporated by reference to Exhibit 4.1 to the
    Companys Current Report on
    Form 8-K
    filed on February 4, 2008
    (File No. 000-50563)).4
.13

Note evidencing amounts borrowed by the Company under the Loan
    Agreement (incorporated by reference to Exhibit 4.2 to the
    Companys Current Report on
    Form 8-K
    filed on February 4, 2008
    (File No. 000-50563)).4
.14

Security Agreement dated February 1, 2008 by and among the
    Company, Private Equity Management Group, Inc. and the Lender
    named therein (incorporated by reference to Exhibit 4.3 to
    the Companys Current Report on
    Form 8-K
    filed on February 4, 2008 (File
    No. 000-50563)). 46




---



##### Table of Contents



Exhibit No.

Description4
.15

Subordination Agreement dated February 1, 2008 by and among
    the Company, Bank of America, N.A. and Private Equity Management
    Group, Inc., in its capacity as administrative agent for the
    Lender named therein (incorporated by reference to
    Exhibit 4.4 to the Companys Current Report on
    Form 8-K
    filed on February 4, 2008 (File
    No. 000-50563)).4
.16

Subordination Agreement dated February 1, 2008 by and among
    the Company, Private Equity Management Group, Inc., in its
    capacity as administrative agent for the Lender named therein,
    and the subordinated creditors named therein (incorporated by
    reference to Exhibit 4.5 to the Companys Current
    Report on
    Form 8-K
    filed on February 4, 2008 (File
    No. 000-50563)).4
.17

Registration Rights Agreement dated February 1, 2008 by and
    among the Company and Private Equity Management Group, Inc.
    (incorporated by reference to Exhibit 4.6 to the
    Companys Current Report on
    Form 8-K
    filed on February 4, 2008 (File
    No. 000-50563)).4
.18

Fee Letter dated February 1, 2008 between Private Equity
    Management Group, Inc. and the Company (incorporated by
    reference to Exhibit 4.7 to the Companys Current
    Report on
    Form 8-K
    filed on February 4, 2008 (File
    No. 000-50563)).4
.19

Amendment Number 1 to Loan Documents dated May 9, 2008 by
    and among the Company, Private Equity Management Group, Inc. and
    the Lender named therein (incorporated by reference to
    Exhibit 4.8 to the Companys Quarterly Report on
    Form 10-Q
    for the quarter year ended May 3, 2008 filed on
    June 17, 2008 (File
    No. 000-50563)).4
.20

Letter of Consent delivered to the Company and Private Equity
    Management Group, Inc. by Bank of America, N.A. (incorporated by
    reference to Exhibit 4.3 to the Companys Current
    Report on
    Form 8-K
    filed on May 9, 2008 (File
    No. 000-50563)).4
.21

Amendment Number 2 to Loan Documents dated April 9, 2009 by
    and among the Company, Private Equity Management Group, Inc. and
    the Lender named therein (incorporated by reference to
    Exhibit 4.10 to the Companys Current Report on
    Form 8-K
    filed on April 15, 2009
    (File No. 000-50563)).10
.1

Bakers Footwear Group, Inc. 2003 Stock Option Plan, as amended
    (incorporated by reference to Exhibit 10.3 to the
    Companys Current Report on
    Form 8-K
    filed on March 21, 2007
    (File No. 000-50563)).10
.1.1

Form of Nonqualified Option Award Agreement under Bakers
    Footwear Group, Inc. 2003 Stock Option Plan (incorporated by
    reference to Exhibit 10.2 to the Companys Current
    Report on
    Form 8-K
    filed on March 21, 2007 (File
    No. 000-50563)).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
    filed on January 8, 2004 (File
    No. 333-86332)).10
.3

Letter to Peter Edison outlining 2008 bonus levels (incorporated
    by reference to Exhibit 10.4 to the Companys Current
    Report on
    Form 8-K
    filed on March 17, 2008 (File
    No. 000-50563)).10
.4

Letter to Stan Tusman outlining 2008 bonus levels (incorporated
    by reference to Exhibit 10.5 to the Companys Current
    Report on
    Form 8-K
    filed on March 17, 2008 (File
    No. 000-50563)).10
.5

