<PAGE>   1

================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

--------------------------------------------------------------------------------
                                    FORM 10-K
--------------------------------------------------------------------------------

  FOR THE ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                                   (MARK ONE)

          [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
              SECURITIES EXCHANGE ACT OF 1934
                              FOR THE FISCAL YEAR ENDED JANUARY 1, 2000

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

                         COMMISSION FILE NUMBER 1-13474

                              FLORSHEIM GROUP INC.
             (Exact name of registrant as specified in its charter)

                 DELAWARE                                 36-3520923
      (STATE OR OTHER JURISDICTION OF                  (I.R.S. EMPLOYER
      INCORPORATION OR ORGANIZATION)                 IDENTIFICATION NO.)
200 NORTH LASALLE STREET, CHICAGO, ILLINOIS               60601-1014
 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                 (ZIP CODE)

        Registrant's telephone number, including area code (312) 458-2500

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:


                                                Name of each exchange on
         Title of each class                        which registered
----------------------------------------       -------------------------
  12 3/4% SENIOR NOTES DUE 2002   NEW             YORK STOCK EXCHANGE


           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                         COMMON STOCK, WITHOUT PAR VALUE
                                (Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
  Yes [X]   No [ ]

Indicate 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. [X]

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 15, 2000, was approximately $11,374,000 based on the
closing price of the registrant's common stock as reported on The NASDAQ Stock
Market on March 15, 2000.

              APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
                  PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
  Yes [ ]   No [ ]

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
                     8,483,651 shares as of March 15, 2000

                       DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held on May 17, 2000, are incorporated by reference into
Part III of this report.



<PAGE>   2

                                     PART I

ITEM 1.  BUSINESS

        This report contains forward-looking statements that address, among
other things, distribution efforts, sourcing arrangements, projected capital
expenditures, future cost of compliance with environmental laws and the adequacy
of financing arrangements to meet debt service, capital expenditures, and other
liquidity requirements. These statements may be found under Item 1. "Business"
and Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" as well as in other portions of this report generally.
Actual events or results may differ materially from those discussed in
forward-looking statements as a result of various factors, including without
limitation those discussed under the caption "Risk Factors" included in Item 1.
and other matters included in this report.

GENERAL

     Florsheim Group Inc. (Florsheim or the Company) founded in 1892, markets,
designs and sources a diverse and extensive range of products in the middle to
upper price range of the men's quality footwear market. Florsheim became a
publicly held and publicly traded corporation on November 17, 1994 when
Furniture Brands International, Inc., formerly known as INTERCO INCORPORATED,
distributed the common stock of Florsheim to its stockholders. References herein
to Florsheim or the Company include the consolidated subsidiaries of Florsheim
unless the context indicates otherwise.

     Florsheim markets products to more than 6,000 specialty and department
store locations worldwide and through 271 Company-operated specialty stores and
outlet stores as of January 1, 2000. The Company believes that the Florsheim
brand name is widely recognized both in the U.S. and in international markets
for quality and value and that consumers' unaided brand awareness of Florsheim's
products in the U.S. in the men's dress shoe category is over four times greater
than that of its nearest competitor (according to Footwear Market Insights
(FMI)).

     Florsheim competes primarily in the $65 and above retail price point
segment of the men's non-athletic footwear market. The below $65 price point
segment is dominated by private label offerings. According to FMI, the Company
is the leading provider of men's dress shoes, with approximately an 11% share of
the men's total dress market, the nearest competitor having a 7% share.
Florsheim is also the leader in men's dress shoes over $65 with a 15% share,
versus 10% for the closest competitor.

     The Company's worldwide wholesale distribution accounted for approximately
48% of fiscal 1999 sales. The Company has a global wholesale customer base which
includes department stores and national accounts, such as Sears, JC Penney, and
Nordstrom, independent dealers located worldwide and licensee locations in
Mexico, India, the Pacific Rim and the Middle East. In addition, as of January
1, 2000, Florsheim had a retail network of 157 Company-operated specialty stores
and 63 Company-operated outlet stores in the U.S. As of January 1, 2000, the
Company also operated 42 specialty retail stores and 9 outlet stores in
Australia, Canada, Italy, and New Zealand and licensed an additional 42
specialty shops to selected international partners. The Company's retail
operations allow the Company to: achieve broader distribution of its products;
provide a showcase for a variety of Florsheim branded products marketed by the
Company; test market acceptance of newly introduced products; further develop
consumer recognition of the Florsheim brand; and maintain direct contact with
changes in consumer preferences and buying practices. The Company continues to
develop store formats which provide updated, contemporary looks to its specialty
stores.

INDUSTRY OVERVIEW

     The U.S. footwear industry has undergone substantial changes since the
early 1980s, which has resulted in significant challenges for U.S.-based
footwear manufacturers and retailers. Three major influences of this change have
been the increase in footwear imports into the U.S., the growth of consumer
demand for athletic and casual footwear, and a shift away from traditional shoe
stores. Management believes these influences have contributed to the following
trends: (i) the reduction in the domestic manufacturing base and an increase in
foreign sourcing of footwear products, (ii) the decline in annual sales (in
units) for the traditional dress shoe market, (iii) the increase in sales of
athletic and casual footwear and footwear products targeted for specific
athletic and leisure activities, and (iv) the shift in the primary channels of
distribution for footwear from independent dealers to department stores,
regional retailers and mass merchandisers. In response, the Company has
developed reliable, cost-effective foreign sourcing capabilities,



                                       2
<PAGE>   3


developed new product lines, developed lines of dress casual and casual shoes,
and has expanded its wholesale distribution capabilities.

     According to FMI, 1998 U.S. retail sales of men's footwear (excluding
athletic footwear and work boots) were approximately $6.35 billion. Within this
market, declines in the traditional dress shoe segment have been primarily
driven by the lifestyle trend toward more casual clothing and emphasis on
leisure time and the increased popularity of casual dress or "dress down" days
within the business community. The men's footwear industry merchandise mix has
mirrored these changes as consumer preferences have shifted from dress toward
casual. A dress casual category within the men's footwear segment, which
combines features of dress shoes with the comfort enhancing aspects of casual
footwear, has also developed in response to this lifestyle and fashion shift.
Over this period, consumers' perceptions of the distinctions between product
offerings within the dress, dress casual and casual categories have diminished
as a result of "crossover" products that are not limited to a particular use or
occasion but are suitable for a variety of styles, fashions and end uses.
Florsheim's marketing efforts are designed to respond to these market
developments and capture a larger percentage of the footwear market consisting
of younger and more casual-dress oriented consumers. Remodeled specialty store
locations also provide an updated, contemporary and more casual feel.

     Department stores, regional retailers and mass merchandisers continue to
play a larger role in the retailing of footwear, and the significance of small
independent footwear dealers, which once dominated retail distribution, continue
to decline dramatically. To compensate for these shifts in the channels of
distribution, the Company has expanded its distribution to department stores and
regional and national retail stores and through Company operated stores. In
recent years, the Company has also developed a closer working relationship with
its key independent dealers in order to assist them with the expansion of their
Florsheim business.

MARKETING AND DISTRIBUTION GROWTH STRATEGY

     Management of the Company emphasizes two principal growth objectives: to
strengthen the Company's position as the leading distributor of men's dress
shoes at retail prices of $65 and above and to improve its market share in the
growing dress casual and casual footwear categories. To further these
objectives, the Company has adopted growth strategies to: (i) strengthen its
leading position in the traditional dress shoe market, (ii) extend its dress and
dress casual product lines and enhance marketing initiatives to improve its
appeal to younger and casual-dress target audiences, (iii) broaden wholesale
distribution, (iv) offer additional products in its retail stores, using a
multi-brand approach, (v) expand international sales and (vi) increase sales
through new product introductions.

     In order to execute the growth plans, the Company organized strategic
business units (SBU's) within the Company: wholesale, retail and international.
The SBU's focus specifically on achieving the growth objectives of the
individual units and provide the accountability necessary to allow management to
control the units in a manner consistent with the Company's overall goals.

     Strengthen Leading Position in the Traditional Dress Shoe Market: FMI
estimates that the $65 and above dress shoe segment of the men's footwear
market, Florsheim's strongest historical product segment, accounted for $1.5
billion in annual retail sales in 1998. To expand market share in dress shoes,
the Company has positioned the Florsheim brand at retail price points above $80
and created a sub-label, FLS, to represent product under $80 at retail. This
strategy will allow Florsheim to market its products to broader channels of
distribution and appeal to a larger consumer base.

     Extension of Dress Casual and Casual Product Offerings: The Company intends
to increase its market share in the growing dress casual and casual categories
through new product introductions, enhanced marketing initiatives that are
intended to appeal to younger and casual dress target audiences and the
promotion of product at Company-operated stores through a more contemporary
format. The Company originally developed Comfortech technology to improve the
comfort and durability features of its products without sacrificing style or
quality. Florsheim has continued to enhance the Comfortech design each year and
has added new products and features to encourage acceptance of Comfortech line
extensions, including Comfortech Maintenance Free, Comfortech SofTreds, and new
Comfortech MagneForce. The MagneForce technology, which met with considerable
success when introduced in Florsheim Golf in 1998, was expanded to the Company's
Comfortech and John Deere labels and introduced to the trade in August, 1999,
for the Spring 2000 consumer market. This technology features a flexible,
unipolar magnetic insole permanently lasted into the shoe. Magnets are believed
to increase circulation, reduce pain and increase the natural healing process.
Although magnetic therapy has been practiced for centuries in many parts of the
world, its



                                       3
<PAGE>   4


acceptance has recently begun to permeate mainstream American consciousness.
Florsheim is the first major vendor to offer this technology, and the Company
believes these introductions will reinforce its position as both a maker of
casual and business casual footwear, and as an industry leader and innovator.

      Broaden Wholesale Distribution: The Company is aggressively seeking to
expand its sales to wholesale accounts by adding new customers, such as national
and regional retailers, including expansion of department store distribution, as
well as increasing penetration of existing accounts with its extended product
line and aggressive merchandising and advertising programs. The Company's
success in distributing its branded merchandise through Sears and JC Penney
locations is being used as a model in marketing similar arrangements to other
department stores and national and regional retailers. An important component of
the Sears/Florsheim success is the use of an interactive video kiosk that allows
the consumer to electronically seek product information, learn about store
promotions, and special order footwear directly from the Florsheim distribution
center.

     Multi-Brand Concept: In order to meet consumers' needs for a complete range
of men's footwear in its retail stores, the Company has added additional branded
products that do not conflict with the current Florsheim line. By selling
additional brands in its store, the Company expects, based on successful results
to date, that this strategy will introduce the Florsheim brand to additional
consumers by attracting new customers into the stores. The multi-brand concept
results in improved Florsheim product sales and higher overall sales per square
foot for the store.

     Expanding International Distribution: The Florsheim name is recognized in
many international markets around the world, especially Australia, Canada and
Mexico. The Company has initiated efforts to establish a stronger presence in
Europe, Central and South America, and the Pacific Rim. In addition, the Company
has launched an international strategy, through licensing of stores, selective
openings of Company-operated specialty stores, and increased sales to wholesale
accounts, to increase its penetration of established markets and to introduce
the Florsheim brand in selected new markets.

     New Products: In 1996 and 1997, the Company launched three new product
lines through its wholesale business unit. The new products include: Florsheim
Golf Shoes, John Deere Footwear, and Joseph Abboud Footwear.

ADVERTISING

     The Company's advertising objective is to build upon the strength of the
Florsheim brand name and expand its market share and sales in the growing dress
casual and casual categories with particular attention on targeting a younger,
more affluent customer. According to FMI, unaided brand awareness of the
Florsheim name is approximately 50% in the United States in the men's dress shoe
category. Management believes this unaided brand awareness is over four times
greater than that of Florsheim's nearest competitor in the dress category of the
footwear industry and is third overall, behind Nike and Reebok, in the entire
footwear industry. Management believes the consumer's image of Florsheim is
typically associated with a high quality product that offers good value.
Management has implemented advertising and marketing programs to successfully
carry that well-established quality image through to offerings in the dress
casual and casual categories.

         The total domestic advertising expenditures were approximately 3.0% of
Florsheim's total domestic sales in fiscal 1999 and 1998 and 2.0% in fiscal
1997. These expenditures were divided among television, national print ads and
print advertising placed on behalf of the Company-operated specialty stores and
independent dealers.


WHOLESALE OPERATIONS

     The Company distributes its product at wholesale to more than 6,000 retail
locations worldwide ranging from independent shoe stores to large national
retailers and department stores to Company-operated specialty and outlet stores.
The Company is continually developing new programs to add distribution,
strengthen its position with its existing customers and capitalize on
opportunities in response to the shifts in consumer shopping patterns. The
Company's broadened product line has helped strengthen its position with dealers
because each dealer can select the items from the product line which will appeal
to its particular customer base.

     Due to the changing profile of the retail shoe industry with the reduced
importance of the traditional shoe store, Florsheim has expanded its
distribution strategy to include a broader range of retailers. While remaining
selective in its choice of dealers and focusing on those that will best serve
the Company for the long-term, the Company believes that



                                       4
<PAGE>   5


a broader distribution base that includes department stores, national and
regional retailers and mass merchandisers is essential for continued success.

RETAIL OPERATIONS

     As of January 1, 2000, Florsheim had 271 Company-operated stores worldwide,
represented by 199 Florsheim specialty shoe shops and 72 outlet stores.
According to industry data, management believes that Florsheim's
Company-operated chain of stores is the largest U.S. specialty retailer of men's
quality dress footwear. The Company evaluates each of these locations as leases
expire and makes the decision to renew, relocate, or close. The Company intends
to continue the selective opening of new stores and closing unprofitable stores.

     The Company-operated stores provide a strategic distribution channel which
gives the Company a key competitive advantage. Management believes that as the
footwear retailing industry continues to consolidate, it is critical that the
Company maintains its own controlled distribution channel. Company-operated
stores are the largest distributor of Company products and, in the U.S.,
represented approximately 30% of the wholesale sales value of total domestic
wholesale shipments during fiscal 1999. The Company realizes both a wholesale
gross profit margin and a retail gross profit margin on product distributed
through its Company-operated stores. The combined gross profit margin on such
sales is larger than the gross profit margin earned on product distributed
exclusively through wholesale channels. Florsheim maintains a consistent pricing
policy for the wholesale division such that prices for shoes purchased by
Company-operated retail stores are typically the same as those paid by
independent dealers.

     During 1996, a number of Company-operated specialty stores began to offer a
limited selection of non-Florsheim products in order to attract new consumers
into the stores. Management believes that this strategy will continue to improve
overall sales per square foot and will enable the Company to introduce the
Florsheim brand to a new group of younger consumers. Company-operated stores
will continue to carry predominantly Florsheim product which will help reinforce
the Company's quality footwear image by displaying the complete Florsheim
product line in an attractive, Company-controlled display format. The Company
has opened three new @ease retail locations which it believes appeal to a
younger consumer with a casual product mix offering of Florsheim and
non-Florsheim brands.

     The traditional Florsheim specialty shoe stores carry a full selection of
the Company's brands, while the outlet stores carry discontinued merchandise,
close out inventory and specially manufactured products. Generally, the Company
does not concurrently offer any identical products through these separate and
distinct distribution channels. Both the traditional specialty shoe stores and
the outlet stores have been, and will continue to be, key elements of the
Company's distribution efforts.