Letter to Joe Vander Pluym outlining 2008 bonus levels
    (incorporated by reference to Exhibit 10.7 to the
    Companys Current Report on
    Form 8-K
    filed on March 17, 2008 (File
    No. 000-50563)).10
.6

Letter to Mark Ianni outlining 2008 bonus levels (incorporated
    by reference to Exhibit 10.6 to the Companys Current
    Report on
    Form 8-K
    filed on March 17, 2008 (File
    No. 000-50563)).19
.7

Letter to Charlie Daniel outlining 2008 bonus levels
    (incorporated by reference to Exhibit 10.8 to the
    Companys Current Report on
    Form 8-K
    filed on March 17, 2008 (File
    No. 000-50563)).10
.8

Letter to Peter Edison outlining 2009 bonus levels (incorporated
    by reference to Exhibit 10.4 to the Companys Current
    Report on
    Form 8-K
    filed on March 18, 2009 (File
    No. 000-50563)).10
.9

Letter to Stan Tusman outlining 2009 bonus levels (incorporated
    by reference to Exhibit 10.5 to the Companys Current
    Report on
    Form 8-K
    filed on March 18, 2009 (File
    No. 000-50563)).10
.10

Letter to Joe Vander Pluym outlining 2009 bonus levels
    (incorporated by reference to Exhibit 10.6 to the
    Companys Current Report on
    Form 8-K
    filed on March 18, 2009 (File
    No. 000-50563)). 47




---



##### Table of Contents



Exhibit No.

Description10
.11

Letter to Mark Ianni outlining 2009 bonus levels (incorporated
    by reference to Exhibit 10.7 to the Companys Current
    Report on
    Form 8-K
    filed on March 18, 2009 (File
    No. 000-50563)).10
.12

Letter to Charlie Daniel outlining 2009 bonus levels
    (incorporated by reference to Exhibit 10.8 to the
    Companys Current Report on
    Form 8-K
    filed on March 18, 2009 (File
    No. 000-50563)).10
.13

Bakers Footwear Group, Inc. 2005 Incentive Compensation Plan
    (incorporated by reference to Appendix A to the
    Companys 2005 Proxy Statement filed on April 27, 2005
    (File
    No. 000-50563)).10
.13.1

Form of Notice of Award of Performance Shares under Bakers
    Footwear Group, Inc. 2005 Incentive Compensation Plan
    (incorporated by reference to Exhibit 10.4 to the
    Companys Current Report on
    Form 8-K
    filed on March 22, 2006 (File
    No. 000-50563)).10
.13.2

Form of Restricted Stock Award Agreement under Bakers Footwear
    Group, Inc. 2005 Incentive Compensation Plan (incorporated by
    reference to Exhibit 10.4 to the Companys Current
    Report on
    Form 8-K
    filed on October 9, 2007 (File
    No. 000-50563)).10
.14

Summary of base salaries for specified executive officers
    (incorporated by reference to Exhibit 10.25 to the
    Companys Annual Report on
    Form 10-K
    for the fiscal year ended February 2, 2008 filed on
    May 2, 2008 (File
    No. 000-50563)).10
.15

Summary of March 11, 2008 stock option grants for the
    executive officers (incorporated by reference to
    Exhibit 10.1 to the Companys Current Report on
    Form 8-K
    filed on March 17, 2008
    (File No. 000-50563)).10
.16

Summary of March 12, 2009 restricted stock awards for the
    executive officers (incorporated by reference to
    Exhibit 10.1 to the Companys Current Report on
    Form 8-K
    filed on March 18, 2009
    (File No. 000-50563)).10
.17

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
    filed on January 20, 2004 (File
    No. 333-86332)).10
.18

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
    filed on January 20, 2004 (File
    No. 333-86332)).10
.19

Employment Agreement dated September 5, 2006 by and between
    the Company and Joe Vander Pluym (incorporated by reference to
    Exhibit 10.4 to the Companys Current Report on
    Form 8-K
    filed on September 7, 2006 (File
    No. 000-50563)).10
.20

Employment Agreement dated August 31, 2006 by and between
    the Company and Mark Ianni (incorporated by reference to
    Exhibit 10.3 to the Companys Current Report on
    Form 8-K
    filed on September 7, 2006 (File
    No. 000-50563)).10
.21

Amended Employment Agreement dated February 3, 2008 by and
    among the Company and Lawrence L. Spanley, Jr.
    (incorporated by reference to Exhibit 10.3 to the
    Companys Current Report on
    Form 8-K
    filed on February 4, 2008 (File
    No. 000-50563)).10
.22

Summary of Compensation of Non-management Directors as of
    March 15, 2007 (incorporated by reference to
    Exhibit 10.12 to the Companys Quarterly Report on
    Form 10-Q
    for the period ended May 5, 2007 filed on June 19,
    2007 (File
    No. 000-50563)).10
.23

Second Amended and Restated Loan and Security Agreement dated as
    of August 31, 2006 by and between Bank of America, N.A. and
    the Company (incorporated by reference to Exhibit 10.1 to
    the Companys Current Report on
    Form 8-K
    filed on September 7, 2006 (File
    No. 000-50563)).10
.23.1

Amended and Restated Revolving Credit Note dated as of
    August 31, 2006 by and between Bank of America, N.A. and
    the Company (incorporated by reference to Exhibit 10.2 to
    the Companys Current Report on
    Form 8-K
    filed on September 7, 2006 (File
    No. 000-50563)).10
.23.2

Waiver and Consent Agreement dated as of April 18, 2007 by
    and between Bank of America, N.A. and the Company (incorporated
    by reference to Exhibit 10.14.2 to the Companys
    Annual Report on
    Form 10-K
    for the fiscal year ended February 3, 2007 filed on
    April 24, 2007 (File
    No. 000-50563)). 48




---



##### Table of Contents



Exhibit No.

Description10
.23.3

First Amendment to Second Amended and Restated Loan and Security
    Agreement dated as of May 17, 2007 by and between the
    Company and Bank of America, N.A. (incorporated by reference to
    Exhibit 10.4 to the Companys Current Report on
    Form 8-K
    filed on May 18, 2007
    (File No. 000-50563)).10
.23.4

Extension Agreement dated June 26, 2007 between the Company
    and Bank of America, N.A. (incorporated by reference to
    Exhibit 4.4 to the Companys Current Report on
    Form 8-K
    filed on July 2, 2007 (File
    No. 000-50563)).10
.23.5

Second Amendment to Second Amended and Restated Loan and
    Security Agreement dated February 1, 2008 by and among the
    Company and Bank of America, N.A. (incorporated by reference to
    Exhibit 10.1 to the Companys Current Report on
    Form 8-K
    filed on February 4, 2008
    (File No. 000-50563)).10
.23.6

Third Amendment to Second Amended and Restated Loan and Security
    Agreement dated February 1, 2008 by and among the Company
    and Bank of America, N.A. (incorporated by reference to
    Exhibit 10.7 to the Companys Current Report on
    Form 8-K
    filed on April 15, 2009
    (File No. 000-50563)).10
.24

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
    filed on April 16, 2002 (File
    No. 333-86332)).10
.25

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
    filed on April 16, 2002 (File
    No. 333-86332)).10
.26

Letter of Understanding Between the Company, Transmodal
    Associates, Inc. and Cargotrans Transitarios Internacionais
    Ltda. (incorporated by reference to Exhibit 10.13 of
    Amendment No. 1 to the Companys Registration
    Statement on
    Form S-1
    filed on June 4, 2002 (File
    No. 333-86332)).10
.27

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
    filed on June 4, 2002 (File
    No. 333-86332)).10
.28

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
    (incorporated by reference to Exhibit 10.32 to the
    Companys Annual Report on
    Form 10-K
    for the fiscal year ended January 3, 2004 filed on
    April 2, 2004
    (File No. 000-50563)).11
.1

Statement regarding computation of per share earnings
    (incorporated by reference from Note 16 of the Financial
    Statements).14
.1

Code of Business Conduct (incorporated by reference to
    Exhibit 14.1 to the Companys Annual Report on
    Form 10-K
    for the fiscal year ended January 3, 2004 filed on
    April 2, 2004 (File
    No. 000-50563)).23
.1

Consent of Independent Registered Public Accounting Firm.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).  49