INTERNATIONAL

     Florsheim has been a participant in international markets since the 1960s
and has a strong, established presence in Australia and Canada through
Company-operated businesses, and in Mexico through a licensee operation. The
Company is establishing a stronger presence in selected regions of Europe,
Central and South America, India, the Middle East, and the Pacific Rim. The
international division markets the Company's products through a global network
of wholesale dealers, distributors, licensees and Company-operated stores. At
January 1, 2000, the Company operated 51 specialty and outlet stores in
international markets and licensed an additional 43 specialty shops to selected
partners. International sales, including exports, were $45.9 million in fiscal
1999, and were distributed as shown below:

                           INTERNATIONAL DISTRIBUTION
               PERCENTAGE OF TOTAL FISCAL 1999 INTERNATIONAL SALES

                       Australia                    49%
                       Canada                       24
                       Pacific Rim                  10
                       Europe                        7
                       Other Exports                10
                                                   ----
                                                   100%

     Management believes American brand names, in general, have well recognized
marketing appeal in many countries throughout the world and believes that the
Company's classic, high quality products are well received in the European,
Central and South American and Pacific Rim markets. The Company believes that
the Florsheim brand



                                        5
<PAGE>   6


name is recognized throughout the world and that the trend toward the growth of
international brand names offers tremendous opportunity for Florsheim.

     Australia and Canada are important and well established markets for
Florsheim. The Australian and Canadian operations both include wholesale
distribution and a chain of Company-operated specialty and outlet stores. As of
January 1, 2000, the Company operated 38 stores in Australia and New Zealand and
12 stores in Canada. Management believes that its Australian stores are the only
chain of dedicated quality men's dress shoes in Australia and provide a key
competitive advantage in this market. Both the Australian and Canadian retailing
industries are dominated by large department stores; therefore, the Company is
concentrating on building wholesale sales to these key department store accounts
while maintaining its commitment to a profitable network of Company-operated
stores and independent dealers. Currently, there is one Company-operated
manufacturing facility in Australia and none in Canada.

     Management believes that the Pacific Rim offers opportunities for Florsheim
and has targeted this region as part of the Company's international growth
strategy. Distribution to this market is primarily effected by its Hong Kong
sales subsidiary through wholesale sales to independent retailers in the Pacific
Rim and licensees and distributors in Hong Kong, Indonesia, Taiwan, Singapore,
Japan, China and the Philippines. The Company's primary strategy for increasing
its presence in this area is to increase the number of independent dealers and
licensees while establishing Company-operated specialty stores in a few select
locations.

     Management believes there is a significant opportunity to increase sales in
Europe by capitalizing on the appeal of American brand name products. While it
is expected that the Company will encounter greater competition in Europe than
in the Pacific Rim, the Company intends to draw upon its long-standing
relationships with Italian and Spanish suppliers to establish a presence and
generate demand for its products in Europe. The Company has developed a sales
presence in several European countries through a Company-operated store in
Milan, Italy and through an arrangement for corner stores within Printemps, a
large department store chain in France, El Corte Ingles in Spain and other large
department stores in Europe.

     The International Division also includes licensees and distributors in
India, Mexico, Japan, Qatar, the Philippines, Saudi Arabia, Venezuela, Guatemala
and the United Arab Emirates.

     Note 15 to the Company's consolidated financial statements included under
item 8 of this Report contains certain geographical segment information
regarding the Company's domestic and international operations.


PRODUCT

     Management's primary product strategy is to strengthen its leading position
in the dress category while further penetrating the growing dress casual and
casual categories. Florsheim offers a diverse line of men's quality dress,
dress-casual and casual shoes in the $65 and above price range. All products,
except those that are sold under license, are currently sold under the Florsheim
brand, but are identified with the following sub-labels to differentiate product
by lifestyle or construction. In addition, the Company has entered into
licensing agreements to manufacture and sell John Deere work boots and Joseph
Abboud footwear.

The following is a summary of the Florsheim brands by category:

<TABLE>
<CAPTION>

                DRESS               DRESS CASUAL            CASUAL               OTHER
                -----               ------------            ------               -----
    <S>                     <C>                      <C>                      <C>
     Florsheim               Florsheim                Florsheim                MagneForce
     Florsheim Comfortech    Florsheim Comfortech     Florsheim Comfortech     John Deere**
     Florsheim Imperial      FLS                      @ease                    Florsheim Golf
     FLS                     Joseph Abboud*           MagneForce
     Joseph Abboud*
</TABLE>

*   This is the registered trademark of Joseph Abboud
**  This is the registered trademark of Deere and Company



                                       6
<PAGE>   7


     FLORSHEIM: The Florsheim label represents the company's heritage of
quality, value and appropriate style in dress and casual footwear that can be
worn with confidence. Retail price points for this line range from $80 to $120.

     FLORSHEIM COMFORTECH: Incorporating the most advanced comfort technology
and construction methods, the Florsheim Comfortech line offers uncompromising
comfort in versatile business casual and casual styles. Retail price points
range from $90 to $120.

     FLORSHEIM IMPERIAL: Florsheim Imperial, recognized worldwide for superior
quality and impeccable fashion, includes dress and dress casual styles for the
discriminating gentleman. Retail price points range from $120 to $170.

     FLS: This label was developed to differentiate the company's value line of
footwear from the moderate to high-end product associated with the Florsheim
brand. FLS by Florsheim represents a quality product at a value price in
traditional dress and dress casual styles, with retail prices from $50 to $80.

     JOSEPH ABBOUD FOOTWEAR: A complete line of high-end fashion footwear
designed and manufactured to the specifications of men's fashion designer Joseph
Abboud. Joseph Abboud fashions are available only at selected specialty and
department stores which serve upscale clientele. Retail price points range from
$150 to $300.

     JOHN DEERE: A comprehensive line of work boots designed and manufactured to
meet the specific, functional needs of industrial, agricultural and other
blue-collar workers. The line is marketed under the John Deere label through a
licensing agreement with Deere, one of the world's best known
industrial/agricultural equipment manufacturers. The boots are designed to be
the most comfortable and durable product in the market. Retail price points
range from $80 to $175.

     FLORSHEIM GOLF: Designed to be technologically superior, Florsheim Golf
combines the best of Florsheim Comfortech with quality materials and
workmanship. MagneForce technology introduced in 1999 marked this line as an
innovative force in golf, with the first shoes featuring a full length,
permanently lasted, magnetic insole. Retail priced at $120.

     @EASE: Contemporary dress casual and casual styles designed for the younger
consumer in the wardrobe-building phase of his life. Marketed primarily in
company-owned Florsheim and @ease stores. Retail prices range from $60 to $80.

     Florsheim has entered into non-footwear licensing agreements which include
hosiery, shoe care products, belts and small leather goods. These products are
sold under the Florsheim name through the wholesale distributor network and at
Florsheim company operated stores.

SOURCING AND MANUFACTURING TRADE REGULATIONS

    Florsheim's sourcing strategy is to manufacture products where they can be
produced most efficiently while still meeting management's quality and service
specifications. Toward this goal, Florsheim shoes are manufactured both
domestically and overseas. Florsheim has consolidated its domestic manufacturing
in recent years to improve production capabilities. In December 1999, the
Company closed its last manufacturing facility. The facility was located in Cape
Girardeau, Missouri and represented approximately 20% of the company's worldwide
production. During 1999, approximately 80% of Florsheim's finished shoe sourcing
requirements were fulfilled outside of the United States. Approximately 58% of
Florsheim's non-domestic products are manufactured in India, where Florsheim is
the minority partner (26% ownership) in a joint venture arrangement with a local
operator. Under this arrangement, the venture manufactures exclusively for
Florsheim and without minimum quantity restrictions for the production output.
Also under this arrangement, the Company is actively involved in training and
production techniques, and management believes that production quality is
comparable to what could otherwise be produced using domestic production
facilities. The remainder of the Company's products are sourced from a variety
of suppliers in a number of other countries, including Spain, Italy, Dominican
Republic, China, and Mexico. The Company will continue to source certain
products in the U.S.



                                       7
<PAGE>   8



     Florsheim's major raw materials include leather uppers, linings and
outsoles. Florsheim obtains raw materials and components from a wide variety of
sources located throughout the world and has alternate sources for leathers,
components and other materials. Leather pricing and availability are subject to
fluctuating supply and demand cycles; however, Florsheim management believes it
has adequate sourcing arrangements through its own suppliers as well as through
its overseas manufacturers to ensure an uninterrupted supply of raw materials.

     The Company's operations are subject to the customary risks of doing
business abroad, including currency fluctuations, labor unrest, political
instability, restrictions on transfer of funds, export duties and quotas and
U.S. customs and tariffs. The Omnibus Trade and Competitiveness Act of 1988
added a new provision to the Trade Act of 1974 dealing with intellectual
property rights. This provision, which is commonly referred to as "Special 301,"
directed the United States Trade Representative (USTR) to designate those
countries with poor records for protecting intellectual property rights as
"priority foreign countries" and to initiate investigations with respect to the
allegedly unfair practices in such countries. Where such an investigation does
not lead to a satisfactory resolution of such practices, through consultations
or otherwise, USTR is authorized to take retaliatory action, including the
imposition of restrictions on imports from the particular country into the
United States.

     In the past, the USTR has reviewed the trade practices of various
countries, including India, Taiwan and China under Special 301, but such reviews
have not had any material affect on the Company's sourcing arrangements. No
assurance can be given, however, that the USTR's efforts will not, in the
future, have an adverse effect on the Company's sourcing arrangements.

     The Company's imported finished footwear products are subject to U.S.
customs duties of 8.5%. The Company's imported leather uppers may be imported
from India duty-free under the Generalized System of Preferences. The Company's
imports of leather are subject to a range of duty rates from 0-5.0%. The Company
is unable to predict whether additional U.S. customs duties, quotas or other
restrictions may be imposed upon the importation of its products in the future
or whether duty-free privileges may be suspended or terminated in the future.

INFORMATION TECHNOLOGY UPGRADE AND YEAR 2000

     In 1998, the Company established a task force to assess the impact of the
Year 2000 issue on the hardware and software utilized in the Company's internal
operations. The task force was also responsible for the evaluation of exposures
from third parties, including customers and suppliers. Upon completion of the
assessment, the Company initiated a significant information technology upgrade
in order to resolve the Year 2000 issue. The cost of the upgrade was
approximately $15.4 million, which was capitalized during the three years ended
January 1, 2000.

     The Company successfully completed the installation of new financial
systems during 1998 and completed wholesale and warehouse systems and retail
systems in 1999. While the Company did transition into Year 2000 without any
significant problems, the Company did experience problems which negatively
impacted operations at times during 1999 as a result of the new system.

SEASONALITY OF BUSINESS

     See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Seasonality of Business."

BACKLOG

     At January 1, 2000, the Company's U.S. wholesale operations had a backlog
of customer orders amounting to approximately $14.9 million, compared to
approximately $13.8 million, at January 2, 1999, an increase of 7.4%. The
majority of incoming orders are for "at once" shipments; therefore, the backlog
is not necessarily indicative of a corresponding change in annual sales.

EMPLOYEES

     As of January 1, 2000, Florsheim had 1,889 employees in the United States
and overseas. Approximately 18% of Florsheim's work force is represented by
unions. Management believes Florsheim has maintained satisfactory overall
relations with its unionized and non-unionized workforce.



                                       8
<PAGE>   9


INTELLECTUAL PROPERTY

     The major trademarks and trade names under which Florsheim's men's footwear
are sold include: Florsheim, Florsheim Comfortech, Florsheim Imperial, Florsheim
Comfortech Maintenance Free, MagneForce, FLS and @ease. Other footwear is sold
through licensing agreements as: Joseph Abboud footwear and John Deere boots.
The Company considers Florsheim and the names and marks traditionally used with
it to be material to its business. The Company also owns several patents which
relate to footwear construction and are material to the operations of the
business and expire over the next 13 years.

ENVIRONMENTAL MATTERS

     The Company's operations are subject to federal, state and local laws,
regulations and ordinances relating to the operation and removal of underground
storage tanks and the storage, handling, generation, treatment, emission,
release, discharge and disposal of certain materials, substances and wastes
pursuant to which the Company has in the past been required to incur compliance
and clean-up costs. The nature of the Company's operations expose it to the risk
of claims with respect to environmental matters, and there can be no assurance
that material costs or liabilities will not be incurred in connection with such
claims.

     Based on the Company's experience to date, the Company believes that its
future cost of compliance with environmental laws, regulations and ordinances,
or exposure to liability for environmental claims, will not have a material
adverse effect on the Company's business or financial position. However, future
events, such as changes in existing laws and regulations, or unknown
contamination of sites owned or operated by the Company (including contamination
caused by prior owners and operators of such sites) may give rise to additional
compliance costs which could have a material adverse effect on the Company's
financial position.

RISK FACTORS

Impact of General Economic Conditions on Footwear Industry and the
Company's Operations

     Florsheim and the footwear industry in general are dependent on the
economic environments, both domestic and international, and levels of consumer
spending which affect not only the ultimate consumer, but also retailers,
Florsheim's primary direct customers. As a result, Florsheim's results may be
adversely affected by downward trends in the economy or the occurrence of events
that adversely affect the economy in general. There can be no assurance that any
prolonged economic downturn would not have a material adverse effect on
Florsheim.

     Competition

     Florsheim directly competes, with respect to fashion, quality and price,
with a number of domestic manufacturers and retailers of men's dress, dress
casual and casual footwear. In addition, Florsheim indirectly competes with
manufacturers and retailers of athletic footwear. Florsheim's retail stores also
compete with a variety of retailers, including regional specialty retailers,
department stores, national retailers and mass merchandisers, with respect to
men's dress, dress casual and casual footwear. The additions of John Deere work
boots, Joseph Abboud footwear and Florsheim Golf shoes increase the number and
types of marketers with which Florsheim competes. Florsheim also experiences
significant competition from imports. Highly competitive conditions existing
within both the wholesale and retail segments of the men's footwear market may
result in increased price promotions and promotional expenses that limit the
Company's ability to grow its sales and enhance its gross profit margins.

     Reliance on Foreign Production

     During 1999, approximately 80% of Florsheim's finished shoe sourcing
requirements were fulfilled outside of the United States. Approximately 58% of
total products are manufactured in India, where Florsheim is a participant in a
joint venture arrangement with a local operator. The remainder of such
non-domestic product sourced from a variety of suppliers in a number of other
countries, including Portugal, Spain, Italy, Dominican Republic, China and
Mexico. The Company's operations are subject to the customary risks of doing
business abroad, including currency fluctuations, labor unrest, political
instability, restrictions on transfer of funds, import and export duties and
trade barriers (including quotas) and U.S. customs and tariffs. In addition,
trade regulations and potential U.S. government sanctions could be imposed
against some of the countries from which the Company sources product and result
in restrictions on imports from such countries. To date, these factors have not
had an adverse impact on the Company's operations.



                                       9
<PAGE>   10



     Control of Florsheim

     Apollo Investment Fund, L.P. ("Apollo") and its affiliate Lion Advisors,
L.P., on behalf of an investment account under management ("Lion"; Apollo and
Lion together being referred to herein as the "Apollo Stockholders"), together
beneficially own approximately 66.2% of the outstanding shares of Florsheim
common stock. By reason of their ownership of shares of Florsheim common stock,
the Apollo Stockholders effectively have the power to control or influence
control of the Company, including in elections of the Board of Directors and
other matters submitted to a vote of the Company's stockholders, including
extraordinary corporate transactions such as mergers. The Apollo Stockholders
may exercise such control from time to time. A majority of the Board of
Directors consists of individuals associated with affiliates of Apollo and Lion.

     Shares Eligible for Future Sale

     The Apollo Stockholders beneficially own approximately 5,615,160 shares of
Florsheim Common Stock. However, the Apollo Stockholders continually review
decisions to buy, sell or hold investments and based on market conditions or
other considerations, their intentions may change. Sales of shares of Florsheim
Common Stock by the Apollo Stockholders would be subject to restrictions imposed
by the Securities Act of 1933, as amended (the "Securities Act"), including Rule
144 promulgated thereunder, unless the Apollo Stockholders exercise certain
rights for the registration of their shares of Florsheim Common Stock under the
Securities Act. The sale of a substantial number of shares of Florsheim Common
Stock by the Apollo Stockholders could adversely affect the market price of the
Florsheim Common Stock.

ITEM 2.  PROPERTIES

     Florsheim owns or leases the following principal plants, offices and
warehouses:

                                                           Floor       Owned
                                                           Space        or
                 Location             Type of Facility   (Sq. Ft.)    Leased
                 --------             ----------------   ---------    ------

       Chicago, IL.............   Headquarters             80,000     Leased
       Jefferson City, MO......   Warehouse               562,000      Owned
       Preston, Australia......   Plant/Warehouse          59,000     Leased
       Hong Kong...............   Office/Warehouse         12,000     Leased
       Florence, Italy.........   Office/Warehouse          5,000     Leased


     The Company also operates 270 retail stores in leased facilities. The
stores generally range in size from 800 to 3,000 square feet.

     The Jefferson City facility is encumbered by a first priority lien and
mortgage pursuant to the Company's bank credit facility.

     The Company's properties listed above are generally well maintained,
suitable for present operations and adequate for current requirements. Florsheim
estimates that its facilities were effectively utilized during fiscal 1999 at
moderate levels of productive capacity and believes that its facilities in
combination with other facilities available through the Company's sourcing
network have the capacity, if necessary, to expand production to meet
anticipated product requirements.

ITEM 3.  LEGAL PROCEEDINGS

     The Company is or may become a defendant in a number of pending or
threatened legal proceedings in the ordinary course of business. In the opinion
of management, the ultimate liability, if any, of the Company from all such
proceedings will not have a material adverse effect upon the consolidated
financial position or results of operations of the Company and its subsidiaries.




                                       10
<PAGE>   11


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

         Not applicable.


                                     PART II


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

     As of March 15, 2000, there were approximately 1,500 holders of record of
common stock.

     Shares of the Company's common stock trade on The NASDAQ Stock Market under
the symbol FLSC. The reported high and low sale prices for Florsheim's common
stock on The NASDAQ Stock Market for each quarterly period within the two most
recent fiscal years are included in Note 16 to the consolidated financial
statements of the Company included under Item 8 of this report.

     The Company did not pay dividends on its common stock during the fiscal
years ended January 3, 1998, January 2, 1999, and January 1, 2000.

     A discussion of restrictions on the Company's ability to pay cash dividends
is included in Note 6 to the consolidated financial statements of the Company
included under Item 8 of this Report.



                                       11
<PAGE>   12

ITEM 6.  SELECTED FINANCIAL INFORMATION

(Dollars in thousands, except per share data)

The following financial data should be read with the consolidated financial
statements and notes thereto included in Item 8 of this report.

<TABLE>
<CAPTION>
                                                                  Fiscal year ended (1)
                                          --------------------------------------------------------------------
                                          December 30,  December 28,   January 3,    January 2,     January 1,
                                              1995          1996          1998         1999          2000
                                          ----------     ---------     ---------     ----------    -----------
<S>                                        <C>           <C>           <C>           <C>           <C>
SUMMARY OF OPERATING RESULTS:
Net sales (2)                              $ 285,307     $ 244,855     $ 253,056     $ 244,895     $ 245,726
Earnings (loss) from operations                6,920        11,408        12,221         7,069          (484)
Earnings (loss) before extraordinary
    item (3)                                  (4,846)        1,964         3,607          (559)       (7,618)
Net earnings (loss) (4)                       (4,846)        1,964        (1,435)         (559)       (8,368)

BASIC EARNINGS (LOSS) PER SHARE:
   Earnings (loss) before extraordinary
     item                                  $   (0.58)    $    0.24     $    0.43     $   (0.07)    $   (0.90)
   Net earnings (loss)                         (0.58)         0.24         (0.17)        (0.07)        (0.99)

DILUTED EARNINGS (LOSS) PER SHARE:
   Earnings (loss) before extraordinary
     item                                      (0.58)         0.23          0.42         (0.07)        (0.90)
   Net earnings (loss)                         (0.58)         0.23         (0.17)        (0.07)        (0.99)

OTHER INFORMATION:
Dividends paid per share                   $    --       $    --       $    --       $    --       $    --
Cash flow provided by (used in):
   Operating activities                       31,010        13,221       (17,783)       (5,092)       (5,030)
   Investing activities                       (5,320)       13,991        (3,633)       (9,172)       (7,993)
   Financing activities                      (25,313)      (10,770)        6,920        14,000        11,767
Depreciation and amortization                  4,539         4,875         5,425         4,937         6,245
Capital expenditures                           5,479         9,424         9,922        10,308         8,462

BALANCE SHEET DATA AT PERIOD END:
Working capital                            $ 111,922     $  95,116     $  94,167     $  83,452     $  69,275
Property, plant, and equipment, net           21,742        24,974        27,245        30,981        32,525
Total assets                                 186,321       185,238       183,646       199,566       197,352
Long-term debt, less current maturities       80,126        69,450        76,912        76,912        83,412
Shareholders' equity                          55,068        57,655        54,482        53,347        44,648

NUMBER OF RETAIL STORES AT PERIOD END:
   U.S. Specialty                                220           205           200           173           157
   U.S. Outlet                                    90            93            99            84            63
   International                                  53            53            54            54            51
                                           ---------     ---------     ---------     ---------     ---------
   Total Stores                                  363           351           353           311           271
                                           =========     =========     =========     =========     =========
</TABLE>


                                       12
<PAGE>   13
Notes to Selected Financial Information:

(1)  Florsheim's fiscal year end is the Saturday closest to December 31. The
     results of operations will periodically include a 53 week fiscal period.
     Fiscal 1995, 1996, 1998 and 1999 each represented a 52 week period. Fiscal
     1997 represented a 53 week period.

(2)  Includes sales of the Company's Hy-Test Inc. safety shoe business, which
     was sold in March 1996. Net sales of Hy-Test were $38,659, and $6,943 in
     fiscal 1995, and 1996, respectively.

(3)  Fiscal 1997 includes a $4,300 million gain associated with the sale of the
     Company's former corporate headquarters.

(4)  Fiscal 1997 includes an extraordinary loss of $5,042 associated with the
     tender premium and expenses related to the repurchase of Senior Notes and
     the execution of a revolving credit facility. 1999 includes an
     extraordinary loss of $750 associated with the refinancing of the credit
     facility.


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

The following commentary should be read in conjunction with the consolidated
financial statements and notes thereto included under Item 8 of this report. All
dollar amounts are presented in thousands.

RESULTS OF OPERATIONS

The Company's fiscal year end is the Saturday closest to December 31. Throughout
this analysis fiscal 1997 refers to the 53 week period ended January 3, 1998,
fiscal 1998 refers to the 52 week period ended January 2, 1999, and fiscal 1999
refers to the 52 week period ended January 1, 2000.


FISCAL 1999 COMPARED TO FISCAL 1998

Net sales for fiscal 1999 were $245,726, an increase of $831 as compared to
fiscal 1998. The increase resulted from significant gains in U.S. Wholesale net
sales, which were more than offset by reductions in U.S. Retail net sales. U.S.
Wholesale net sales increased $8,555, or 9.7%, with all channels of distribution
reporting higher sales. The gains were led by significant increases at both
Sears, J C Penney and big box retailers. U.S. Retail net sales decreased $9,214
or 8.2%, as a result of planned store closings and lower inventory levels due to
computer system issues, which resulted in improper inventory replenishment.
International net sales increased $1,490 or 3.3% on strengthening in the
Company's Australian operations and the Pacific Rim.

Gross profit for fiscal 1999 was $106,176, a decrease of $3,400 as compared to
fiscal 1998. Fiscal 1999 included charges of $2,646 for costs associated with
the December 1999 closing of the Company's Cape Girardeau, Missouri
manufacturing facility, costs associated with the planned sale of the Golf
division and a $3,169 inventory adjustment recorded in the fourth quarter. The
adjustment was based on a physical inventory completed upon the conclusion of
the year and was related to the new computer system. Fiscal 1998 included a
charge of $2,132 for the closing of unprofitable retail stores. Excluding the
effect of theses charges in both years, gross profit as a percent of net sales
was 45.6% in fiscal 1999 and 1998.

Selling, general and administrative expenses, excluding non-recurring selling,
general and administrative expenses, were $104,284 in fiscal 1999 compared to
$101,378 in fiscal 1998. In fiscal 1999 these costs were 42.4% of net sales, an
increase from 41.4% of net sales for fiscal 1998. The increase was due to higher
bad debt expense, increased depreciation expense related to the new computer
systems and increased costs resulting from the implementation of the new
computer systems. The Company recorded impairment charges in selling, general
and administrative expense related to long-lived assets of certain retail stores
of $256 in fiscal 1998. See Note 2 to the Notes to Consolidated Financial
Statements. Non-recurring selling general and administrative expenses were
$2,376 in fiscal 1999 compared to $1,129 in fiscal 1998. Fiscal 1999 included
costs associated with the downsizing of both the Company's corporate
headquarters and its New York showroom space, costs associated with the
disposition of



                                       13
<PAGE>   14


the Golf division, costs associated with the resignation of the Company's former
Chairman and costs related to the Company's evaluation of strategic
alternatives. Fiscal 1998 included charges for the effects of retail store
closings.

Loss from operations for fiscal 1999 was $484 compared to earnings of $7,069 in
fiscal 1998. Excluding the effects of the non-recurring costs in both years,
earnings from operations were $4,538 in fiscal 1999, compared to $10,330 in
fiscal 1998, a decrease of $5,792. The decrease is the result of lower gross
profit and increased selling, general and administrative expenses as discussed
above. Interest expense for fiscal 1999 was $10,423 as compared to $8,699 in
fiscal 1998. The increase is due to primarily to higher daily average
outstanding borrowings in fiscal 1999 compared to fiscal 1998. Other expense was
$105 in fiscal 1999 compared to other income of $677 in fiscal 1998. Fiscal 1998
included a gain of $775 related to the sale of a foreign trademark.

Income tax benefit was $3,394 in fiscal 1999 compared to $394 in fiscal 1998.
The effective tax rate for fiscal 1999 and fiscal 1998 was 31.3% and 41.3%
respectively. The change in the effective rate reflects the effect of the
recording of a $1,306 valuation allowance for foreign tax assets in fiscal 1999.

In fiscal 1999, the company recorded an extraordinary charge of $750 (net of tax
benefits of $418) related to the write-off of deferred financing fees associated
with the company's former credit facility.


FISCAL 1998 COMPARED TO FISCAL 1997

Net sales for fiscal 1998 were $244,895, a decrease of $8,161, or 3.2%, as
compared to fiscal 1997. The decrease in net sales was primarily the result of
the net effect of store closures in 1998, the fact that fiscal 1998 included 52
weeks compared to 53 weeks in fiscal 1997, and the effect of currency
devaluations in Australia and Southeast Asia. U.S. Wholesale net sales increased
$5,727, or 6.9%, due to gains from new products, the rollout and reorders of J C
Penney and expansion in department and big box stores. U.S. Retail net sales
decreased $7,667 or 6.4%, as a result of store closings and the 52 week year in
fiscal 1998 included one less week compared to 53 weeks in fiscal 1997.
International net sales decreased $6,221 or 12.3%, due to currency devaluations.

Gross profit for fiscal 1998 was $109,576, a decrease of $11,281 as compared to
fiscal 1997. Fiscal 1998 included charges of $2,132 for costs associated with
the closing of unprofitable retail stores. Excluding the effect of the store
closings, gross profit as a percent of net sales was 45.6% in fiscal 1998,
compared to 47.8% in fiscal 1997. The reduction resulted from the shift in mix
to more wholesale sales, the effects of the lower sales volume and currency
devaluations.

Selling, general, and administrative expenses, excluding the costs associated
with store closings, were $101,378 for fiscal 1998, a decrease of $7,258, or
6.7%, from fiscal 1997. Selling, general, and administrative expenses for fiscal
1998 were 41.4% of net sales, a decrease from 42.9% of net sales for fiscal
1997. The decrease was due to the effects of store closings and cost reduction
programs. The Company recorded impairment charges in selling, general and
administrative expense related to the carrying value of the long lived assets of
certain retail stores of $256 and $400 in fiscal 1998 and fiscal 1997,
respectively. See Note 2 to the Notes to Consolidated Financial Statements.

Earnings from operations for fiscal 1998 were $7,069 compared to $12,221 in
fiscal 1997. Excluding the effects of the costs associated with store closings,
earnings from operations were $10,330 in fiscal 1998, compared to $12,221 in
fiscal 1997, a decrease of $1,891. Interest expense for fiscal 1998 was $8,699
as compared to the fiscal 1997 amount of $9,130. This decrease is due to the
lower average cost of outstanding debt as a result of the repurchase of the
Senior Notes in May 1997, compared to the cost of borrowings under the Company's
bank credit facility. Other income was $677 in fiscal 1998 compared to $3,742 in
fiscal 1997. Significant items in other income included a gain of $775 related
to the sale of a foreign trademark in fiscal 1998 and the sale of the Company's
former headquarters building in fiscal 1997 which resulted in a gain of $4,300.

An extraordinary loss associated with the tender premium and expenses related to
the purchase of the Senior Notes was $5,042, net of tax benefits of $2,813, in
fiscal 1997.



                                       14
<PAGE>   15


LIQUIDITY AND CAPITAL RESOURCES

WORKING CAPITAL

Working capital at January 1, 2000 was $69,275 compared to $83,452 at January 2,
1999, a decrease of $14,177. The decrease in working capital resulted from a
decrease in inventory and accounts receivable and an increase in current
borrowings under the bank credit facility, partially offset by a decrease in
accounts payable.

CAPITAL EXPENDITURES

During fiscal 1999, 1998 and 1997, capital expenditures totaled $8,462, 10,308,
and $9,922, respectively. During fiscal 1999 and fiscal 1998, approximately 80%
and 72%, respectively, was capitalized for management information systems.
During fiscal 1997, approximately 62% of the expenditures were used to open or
remodel retail stores and outlets.

FINANCING ARRANGEMENTS

In May 1997, the Company completed its cash tender offer and consent
solicitation relating to its Senior Notes. Approximately $51,000 aggregate
principal amount of Senior Notes were tendered, representing approximately 73%
of the $69,450 aggregate principal amount of outstanding Senior Notes.
Approximately $18,400 of Senior Notes remain outstanding. Concurrently with the
tender offer, the Company also executed a $110,000, five-year secured revolving
credit facility that replaced its previous $75,000 credit facility. Borrowings
under the credit facility were used to finance the tender offer for the Senior
Notes. In August 1999, the Company refinanced its existing revolving credit
facility with a new $110,000 credit facility. Borrowings under the credit
facility were $88,767 at January 1, 2000, of which $23,767 was classified as
short-term and $65,000 was classified as long-term.

Further credit facility borrowings will be made from time to time to finance
future liquidity requirements, including month-to-month working capital
requirements. The credit facility provides for borrowings of up to $110,000,
subject to borrowing base availability ($102,490 at January 1, 2000). The cash
borrowings under the credit facility bear interest at the prime rate plus 1.75
%, or at an adjusted LIBOR rate plus a factor, currently 2.75 %, depending on
the type of loan the Company executes and various covenant ratios.