---



##### 



INDEX TO
    FINANCIAL STATEMENTS
  Contents
   
 Report of Independent Registered Public
    Accounting Firm


F-1Balance Sheets


F-2Statements of Operations


F-3Statements of Shareholders Equity


F-4Statements of Cash Flows


F-5Notes to Financial Statements


F-6   50




---



##### Table of Contents



Report of
    Independent Registered Public Accounting Firm               /s/ ERNST & YOUNG LLP
    F-1




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  BALANCE
    SHEETS
  February 2,


January 31,2008


2009ASSETSCurrent assets:Cash and cash equivalents

$
159,671


$
134,676Accounts receivable


1,192,674



1,330,289Other receivables


182,999



43,090Inventories


18,061,941



20,976,352Prepaid expenses and other current assets


697,174



908,796Prepaid income taxes


1,987,621



118,799Total current assets


22,282,080



23,512,002Property and equipment, net


43,810,776



34,029,666Other assets


1,466,095



966,524Total assets

$
67,558,951


$
58,508,192LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable

$
7,082,214


$
7,556,984Accrued expenses


9,162,561



8,175,564Subordinated secured term loan






4,817,282Subordinated convertible debentures






4,000,000Sales tax payable


498,510



1,032,584Deferred income


1,362,563



1,218,687Revolving credit facility


11,184,379



11,482,862Current maturities of capital lease obligations


57,863



Total current liabilities


29,348,090



38,283,963Subordinated convertible debentures


4,000,000



Accrued rent liabilities


10,170,761



9,774,829Shareholders equity:Preferred stock, $0.0001 par value; 5,000,000 shares
    authorized, no shares outstanding






Common stock, $0.0001 par value; 40,000,000 shares
    authorized, 6,655,856 and 7,055,856 shares outstanding at
    February 2, 2008 and January 31, 2009, respectively


665



705Additional paid-in capital


37,101,923



38,506,784Accumulated deficit


(13,062,488
)


(28,058,089
)Total shareholders equity


24,040,100



10,449,400Total liabilities and shareholders equity

$
67,558,951


$
58,508,192    F-2




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  STATEMENTS
    OF OPERATIONS
  Year Ended


Year Ended


Year EndedFebruary 3,


February 2,


January 31,2007


2008


2009Net sales

$
204,753,062


$
186,279,987


$
183,661,789Cost of merchandise sold, occupancy, and buying expenses


142,551,034



138,818,865



133,110,127Gross profit


62,202,028



47,461,122



50,551,662Operating expenses:Selling


45,221,479



46,513,361



42,157,931General and administrative


18,207,593



17,901,666



17,213,142(Gain) loss on disposal of property and equipment


277,754



(4,698,232
)


347,176Impairment of long-lived assets


55,266



3,131,169



2,609,588Operating loss


(1,560,064
)


(15,386,842
)


(11,776,175
)Other income (expense):Interest expense


(1,005,217
)


(1,693,878
)


(3,255,087
)Other income (expense), net


112,310



114,822



120,508Loss before income taxes


(2,452,971
)


(16,965,898
)


(14,910,754
)Provision for (benefit from) income taxes


(909,860
)


691,367



84,847Net loss

$
(1,543,111
)

$
(17,657,265
)

$
(14,995,601
)Net loss per common share:

$
(0.24
)

$
(2.70
)

$
(2.13
)    F-3




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  STATEMENTS
    OF SHAREHOLDERS EQUITY
  Common Stock





RetainedShares





Additional


EarningsIssued and





Paid-In


(AccumulatedOutstanding


Amount


Capital


Deficit)


TotalBalance at January 28, 2006


6,300,479


$
630


$
34,252,066


$
6,137,888


$
40,390,584Stock-based compensation expense










744,422







744,422Shares issued in connection with exercise of stock warrants


71,366



7



508,983







508,990Shares issued in connection with exercise of stock options


121,190



12



451,410







451,422Income tax benefit from exercise of stock options










614,542







614,542Net loss














(1,543,111
)


(1,543,111
)Balance at February 3, 2007


6,493,035



649



36,571,423



4,594,777



41,166,849Stock-based compensation expense










529,571







529,571Shares issued in connection with exercise of stock options


93,821



9



929







938Issuance of restricted stock


69,000



7











7Net loss














(17,657,265
)