INFORMATION TECHNOLOGY UPGRADE AND YEAR 2000

In 1998, the Company established a task force to assess the impact of the Year
2000 issue on the hardware and software utilized in the Company's internal
operations. The task force was also responsible for the evaluation of exposures
from third parties, including customers and suppliers. Upon completion of the
assessment, the Company initiated a significant information technology upgrade
in order to resolve the Year 2000 issue. The cost of the upgrade was
approximately $15,400, which was capitalized during the three years ended
January 1, 2000.

The Company successfully completed the installation of new financial systems
during 1998 and completed wholesale and warehouse systems, as well as retail,
systems in 1999. While the Company did transition into Year 2000 without any
significant problems, the Company did experience problems which negatively
impacted operations at times during 1999 as a result of the new systems.

RECENT ACCOUNTING PRONOUNCEMENTS

Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133") requires companies to
recognize all derivative instruments as assets or liabilities in the balance
sheet and to measure those instruments at fair value. SFAS No. 133 initially
required adoption by January 1, 2000. However, Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Financial Instruments and Hedging
Activities-Deferral of Effective Date of SFAS No. 133," issued in June 1999,
delayed the required implementation date of SFAS No. 133 to no later than
January 1, 2001. The Company anticipates that the new standards will not have a
significant impact on the results of operations and financial condition of the
Company.

SEASONALITY OF BUSINESS

In total, the Company's net sales are generally not seasonal however, earnings
from operations tend to be higher in the fourth quarter due to the
proportionately higher retail sales which include both a wholesale and a retail
margin.



                                       15
<PAGE>   16

FOREIGN CURRENCY

The Company's export sales are denominated in United States dollars, and its
international sales other than export sales are denominated in the local
currency of each jurisdiction in which Florsheim's international operations are
located. The effects of foreign currency movements relative to the dollar in
both the Pacific Rim and Australia negatively impacted operating results in
fiscal 1998, however, the Company did partially recover from the currency
movements in 1999. The majority of purchases by the Company from foreign sources
are denominated in United States dollars.

EURO CONVERSION

In January 1999, eleven of the member countries of the European Monetary Union
converted from their sovereign currencies to a common currency, the Euro. At
that time, fixed conversion rates between the legacy currencies and the Euro
were set. The legacy currencies will remain legal tender from January 1, 1999,
through July 1, 2002. Beginning July 1, 2002, Euro denominated currency will be
issued. No later than July 1, 2002, the participating countries will withdraw
bills and coins so that the legacy currencies will no longer be considered legal
tender. The Company does not expect the conversion to have a material impact on
its operating results or financial condition.

INFLATION

The Company does not believe that inflation has had a material impact on sales
or operating results during the periods covered in this discussion.

FORWARD LOOKING STATEMENTS

When used in this discussion, the words "believes" and "expects" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties, over which the Company has no
control, which could cause actual results to differ materially from those
projected. Readers are cautioned not to place reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligations to republish revised forward-looking statements to reflect events or
circumstances after the date thereof or to reflect the occurrence of
unanticipated events. Readers are also urged to carefully review and consider
the various disclosures made by the Company in this report, as well as the
Company's periodic reports with the Securities Exchange Commission.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to certain market risks, including foreign currency and
interest rates. The Company uses a variety of practices to manage these market
risks. The Company is exposed to potential gains or losses from currency
fluctuations affecting net investments and earnings denominated in foreign
currencies. The Company's primary exposures are to changes in exchange rates for
the U.S. dollar versus the Canadian dollar and the Australian dollar.

The Company's various currency exposures often offset each other, providing a
hedge against currency risk. The Company has not historically entered into
forward contracts to hedge currency risks.

Interest rate risk is managed through a combination of fixed rate and variable
rate debt with varying maturities. All material components of debt are
denominated in U.S. dollars. At January 1, 2000, variable rate long-term debt
was $88.8 million.

The Company is exposed to credit risk on certain assets, primarily accounts
receivable. The Company provides credit to customers in the ordinary course of
business and performs ongoing credit evaluations. Concentrations of credit risk
with respect to trade receivables are limited due to the large number of
customers comprising the Company's customer base. The Company currently believes
its allowance for doubtful accounts is sufficient to cover customer credit
risks.

ITEM 8. FINANCIAL DATA AND SUPPLEMENTARY DATA

The following pages contain the Financial Statements and Supplementary Data as
specified by Item 8 of Part II of Form 10-K.




                                       16
<PAGE>   17

<TABLE>
<CAPTION>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

CONSOLIDATED FINANCIAL STATEMENTS:                                                                          PAGE
<S>                                                                                                          <C>
     Consolidated Balance Sheets at January 2, 1999 and January 1, 2000.......................................18

     Consolidated Statements of Operations and Comprehensive Earnings for the Fiscal
       Years Ended January 3, 1998, January 2, 1999 and January 1, 2000.......................................19

     Consolidated Statements of Cash Flows for the Fiscal Years Ended January 3, 1998,
       January 2, 1999 and January 1, 2000....................................................................20

     Consolidated Statements of  Shareholders' Equity for the Fiscal Years Ended January 3,
         1998, January 2, 1999, and January 1, 2000...........................................................21

     Notes to Consolidated Financial Statements. .............................................................22

     Independent Auditors' Report.............................................................................46

CONSOLIDATED FINANCIAL STATEMENT SCHEDULE:

   Schedule II - Valuation and Qualifying Accounts............................................................45
</TABLE>



                                       17
<PAGE>   18


<TABLE>

FLORSHEIM GROUP INC.
CONSOLIDATED BALANCE SHEETS JANUARY 2, 1999 AND JANUARY 1, 2000 (DOLLARS IN
THOUSANDS, EXCEPT PER SHARE DATA)
============================================================================================================
<CAPTION>
ASSETS                                                                    January 2,              January 1,
Current assets:                                                              1999                    2000
                                                                       ---------------           -------------
<S>                                                                   <C>                       <C>
   Cash and cash equivalents                                           $       6,931             $     5,675
   Receivables, less allowances of $1,207 at January 2, 1999
      and $1,475 at January 1, 2000                                           33,370                  30,163
   Inventories                                                                79,855                  70,964
   Deferred income taxes                                                       4,719                   5,539
   Prepaid expenses and other current assets                                   5,451                   5,543
                                                                       -------------             -----------
Total current assets                                                         130,326                 117,884

Property, plant and equipment:
    Buildings and improvements                                                23,363                  22,357
    Machinery and equipment                                                   31,848                  38,066
                                                                       -------------             -----------
                                                                              55,211                  60,423
    Less: accumulated depreciation                                          (24,230)                (27,898)
                                                                       -------------             -----------

Net property, plant and equipment                                             30,981                  32,525
Deferred income taxes                                                         12,852                  16,623
Other assets                                                                  25,407                  30,320
                                                                       -------------             -----------

    Total assets                                                       $     199,566             $   197,352
                                                                       =============             ===========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Bank credit facility, current                                      $      18,500             $    23,767
    Accounts payable                                                          16,183                  11,175
    Accrued employee compensation                                              3,958                   3,706
    Accrued interest expense                                                     981                   1,104
    Other accrued expenses                                                     7,120                   8,795
    Income taxes payable                                                         132                      62
                                                                       -------------             -----------
Total current liabilities                                                     46,874                  48,609
                                                                       -------------             -----------

Bank credit facility, long-term                                               58,500                  65,000
Long-term debt                                                                18,412                  18,412
Accrued postretirement benefits other than pension                            19,122                  17,741
Other long-term liabilities                                                    3,311                   2,942
                                                                       -------------             -----------
Total liabilities                                                            146,219                 152,704
                                                                       -------------             -----------

Shareholders' equity:
   Common Stock, 20,000,000 shares authorized, without par value,
     $1.00 stated value, 8,453,651 shares issued and outstanding at
     January 1, 1999 and 8,483,651 shares issued and outstanding at
     January 1, 2000                                                           8,454                   8,484
Paid-in capital                                                               50,580                  50,644
Accumulated other comprehensive income -
   Cumulative translation adjustment                                         (2,335)                 (2,760)
Accumulated deficit                                                          (3,352)                (11,720)
                                                                       -------------             -----------
Total shareholders' equity                                                    53,347                  44,648
                                                                       -------------             -----------

   Total liabilities and shareholders' equity                          $     199,566             $   197,352
                                                                       =============             ===========
</TABLE>

See accompanying notes to consolidated financial statements.



                                       18
<PAGE>   19

<TABLE>


FLORSHEIM GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)

===============================================================================================================
<CAPTION>
                                                                                Fiscal Year Ended
                                                                -----------------------------------------------
                                                                  January 3,       January 2,        January 1,
                                                                     1998             1999              2000
                                                                -------------     -----------      ------------

<S>                                                             <C>               <C>              <C>
Net sales                                                       $   253,056       $   244,895      $   245,726
Cost of sales                                                       132,199           133,187          136,904
Non-recurring costs of sales                                            -               2,132            2,646
                                                                -----------       -----------      -----------

Gross profit                                                        120,857           109,576          106.176
Selling general, and administrative expenses                        108,636           101,378          104,284
Non-recurring selling, general and administrative
   expenses                                                             -               1,129            2,376
                                                                -----------       -----------      -----------

Earnings (loss) from operations                                      12,221             7,069            (484)
Interest expense, net                                                 9,130             8,699           10,423
Other income (expense)                                                3,742               677            (105)
                                                                -----------       -----------      -----------

Earnings (loss) before income taxes and extraordinary item            6,833             (953)         (11,012)
Income tax expense (benefit)                                          3,226             (394)          (3,394)
                                                                -----------       -----------      -----------

Earnings (loss) before extraordinary item                             3,607             (559)          (7,618)
Extraordinary item (less income tax benefit of $2,813
   in fiscal 1997 and $418 in fiscal 1999)                          (5,042)              -               (750)
                                                                -----------       -----------      -----------

Net loss                                                            (1,435)             (559)          (8,368)
Other comprehensive loss -
   foreign currency translation adjustment                          (1,993)             (714)            (425)
                                                                -----------       -----------      -----------
Comprehensive loss                                              $   (3,428)       $   (1,273)      $   (8,793)
                                                                ===========       ===========      ===========

Basic earnings (loss) per share:
   Earnings (loss) before extraordinary item                    $      0.43       $    (0.07)      $    (0.90)
   Extraordinary item                                                (0.60)              -              (0.09)
                                                                -----------       -----------      -----------
   Net loss                                                     $    (0.17)       $    (0.07)      $    (0.99)
                                                                ===========       ===========      ===========

Diluted earnings (loss) per share:
   Earnings (loss) before extraordinary item                    $      0.42       $    (0.07)      $    (0.90)
   Extraordinary item                                                (0.59)              -              (0.09)
                                                                -----------       -----------      -----------
   Net loss                                                     $    (0.17)       $    (0.07)      $    (0.99)
                                                                ===========       ===========      ===========

Weighted average number of shares outstanding:
   Basic                                                              8,361             8,454            8,456
   Diluted                                                            8,567             8,454            8,456
</TABLE>

See accompanying notes to consolidated financial statements.



                                       19
<PAGE>   20
<TABLE>
FLORSHEIM GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000
(IN THOUSANDS)

================================================================================================================
<CAPTION>
                                                                            Fiscal Year Ended
                                                          ------------------------------------------------------
                                                           January 3,            January 2,          January 1,
                                                              1998                  1999                2000
                                                          -------------         -------------      -------------
Cash flows from operating activities:
<S>                                                       <C>                   <C>                <C>
   Net loss                                               $     (1,435)         $       (559)      $     (8,368)
   Adjustments to reconcile net loss to
       net cash used in operating activities:
     Gain on disposal of assets                                 (4,682)                 (102)            (1,219)
     Depreciation and amortization                               5,425                 4,937              6,245
     Deferred income taxes                                        (490)               (1,054)            (4,591)
     Extraordinary loss                                           5,042                   -                  750
     Noncash interest and other expenses                            547                   431                653
     Decrease (increase) in receivables                           (163)               (6,776)              3,207
     Decrease (increase) in inventories                         (7,165)                 1,134              8,891
     Increase in prepaid expenses and other assets              (4,481)               (6,158)            (2,226)
     Increase (decrease) in accounts payable, accrued
       interest and other accrued expenses                     (11,962)                 5,079            (3,466)
     Increase (decrease) in income taxes payable                    265                 (611)               (70)
     Increase (decrease) in other long-term liabilities           1,316               (1,413)            (1,750)
                                                          -------------         -------------      -------------
   Net cash used in operating activities                       (17,783)               (5,092)            (1,944)
                                                          -------------         -------------      -------------

Cash flows from investing activities:
   Proceeds from sale of Corporate headquarters building          6,277                   -                   -
   Proceeds from disposal of assets                                  12                 1,136                469
   Capital expenditures, net                                    (9,922)              (10,308)            (8,462)
                                                          -------------         -------------      -------------
   Net cash used in investing activities                        (3,633)               (9,172)            (7,993)
                                                          -------------         -------------      -------------

Cash flows from financing activities:
   Proceeds from initial borrowing under bank credit facility    58,500                   -              84,000
   Deferred financing fees on bank credit facility                  -                     -              (3,086)
   Retirement of former credit facility                             -                     -             (84,000)
   Borrowings under former bank credit facility                  33,700                33,700             8,000
   Repayments on former bank credit facility                    (29,200)              (19,700)           (1,000)
   Borrowings under new bank credit facility                        -                     -              86,066
   Repayments under new bank credit facility                        -                     -             (84,491)
   Repurchase of 12-3/4% Senior Notes, including tender
     premium and refinancing costs, net of tax                  (56,080)                  -                 -
                                                          -------------         -------------      ------------
   Net cash provided by financing activities                      6,920                14,000             8,681
                                                          -------------         -------------      ------------

   Net decrease in cash and cash equivalents                   (14,496)                 (264)            (1,256)
   Cash and cash equivalents at beginning of period              21,691                 7,195             6,931
                                                          -------------         -------------      ------------
   Cash and cash equivalents at end of period             $       7,195         $       6,931      $       5,675
                                                          =============         =============      =============

Supplemental disclosure:
   Cash payments for income taxes, net                    $       1,000         $       1,272      $         386
   Cash payments for interest                                    10,366                 8,362              9,647
</TABLE>

See accompanying notes to consolidated financial statements.



                                       20
<PAGE>   21


<TABLE>


FLORSHEIM GROUP INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000
(IN THOUSANDS)

=================================================================================================================
<CAPTION>
                                            Common Stock               Accumulated
                                ----------------------------------        Other
                                   Number of               Paid in    Comprehensive   Accumulated   Shareholders'
                                    Shares      Amount     Capital    Income (loss)     Deficit        Equity
                                -----------    --------   --------    -------------   -----------   -------------
<S>                              <C>          <C>        <C>           <C>             <C>          <C>
Balance at December 28, 1996        8,346     $  8,346     $ 50,295     $    372      $  (1,358)      $57,655

Net loss                             --           --           --           --           (1,435)        (1435)

Foreign currency translation         --           --           --         (1,993)         --           (1,993)

Exercise of stock options              67           67          188         --            --              255
                                 --------     --------     --------      --------     ---------      --------

Balance at January 3, 1998          8,413        8,413       50,483       (1,621)        (2,793)       54,482

Net loss                             --           --           --           --             (559)         (559)

Foreign currency translation         --           --           --           (714)         --             (714)

Exercise of stock option               41           41           97         --            --              138
                                 --------     --------     --------      --------     ---------      --------

Balance at January 2, 1999          8,454        8,454       50,580       (2,335)        (3,352)       53,347

Net loss                             --           --           --           --           (8,368)       (8,368)

Foreign currency translation         --           --           --           (425)         --             (425)

Exercise of stock options              30           30           64         --            --               94
                                 --------     --------     --------      --------     ---------      --------

Balance at January 1, 2000          8,484     $  8,484     $ 50,644     $ (2,760)     $ (11,720)     $ 44,648
                                 ========     ========     ========     ========      =========      ========
</TABLE>


See accompanying notes to consolidated financial statements.