(17,657,265
)Balance at February 2, 2008


6,655,856



665



37,101,923



(13,062,488
)


24,040,100Stock-based compensation expense










609,901







609,901Issuance of common stock


400,000



40



794,960







795,000Net loss














(14,995,601
)


(14,995,601
)Balance at January 31, 2009


7,055,856


$
705


$
38,506,784


$
(28,058,089
)

$
10,449,400    F-4




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  STATEMENTS
    OF CASH FLOWS
  Year Ended


Year Ended


Year EndedFebruary 3,


February 2,


January 31,2007


2008


2009Operating activitiesNet loss

$
(1,543,111
)

$
(17,657,265
)

$
(14,995,601
)Adjustments to reconcile net loss to net cash provided by (used
    in) operating activities:Depreciation and amortization


7,579,929



8,583,524



7,781,462Deferred income taxes


(755,756
)


2,387,809



Accretion of debt discount










667,282Stock-based compensation expense


744,422



529,571



609,901Excess income tax benefit from exercise of stock options


(614,542
)






Impairment of long-lived assets


55,266



3,131,169



2,609,588(Gain) loss on disposal of property and equipment


277,754



(4,698,232
)


347,176Changes in operating assets and liabilities:Accounts receivable and other receivables


(122,124
)


1,117,431



2,294Inventories


1,895,853



6,040,065



(2,914,411
)Prepaid expenses and other current assets


537,771



16,636



(211,622
)Prepaid income taxes


(1,129,637
)


(857,984
)


1,868,822Other assets


(217,235
)


(201,690
)


714,785Accounts payable


(3,925,092
)


(1,052,428
)


474,770Accrued expenses and deferred income


(2,760,542
)


(71,143
)


(596,799
)Accrued income taxes


(683,422
)






Accrued rent liabilities


3,087,992



755,144



(395,932
)Net cash provided by (used in) operating activities


2,427,526



(1,977,393
)


(4,038,285
)Investing activitiesPurchase of property and equipment


(20,390,113
)


(4,763,687
)


(923,256
)Proceeds from disposition of property and equipment


157,449



5,017,639



1,468Net cash provided by (used in) investing activities


(20,232,664
)


253,952



(921,788
)Financing activitiesNet borrowings (payments) on line of credit


13,099,304



(1,914,925
)


298,483Proceeds from issuance of convertible debentures






4,000,000



Debt issuance costs






(420,447
)


(325,542
)Excess income tax benefit from exercise of stock options


614,542







Net proceeds from exercise of stock options


451,422



938



Net proceeds from exercise of stock warrants


508,990







Proceeds from issuance of restricted stock






7



Proceeds from issuance of subordinated secured term loan and
    common stock










7,020,000Principal payments of subordinated secured term loan










(2,000,000
)Principal payments under capital lease obligations


(386,744
)


(189,807
)


(57,863
)Net cash provided by financing activities


14,287,514



1,475,766



4,935,078Net increase (decrease) in cash and cash equivalents


(3,517,624
)


(247,675
)


(24,995
)Cash and cash equivalents at beginning of period


3,924,970



407,346



159,671Cash and cash equivalents at end of period

$
407,346


$
159,671


$
134,676Supplemental disclosures of cash flow informationCash paid for income taxes

$
1,643,607


$
82,631


$
Cash paid for interest

$
986,622


$
1,667,213


$
2,098,519    F-5




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS
 January 31,
    2009
  1.
    Summary
    of Significant Accounting Policies  Operations
    Fiscal
    Year
    Use of
    Estimates
    Cash
    and Cash Equivalents
    Accounts
    Receivable
    Inventories
  first-in,
 F-6




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Property
    and Equipment
    Impairment
    of Long-Lived Assets
  Accounting for the Disposal of
    Long-Lived Assets store-by-store start-up
  Revenue
    Recognition
    Cost
    of Merchandise Sold
    Operating
    Leases
     F-7




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Stock-Based
    Compensation
  Share-Based Payment
  Advertising
    and Marketing Expense
    Earnings
    per Share
    Income
    Taxes
  Accounting for Income Taxes
  Accounting for Uncertainty
    in Income Taxes  an interpretation of FASB Statement
    No. 109
 F-8