                                       21
<PAGE>   22



FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000 (IN
THOUSANDS, EXCEPT SHARE DATA)
================================================================================

(1)  BASIS OF PRESENTATION


     Nature of Business

     Florsheim Group Inc. and its subsidiaries (Florsheim or the Company)
     design, market, source and distribute a diverse and extensive range of
     products in the middle to upper price range of the men's quality footwear
     market.

     The Distribution

     In November 1994, Florsheim became an independent public company. Furniture
     Brands International, Inc., formerly known as INTERCO INCORPORATED
     (INTERCO), its former parent company and sole stockholder, distributed all
     of the Company's common stock to existing INTERCO shareholders. In
     connection with the distribution, Florsheim issued $85,000 in 12-3/4%
     Senior Notes due 2002 (INTERCO) and entered into a bank credit facility.
     Florsheim used the proceeds from the Senior Notes and $25,000 from the bank
     facility to pay financing expenses and repay its share of the outstanding
     joint and several indebtedness issued in connection with the 1992 plan of
     reorganization of INTERCO and its principal subsidiaries.

     Reorganization and Emergence from Chapter 11

     On January 24, 1991, INTERCO and its domestic subsidiaries filed petitions
     for reorganization under Chapter 11 of the United States Bankruptcy Code in
     the United States Bankruptcy Court for the Eastern District of Missouri.
     INTERCO emerged from Chapter 11 effective with the beginning of business on
     August 3, 1992.

     Sale of Assets of Corporate Headquarters Building

     On March 20, 1997, the Company completed the sale of the corporate
     headquarters building located in Chicago, Illinois, for an all cash sale
     price of approximately $8,050. Net cash proceeds were approximately $6,000
     before income taxes. The net gain on sale of $4,300 is included in other
     income.

     Tender Offer for Senior Notes-Extraordinary Item

     On May 9, 1997, the Company completed a cash tender offer and consent
     solicitation relating to the Senior Notes. Approximately $51 million
     aggregate principal amount of Senior Notes were tendered, representing
     approximately 73% of the $69.45 million aggregate principal amount of
     outstanding Senior Notes. The Company also executed a new $110 million,
     five-year secured revolving credit facility (bank credit facility) that
     replaced the $75 million credit facility described above. An extraordinary
     loss of approximately $5.0 million, net of tax, is associated with the
     tender premium and expenses related to the repurchase of the Senior Notes
     and the execution of the new revolving credit facility.

     Reclassifications

     Certain amounts in the Company's historical financial statements have been
     reclassified to be consistent with the presentation in the current period.

(2)  SIGNIFICANT ACCOUNTING POLICIES

     Florsheim follows generally accepted accounting principles to present
     fairly its consolidated financial position, results of operations, cash
     flows and shareholders' equity. The major accounting policies of Florsheim
     are set as follows:



                                       22
<PAGE>   23
FLORSHEIM GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FISCAL
YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)

================================================================================
     Principles of Consolidation

     The financial statements include the accounts of the Company and its
     subsidiaries on a consolidated basis. All significant intercompany
     transactions and balances have been eliminated.

     Fresh Start Reporting

     As of August 2, 1992, in accordance with the AICPA Statement of Position
     90-7, "Financial Reporting by Entities in Reorganization Under the
     Bankruptcy Code" (SOP 90-7), INTERCO and its domestic subsidiaries were
     required to adopt "fresh start" reporting. The ongoing impact of the
     adoption of "fresh start" reporting is reflected in Florsheim's financial
     statements.

     Fiscal Year

     Florsheim's fiscal year end is the Saturday closest to December 31.
     Therefore, the results of operations will periodically include a 53 week
     period. Fiscal 1998 and 1999 each represented a 52 week period. Fiscal 1997
     represented a 53 week period. For purposes of these financial statements,
     fiscal 1997 refers to the period ended January 3, 1998, fiscal 1998 refers
     to the period ended January 2, 1999 and fiscal 1999 refers to the period
     ending January 1, 2000.

     Cash and Cash Equivalents

     Cash and cash equivalents represent cash and short-term, liquid investments
     with an original maturity of three months or less.

     Inventories

     Inventories are stated at the lower of cost (first-in, first-out) or net
     realizable value.

     Property, Plant and Equipment

     Property, plant and equipment are recorded at cost when acquired.
     Expenditures for improvements are capitalized while normal repairs and
     maintenance are expensed as incurred. For financial reporting purposes,
     Florsheim utilizes both accelerated and straight-line methods of computing
     depreciation and amortization. Such expense is computed based on the
     estimated useful lives of the respective assets, which generally range from
     34 to 50 years for buildings, 10 years for machinery and equipment, 2 to 18
     years for furniture and fixtures, and 3 to 5 years for computer equipment
     and software. Leasehold improvements are amortized over the shorter of the
     estimated useful life of the assets or the lease term, and generally range
     from 2 to 18 years.

     Revenue Recognition

     The Company recognizes revenue as products are shipped to wholesale
     customers and at the point of sale for retail customers.

     Advertising

     Advertising costs are expensed as incurred. These expenses were $6,412,
     $7,027 and $7,376 in fiscal 1997, 1998, and 1999, respectively.

     Income Taxes

     Income taxes are accounted for under the asset and liability method.
     Deferred taxes assets and liabilities are recognized for the future tax
     consequences attributable to differences between the financial statement
     carrying amounts of existing assets and liabilities and their respective
     tax bases and operating loss and tax credit carryforwards. Deferred tax
     assets and liabilities are measured using enacted tax rates expected to
     apply to taxable income in the years in which those temporary differences
     are expected to be recovered or settled. The effect on deferred tax assets
     and liabilities of a change in tax rates is recognized in income in the
     period that includes the enactment date.



                                       23
<PAGE>   24



FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================

     Stock Option Plans

     The Company accounts for its stock options plans in accordance with
     Statement of Financial Accounting Standards No. 123, Accounting for
     Stock-Based Compensation (SFAS No. 123), which allows entities to continue
     to apply the provisions of APB opinion No. 25 and provide pro forma net
     income and pro forma earnings per share disclosures for employee stock
     option grants made in 1995 and thereafter as if the fair-valued based
     method defined in SFAS No. 123 had been applied.

     Foreign Currency Translation

     The accounts of the foreign subsidiaries have been translated from their
     functional currency to the U.S. dollar. Such translation adjustments are
     not included in income, but are accumulated directly in a separate
     component of stockholders' equity.

     Earnings Per Share

     The Company presents basic and diluted earnings per share. Basic earnings
     per share is computed by dividing income available to common stockholders
     by the weighted-average number of common shares outstanding for the period.
     Diluted earnings per share reflects the potential dilution that could occur
     if securities or other contracts to issue common stock were exercised or
     converted into common stock or resulted in the issuance of common stock
     that then shared in the earnings of the equity. Basic and diluted earnings
     per share do not include securities in instances where they would be
     antidilutive.

     The following table provides a reconciliation of the weighted average
     shares outstanding used in calculating basic and diluted earnings per
     share:

<TABLE>
<CAPTION>

                                                        Fiscal Year Ended
                                          -----------------------------------------
                                            January 3,     January 2,     January 1,
                                               1998           1999           2000
                                          -------------  -------------   ----------
<S>                                      <C>            <C>             <C>
     Weighted average shares
       outstanding - basic                $     8,361    $       8,454   $    8,456
     Assumed exercise of stock options            206          -             -
                                          ------------   -------------   ----------
     Weighted average shares
       outstanding - diluted              $     8,567    $       8,454   $    8,456
                                          =============  =============   ==========
</TABLE>

     There are no adjustments to earnings before extraordinary item,
     extraordinary item, or net earnings.




                                       24
<PAGE>   25



FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)

================================================================================

     Deferred Financing Costs

     Certain expenses related to obtaining financing have been capitalized and
     are being amortized over the life of the financing to which they relate.

     Use of Estimates

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent liabilities at the date of the financial
     statements and the reported amounts of revenues and expenses during the
     reporting period. Actual results could differ from those estimates.

     Impairment of Long-Lived Assets

     The Company reviews long-lived assets and certain identifiable intangibles
     for impairment whenever events or changes in circumstances indicate that
     the carrying amount of an asset may not be recoverable. The Company
     considers stores with operating losses in a consecutive two year period as
     potentially impaired. A review is conducted on a store by store basis,
     grouped by year of lease expiration, comparing future undiscounted net cash
     flows to the carrying value of fixtures and leasehold improvements to test
     for impairment. Impairment, when present, is calculated as the difference
     between the asset carrying value and the future discounted net cash flows
     (fair value).

     Pursuant to its review of the retail store operations, the Company recorded
     impairment charges related to the long lived assets of certain retail
     stores in selling, general and administrative expenses of $400 in fiscal
     1997 and $256 in fiscal 1998. There was no impairment charge in 1999.

     Non-cash Transactions

     During fiscal 1997 and 1998, the Company entered into non-cash transactions
     with a third party whereby Florsheim would exchange excess inventory for
     advertising and media credits. At January 1, 2000 and January 2, 1999,
     barter credits of $2,492 and $2,624, respectively, are recorded in prepaid
     expenses and other current assets at a cost that is consistent with the
     value of the inventory surrendered.

     Accounting for the Costs of Computer Software Developed/Obtained for
     Internal Use

     During 1998, the company adopted the provisions of Statement of Position
     98-1 which provides guidance on the capitalization of certain internal
     costs as they relate to implementing software being developed or
     implemented for internal use. In fiscal 1999 and 1998, Florsheim
     capitalized approximately $1,100 and $1,000, respectively, of internal
     costs associated with its SAP software implementation.

(3)  NON-RECURRING COSTS

     In the fourth quarter of fiscal 1998, the Company recognized restructuring
     charges of $3,261 related to the closing of 46 retail locations in fiscal
     1998, and the closing of 30 locations in fiscal 1999. These charges were
     taken in connection with the Company's plan to close non-contributing
     locations and to liquidate the inventory in place.

     The following table summarizes the costs reflected in the 1998 Consolidated
     Statement of Operations and Comprehensive Earnings. $2,132 is reflected as
     non-recurring cost of sales which is principally related to the liquidation
     of inventory and $1,129 as non-recurring selling, general, and
     administrative expenses, which consisted of fixed asset write downs and
     incremental operating expenses. A summary of the charges is as follows:



                                       25
<PAGE>   26
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)

================================================================================
                                              Stores     Stores to be
                                            Closed in     Closed in
                                               1998          1999         Total
                                            ---------     ---------    ---------
     Fixed asset write downs                $     140     $      99    $     239
     Store incremental operating expenses         205           685          890
     Provision for inventory write down
       to net realizable value                     94         2,038        2,132
                                            ---------     ---------    ---------
     Total effect of restructuring charges  $     439     $   2,822    $   3,261
                                            =========     =========    =========

     The fixed asset write-downs were for store fixturing and leasehold
     improvements, which were disposed of or abandoned upon exiting the
     locations. Store closing expenses were primarily incremental administrative
     and store salaries and other costs incurred in connection with the
     wind-down of store operations. The inventory write-down was for the
     adjustment of the carrying value of store merchandise to the expected net
     realizable value during the sale. The reserves established during fiscal
     1998 were fully utilized during fiscal 1999.

     In fiscal 1999, the Company recognized special charges of $5,022. In the
     second quarter, the Company recorded $1,100 related to the resignation of
     its former Chairman and costs related to the Company's review of strategic
     alternatives. These costs include legal and professional fees and salary
     continuation costs including related benefits. These costs are included in
     non-recurring selling, general and administrative expense. In the third
     quarter, the Company announced the closing of its Cape Girardeau, Missouri
     manufacturing facility, and recorded a $2,000 charge related to the
     closing. The $2,000 charge, which was included in non-recurring cost of
     sales included charges for the write-down of certain inventory and
     property, plant and equipment to net realizable value. In addition, the
     charge included severance and related payroll taxes for 186 employees at
     the facility plus certain other personnel who supported the operation, as
     well as additional pension costs and a post-retirement benefits gain. In
     the fourth quarter, the Company recorded a special charge of $1,922 for the
     sale of the Golf division and costs associated with the downsizing of the
     Corporate headquarters and New York showroom space, severance and other
     costs. The charge included $646 of non-recurring cost of sales related to
     the write-down of certain Golf inventory and $1,276 of non-recurring
     selling, general and administrative costs. The $1,276 includes the
     write-down of certain Golf related receivables to net realizable value,
     severance and related benefits for Golf and other corporate personnel, and
     lease termination and other related costs for the Company's corporate
     headquarters and its New York showroom space. The accruals for the
     non-recurring costs are expected to be fully utilized during fiscal 2000.

     The following table summarizes the costs reflected in the 1999 Consolidated
     Statement of Operations and Comprehensive Earnings and the resulting
     Consolidated Balance Sheets for the year ended January 1, 2000.



                                     26
<PAGE>   27


FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                         Initial    Amounts charged   Reserve Balance
                                        Provision     to accrual    at January 1, 2000
                                        ---------     ----------    ------------------
<S>                                    <C>          <C>              <C>
     RESIGNATION/STRATEGIC STUDY
         Legal and professional fees      $    432     $   (178)         $    254
         Employee related expenses             668         (303)              365
                                          --------     --------          --------
                                             1,100         (481)              619
                                          --------     --------          --------

     CAPE GIRARDEAU CLOSING
         Inventory write-offs                  690          (80)              610
         Plant and equipment costs             606         (169)              437
         Employee related expenses             704         (138)              566
                                          --------     --------          --------
                                             2,000         (387)            1,613
                                          --------     --------          --------

     FACILITY DOWNSIZING/GOLF SALE
         Inventory write-offs                  646         (346)              300
         Receivables allowance                 365         --                 365
         Facilities charges                    716         (440)              276
         Employee related expenses             195         --                 195
                                          --------     --------          --------
                                             1,922         (786)            1,136
                                          --------     --------          --------

                Total                     $  5,022     $ (1,654)         $  3,368
                                          ========     ========          ========

(4)  INVENTORIES

         Inventories are as follows:
                                           January 2,   January 1,
                                              1999         2000
                                            --------     --------

         Retail merchandise                 $ 39,375     $ 34,329
         Finished products                    32,621       32,682
         Work-in process                       1,172           82
         Raw materials                         6,687        3,871
                                            --------     --------
                                            $ 79,855     $ 70,964
                                            ========     ========
</TABLE>

(5)  DEBT


     12-3/4% Senior Notes due 2002

     The Senior Notes are senior unsecured obligations of Florsheim. The Senior
     Notes are jointly and severally guaranteed on a senior unsecured basis by
     all existing domestic subsidiaries of Florsheim and may be guaranteed by
     future domestic subsidiaries.

     Interest on the Senior Notes is payable semiannually on March 1 and
     September 1. The Senior Notes mature on September 1, 2002. On or after
     September 1, 1998, the Senior Notes are redeemable, at Florsheim's option,
     in whole or in part, at various prices plus accrued and unpaid interest, if
     any, to the redemption date. In the event of a change of control, Florsheim
     is required to offer to repurchase all of the Senior Notes at a price equal
     to 101% of the principal amount thereof, plus accrued and unpaid interest,
     if any, to the purchase date.

     See Note 1 for a description of the fiscal 1997 tender offer.



                                       27
<PAGE>   28



FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)

================================================================================

     Bank Credit Facility


     In August 1999, the Company refinanced its existing revolving credit
     facility with a three year, $110,000 Credit Facility (the "Credit
     Facility") with a new bank. Borrowings under the Credit Facility are
     subject to borrowing base availability ($102,490 at January 1, 2000).
     Borrowings outstanding under the credit facility were $88,767 at January 1,
     2000, $65,000 of which are classified as long-term. The Credit Facility
     includes $10,000 of Tranche B Availability ("Tranche B"), which amortizes
     $2,000 per month (subject to certain limitations) commencing in August 2000
     through December 2000. Tranche B amortization does not reduce the total
     $110,000 availability. The Tranche B interest rate is 11.5%. Interest on
     the remaining outstanding borrowings (9.4% at January 1, 2000) are based on
     alternative floating rate structures, at the Company's option, and various
     covenant ratios.

     The Credit Facility is secured by substantially all domestic accounts
     receivable, inventory and property, plant and equipment as well as the
     capital stock of certain foreign subsidiaries. The Credit Facility requires
     a minimum EBITDA (earnings before interest expense, income taxes,
     depreciation and amortization and other non-cash items) to interest
     expense, commencing with the quarter ended January 1, 2000. The Credit
     Facility provides various other restrictions including limitations on the
     incurrence of additional indebtedness and the payment of dividends. The
     Company was in compliance with the covenants at January 1, 2000.

     The Credit Facility includes an unused line fee of 0.375% per annum.
     Letters of credit are permitted by the Credit Facility but reduce the
     amount of availability. Letters of credit of $7,183 were outstanding at
     January 1, 2000.

     In connection with the refinancing, the Company recorded an extraordinary
     charge of $750 (net of tax benefits of $418) related to the write-off of
     deferred financing fees associated with the old credit facility.


     Other Debt

     The Company's Australian subsidiary utilizes a credit facility for working
     capital borrowings and issuance of letters of credit. This facility is
     subject to annual review and secured by a debenture mortgage over the
     company's inventory to a limit of approximately $1,400. There were no
     borrowings or letters of credit outstanding under this facility at January
     2, 1999 and January 1, 2000.

     Subsequent to January 1, 2000, the Company's Australian subsidiary entered
     into a new five year $6,100 credit facility with an Australian bank. The
     facility provides for a $3,800 term loan, a $1,000 overdraft facility, a
     $700 letter of credit facility and certain other facilities. The term loan
     facility bears interest based on alternative floating rate structures at
     the Company's option. The initial borrowing under the term loan on January
     31, 2000 was $3,152 which was used to pay a dividend to the Company.

(6)  CAPITAL STOCK


     Preferred Stock

     The Company's restated certificate of incorporation includes authorization
     to issue up to two million shares of no par value, preferred stock. No
     preferred stock has been issued.

     Common Stock

     The Company's restated certificate of incorporation includes authorization
     to issue up to 20 million shares of common stock. As of January 2, 1999,
     8,453,561 shares of common stock had been issued and were outstanding. As
     of January 1, 2000, 8,483,561 shares of common stock had been issued and
     were outstanding.



                                       28
<PAGE>   29



FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000 (IN
 THOUSANDS, EXCEPT SHARE DATA)

================================================================================

       The holders of the common stock are entitled to one vote for each share
       held of record on all matters submitted to a vote of stockholders.
       Subject to preferential rights that may be applicable to any preferred
       stock (none of which had been issued as of January 1, 2000), holders of
       common stock are entitled to receive ratably such dividends as may be
       declared by the Board of Directors out of funds legally available
       therefore. However, it is not presently anticipated that dividends will
       be paid on common stock in the foreseeable future. At January 1, 2000 the
       Company was prohibited from paying dividends under the terms of its bank
       credit facility.

(7)  STOCK OPTION PLANS

     The Florsheim Shoe Company 1994 Stock Option Plan

     In 1994, prior to the Distribution, the Company adopted The Florsheim Shoe
     Company 1994 Stock Option Plan (the "Option Plan") pursuant to which the
     Executive Compensation and Stock Option Committee (the "Compensation
     Committee") of the Board may grant stock options to officers and key
     employees. The Option Plan was amended and approved by the stockholders
     during the Company's annual 1996 Stockholder Meeting. The Option Plan
     authorizes grants of options to purchase up to 800,000 shares of common
     stock.

     Stock options may be granted with an exercise price below the stock's fair
     market value at the grant date. All outstanding stock options have ten year
     terms and vest and become fully exercisable after five to six years from
     the date of grant.

     The Company has adopted the disclosure-only provisions of SFAS No. 123,
     Accounting for Stock-Based Compensation. Accordingly, no compensation cost
     has been recognized for the Option Plan as options issued to date were at
     prices equal to or in excess of the stock's fair market value at the date
     of grant. Had compensation cost for the company's Option Plan been
     determined based on the fair value at the grant date for awards in 1997,
     1998 and 1999 consistent with the provisions of SFAS No. 123, the resulting
     reduction in the company's net income and earnings per share for the years
     ended January 3, 1998, January 2, 1999 and January 1, 2000 would not have
     been significant.

     At January 1, 2000, options to purchase 440,850 shares of common stock were
     outstanding and 179,350 options were exercisable. Options to purchase
     79,000 shares were granted in 1999. The per share weighted-average fair
     value of stock options granted during 1999 was $2.38 on the date of grant
     using the Black Scholes option pricing model with the following
     weighted-average assumptions: dividend yield rate of 0.0%, risk free
     interest rate of 5.03% , stock volatility rate of 50.0%, expected turnover
     rate of 3.35% and an expected life of five years.

     At January 2 1999, options to purchase 415,000 shares of common stock were
     outstanding and 170,250 options were exercisable. Options to purchase 5,000
     shares were granted in 1998 and were cancelled prior to January 2, 1999. At
     January 3, 1998, options to purchase 555,750 shares of common stock were
     outstanding and 54,900 options were exercisable. The per share
     weighted-average fair value of stock options granted during fiscal 1997,
     was $4.80 on the date of grant using the Black Scholes option pricing model
     with the following weighted-average assumptions: dividend yield rate of
     0.0%, risk free interest rate of 5.5%, stock volatility rate of 65.0%,
     expected turnover rate of 50.0% and an expected life of five years.

     The Charles J. Campbell Stock Option Plan

     In 1995, the Company adopted the second stock option plan, the Charles J.
     Campbell Stock Option Plan (the "Campbell Plan"). The Campbell Plan was
     adopted as a means to encourage and provide opportunities for ownership of
     Florsheim common stock by the former Chairman of the Board, Charles J.
     Campbell. The



                                       29
<PAGE>   30



GROUP INC. FLORSHEIM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000 (IN
THOUSANDS, EXCEPT SHARE DATA)

================================================================================

     Campbell Plan was also approved by the public stockholders during the
     Company's annual 1996 Stockholder Meeting.

     The Campbell Plan authorized grants of options to purchase up to a total of
     250,000 shares of common stock. The Campbell Plan consisted of three
     separate grants of non-qualified stock options as follows: (i) options to
     purchase 83,333 shares of common stock with an option price per share of
     $5.00; (ii) options to purchase 83,333 shares of common stock with an
     option price per share of $7.50; (iii) option to purchase 83,334 shares of
     common stock with an option price per share of $10.00. All stock options
     had ten year terms, vest, and 20% became fully exercisable on the first
     five anniversaries of the date of grant. Options to purchase 250,000 shares
     were granted in 1995. No compensation cost was recognized for the Campbell
     Plan as options issued to date were at prices equal to or in excess of the
     stock's fair market value at the date of grant.

     At January 1, 2000, all outstanding and exercisable options under the
     Campbell Plan were forfeited or canceled pursuant to the resignation of Mr.
     Campbell in June 1999. At January 2, 1999, options to purchase 250,000
     shares of common stock were outstanding and 149,998 options were
     exercisable. At January 3, 1998, options to purchase 250,000 shares of
     common stock were outstanding and 100,000 shares were exercisable. No
     options were granted during fiscal 1997, 1998, or 1999, under the Campbell
     Plan.


     The Florsheim Group Inc. Consultants Stock Option Plan

     In 1997, the Company adopted its third stock option plan, The Florsheim
     Group Inc. Consultants Stock Option Plan (the "Consultants Plan") which is
     intended to encourage and provide opportunities for ownership of Florsheim
     common stock by those certain outside consultants and advisors (including
     endorsers of Company products) of the Company. To date, only selected
     endorsers of the Company products have been granted options. The
     Consultants Plan authorizes grants of options to purchase an aggregate of
     100,000 shares of common stock.

     At January 1, 2000, options to purchase 7,000 shares of common stock were
     outstanding, and 4,000 shares were exercisable. No options were granted in
     1999 under the Consultants Plan. At January 2, 1999, options to purchase
     10,000 shares of common stock were outstanding, and 2,000 were exercisable.
     No options were granted in 1998 under the Consultants Plan. At January 3,
     1998, options to purchase 30,000 shares of common stock were outstanding,
     and none were exercisable. The per share weighted-average fair value of
     stock options granted during 1997, 30,000 shares, was $4.84 on the date of
     grant using the Black Scholes option pricing model with the following
     weighted-average assumptions: dividend yield rate of 0.0%, risk free
     interest rate of 5.5%, stock volatility rate of 65.0%, expected turnover
     rate of 50.0% and an expected life of five years.



                                       30
<PAGE>   31



GROUP INC. FLORSHEIM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)

================================================================================

       Stock option activity is as follows:
                                               Number of       Weighted-Average
                                                 Shares         Exercise Price
                                              ----------        --------------

       Balance at December 28, 1996              721,000         $    5.49
         Granted                                 245,000              7.93
         Exercised                              (73,650)              3.92
         Forfeited                              (56,600)              4.84
                                              ----------         ---------

       Balance at January 3, 1998                835,750              6.38
         Granted                                   5,000              9.25
         Exercised                              (40,750)              3.31
         Forfeited                             (125,000)              6.60
                                              ----------         ---------

       Balance at January 2, 1999                675,000              6.54
         Granted                                  79,000              4.84
         Exercised                              (30,000)              3.19
         Forfeited                             (283,150)              7.45
                                              ----------         ---------

       Balance January 1, 2000                   440,850         $    5.91
                                              ==========         =========



                                       31
<PAGE>   32



FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)

================================================================================

The following tables summarize information about fixed price stock options
outstanding and exercisable at January 1, 2000:

<TABLE>
<CAPTION>

       Range            Number              Average            Weighted          Number           Weighted
        of            Outstanding          Remaining            Average        Exercisable         Average
     Exercise             at           Contractual Life        Exercise            at             Exercise
      Prices        January 1, 2000       (in Years)             Price       January 1, 2000        Price
---------------     ---------------    ----------------       ---------      ---------------      ---------
<S>                 <C>                <C>                  <C>             <C>                 <C>
$ 2.98 - $ 4.46         45,000               2.7              $  3.23             45,000         $  3.23
$ 4.46 -   5.95        253,000               6.8                 4.98             95,100            5.19
$ 5.95 -   7.44         43,000               7.9                 6.19              7,500            6.13
$ 7.44 -   8.93         82,850               6.5                 8.24             26,650            8.23
$13.99 -  14.88         17,000               7.6                14.88              5,100           14.88
                       -------                                                   -------
                       440,850                                                   179,350
                       =======                                                   =======

</TABLE>


(8)  INCOME TAXES

     Income tax expense (benefit) was comprised of the following:

                                            Fiscal Year Ended
                         ---------------------------------------------------
                             January 3,          January 2,       January 1,
                                1998                1999             2000
                         -------------         -----------       --------
     Current:
       Federal           $        (40)         $      -          $     -
       State and local              23                  47                39
       Foreign                     920                 613               709
                         -------------         -----------       -----------
                                   903                 660               748
     Deferred                    (490)             (1,054)           (4,560)
                         -------------         -----------       -----------
                         $         413         $     (394)       $   (3,812)
                         =============         ===========       ===========




                                       32
<PAGE>   33
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000 (IN
 THOUSANDS, EXCEPT SHARE DATA)

================================================================================

     The following table reconciles the difference between the Federal corporate
     statutory rate and Florsheim's effective tax rate:

<TABLE>
<CAPTION>
                                                                        Fiscal Year Ended
                                                       -------------------------------------------------
                                                         January 3,        January 2,         January 1,
                                                            1998              1999               2000
                                                       --------------    ------------          --------
<S>                                                         <C>                 <C>              <C>
       Federal corporate statutory rate                     35.0%               35.0%            35.0%
       State and local income taxes, net of
         Federal tax benefit                                (1.5)               (5.0)            (0.3)
       Foreign taxes, including foreign
         currency translation effects                       21.5                10.5              5.5
       Adjustments for foreign tax credits
         and foreign dividend income                        40.5                13.9             11.1
       Nontaxable foreign income                          (136.0)              (15.0)            (8.8)
       Change in valuation allowance                         -                   -              (10.8)
       Other                                                 0.1                 1.9             (0.4)
                                                       -----------       ------------        ---------
       Effective income tax rate                           (40.4)%              41.3%             31.3%
                                                       ===========       ============        ==========
</TABLE>

     The sources of the tax effects for temporary differences that give rise to
     the deferred tax assets and liabilities were as follows:

<TABLE>
<CAPTION>

                                                         January 2,          January 1,
                                                            1999                2000
                                                     ----------------      ---------
<S>                                                  <C>                   <C>
       Deferred tax assets:
         Fair value adjustment                       $       3,059         $     2,773
         Employee postretirement benefits                    7,025               6,542
         Expense accruals                                    1,850               3,448
         Rent abatement                                        625                 501
         Intangibles                                           480                 521
         Valuation allowances                                  653                 793
         Plant and equipment                                 1,777               1,334
         Inventory costs capitalized                           632                 640
         Net operating loss carryforwards                    3,923               9,994
         Foreign tax credits                                 4,647               6,002
         Barter credits                                        272                 272
         Restructuring accruals                                988                   3
                                                     -------------         -----------
       Total gross deferred tax assets                      25,931              32,823
         Valuation allowance                                  -                (1,306)
                                                     -------------         -----------
             Total deferred tax assets                      25,931              31,517
                                                     -------------         -----------

       Deferred tax liabilities:
         Employee benefit plans                            (8,406)             (9,434)
         Other                                                  46                  48
                                                     -------------         -----------
       Total deferred tax liabilities                      (8,360)             (9,386)
                                                     -------------         -----------

       Net deferred tax assets                       $      17,571         $    22,131
                                                     =============         ===========

</TABLE>
<PAGE>   34
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)


--------------------------------------------------------------------------------

     A valuation allowance is provided when it is more likely than not that some
     portion of the deferred tax assets will not be realized. The $1,306
     valuation allowance above represents unrealizable Foreign tax credits
     expiring in fiscal 2000. Management believes sufficient taxable income will
     be generated from future operations to realize the remaining benefits of
     the deferred tax assets. At January 1, 2000, the Company had net operating
     loss carryforwards for federal income tax purposes which expire through
     2019, and foreign tax credit carryforwards which expire through 2004.

(9)  EMPLOYEE BENEFIT PLANS

     Florsheim maintains non-contributory defined benefit pension plans covering
     the majority of its employees and retirees. Annual cost for
     company-sponsored defined benefit plans is determined using the projected
     unit credit actuarial method. Prior service cost is amortized on a
     straight-line basis over the average remaining service period of employees
     expected to receive benefits. It is Florsheim's practice to fund pension
     costs to the extent that such costs are tax deductible and in accordance
     with ERISA. The assets of the various plans include corporate equities,
     government securities, corporate debt securities and insurance contracts.