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Deferred
    Income
  12-month 12-month
    Business
    Segment
    Shipping
    and Handling Costs
    Recent
    Accounting Pronouncements
  14-1, Accounting for Convertible Debt Instruments That May Be
    Settled in Cash upon Conversion (Including Partial Cash
    Settlement) Accounting for
    Convertible Debt and Debt issued with Stock Purchase
    Warrants 14-1
  No. 07-5, Determining Whether an Instrument (or Embedded Feature) is
    Indexed to an Entitys Own Stock (EITF 07-5) EITF 07-5 EITF 07-5
  No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based
    Payment Transactions Are Participating Securities EITF 03-6-1). EITF 03-6-1
 F-9




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  EITF 03-6-1 EITF 03-6-1
  Fair
    Value Measurements
  Fair Value Measurements
  The Fair Value Option for Financial
    Assets and Financial Liabilities, Including an Amendment of FASB
    Statement No. 115 instrument-by-instrument
  2.
    Liquidity       F-10




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
          Form 10-K
 F-11




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  3.
    Subsequent
    Event  Amendments to Debt Agreements      4.
    Issuance
    of Debt and Common Stock           F-12




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Form 10-K
  re-amortized Accounting for
    Contingencies
   F-13




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  5.
    Property
    and Equipment    EstimatedUseful

February 2,


January 31,Lives

2008


2009Furniture, fixtures, and equipment

3 to 8 years

$
29,436,089


$
29,354,367Leasehold improvements

up to 10 years


41,559,804



41,770,376Computer equipment and software

3 years


5,129,929



5,290,391Construction in progress




1,152,039



556,81977,277,861



76,971,953Less accumulated depreciation and amortization




33,467,085



42,942,287$
43,810,776


$
34,029,666     6.
    Accrued
    Expenses    February 2,


January 31,2008


2009Employee compensation and benefits

$
1,870,318


$
1,861,819Accrued rent


873,247



265,975Other


6,418,996



6,047,770$
9,162,561


$
8,175,564   7.
    Capital
    Lease Obligations      8.
    Operating
    Leases   F-14




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Fiscal year:2009

$
25,713,7362010


23,452,7332011


22,090,5492012


20,431,8062013


18,560,196Thereafter


43,122,540$
153,371,560   9.
    Sale of
    Leasehold Interest    10.
    Subordinated
    Convertible Debentures      11.
    Revolving
    Credit Agreement  pre-amendment) pre-amendment), pre-amendment)
 F-15




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  pre-amendment) pre-amendment).
      12.
    Employee
    Benefit Plan    13.
    Commitments
    and Contingencies      14.
    Income
    Taxes  Accounting
    for Income Taxes
 F-16




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
          Year Ended


Year Ended


Year EndedFebruary 3,


February 2,


January 31,2007


2008


2009Current:Federal

$
(111,713
)

$
(3,380,295
)

$
(3,007,729
)State and local


(42,391
)


(220,329
)


(840,435
)Total current


(154,104
)


(3,600,624
)


(3,848,164
)Deferred:Federal


(639,486
)


(1,982,129
)


(1,491,342
)State and local


(116,270
)


(912,269
)


(285,264
)Total deferred


(755,756
)


(2,894,398
)


(1,776,606
)Valuation allowance






7,186,389



5,709,617Total provision for (benefit from) income taxes

$
(909,860
)

$
691,367


$
84,847  F-17




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Year Ended


Year Ended


Year EndedFebruary 3,


February 2,


January 31,2007


2008


2009Federal income tax at statutory rate

$
(858,540
)

$
(5,938,064
)

$
(5,218,763
)Impact of federal alternative minimum tax










214,907Impact of state NOL carryback refunds










(137,651
)Impact of graduated Federal rates


24,530



169,659



149,107State and local income taxes, net of Federal income taxes


(108,632
)


(753,399
)


(651,802
)Change in valuation allowance






7,186,389



5,709,617Permanent differences


32,782



26,782



19,432Total provision for (benefit from) income taxes

$
(909,860
)