     In addition to pension and other supplemental benefits, certain retired
     employees are currently provided with specified health care and life
     insurance benefits. Eligibility requirements for such benefits generally
     state that benefits are available to employees who retire after a certain
     age with specified years of service if they agree to contribute a portion
     of the cost. Florsheim has reserved the right to modify or terminate these
     benefits. Health care and life insurance benefits are provided to both
     retired and active employees through third-party administrators and
     insurance companies.




                                       34

<PAGE>   35
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)

-------------------------------------------------------------------------------

Information for the Company's pension and postretirement benefit plans is shown
in the following schedule:
<TABLE>
<CAPTION>

                                              Pension Benefits      Postretirement Benefits
                                           ----------------------    ----------------------
                                             1998         1999         1998         1999
                                           ---------    ---------    ---------    ---------
<S>                                        <C>          <C>          <C>          <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year    $  78,154    $  85,262    $  15,507    $  13,235
Service cost                                     946        1,169          117          275
Interest cost                                  5,647        5,361          905          913
Actuarial (gain)/loss                          7,155       (6,666)      (1,553)         391
Benefits paid                                 (6,641)      (6,461)      (1,741)      (1,301)
Effect of curtailment                           --           (357)        --           (740)
                                           ---------    ---------    ---------    ---------
Benefit obligation at end of year          $  85,261    $  78,308    $  13,235    $  12,773
                                           =========    =========    =========    =========

CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning
   of year                                 $ 108,161    $ 117,580    $   3,957    $   3,596
Actual return on plan assets                  15,915       14,428          117          181
Company contributions                            144          136        1,262        1,347
Benefits paid from plan assets                (6,641)      (6,461)      (1,740)      (1,301)
                                           ---------    ---------    ---------    ---------
Fair value of plan assets at end of year   $ 117,579    $ 125,683    $   3,596    $   3,823
                                           =========    =========    =========    =========

Funded status of plan                      $  32,317    $  47,375    $  (9,639)   $  (8,949)
Unrecognized net gain                        (12,783)     (23,602)      (9,560)      (8,992)
Unrecognized prior service cost                4,483        3,182         (873)        (750)
                                           ---------    ---------    ---------    ---------
Prepaid (accrued) benefit cost             $  24,017    $  26,955    $ (20,072)   $ (18,691)
                                           =========    =========    =========    =========

AMOUNTS RECOGNIZED IN THE
   CONSOLIDATED BALANCE SHEET
Prepaid benefit cost                       $  25,222    $  28,266    $    --      $    --
Accrued benefit liability                     (1,206)      (1,311)     (20,072)     (18,691)
Fresh start adjustment                        (9,131)      (8,459)        --           --
                                           ---------    ---------    ---------    ---------
Net amount recognized                      $  14,885    $  18,496    $ (20,272)   $ (18,691)
                                           =========    =========    =========    =========
</TABLE>


                                       35
<PAGE>   36





FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
                                               Pension Benefits                       Postretirement Benefits
                                      ------------------------------------   -----------------------------------
                                               Fiscal Year Ended                         Fiscal Year Ended
                                               -----------------                         -----------------
                                      January 3,  January 2,    January 1,   January 3,   January 2,   January 1,
                                         1998        1999         2000         1998         1999         2000
                                      --------    ----------    ----------   ---------    ---------    ---------
<S>                                   <C>          <C>          <C>          <C>          <C>          <C>
Components of Net Periodic Expense
Service cost                          $    887     $    946     $  1,169     $    210     $    117     $    275
Interest cost                            5,617        5,647        5,361        1,105          905          913
Expected return on assets               (8,610)      (9,441)     (10,297)        (300)        (302)        (277)
Amortization of prior service cost         378          378          397         (105)        (105)        (105)
Amortization of actuarial loss              38           30         (241)        (432)        (555)        (404)
Fresh start amortization                  (672)        (672)        (672)        --           --           --
                                      --------     --------     --------     --------     --------     --------
Net cost before plant closure           (2,362)      (3,112)      (4,283)         478           60          402
One time expense (benefit) plant
   closure                                --           --            810         --           --           (757)
                                      --------     --------     --------     --------     --------     --------
Net periodic expense (income)         $ (2,362)    $ (3,112)    $ (3,473)    $    478     $     60     $   (355)
                                      ========     ========     ========     ========     ========     ========


Weighted average assumptions
Discount Rate for Obligations             7.25%        6.75%        7.25%        7.25%        6.75%        7.25%
Discount Rate for Expense                 7.75         7.25         6.75%        7.75         7.25         6.75
Expected Return Rate on Plan Assets       9.00         9.00         9.00         8.00         8.00         8.00
Rate of Compensation Increase             4.00         4.00         4.00         --           --           --
Health Care Cost Trend Rate               --           --           --           9.00         8.00         7.00
</TABLE>


     For postretirement benefit plans, Florsheim assumed 7.0% annual rate of
     increase in the per capita costs of covered health care benefits (the
     health care cost trend rate) for fiscal 1999, and 6.0% in fiscal 2000 and
     thereafter. A one percent increase in the health care cost trend rate would
     result in an increase in Florsheim's accumulated postretirement benefit
     obligation as of January 1, 2000 by $136 and the interest and services cost
     by $31. A decrease of 1% would result in decreases of $128 and $28,
     respectively.

     Florsheim has Supplemental Pension Plans in place with an accumulated
     obligation in excess of plan assets, which are reflected in the prepaid
     pension cost above on a net basis. In the Consolidated Balance Sheets they
     are recorded in Other liabilities. These plans cover certain executives of
     the Company and employees covered under pre-ERISA regulations. For the
     years ended January 2, 1999 and January 1, 2000, the Projected Benefit
     Obligation is $1,362 and $1,523, respectively, and the Accumulated Benefit
     Obligation is $1,205 and $1,311, respectively. There are no assets in the
     plan.

     The Company maintains a 401(K) plan that allows employees to contribute a
     portion of their pre-tax and/or after tax income in accordance with
     specified guidelines. Florsheim matches a percentage of employee
     contributions up to certain limits. Florsheim's cost for this plan for
     fiscal 1997, 1998 and 1999 was $143, $109 and $92, respectively.

(10) LEASE COMMITMENTS

     Substantially all of Florsheim's retail outlets and certain other real
     properties and equipment are operated under lease agreements expiring at
     various dates through the year 2016. Leases covering retail outlets and
     equipment generally require, in addition to stated minimums, contingent
     rentals based on retail sales and


                                       36
<PAGE>   37


FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)

--------------------------------------------------------------------------------

     equipment usage. Certain of the leases provide for renewal for various
     periods at stipulated rates. Rental expenses under operating leases were as
     follows:

                                         Fiscal Year Ended
                                   -----------------------------
                                  January 3, January 2, January 1,
                                       1998      1999      2000
                                    -------   -------   -------
Basic rentals                       $16,604   $21,087   $17,782
Contingent rentals                    6,540       191       141
                                    -------   -------   -------
                                     23,144    21,278    17,923
Less:  sublease rentals                --        --          88
                                    -------   -------   -------
                                    $23,144   $21,278    17,835
                                    =======   =======   =======

     Minimum future annual rental commitments under non-cancelable operating
     leases in each of the five fiscal years 2000 through 2004 are $13,180,
     $11,321, $10,295, $9,131 and $7,074, respectively, and in aggregate for all
     lease agreements, $71,946 through the end of the lease terms. At January 1,
     2000, Furniture Brands International, Inc. guaranteed future base operating
     lease payments on behalf of Florsheim of approximately $10,000, exclusive
     of related operating expenses.

(11) FAIR VALUE OF FINANCIAL INSTRUMENTS

     The fair values of the following long-term debt are based on closing market
     prices at year end for the Senior Notes and on the outstanding balance for
     the bank credit facility:
<TABLE>
<CAPTION>

                                             January 2, 1999              January 1, 2000
                                          ----------------------     ---------------------
                                          Carrying     Estimated     Carrying   Estimated
                                          Amount      Fair Value      Amount    Fair Value
                                          ------      ----------      ------    ----------
<S>                                      <C>          <C>           <C>          <C>
         12-3/4% Senior Notes due 2002$    18,412     $    19,448   $  18,412    $  17,860
         Bank Credit Facility              58,500          58,500      65,000       65,000
</TABLE>

(12) TRANSACTIONS WITH AFFILIATES

     In 1994, a consulting agreement was established with Apollo Advisors, L.P.,
     an affiliate of Florsheim's controlling shareholders. Charges totaled $400
     per year for fiscal years 1997, 1998 and 1999.

(13) LITIGATION

     Florsheim is involved in a number of pending or threatened legal
     proceedings in the ordinary course of business. In the opinion of
     management, the ultimate liability, if any, of Florsheim from all such
     proceedings will not have a material adverse effect upon the consolidated
     financial position or results of operations of Florsheim.



                                       37
<PAGE>   38
FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)

--------------------------------------------------------------------------------

(14) OTHER FINANCIAL DATA
<TABLE>
<CAPTION>

Items included in other assets are as follows:

                                                         January 2, January 1,
                                                              1999      2000
                                                           -------   -------
<S>                                                        <C>       <C>
  Prepaid pension                                          $16,091   $19,807
  Investment in unconsolidated subsidiaries                  4,389     4,980
  Deferred financing costs                                   1,058     1,844
  Other                                                      3,869     3,689
                                                           -------   -------
  Total other assets                                       $25,407   $30,320
                                                           =======   =======
<CAPTION>

Items included in other accrued expenses are as follows:

                                                         January 2, January 1,
                                                              1999      2000
                                                           -------   -------
<S>                                                        <C>       <C>
  Taxes-general                                            $   295   $   327
  Postretirement benefits other than pensions                  950       950
  Group insurance                                              711       840
  Accrued selling and advertising costs                      1,536     1,757
  Other                                                      3,628     4,921
                                                           -------   -------
  Total other accrued expenses                             $ 7,120   $ 8,795
                                                           =======   =======
</TABLE>

(15) BUSINESS SEGMENTS

     Effective for fiscal 1998 reporting the Company adopted SFAS No. 131,
     Disclosures about Segments of an Enterprise and Related Information (SFAS
     No. 131). SFAS No. 131 establishes standards for reporting information
     about operating segments, products and services, geographic areas and major
     customers. The presentation of segments information reflects the manner in
     which management organizes segments for making operating decisions and
     assessing performance. Prior year amounts have been restated to conform to
     SFAS No. 131. Under the provisions of the new standard, Florsheim has three
     reportable segments: U.S. Wholesale, U.S. Retail and International. U. S.
     Wholesale distributes footwear to large national retailers, department
     stores, independent shoe stores and to Company operated specialty and
     outlet stores. U.S. Wholesale also includes certain corporate expenses and
     assets which are not charged to other reportable segments. U. S. Retail
     consists of specialty retail shoe shops and outlet stores. International
     consists of wholesale and retail operations in Australia, Canada, the
     Pacific Rim, Europe and export business.

     The Company's reportable segments are organized according to the markets
     which they serve. The segment disclosures are on a basis consistent with
     internal management reporting. Sales of product from U.S. Wholesale to U.S.
     Retail and International include a standard mark-up, which is eliminated in
     consolidation. The cost of certain corporate functions are charged to the
     segments, however no allocation of debt or income taxes is made to the
     individual segments. The accounting policies of the segments are the same
     as those described in the summary of significant accounting policies.



                                       38
<PAGE>   39


FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)

--------------------------------------------------------------------------------
Operating segment information is as follows:
<TABLE>
<CAPTION>

                          Fiscal Year Ended               Fiscal Year Ended
                          -----------------               -----------------
                 January 3, January 2,  January 1,  January 3  January 2,  January 1,
                   1998        1999       2000       1998        1999(1)    2000(2)
                   ----        ----       ----       ----        -------    -------
                             Net Sales             Earnings (Loss) from Operations
                  ------------------------------   --------------------------------
<S>               <C>        <C>        <C>        <C>         <C>         <C>
U. S. Wholesale   $ 82,413   $ 88,140   $ 96,695   $ 13,676    $ 13,829    $  1,767
U. S. Retail       120,022    112,355    103,141     (4,594)     (8,703)     (6,791)
International       50,621     44,400     45,890      3,139       1,943       4,540
                  --------   --------   --------   --------    --------    --------
                  $253,056   $244,895   $245,726   $ 12,221    $  7,069    $   (484)
                  ========   ========   ========   ========    ========    ========


                   Depreciation and Amortization         Capital Expenditures
                    ---------------------------    ------------------------------
<CAPTION>
U. S. Wholesale    $ 1,310    $ 1,109    $ 2,179    $ 3,476     $ 7,805   $ 5,803
U. S. Retail         3,359      3,079      3,328      5,851       1,825     1,887
International          756        749        738        595         678       772
                   -------    -------    -------    -------     -------   -------
                   $ 5,425    $ 4,937    $ 6,245    $ 9,922     $10,308   $ 8,462
                   =======    =======    =======    =======     =======   =======

                             Total Assets
                  ------------------------------
<CAPTION>
U. S. Wholesale   $ 77,111   $105,459   $105,956
U.S. Retail         82,720     71,544     69,112
International       23,815     22,563     22,284
                  --------   --------   --------
                  $183,646   $199,566   $197,352
                  ========   ========   ========
</TABLE>


     (1)  Includes charge of $3,261 for retail store closings

     (2)  Includes charge of $5,022 for plant closing expenses, cost associated
          with the disposition of the Golf division, severance, costs associated
          with the downsizing of corporate headquarters and New York showroom
          space, cost associated with the resignation of the Company's former
          Chairman and costs related to the Company's evaluation of strategic
          alternatives.

Summary geographic information is as follows:

                     Fiscal Year Ended                  Fiscal Year Ended
                     -----------------                  -----------------
                January 3, January 2, January 1 January 3, January 2, January 1,
                  1998      1999         2000       1998      1999       2000
                  ----      ----         ----       ----      ----       ----
                           Net Sales                        Total Assets
                ------------------------------   ------------------------------
United States   $202,435   $200,495   $199,836   $159,831   $177,003   $175,068
Other             50,621     44,400     45,890     23,815     22,563     22,284
                --------   --------   --------   --------   --------   --------
Total           $253,056   $244,895   $245,726   $183,646   $199,566   $197,352
                ========   ========   ========   ========   ========   ========










                                       39
<PAGE>   40



FLORSHEIM GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FISCAL YEARS ENDED JANUARY 3, 1998, JANUARY 2, 1999 AND JANUARY 1, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)

--------------------------------------------------------------------------------
(16)  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>

                                                  First     Second      Third        Fourth
                                                 Quarter    Quarter    Quarter       Quarter
                                                 -------    -------    -------       -------
<S>                                              <C>        <C>         <C>         <C>
   FISCAL YEAR ENDED JANUARY 2, 1999
   Net sales                                     $ 58,670   $ 61,812    $ 60,258    $ 64,155
   Gross profit                                    27,784     28,650      27,472      25,670
   Earnings (loss) from operations                  2,886      3,194       3,237      (2,248)
   Net earnings (loss)                                526        598         563      (2,246)

   Common stock price range (high-low)           $10.75-6.31$11.00-7.88 $9.75-6.00  $ 8.00-4.38
   Common stock price
       at end of quarter                         $   8.75   $   9.00    $   6.50    $   4.75

   Basic earnings (loss) per share:
     Net earnings (loss)                             0.06       0.07        0.07       (0.27)
     Weighted average number of
        common shares outstanding                   8,413      8,413       8,413       8,428

   Diluted earnings (loss) per share:
     Net earnings (loss)                             0.06       0.07        0.07       (0.27)
     Weighted average number of
       common shares outstanding                    8,573      8,588       8,612       8,428

   FISCAL YEAR ENDED JANUARY 1, 2000
   Net sales                                     $ 63,525   $ 62,544    $ 57,455    $ 62,202
   Gross profit                                    30,123     29,747      22,100      24,206
   Earnings (loss) from operations                  3,938      1,525      (3,914)     (2,033)
   Earnings (loss) before extraordinary item          979       (587)     (5,622)     (2,388)
   Extraordinary item                                --         --          (750)       --
   Net earnings (loss)                                979       (587)     (6,372)     (2,388)
   Common stock price
     range (high-low)                            $7.50-4.63 $ 8.00-5.38 $6.00-2.47  $ 3.81-2.19
   Common stock price
     at end of quarter                           $   5.44   $   5.63    $   2.47    $   2.81

   Basic earnings (loss) per share:
     Earnings (loss) before extraordinary item   $   0.12   $  (0.07)   $  (0.66)   $  (0.28)
     Extraordinary item                              --         --         (0.09)       --
     Net earnings (loss)                             0.12      (0.07)      (0.75)      (0.28)
     Weighted average number of
       common shares outstanding                    8,454      8,454       8,454       8,464

   Diluted earnings per share:
     Earnings (loss) before extraordinary item   $   0.11   $  (0.07)   $  (0.66)   $  (0.28)
     Extraordinary item                              --         --         (0.09)       --
     Net earnings (loss)                             0.11      (0.07)      (0.75)      (0.28)
     Weighted average number of
       common shares outstanding                    8,526      8,454       8,454       8,464
</TABLE>





                                       40
<PAGE>   41

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The sections entitled "Election of Directors-Nominees" and "Section 16(a)
Beneficial Ownership Reporting Compliance" to be included in the Company's
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 17, 2000 are incorporated herein by reference.

      The names, ages, and positions of the Executive Officers of the Company
are:



           Name                Age              Position
    Peter P. Corritori, Jr.    46        Chairman of the Board of Directors and
                                           Chief Executive Officer

    Richard J. Anglin          43        Executive Vice President,
                                           Chief Financial Officer

    L. David Sanguinetti       55        Executive Vice President,
                                           Chief Operating Officer

    Thomas W. Joseph           48        Senior Vice President,
                                           President, International Division


     MR. CORRITORI was elected Chairman of the Board of Directors and Chief
Executive Officer of the Company in March 2000. From February 1991 to December
1999, Mr. Corritori was President of Gant USA and President of The Designer
Group, operating divisions of Phillips Van Heusen Corporation, a diversified
apparel and footwear company. From June 1985 to December 1990, Mr. Corritori
served as President of two divisions of Cluett Peabody, an apparel manufacturer.


     MR. ANGLIN was elected Executive Vice President in June 1999 and was
previously Chief Financial Officer since December 1997. From August 1996 to
November 1997, Mr. Anglin served as Vice President of Store Operations at
Service Merchandise where he was responsible for the operations of 400 stores.
From 1990 through July 1996, Mr. Anglin was Vice President of Operations and
Chief Financial Officer for Mark Shale, a specialty retailer of men and women's
clothing. In November 1995, Mark Shale filed a petition for relief under Chapter
11 of the Federal Bankruptcy Code. Mr. Anglin has also held various financial
positions with Marshall Fields department stores and was a member of the tax
department of Arthur Andersen & Company.


     MR. SANGUINETTI was appointed Executive Vice President, Chief Operating
Officer in February 1997 and was previously President, Retail Division from
April 1996 through June 1999. From August 1995 through April 1996, Mr.
Sanguinetti served as President and Chief Operating Officer for Chernin's Shoes,
a retail family shoe company. From August 1994 to July 1995, Mr. Sanguinetti
served as President of Crystal Brands Inc., a multi-division apparel company.
From May 1987 to July 1994 he was employed by Yonkers Department Store and
previously held several senior officer positions at other department stores in
multi-store management and merchandising.


     MR. JOSEPH was elected Senior Vice President in June 1999 and was
previously President, International Division since January 1996 and served as
Vice President-Retail Shops Division (Florsheim Shoe Shops and Florsheim Thayer
McNeil stores - 1991 to April 1996). Mr. Joseph was previously Vice President,
Marketing of Florsheim Australia Limited (1988-1991) and Vice President,
Florsheim Thayer McNeil Stores (1986-1988). Prior to that time, Mr. Joseph also
held the positions of General Manager, International Retail Stores (Florsheim
Shoe Shops), and Regional Supervisor of Retail Stores and Retail Stores Area
Manager.





                                       41
<PAGE>   42

ITEM 11. EXECUTIVE COMPENSATION

The sections entitled "Election of Directors - Compensation and Organization of
Board of Directors," "Executive Compensation," and "Comparative Stock and
Performance Graph" to be included in the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders to be held on May 17, 2000, are
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The section entitled "Security Ownership" to be included in the Company's
definitive Proxy Statement for the Annual Meeting of Stockholders to be held on
May 17, 2000, is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The sections entitled "Executive Compensation - Compensation Committee
Interlocks and Insider Participation" and "Certain Transactions" to be included
in the Company's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on May 17, 2000, are incorporated herein by reference.


                                     PART IV



ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)    List of documents filed as part of this report:

       1. Consolidated Balance Sheets as of January 2, 1999 and January 1, 2000.

          Consolidated Statements of Operations and Comprehensive Earnings
          for the Fiscal Years Ended January 3, 1998, January 2, 1999, and
          January 1, 2000.

          Consolidated Statements of Cash Flows for the Fiscal Years Ended
          January 3, 1998, January 2, 1999, and January 1, 2000.

          Consolidated Statements of Shareholders' Equity for the Fiscal
          Years Ended January 3, 1998, January 2, 1999, and January 1, 2000.

          Notes to Consolidated Financial Statements.

          Independent Auditors' Report

       2. Financial Statement Schedules:

          Valuation and Qualifying Accounts (Schedule II)

          All other schedules are omitted as the required information is
          presented in the consolidated financial statements or related
          notes or are not applicable.

       3. Exhibits

   EXHIBIT
   NUMBER                                        DESCRIPTION
   ------                                        -----------

     3.1  Restated Certificate of Incorporation of the Company (incorporated by
          reference to Exhibit 3.1 as filed with the Company's Annual Report on
          Form 10-K for the year ended December 28, 1996).



                                       42
<PAGE>   43

     3.2  Restated by-laws of the Company (incorporated by reference to Exhibit
          3.2 as filed with the Company's Annual Report on Form 10-K for the
          year ended December 28, 1996).

     4.1  Indenture, dated as of November 17, 1994, among the Company, certain
          of its subsidiaries and First Fidelity Bank, National Association,
          (now named First Union National Bank), as Trustee, including form of
          Senior Note (incorporated by reference to Exhibit 4.1 by The Florsheim
          Shoe Company Registration Statement on Form 10/A, Amendment No. 3).

     4.2  First Supplemental Indenture, dated as of April 19, 1997, amending and
          supplementing the Indenture dated as of November 17, 1994, among the
          Company, certain of its subsidiaries and First Union National Bank, as
          trustee (incorporated by reference to Exhibit 4.1 as filed with the
          Company's Quarterly Report on Form 10-Q for the Quarterly Period Ended
          March 29, 1997).

     4.3  Amended and Restated Credit Agreement dated August 23, 1999 among the
          Company and BT Commercial Corporation, as agent, and Lenilus party
          thereto (incorporated by reference to Exhibit 4.1 as filed with the
          Company's Quarterly Report on Form 10-Q for the quarterly period ended
          October 2, 1999

     4.4  First Amendment to Credit Agreement, dated December 3, 1999, among the
          Company and BT Commercial Corporation, individually and as agent, and
          Lenders party thereto.

     10.1 Registration Rights Agreement, dated as of November 17, 1994, between
          the Company and Apollo Interco Partners, L.P. (incorporated by
          reference to Exhibit 10.2 by The Florsheim Shoe Company Registration
          Statement on Form 10/A, Amendment No. 3).

     10.2 License and Technical Assistance Agreement, dated February 4, 1994,
          between Florind Shoes Limited and INTERCO INCORPORATED, acting by and
          through its Florsheim Shoe Company Division (incorporated by reference
          to Exhibit 10.3 filed by The Florsheim Shoe Company Registration
          Statement on Form S-1, and all amendments thereto, File No. 33-83204).

     10.3 License and Technical Assistance Agreement, dated February 4, 1994,
          between Floram Shoes India, Ltd. and INTERCO INCORPORATED, acting by
          and through its Florsheim Shoe Company Division (incorporated by
          reference to Exhibit 10.4 filed by The Florsheim Shoe Company
          Registration Statement on Form S-1, and all amendments thereto, File
          No. 33-83204).

     10.4 Export Sales Agreement, dated February 4, 1994, between Floram Shoes
          India, Ltd. and INTERCO INCORPORATED, acting by and through its
          Florsheim Shoe Company Division (incorporated by reference to Exhibit
          10.5 by filed The Florsheim Shoe Company Registration Statement on
          Form S-1, and all amendments thereto, File No. 33-83204).

     10.5 Export Sales Agreement, dated as of February 4, 1994, between Florind
          Shoes Limited and INTERCO INCORPORATED, acting by and through its
          Florsheim Shoe Company Division (incorporated by reference to Exhibit
          10.6 filed by The Florsheim Shoe Company Registration Statement on
          Form S-1, and all amendments thereto, File No. 33-83204).

     10.6 Renewed Joint Venture Agreement, dated February 4, 1994, among Shri K.
          Ameenur Rahman, Floram Shoes India, Ltd., Florind Shoes Limited and
          INTERCO INCORPORATED, acting by and through its Florsheim Shoe Company
          Division (incorporated by reference to Exhibit 10.7 filed by The
          Florsheim Shoe Company Registration Statement on Form S-1, and all
          amendments thereto, File No. 33-83204).

     10.7 Florsheim Supplemental Employee Retirement Plan (incorporated by
          reference to Exhibit 10.10 filed by The Florsheim Shoe Company
          Registration Statement on Form S-1, and all amendments thereto, File
          No. 33-83204).





                                       43
<PAGE>   44

     10.8  Consulting Agreement, dated as of November 17, 1994, between Apollo
           Advisors, L.P. and the Company (incorporated by reference to Exhibit
           10.11 by The Florsheim Shoe Company Registration Statement on Form
           10/A, Amendment No. 3).

     10.9  1994 Stock Option Plan, as amended and restated as of March 15, 1996
           (incorporated by reference to Exhibit 10.1, as filed with the
           Company's Registration Statement on Form S-8 no. 333-06353).

     10.10 Charles J. Campbell Stock Option Plan, as amended and restated as of
           March 15, 1996 (incorporated by reference to Exhibit 10.2, as filed
           with the Company's Registration Statement on Form S-8 no.
           333-06353).

     10.11 Consultants' Stock Option Plan, as amended and restated as of
           December 17, 1997 (incorporated by reference to Exhibit 10, as filed
           with the Company's Registration Statement on Form S-8 no.
           333-42495).

     10.12 Lease Agreement dated September 6, 1996 between Teachers Insurance
           and Annuity Association of America, a New York corporation, (the
           "Landlord") and The Florsheim Shoe Company (incorporated by
           reference to Exhibit 10.1 as filed with the Company's Quarterly
           Report on form 10-Q, for the Quarterly Period ended September 28,
           1996).

     10.13 Settlement and Release Agreement, dated June 22, 1999, between
           Charles J. Campbell and the Company.

     10.14 Employment Security Agreement, dated December 13, 1999, by and
           between the Company and Richard Anglin.

     10.15 Employment Security Agreement, dated December 13, 1999, by and
           between the Company and Thomas W. Joseph

     10.16 Employment Security Agreement, dated December 13, 1999, by and
           between the Company and Dave Sanguinetti.

     10.17 Employment Agreement, dated March 23, 2000, by and between the
           Company and Peter Corritori.


     21    Subsidiaries of the Company.

     23    Consent of KPMG LLP.

     27    Financial Data Schedule

(b)  Reports on Form 8-K.

      A Form 8-K was not required to be filed during the last quarter of the
fiscal year ended January 1, 2000.


     UPON WRITTEN REQUEST TO THE COMPANY'S CHIEF FINANCIAL OFFICER, THE COMPANY
     WILL FURNISH SHAREHOLDERS WITH A COPY OF ANY OR ALL SUCH EXHIBITS
     REQUESTED AT A CHARGE OF TEN CENTS PER PAGE, WHICH REPRESENTS THE
     COMPANY'S REASONABLE EXPENSES IN FURNISHING SUCH EXHIBITS.



                                       44
<PAGE>   45


FLORSHEIM GROUP INC.                                                SCHEDULE II
                                                                    -----------
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                  CHARGED
                                      BALANCE AT  TO COSTS  CHARGED         OTHER       BALANCE AT
FISCAL                                 BEGINNING     AND    TO OTHER       CHARGES        YEAR
 YEAR         DESCRIPTION               OF YEAR   EXPENSES  ACCOUNT    ADD (DEDUCT) (1)    END
 ----         -----------               -------   --------  -------    ----------------    ---

<S>            <C>                        <C>      <C>       <C>          <C>               <C>
1997   Allowance for doubtful accounts    1,705    1,734      --          (2,355)           1,084

1989   Allowance for doubtful accounts
       and cash discounts                 1,084    1,288      --          (1,165)           1,207

1999   Allowance for doubtful accounts
       and cash discounts                 1,207    3,837      --          (3,569)           1,475
</TABLE>



(1) Includes write offs for bad debts and cash discounts allowed





                                       45
<PAGE>   46


                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Shareholders of Florsheim Group Inc.:

We have audited the consolidated balance sheets of Florsheim Group Inc. and
subsidiaries (the Company) as of January 2, 1999 and January 1, 2000 and the
consolidated statements of operations and comprehensive earnings, cash flows,
and shareholders' equity for the years ended January 3, 1998, January 2, 1999,
and January 1, 2000. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of management of Florsheim Group Inc.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Florsheim Group Inc.
and subsidiaries as of January 2, 1999 and January 1, 2000 and the results of
their operations and their cash flows for the years ended January 3, 1998,
January 2, 1999, and January 1, 2000 in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.





KPMG LLP
Chicago, Illinois
March 21, 2000





                                       46
<PAGE>   47


                                   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.

                               FLORSHEIM GROUP INC.
                               --------------------
                               (Registrant)

                               /s/ Richard J. Anglin
                               ---------------------------------------
                               Richard J. Anglin
                               Executive Vice President, Chief Financial Officer

Date:  March 30, 2000

Pursuant to the requirement 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 indicated on March 30, 2000.


                    Signature                Title
                    ---------                -----

/s/  Peter P. Corritori                      Chairman of the Board of Directors
----------------------------------------     and Chief Executive Officer
Peter P. Corritori, Jr.

/s/  Adam M. Aron                            Director
----------------------------------------
Adam M. Aron

                                             Director
----------------------------------------
Bernard Attal

/s/  Robert H. Falk                          Director
----------------------------------------
Robert H. Falk

/s/  Michael S. Gross                        Director
----------------------------------------
Michael S. Gross

/s/  John J. Hannan                          Director
----------------------------------------
John J. Hannan

/s/  Joshua J. Harris                        Director
----------------------------------------
Joshua J. Harris

/s/  John H. Kissick                         Director
----------------------------------------
John H. Kissick

/s/  Ronald J. Mueller                       Director
----------------------------------------
Ronald J. Mueller

/s/  Michael D. Weiner                       Director
----------------------------------------
Michael D. Weiner

/s/  Richard J. Anglin                       Executive Vice President,
----------------------------------------     Chief Financial Officer
Richard J. Anglin                            (Principal Financial Officer)

/s/  F. Terrence Blanchard                   Vice President, Controller
----------------------------------------     (Principal Accounting Officer)
(F. Terrence Blanchard)



                                       47