$
691,367


$
84,847       February 2,


January 31,2008


2009Deferred tax assets:Net operating loss carryforward

$
3,048,240


$
7,332,648Vacation accrual


392,994



384,696Inventory


1,379,621



1,187,969Stock-based compensation


650,373



888,235Accrued rent


4,049,924



3,812,183Total deferred tax assets


9,521,152



13,605,731Deferred tax liabilities:Property and equipment


2,150,157



550,008Prepaid expenses


184,606



159,717Total deferred tax liabilities


2,334,763



709,725Valuation allowance


(7,186,389
)


(12,896,006
)Net deferred tax assets

$



$
   15.
    Stock-Based
    Compensation  Adoption
    of SFAS 123R
   F-18




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Stock
    Options
      Year Ended

Year Ended

Year EndedFebruary 3,

February 2,

January 31,2007

2008

2009Options granted

91,728

272,613

310,500Weighted-average fair value of options granted

$10.48

$3.59

$0.86Assumptions:Dividends

0%

0%

0%Risk-free interest rate

4.75% - 5.0%

4.25% - 4.5%

2.83% - 3.69%Expected volatility

50% - 55%

43% - 46%

46%Expected option life

5-6 years

5-6 years

6 years  F-19




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Vested


Non Vested


TotalNumber of


Weighted Average


Number of


Weighted Average


Number of


Weighted AverageOptions


Exercise Price


Options


Exercise Price


Options


Exercise PriceBalance at January 28, 2006


207,710


$
1.62



438,680


$
9.41



646,390


$
6.91Granted










91,728



19.61



91,728



19.61Vested


98,660



9.21



(98,660
)


9.21







Exercised


(121,190
)


3.79











(121,190
)


3.79Forfeited


(1,380
)


8.32



(16,220
)


13.55



(17,600
)


13.14Balance at February 3, 2007


183,800



4.22



415,528



11.55



599,328



9.30Granted










272,613



7.38



272,613



7.38Vested


116,876



11.00



(116,876
)


11.00







Exercised


(93,821
)


0.01











(93,821
)


0.01Forfeited


(31,077
)


10.27



(58,817
)


11.62



(89,894
)


11.15Balance at February 2, 2008


175,778



9.90



512,448



9.45



688,226



9.56Granted










310,500



1.79



310,500



1.79Vested


156,498



9.67



(156,498
)


9.67







Exercised






















Forfeited


(12,154
)


10.62



(24,999
)


6.98



(37,153
)


8.17Balance at January 31, 2009


320,122


$
9.76



641,451


$
5.78



961,573


$
7.11    F-20




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Weighted-Average


Weighted-AverageNumber of


Contractual Life


Exercise


AggregateRange of Exercise Prices

Options


(Years)


Price


Intrinsic Value$0.01


4,719



5.0


$
0.01


$
1,840$1.43 - $4.52


26,800



8.7



4.52



$7.75


140,160



5.0



7.75



$9.30 - $13.80


118,438



6.6



11.11



$20.06


30,005



7.1



20.06



Total ($0.01 - $20.06)


320,122



6.1



9.76


$
1,840     Weighted-Average


Weighted-AverageNumber of


Contractual Life


Exercise


AggregateRange of Exercise Prices

Options


(Years)


Price


Intrinsic Value$0.01


4,719



5.0


$
0.01


$
1,840$1.43 - $4.52


398,400



9.0



2.64



$7.75


190,200



5.0



7.75



$9.30 - $13.80


263,382



7.0



10.95



$20.06


63,037



7.1



20.06



Total ($0.01 - $20.06)


919,738



7.5



7.26


$
1,840     Restricted
    and Performance Shares
   F-21




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      16.
    Earnings
    per Share    Year Ended


Year Ended


Year EndedFebruary 3,


February 2,


January 31,2007


2008


2009Numerator:Net income (loss)

$
(1,543,111
)

$
(17,657,265
)

$
(14,995,601
)Numerator for basic earnings (loss) per share


(1,543,111
)


(17,657,265
)


(14,995,601
)Interest expense related to convertible debentures










Numerator for diluted earnings (loss) per share

$
(1,543,111
)

$
(17,657,265
)

$
(14,995,601
)Denominator:Denominator for basic earnings (loss) per share 
    weighted average shares


6,453,527



6,540,905



7,040,609Effect of dilutive securities:Stock options










Stock purchase warrants










Convertible debentures










Denominator for diluted earnings (loss) per share 
    adjusted weighted average shares and assumed conversions


6,453,527



6,540,905



7,040,609    F-22




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  17.
    Fair
    Value of Financial Instruments    February 2, 2008


January 31, 2009Carrying





CarryingAmount


Fair Value


Amount


Fair ValueCash and cash equivalents

$
159,671


$
159,671


$
134,676


$
134,676Revolving credit facility


11,184,379



11,184,379



11,482,862



11,482,862Subordinated secured term loan










4,817,282



4,786,652Subordinated convertible debentures


4,000,000



3,023,392



4,000,000



2,227,463Capital lease obligations, including current maturities


57,863



57,863







     18.
    Related
    Party Transactions      19.
    Quarterly
    Financial Data  Unaudited    Thirteen Weeks


Thirteen Weeks


Thirteen Weeks


Thirteen WeeksEnded


Ended


Ended


EndedMay 5,


August 4,


November 3,


February 2,2007


2007


2007


2008Fiscal year 2007:Net sales

$
49,255,817


$
41,984,658


$
40,293,957


$
54,745,555Gross profit


15,288,041



9,276,094



3,508,981



19,388,006Net income (loss)(1)(2)(3)


(965,174
)


(8,744,782
)


(15,294,582
)


7,347,273Basic earnings (loss) per share


(0.15
)


(1.35
)


(2.35
)


1.10Diluted earnings (loss) per share


(0.15
)


(1.35
)


(2.35
)


1.03   F-23




---



##### Table of Contents



BAKERS
    FOOTWEAR GROUP, INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  Thirteen Weeks


Thirteen Weeks


Thirteen Weeks


Thirteen WeeksEnded


Ended


Ended


EndedMay 3,


August 2,


November 1,


January 31,2008


2008


2008


2009Fiscal year 2008:Net sales

$
43,537,503


$
43,568,099


$
41,075,064


$
55,481,123Gross profit


11,249,973



12,879,165



8,996,887



17,425,637Net income (loss)(1)(3)


(4,874,068
)


(2,261,710
)


(8,343,124
)


483,301Basic earnings (loss) per share


(0.70
)


(0.32
)


(1.18
)


0.07Diluted earnings (loss) per share


(0.70
)


(0.32
)


(1.18
)


0.07     (1)
    
    At February 3, 2007, the Company had adequate available net
    operating loss carryback potential to support the recorded
    balance of net deferred tax assets. The Companys loss
    before income taxes for the twenty-six weeks ended
    August 4, 2007 exceeded the Companys carryback
    potential and was anticipated to result in a cumulative loss
    before income taxes for the three year period ending
    February 2, 2008. Therefore, as of August 4, 2007, the
    Company concluded that the realizability of net deferred tax
    assets was no longer more likely than not, and established a
    $4,142,287 valuation allowance against its net deferred tax
    assets which resulted in a net provision for income tax expense
    of $1,280,839 for the second quarter of fiscal year 2007. As a
    consequence of the existence of the valuation allowance, there
    was no net provision for or benefit from income taxes during the
    third and fourth quarters of fiscal year 2007. During fiscal
    year 2008 the Company recognized income tax expense of $222,498
    in the second quarter related to federal alternative minimum tax
    and recognized income tax benefit of $137,651 in the fourth
    quarter related to realized state net operating loss carrybacks.
    All other net income tax benefits were offset by changes to the
    valuation allowance.(2)
    
    On December 11, 2007, the Company entered into an agreement
    to terminate a below market operating lease, in exchange for a
    $5,050,000 cash payment, and the right to continue occupying the
    space through January 8, 2009. The Company recognized a net
    gain of $4.7 million from this transaction in the fourth
    quarter of fiscal year 2007.(3)
    
    During the second and third quarters of fiscal year 2007 and the
    third quarter of fiscal year 2008, the Company recognized
    $755,672, $2,375,497, and $2,609,588 respectively in noncash
    charges related to the impairment of long-lived assets of
    underperforming stores. F-24